UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,December 31, 2016
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36477
NEXEO SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
|
| | |
| Delaware | | 46-5188282 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
3 Waterway Square Place, Suite 1000 The Woodlands, Texas | | 77380 |
| (Address of principal executive offices) | | (Zip Code) |
(281) 297-0700
(Registrant’s telephone number, including area code)
WL Ross Holding Corp.
1166 Avenue of the Americas
New York, New York 10036
December 31
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer o | | Accelerated filer x |
| | | |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of August 4, 2016,February 3, 2017, there were 89,286,936 shares of the Company’s common stock issued and outstanding.
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 approved by the shareholders of the Company on June 8, 2016 |
ABL Agent | Bank of America, N.A., as administrative and collateral agent of the New ABL Facility |
| ABL Borrowers | Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation |
| ABL Facility | The asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, Bank of America, N.A., as administrative agent and the lenders party thereto and the other parties thereto |
| ADA Purchase Agreement | The Ashland Distribution Acquisition purchase agreement |
| ASC | The FASB Accounting Standards Codification |
| Ashland | Ashland Inc. and its affiliatessubsidiaries |
| ASU | Accounting Standards Update issued by the FASB |
| Blocker | TPG Accolade Delaware, L.P. |
| Blocker Merger | The merger of Blocker Merger Sub into Blocker on June 9, 2016, immediately following the Company Merger, with Blocker continuing as the surviving entity |
| Blocker Merger Sub | Neon Acquisition Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Blocker Merger |
| Business Combination | The business combination between WLRH and Holdings pursuant to the Merger Agreement, which was consummated on June 9, 2016the Closing Date |
| CAD | Canadian dollar |
| Canadian Tranche | Canadian tranche of the New ABL Facility |
| Closing Date | June 9, 2016 |
| Company / Successor / Nexeo | Nexeo Solutions, Inc. f/(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
|
Director Founder SharesDistribution Business | 30,000 original Founders Shares were transferred toThe global distribution business purchased by the Company’s prior independent directorsPredecessor from Ashland |
| DTSC | United StatesCalifornia Department of Toxic Substances Control |
| EBITDA | Earnings before interest, tax, depreciation and amortization |
| EMEA | Europe, Middle East and Africa |
EPSERP | Earnings or loss per shareEnterprise resource planning |
| Excess Shares | The 5,654,9605,178,642 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 New ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit |
| Founder Shares | The 12,506,250 shares of Company common stock issued to the Sponsor at the time of the IPO |
| GDP | Gross domestic product |
| Holdings | Nexeo Solutions Holdings, LLC |
| IPO | The initial public offering of WLRH, consummated on June 11, 2014 |
Issuers |
| Nexeo Solutions Finance Corporation and Solutions, collectively |
| Merger Agreement | Agreement and Plan of Merger, as amended, by and among WLRH, Blocker Merger Sub, Company Merger Sub, Holdings, Blocker, and New Holdco dated as of March 21, 2016 |
| Mergers | The Company Merger and the Blocker Merger, collectively |
|
| Montgomery Lease | The Company’s leased facility in Montgomery, Illinois commencing in the first fiscal quarter of 2017 |
| NASDAQ | NASDAQ Stock Market |
New ABL Facility | Asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, the ABL Agent, the lenders party thereto and the other parties thereto |
New Credit Facilities | New ABL Facility and New Term Loan Facility, collectively |
New Holdco | Nexeo Holdco, LLC |
New Term Loan Facility | Term loan credit facility pursuant to that certain credit agreement by and among Holdings, Solutions, Sub Holding, the Term Agent, the other agents party thereto and the lenders party thereto |
| Nexeo Plaschem | Nexeo Plaschem (Shanghai) Co., Ltd., a wholly-owned subsidiary of the Company |
| NLRB | United StatesU.S. National Labor Relations Board |
| Notes | Predecessor 8.375% Senior Subordinated Notes of the Predecessor due 2018 |
| Other Retained Remediation Liabilities | Under the ADA Purchase Agreement, Ashland agreed to retain other environmental remediation liabilities unknown at the closing of the Ashland Distribution Acquisition related to the Distribution Business for which Ashland receives notice prior to the fifth anniversary of the closing |
| Performance-Based Units | Units within the Predecessor Equity Plan that vest in accordance with a performance-based schedule |
| Peso | Mexican peso |
| Predecessor | Holdings and its subsidiaries for the periods prior to the Closing Date |
| Predecessor ABL Facility | Holdings asset-based loancredit facility which was terminated in connection with the Business Combination |
Predecessor Credit Facilities | Predecessor ABL Facility and Predecessor Term Loan Facility, collectively |
| Predecessor Equity Plan | Predecessor restricted equity plan |
| Predecessor Term Loan Facility | Holdings’ senior secured term loan credit facility which was terminated in connection with the Business Combination |
| PSLRA | U.S. Private Securities Litigation Reform Act of 1995 |
| PSU | Performance share unit issued under the 2016 LTIP |
| RCRA | U.S. Resource Conservation and Recovery Act |
| Retained Remediation Liabilities | Under the ADA Purchase Agreement, collectively, the Retained Specified Remediation Liabilities and the Other Retained Remediation Liabilities |
| RMB | Chinese renminbi |
| RSU | Restricted stock unit issued under the 2016 LTIP |
| Ryder | Ryder Truck Rental, Inc. |
| Ryder Lease | Lease Agreement entered into by and between the Predecessor and Ryder in May 2015 for certain transportation equipment |
| SAFE | People’s Republic of China State Administration of Foreign Exchange |
| SEC | U.S. Securities and Exchange Commission |
| Secured Net Leverage Ratio | The ratio of Consolidated Total Indebtedness divided by EBITDA (terms as defined in the Term Loan Facility agreement) |
| Securities Act | U.S. Securities Act of 1933, as amended |
| Selling Equityholders | The holders of equity interests in Holdings (other than Blocker) and the holders of equity interests in Blocker, in each case, as of the time immediately prior to the Business Combination |
| Solutions | Nexeo Solutions, LLC |
| Sponsor | WL Ross Sponsor LLC, the sponsor entity of WLRH prior to the Business Combination. |
Sub Holding | Nexeo Solutions Sub Holding Corp.Combination |
| Term Agent | Bank of America, N.A. as administrative agent and collateral agent of the New Term Loan Facility |
| Term Loan Facility | Term loan credit facility pursuant to that certain credit agreement by and among Holdings, Solutions, Sub Holding, the Term Agent, the other agents party thereto and the lenders party thereto |
| Time-Based Units | Units within the Predecessor’s Equity Plan |
| TPG | TPG Capital, L.P. together with its affiliates, including TPG Accolade |
| TPG Accolade | TPG Accolade, L.P. |
| TRA | The Tax Receivable Agreement entered into in connection with the Business Combination, by and between the Company and the Selling Equityholders, dated as of June 9, 2016 |
|
| |
| U.S. | United States of America |
| U.S. GAAP | United States generallyU.S. Generally accepted accounting principles |
| U.S. Tranche | United States trancheU.S. Tranche of the New ABL Facility |
| WLRH | WL Ross Holding Corp. |
Forward-Looking Statements
Certain information and statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the PSLRA codified at Section 27A of the Securities Act, of 1933, as amended, and Section 21E of the Exchange Act. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “may,” “will,” “could,” “would” and similar expressions. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties, and we urge you not to place undue reliance on any forward-looking statements, which reflect management’s current expectations and assumptions about future events, and which are based on currently available information as to the timing and outcome of future events. Certain forward-looking statements are included in this Quarterly Report on Form 10-Q, principally in the section captioned “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I.Operations.” When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on December 31, 2015 filed on January 14, 2016, in our Form 8-K filed on June 15, 2016, our Registration Statement on Form S-3 filed on June 23, 2016 and within the information incorporated by reference therein.8, 2016.
EachThese forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Unless otherwise indicated or the context otherwise requires, comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described in the section captioned "Item 1A. Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on December 8, 2016. Readers are cautioned not to place undue reliance on forward-looking statements, included in or incorporated by reference inwhich speak only as of the date of this Quarterly Report on Form 10-Q speaks only as of the date on which that statement is made.10-Q. We expressly disclaim anyundertake no obligation to update or revise any forward-looking statement, all of whichstatements after the date they are expressly qualified in their entirety by this cautionary statement,made, whether as a result of new information, future events or otherwise. Historical results are not necessarily indicative of the results expected for any future period.
We believe it is important to communicate our expectations to our shareholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed or incorporated by reference in this Quarterly Report on Form 10-Q provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in ourAll forward-looking statements including among other things:
the benefits of the Business Combination;
our future financial performance;
changesattributable to us are qualified in the markets in which we compete;
our ability to grow and manage profitability; maintain relationships with suppliers; obtain adequate supply of products and retain our key employees;
our ability to enter into alliances and complete acquisitions of other businesses;
the outcome of any known and unknown litigation; and
other statements precededtheir entirety by followed by or that include the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “may,” “will,” “could,” “would” or similar words and expressions.
These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These risks and uncertainties include, but are not limited to:
the ability to maintain the listing of our common stock on NASDAQ;
the risk that the Business Combination will disrupt plans and operations;
the ability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition, the ability to maximize the business of the Predecessor, and the ability of the business to grow and manage growth profitably;
costs related to the Business Combination;
changes in applicable laws or regulations;
the inability to profitably expand into new markets;
the possibility that we may be adversely affected by other economic, business, and/or competitive factors; and
other risks and uncertainties indicated in this Quarterly Report on Form 10-Q, including those in Part II under “Item1A. Risk Factors.”
cautionary statement.
PART I
Item 1. Financial Statements
Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, in millions, except share amounts and par value) | | | | Successor | | | Predecessor | | | | | |
| | June 30, 2016 | | | September 30, 2015 | December 31, 2016 | | September 30, 2016 |
| Current Assets | |
| | | |
| |
| | |
|
| Cash and cash equivalents | $ | 38.6 |
| | | $ | 127.7 |
| $ | 33.3 |
| | $ | 47.5 |
|
| Accounts and notes receivable (net of allowance for doubtful accounts of $0.1 million and $3.8 million, respectively) | 475.9 |
| | | 508.7 |
| |
| Accounts and notes receivable (net of allowance for doubtful accounts of $1.2 million and $1.4 million, respectively) | | 452.8 |
| | 474.8 |
|
| Inventories | 321.5 |
| | | 325.1 |
| 301.1 |
| | 315.8 |
|
| Other current assets | 21.8 |
| | | 22.0 |
| 25.7 |
| | 25.7 |
|
| Total current assets | 857.8 |
| | | 983.5 |
| 812.9 |
| | 863.8 |
|
| | | | | | | | |
| Non-Current Assets | |
| | | |
| |
| | |
|
| Property, plant and equipment, net | 339.1 |
| | | 231.2 |
| 332.0 |
| | 322.6 |
|
| Goodwill | 693.4 |
| | | 373.7 |
| 658.0 |
| | 665.7 |
|
| Other intangible assets, net of amortization | | 216.4 |
| | 215.0 |
|
Deferred income taxes
| 1.6 |
| | | 0.3 |
| 1.0 |
| | 1.1 |
|
| Other intangible assets, net of amortization | 216.2 |
| | | 111.4 |
| |
| Other non-current assets | 9.9 |
| | | 8.8 |
| 10.1 |
| | 10.7 |
|
| Total non-current assets | 1,260.2 |
| | | 725.4 |
| 1,217.5 |
| | 1,215.1 |
|
| Total Assets | $ | 2,118.0 |
| | | $ | 1,708.9 |
| $ | 2,030.4 |
| | $ | 2,078.9 |
|
| | | | | | | | |
| Current Liabilities | |
| | | |
| |
| | |
|
| Short-term borrowings and current portion of long-term debt and capital lease obligations | $ | 50.0 |
| | | $ | 72.4 |
| |
| Short-term borrowings, current portion of long-term debt and capital lease obligations | | $ | 48.1 |
| | $ | 47.7 |
|
| Accounts payable | 313.6 |
| | | 326.6 |
| 280.1 |
| | 325.8 |
|
| Accrued expenses and other liabilities | 47.9 |
| | | 63.9 |
| 36.9 |
| | 45.7 |
|
| Income taxes payable | 1.3 |
| | | 2.5 |
| 2.5 |
| | 2.0 |
|
| Total current liabilities | 412.8 |
| | | 465.4 |
| 367.6 |
| | 421.2 |
|
| | | | | | | | |
| Non-Current Liabilities | |
| | | |
| |
| | |
|
| Long-term debt and capital lease obligations, less current portion, net | 780.6 |
| | | 854.4 |
| 783.3 |
| | 765.6 |
|
| Deferred income taxes | 39.8 |
| | | 91.5 |
| 18.1 |
| | 23.1 |
|
| Due to related party pursuant to contingent consideration obligations | 142.2 |
| | | — |
| 129.0 |
| | 118.4 |
|
| Other non-current liabilities | 5.4 |
| | | 12.6 |
| 7.2 |
| | 5.8 |
|
| Total non-current liabilities | 968.0 |
| | | 958.5 |
| 937.6 |
| | 912.9 |
|
| Total Liabilities | 1,380.8 |
| | | 1,423.9 |
| 1,305.2 |
| | 1,334.1 |
|
| | | | | | | | |
| Commitments and contingencies (see Note 13) |
|
| | |
|
|
|
| |
|
|
| | | | | |
| Equity | |
| | | |
| |
| | |
|
| Preferred stock, $0.0001 par value (1,000,000 shares authorized, none issued and outstanding as of June 30, 2016) | — |
| | | — |
| |
| Common stock, $0.0001 par value (300,000,000 shares authorized, 89,222,418 shares issued and outstanding as of June 30, 2016) | — |
| | | — |
| |
| Preferred stock, $0.0001 par value (1,000,000 shares authorized, none issued and outstanding as of December 31, 2016 and September 30, 2016) | | — |
| | — |
|
| Common stock, $0.0001 par value (300,000,000 shares authorized, 89,286,936 shares issued and outstanding as of December 31, 2016 and September 30, 2016) | | — |
| | — |
|
| Additional paid-in capital | 757.7 |
| | | — |
| 760.3 |
| | 758.9 |
|
| Series A membership interest | — |
| | | 490.4 |
| |
| Series B membership interest | — |
| | | 5.1 |
| |
| Accumulated deficit | (18.3 | ) | | | (162.9 | ) | (17.9 | ) | | (9.6 | ) |
| Accumulated other comprehensive loss | (2.2 | ) | | | (47.6 | ) | (17.2 | ) | | (4.5 | ) |
| Total equity | 737.2 |
| | | 285.0 |
| 725.2 |
| | 744.8 |
|
| Total Liabilities and Equity | $ | 2,118.0 |
| | | $ | 1,708.9 |
| $ | 2,030.4 |
| | $ | 2,078.9 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, in millions, except share and per share data)
| | | | Successor | | | Predecessor | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 |
| October 1, 2015 Through June 8, 2016 |
| Three Months Ended
June 30, 2015 |
| Nine Months Ended
June 30, 2015 | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Sales and operating revenues | $ | 214.3 |
| | $ | 214.3 |
| | | $ | 650.2 |
| | $ | 2,340.1 |
| | $ | 988.8 |
| | $ | 3,019.3 |
| $ | 794.8 |
| | | $ | 827.7 |
|
| Cost of sales and operating expenses | 195.5 |
| | 195.5 |
| | | 574.8 |
| | 2,068.2 |
| | 877.5 |
| | 2,716.8 |
| 710.4 |
| | | 732.5 |
|
| Gross profit | 18.8 |
| | 18.8 |
| | | 75.4 |
| | 271.9 |
| | 111.3 |
| | 302.5 |
| 84.4 |
| | | 95.2 |
|
| Selling, general and administrative expenses | 19.1 |
| | 19.2 |
| | | 57.5 |
| | 208.9 |
| | 82.9 |
| | 248.5 |
| 74.5 |
| | | 74.7 |
|
| Transaction related costs | 15.9 |
| | 18.0 |
| | | 26.1 |
| | 33.4 |
| | — |
| | 0.1 |
| 0.8 |
| | | 1.0 |
|
| Change in fair value of contingent consideration obligations | (2.3 | ) | | (2.3 | ) | | | — |
| | — |
| | — |
| | — |
| 10.6 |
| | | — |
|
| Operating income (loss) | (13.9 | ) | | (16.1 | ) | | | (8.2 | ) | | 29.6 |
| | 28.4 |
| | 53.9 |
| (1.5 | ) | | | 19.5 |
|
| Other income | — |
| | — |
| | | 0.3 |
| | 2.9 |
| | 8.4 |
| | 9.1 |
| 2.4 |
| | | 1.7 |
|
| Interest income (expense) | | | | | | | | | | | | |
|
| | |
|
|
| Interest income | 0.3 |
| | 0.9 |
| | | — |
| | 0.1 |
| | — |
| | 0.1 |
| 0.1 |
| | | — |
|
| Interest expense | (3.2 | ) | | (3.2 | ) | | | (11.2 | ) | | (42.3 | ) | | (16.2 | ) | | (48.9 | ) | (12.0 | ) | | | (15.6 | ) |
| Income (loss) from continuing operations before income taxes | (16.8 | ) | | (18.4 | ) | | | (19.1 | ) | | (9.7 | ) | | 20.6 |
| | 14.2 |
| |
| Net income (loss) before income taxes | | (11.0 | ) | | | 5.6 |
|
| Income tax expense (benefit) | (1.3 | ) | | (1.3 | ) | | | 1.1 |
| | 4.2 |
| | 1.8 |
| | 2.7 |
| (2.7 | ) | | | 1.3 |
|
| Net income (loss) from continuing operations | (15.5 | ) | | (17.1 | ) | | | (20.2 | ) | | (13.9 | ) | | 18.8 |
| | 11.5 |
| |
| Net income (loss) from discontinued operations, net of tax | — |
| | — |
| | | — |
| | 0.1 |
| | — |
| | (0.8 | ) | |
| Net income (loss) | $ | (15.5 | ) | | $ | (17.1 | ) | | | $ | (20.2 | ) | | $ | (13.8 | ) | | $ | 18.8 |
| | $ | 10.7 |
| |
| Net Income (Loss) Attributable to Nexeo Solutions, Inc. | | $ | (8.3 | ) | | | $ | 4.3 |
|
| | | | | | | | | | | | | | | | | |
| Net loss per share available to common shareholders | | | | | | | | | | | | | |
| Net loss per share available to common stockholders | | | | | |
| Basic and diluted | $ | (0.45 | ) | | $ | (0.81 | ) | | | | | | | | | | (0.11 | ) | | | |
| Weighted average number of common shares outstanding | | | | | | | | | | | | | | | | |
| Basic and diluted | 34,072,056 |
| | 21,241,897 |
| | | | | | | | | | 76,746,168 |
| | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended
June 30, 2015 | | Nine Months Ended
June 30, 2015 |
| Net income (loss) | $ | (15.5 | ) | | $ | (17.1 | ) | | | $ | (20.2 | ) | | $ | (13.8 | ) | | $ | 18.8 |
| | $ | 10.7 |
|
| Unrealized foreign currency translation gain (loss), net of tax | (2.2 | ) | | (2.2 | ) | | | (3.4 | ) | | (4.0 | ) | | 5.3 |
| | (19.6 | ) |
| Unrealized gain on interest rate hedges, net of tax | — |
| | — |
| | | 0.1 |
| | 0.3 |
| | — |
| | 0.1 |
|
| Other comprehensive income (loss), net of tax | (2.2 | ) | | (2.2 | ) | | | (3.3 | ) | | (3.7 | ) | | 5.3 |
| | (19.5 | ) |
| Total comprehensive income (loss), net of tax | (17.7 | ) | | (19.3 | ) | | | (23.5 | ) | | (17.5 | ) | | 24.1 |
| | (8.8 | ) |
| Comprehensive loss attributable to noncontrolling interest, net of tax | — |
| | — |
| | | — |
| | — |
| | — |
| | 0.1 |
|
Total comprehensive income (loss) attributable to Predecessor and Successor, net of tax (1) | $ | (17.7 | ) | | $ | (19.3 | ) | | | $ | (23.5 | ) | | $ | (17.5 | ) | | $ | 24.1 |
| | $ | (8.7 | ) |
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Net income (loss) | $ | (8.3 | ) | | | $ | 4.3 |
|
| Unrealized foreign currency translation loss, net of tax | (12.7 | ) | | | (6.7 | ) |
| Unrealized gain on interest rate hedges, net of tax | — |
| | | 0.1 |
|
| Other comprehensive loss, net of tax | (12.7 | ) | | | (6.6 | ) |
Total comprehensive loss, net of tax attributable to Nexeo Solutions, Inc. (1) | $ | (21.0 | ) | | | $ | (2.3 | ) |
(1)The tax effects for each component presented are not material.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated StatementsStatement of Equity
(Unaudited, in millions, except share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Series A Membership Interest | | Series B Membership Interest | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
Balance at September 30, 2015, Predecessor | $ | 490.4 |
| | $ | 5.1 |
| | $ | (162.9 | ) | | $ | (47.6 | ) | | $ | 285.0 |
|
| Repurchases of membership units | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Equity-based compensation | — |
| | 2.7 |
| | — |
| | — |
| | 2.7 |
|
| Comprehensive loss: | | | | | | | | | |
| Net loss | — |
| | — |
| | (13.8 | ) | | — |
| | (13.8 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (3.7 | ) | | (3.7 | ) |
Balance at June 8, 2016, Predecessor | $ | 490.4 |
| | $ | 7.7 |
| | $ | (176.7 | ) | | $ | (51.3 | ) | | $ | 270.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | | | |
Balance at September 30, 2015, Successor | 14,853,927 |
| | $ | — |
| | $ | 6.2 |
| | $ | (1.2 | ) | | $ | — |
| | $ | 5.0 |
|
| Reclassification of shares previously subject to redemption | 14,168 |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
| Net loss | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
| Balance December 31, 2015 | 14,868,095 |
| | — |
| | 6.3 |
| | (1.3 | ) | | — |
| | 5.0 |
|
| Reclassification of shares previously subject to redemption | 150,231 |
| | — |
| | 1.5 |
| | — |
| | — |
| | 1.5 |
|
| Net loss | — |
| | — |
| | — |
| | (1.5 | ) | | — |
| | (1.5 | ) |
| Balance March 31, 2016 | 15,018,326 |
| | — |
| | 7.8 |
| | (2.8 | ) | | — |
| | 5.0 |
|
| Reclassification of shares previously subject to redemption | 47,512,924 |
| | — |
| | 475.2 |
| | — |
| | — |
| | 475.2 |
|
| Redeemed shares | (29,793,320 | ) | | — |
| | (298.5 | ) | | — |
| | — |
| | (298.5 | ) |
| Warrant conversion | 2,240,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Private placement shares issued May 23, 2016 | 23,492,306 |
| | — |
| | 234.9 |
| | — |
| | — |
| | 234.9 |
|
| Shares issued to Selling Equityholders | 27,673,604 |
| | — |
| | 276.7 |
| | — |
| | — |
| | 276.7 |
|
| Fair value equity contribution from Sponsor in the form of Founder Shares transferred to Selling Equityholders | — |
| | — |
| | 30.2 |
| | — |
| | — |
| | 30.2 |
|
| Shares issued for advisory services and deferred underwriting fees | 3,078,578 |
| | — |
| | 30.8 |
| | — |
| | — |
| | 30.8 |
|
| Fair value equity contribution from Sponsor in the form of Founder Shares transferred to directors for services rendered | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Equity-based compensation | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Comprehensive loss: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (15.5 | ) | | — |
| | (15.5 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2.2 | ) | | (2.2 | ) |
Balance at June 30, 2016, Successor
| 89,222,418 |
| | $ | — |
| | $ | 757.7 |
| | $ | (18.3 | ) | | $ | (2.2 | ) | | $ | 737.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | | | |
| Balance at September 30, 2016 | 89,286,936 |
| | $ | — |
|
| $ | 758.9 |
|
| $ | (9.6 | ) |
| $ | (4.5 | ) |
| $ | 744.8 |
|
| Equity-based compensation | — |
| | — |
| | 1.4 |
| | — |
| | — |
| | 1.4 |
|
| Comprehensive loss: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (8.3 | ) | | — |
| | (8.3 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (12.7 | ) | | (12.7 | ) |
| Balance at December 31, 2016 | 89,286,936 |
| | $ | — |
| | $ | 760.3 |
| | $ | (17.9 | ) | | $ | (17.2 | ) | | $ | 725.2 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in millions)
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Nine Months Ended
June 30, 2016 | | | October 1, 2015 Through June 8, 2016 | | Nine Months Ended June 30, 2015 |
| Cash flows from operating activities | |
| | | | | |
|
| Net income (loss) from continuing operations | $ | (17.1 | ) | | | $ | (13.9 | ) | | $ | 11.5 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | | | | |
|
| Depreciation and amortization | 4.3 |
| | | 37.7 |
| | 39.6 |
|
| Debt issuance costs and original issue discount amortization | (0.4 | ) | | | 6.1 |
| | 6.5 |
|
| Non-cash transaction costs | 12.8 |
| | | — |
| | — |
|
| Provision for bad debt | 0.1 |
| | | 1.2 |
| | 0.3 |
|
| Inventory impairment | — |
| | | — |
| | 1.6 |
|
| Deferred income taxes | (1.9 | ) | | | 1.1 |
| | 2.0 |
|
| Equity-based compensation charges | 0.3 |
| | | 2.7 |
| | 0.9 |
|
| Change in fair value of contingent consideration obligations | (2.3 | ) | | | — |
| | — |
|
| Gain on sale of property and equipment | — |
| | | (2.0 | ) | | (1.0 | ) |
| Gain on debt extinguishment, net | — |
| | | (0.6 | ) | | — |
|
| Changes in operating assets and liabilities: | |
| | | | | |
|
| Accounts and notes receivable | (6.0 | ) | | | 34.4 |
| | 77.3 |
|
| Inventories | 7.0 |
| | | 8.4 |
| | 10.9 |
|
| Other current assets | 2.8 |
| | | (4.1 | ) | | 6.5 |
|
| Accounts payable | (27.3 | ) | | | 13.4 |
| | (63.2 | ) |
| Related party payable | — |
| | | (0.3 | ) | | (1.6 | ) |
| Accrued expenses and other liabilities | (2.6 | ) | | | (9.7 | ) | | 4.0 |
|
| Changes in other operating assets and liabilities, net | 0.3 |
| | | (4.9 | ) | | (1.7 | ) |
| Net cash provided by (used in) operating activities from continuing operations | (30.0 | ) | | | 69.5 |
| | 93.6 |
|
| Net cash provided by (used in) operating activities from discontinued operations | — |
| | | 0.1 |
| | (0.6 | ) |
| Net cash provided by (used in) operating activities | (30.0 | ) | | | 69.6 |
| | 93.0 |
|
| Cash flows from investing activities | |
| | | | | |
|
| Additions to property and equipment | (1.4 | ) | | | (14.2 | ) | | (27.3 | ) |
| Proceeds from the disposal of property and equipment | — |
| | | 2.4 |
| | 2.3 |
|
| Proceeds withdrawn from trust account | 501.1 |
| | | — |
| | — |
|
| Cash consideration paid for Business Combination, net of cash acquired | (360.6 | ) | | | — |
| | — |
|
| Net cash provided by (used in) investing activities | 139.1 |
| | | (11.8 | ) | | (25.0 | ) |
| Cash flows from financing activities | | | | | | |
| Proceeds from issuance of common stock | 234.9 |
| | | — |
| | — |
|
| Redemption of common stock | (298.5 | ) | | | — |
| | — |
|
| Proceeds from Sponsor convertible note and Sponsor promissory note | 0.7 |
| | | — |
| | — |
|
| Repayment of Sponsor convertible notes and Sponsor promissory note | (1.0 | ) | | | — |
| | — |
|
| Repurchases of membership units | — |
| | | (0.1 | ) | | — |
|
| Tax distributions associated with membership interests | — |
| | | — |
| | (0.1 | ) |
| Purchase of additional equity interest in Nexeo Plaschem | — |
| | | — |
| | (34.3 | ) |
| Proceeds from short-term debt | 4.9 |
| | | 20.9 |
| | 36.9 |
|
| Repayment of short-term debt | (1.7 | ) | | | (17.1 | ) | | (47.6 | ) |
| Proceeds from issuance of long-term debt | 823.6 |
| | | 292.1 |
| | 494.3 |
|
| Repayment of long-term debt and capital lease obligations | (41.0 | ) | | | (417.3 | ) | | (514.6 | ) |
| Repayment of Predecessor long-term debt | (767.3 | ) | | | — |
| | — |
|
| Cash paid for debt issuance costs | (25.3 | ) | | | — |
| | — |
|
| Net cash used in financing activities | (70.7 | ) | | | (121.5 | ) | | (65.4 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | | 0.3 |
| | (1.8 | ) |
| Increase (decrease) in cash and cash equivalents | 38.4 |
| | | (63.4 | ) | | 0.8 |
|
| Cash and cash equivalents at the beginning of the period | 0.2 |
| | | 127.7 |
| | 88.2 |
|
| Cash and cash equivalents at the end of the period | $ | 38.6 |
| | | $ | 64.3 |
| | $ | 89.0 |
|
| | | | | | | |
| | | | | Successor | | | Predecessor |
| | | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Cash flows from operations | | |
| | | |
|
| Net income (loss) | | $ | (8.3 | ) | | | $ | 4.3 |
|
| Adjustments to reconcile to cash flows from operations: | | |
| | | |
|
| Depreciation and amortization | | 16.8 |
| | | 13.6 |
|
| Debt issuance costs amortization, debt issuance costs write-offs and original issue discount amortization | | 1.0 |
| | | 2.2 |
|
| Provision for bad debt | | (0.4 | ) | | | (0.1 | ) |
| Deferred income taxes | | (4.3 | ) | | | 0.9 |
|
| Equity-based compensation expense | | 1.4 |
| | | 0.3 |
|
| Change in fair value of contingent consideration obligations | | 10.6 |
| | | — |
|
| (Gain)/loss on sale of property and equipment | | 0.1 |
| | | (1.7 | ) |
Gain related to reimbursement of certain capital expenditures incurred
| | (2.5 | ) | | | — |
|
| Changes in assets and liabilities: | | |
| | | |
|
| Accounts and notes receivable | | 15.2 |
| | | 56.2 |
|
| Inventories | | 10.1 |
| | | 7.5 |
|
| Other current assets | | (0.6 | ) | | | (0.2 | ) |
| Accounts payable | | (38.6 | ) | | | (44.8 | ) |
| Accrued expenses and other liabilities | | (9.7 | ) | | | (19.2 | ) |
| Changes in other operating assets and liabilities, net | | (0.6 | ) | | | (2.4 | ) |
| Net cash provided by (used in) operating activities | | (9.8 | ) | | | 16.6 |
|
| Cash flows from investing activities | | |
| | | |
|
| Additions to property and equipment | | (6.6 | ) | | | (3.9 | ) |
| Proceeds from the disposal of property and equipment | | — |
| | | 1.7 |
|
| Proceeds from reimbursement of certain capital expenditures incurred | | 2.8 |
| | | — |
|
| Cash paid for acquisitions | | (5.1 | ) | | | — |
|
| Net cash used in investing activities | | (8.9 | ) | | | (2.2 | ) |
| Cash flows from financing activities | | | | | |
| Repurchases of membership units | | — |
| | | (0.1 | ) |
| Proceeds from short-term debt | | 15.9 |
| | | 15.4 |
|
| Repayments of short-term debt | | (14.3 | ) | | | (12.4 | ) |
| Proceeds from issuance of long-term debt | | 165.1 |
| | | 50.2 |
|
| Repayments of long-term debt and capital lease obligations | | (161.4 | ) | | | (136.5 | ) |
| Net cash provided by (used in) financing activities | | 5.3 |
| | | (83.4 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | (0.8 | ) | | | (0.9 | ) |
| Decrease in cash and cash equivalents | | (14.2 | ) | | | (69.9 | ) |
| Cash and cash equivalents at the beginning of the period | | 47.5 |
| | | 127.7 |
|
| Cash and cash equivalents at the end of the period | | $ | 33.3 |
| | | $ | 57.8 |
|
| Supplemental disclosure of cash flow information: | |
| | | | | |
| |
| | | |
|
| Cash paid during the period for interest | $ | 7.2 |
| | | $ | 32.9 |
| | $ | 39.6 |
| $ | 11.1 |
| | | $ | 10.2 |
|
| Cash paid during the period for taxes | $ | 1.5 |
| | | $ | 3.4 |
| | $ | 4.0 |
| $ | 0.7 |
| | | $ | 2.1 |
|
| Supplemental disclosure of non-cash operating activities: | | | | | | | |
| Non-cash payment of deferred underwriting fees | $ | 18.3 |
| | | $ | — |
| | $ | — |
| |
| Supplemental disclosure of non-cash investing activities: | | | | | | | | | | |
| Non-cash capital expenditures, including capital leases | $ | 1.2 |
| | | $ | 16.5 |
| | $ | 2.3 |
| |
| Non-cash capital expenditures | | $ | 16.4 |
| | | $ | 14.1 |
|
| Non-cash intangible assets acquired | | $ | 3.4 |
| | | $ | — |
|
| Supplemental disclosure of non-cash financing activities: | | | | | |
| Non-cash capital lease obligations, net | | $ | 13.4 |
| | | $ | 12.8 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Nexeo Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited, currencies in millions, except per share amounts)
1. Basis of Presentation and Nature of Operations
Basis of Presentation
Nexeo Solutions, Inc. (together with its subsidiaries, the “Company”) is the result of the business combination between WLRH and Holdings. WLRH was incorporated in Delaware on March 24, 2014 and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. WLRH completed its IPO in June 2014, raising approximately $500.0 million in cash proceeds. WLRH neither engaged in any operations nor generated any revenue prior to the Business Combination.
On the Closing Date, WLRH and Holdings and certain other parties consummated the Business Combination, pursuant to the Merger Agreement. In connection with the closing of the Business Combination, WLRH changed its name from “WL Ross Holding Corp.” to “Nexeo Solutions, Inc.” and changed the ticker symbol for its common stock on NASDAQ from “WLRH” to “NXEO”.
WLRH was identified as the acquirer for accounting purposes and Holdings was identified as the acquiree and accounting predecessor. The Company’s financial statement presentation distinguishes a “Predecessor” for the periods prior to the Closing Date. WLRH, which includes HoldingsDate and a “Successor” for periods subsequent to the Business Combination, was subsequently renamed Nexeo Solutions, Inc. and is the “Successor” for periods after the Closing Date. The acquisition was accounted for as a business combination using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting for the assets and liabilities of Holdings that is based on the fair value of net assets acquired and liabilities assumed. See Note 3 for further discussion ofIn the Business Combination.Combination, Holdings was identified as the acquiree and Predecessor and WLRH, subsequently renamed “Nexeo Solutions, Inc.”, was identified as the acquirer and Successor. As a result of the application of the acquisition method of accounting as of the Closing Date, the condensed consolidated financial statements for the Predecessor period and for the Successor period are presented on a different basis and are, therefore, not comparable.
On the Closing Date, the Company’s Board of Directors approved a change in WLRH’s fiscal year-end from December 31 to September 30. As a result of this change and the Business Combination, the condensed consolidated financial statements presented within this 10-Q include the transition period from October 1, 2015 through June 30, 2016.
The Successor periods in the condensed consolidated financial statements as of June 30, 2016 and See Note 3 for the three and nine months ended June 30, 2016 includes 22 days (June 9, 2016 through June 30, 2016) of the combined operating results, as well as the full three and nine months ended June 30, 2016 of WLRH’s operating results, which reflect its financial activity including transaction costs and equity structure changes in preparation of the consummationfurther discussion of the Business Combination. Operating results during the three and nine months ended June 30, 2015 for WLRH were not significant or meaningful and therefore are not presented in the condensed consolidated statements of operations. Operating results for the Predecessor for the three and nine months ended June 30, 2015 are presented as they are reflective of the ongoing operations of the acquired business.
The Predecessor periods in the condensed consolidated financial statements represent the operating results of Holdings and its subsidiaries prior to the Business Combination.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC.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 periods presented hereinthree months ended December 31, 2016 are not necessarily indicative of results to be expected for the fiscal year ending 2016. FinancialSeptember 30, 2017. Quarterly financial data presented herein should be read in conjunction with the informationconsolidated financial statements and accompanying notes for the fiscal year ended September 30, 2016 included in or incorporated by reference into the Company’sCompany's Annual Report on Form 8-K10-K filed with the SEC on June 15, 2016 and Form 8-K/A filed on June 15,December 8, 2016.
The consolidated financial data as of September 30, 20152016 presented in these unaudited condensed consolidated financial statements were derived from the Predecessor’sCompany’s audited consolidated financial statements, but do not include all disclosures required by U.S. GAAP.
Nature of Operations
The Company is a global distributor of chemicals products in North America and Asia and plastics products in North America, EMEA and Asia. In connection with the distribution of chemicals products, the Company provides value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. The Company also provides environmental services, including waste collection, recovery and arrangement for disposal services and recycling in North America, primarily in the U.S., through its Environmental Services line of business. The Predecessor was a distributor of composites products in North America until July 1, 2014, when these operations were sold and as a result, activity associated with these operations is reflected as discontinued operations for all periods presented.
The Company connects a network of approximately 1,300 suppliers with a diverse base of approximately 27,50026,700 customers. The Company offers its customers products used in a broad cross-section of end markets including household, industrial and institutional, lubricants, performance coatings (including architectural coatings, adhesives, sealants and elastomers), automotive, healthcare, personal care, oil and gas and construction. The Company distributes approximately 23,00022,000 products into over 80 countries through a supply chain consisting of approximately 170 owned, leased or third-party warehouses, rail terminals and tank terminals globally. The Company has a private fleet of over 1,000 units, including tractors and trailers, primarily located in North America.
The Company currently employs approximately 2,550 employees globally.
2. Significant Accounting Policies and Recent Accounting Pronouncements
Significant Accounting Policies
The Predecessor’s significant accounting policies are substantially the same as those of the Company presented below.
Principles of Consolidation
The accompanying condensed consolidated financial statements include all the accounts of the Company and all wholly-owned subsidiaries in which it maintains control. Significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates, Risks, and Uncertainties
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include:
the fair value of assets acquired and liabilities assumed in a business combination;
the assessment of recoverability of long lived assets, including property and equipment, goodwill and intangible assets, income taxes, reserves and environmental remediation;
the estimated useful lives of intangible and depreciable assets;
the grant date fair value of equity-based awards;
the recognition, measurement and valuation of current and deferred income taxes;
the recognition and measurement of contingent consideration related to the TRA liability; and
the recognition and measurement of contingent consideration related to the Deferred Cash Consideration.
Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
The Company’s financial instruments exposed to concentration of credit risk consist primarily of cash and cash equivalents. Although the Company deposits cash with multiple banks, these deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. These deposits may generally be redeemed upon demand and bear minimal risks.
No single customer accounted for more than 10.0% of revenues for any line of business, or on a consolidated basis, for each of the periods reported. The Company has two suppliers that each account for between 10% and 13% of consolidated purchases for the Successor and Predecessor periods in the current fiscal year. In the prior fiscal periods presented, the Predecessor had one supplier that accounted for approximately 13% of consolidated purchases.
Cash and Cash Equivalents
All highly liquid temporary investments with original maturities of three months or less are considered to be cash equivalents.
Accounts and Notes Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of discounts and allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company’s accounts receivable in the U.S. and Canada are collateral under the New Credit Facilities.
The Company records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts receivable. On a recurring basis, the Company reviews this allowance and considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Receivables are charged off against the allowance for doubtful accounts when it is probable a receivable will not be recovered.
Certain customers of Nexeo Plaschem are allowed to remit payment during a period of time ranging from 30 days up to nine months. These notes receivables, which are supported by banknotes issued by large banks in China on behalf of these customers, are included in Accounts and notes receivable on the Company's condensed consolidated balance sheets and totaled $7.0 million at June 30, 2016 for the Successor and $4.5 million at September 30, 2015 for the Predecessor, respectively.
The allowance for doubtful accounts was $0.1 million at June 30, 2016 for the Successor and $3.8 million at September 30, 2015 for the Predecessor. Bad debt expense, a component of Selling, general and administrative expenses in the condensed consolidated statements of operations, totaled $0.1 million for the three and nine months ended June 30, 2016 for the Successor, $0.1 million and $1.2 million for the periods from April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and net recoveries of $0.4 million and expenses of $0.3 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.
Inventories
Inventories are carried at the lower of cost or market using the weighted average cost method. The Company’s inventories in the U.S. and Canada are collateral under the New Credit Facilities.
Goodwill and Intangibles
The Company had goodwill of $693.4 million at June 30, 2016 associated with the Business Combination. The Predecessor had goodwill of $373.7 million at September 30, 2015 resulting from previous acquisitions. The purchase consideration of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The estimated fair values are determined after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. To the extent that the purchase consideration exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill.
The Company had other intangible assets, net of amortization, of $216.2 million at June 30, 2016 consisting of customer relationships and the trade name. These intangible assets are amortized on a straight-line basis over their estimated useful lives, including customer relationships which are amortized over 12 years and the trade name is amortized over four years. The Predecessor had other intangible assets, net of amortization, of $111.4 million at September 30, 2015 consisting of leasehold improvements, customer-related intangibles, supplier-related intangibles, non-compete agreements and certain trademarks and trade names.
Property, Plant and Equipment
Property, plant and equipment includes plants and buildings, machinery and equipment and software and computer equipment. Property, plant and equipment acquired or constructed in the normal course of business are initially recorded at cost. Property and equipment acquired in business combinations are initially recorded at their estimated fair value. Property, plant and equipment are depreciated by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their economic useful life or their lease term. The range of useful lives used to depreciate property, plant and equipment is as follows:
|
| | | | |
| Successor | | | Predecessor |
| Estimated Useful
Lives (years) | | | Estimated Useful
Lives (years) |
Plants and buildings | 5-35 | | | 5-35 |
Machinery and equipment | 2-30 | | | 2-30 |
Software and computer equipment | 3-10 | | | 3-10 |
Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. Major expenditures for replacements and significant improvements that increase asset values or extend useful lives are capitalized. The carrying amounts of assets that are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in the condensed consolidated statements of operations.
Leases
The Company leases certain property, plant and equipment in the ordinary course of business. The leases are classified as either capital leases or operating leases. Assets under capital leases are included in Property, plant and equipment, net in the condensed consolidated balance sheets and are depreciated over the lesser of the lease term or the useful life of the assets. Capital lease obligations are included in Short-term borrowings, current portion of long-term debt and capital lease obligations and Long-term debt and capital lease obligations, less current portion, net in the condensed consolidated balance sheets. Generally, lease payments under capital leases are recognized as interest expense and a reduction of the capital lease obligations. Lease payments under operating leases are recognized as an expense in the condensed consolidated statements of operations on a straight-line basis over the lease term.
Impairment of Goodwill and Other Long-lived Assets
Goodwill. Goodwill is tested for impairment annually as of March 31 and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, which is defined as operating segments or groupings of businesses one level below the operating segment level. The Company’s operating segments are the same as the reporting units used in its goodwill impairment test. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit, determined using a market approach if market prices are available or alternatively, a discounted cash flow model, with its carrying value. The annual evaluation of goodwill requires the use of estimates about future operating results, valuation multiples and discount rates of each reporting unit to determine their estimated fair value. Changes in these assumptions can materially affect these estimates. Once an impairment of goodwill has been recorded, it cannot be reversed. No goodwill impairment was recognized during any of the periods presented.
Other Long-Lived Assets. Property, plant and equipment and other intangibles with definite lives are tested for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. When an impairment test is performed and the undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors.
Debt Issuance Costs
Costs associated with the revolving credit facility are recorded as debt issuance costs, which are included in Other non-current assets in the condensed consolidated balance sheets and are being amortized as interest expense over the contractual lives of the related agreements. Costs associated with non-revolving debt facilities are recorded as a reduction of the long-term debt, and are amortized as interest expense over the contractual lives of the related agreements. See Notes 4 and 7.
Commitments, Contingencies and Environmental Costs
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or is realized.
Liabilities for environmental remediation costs are recognized when environmental assessments or remediation are probable and the associated costs can be reasonably estimated. Generally, the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, the divestment or closure of the relevant sites. The amount recognized reflects management’s best estimate of the expenditures expected to be required. Actual environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Actual expenditures that relate to an existing condition caused by past operations and that do not impact future earnings are expensed.
Ashland agreed to retain known environmental remediation liabilities and other environmental remediation liabilities for releases of hazardous materials occurring prior to March 31, 2011, which Ashland received notice prior to March 31, 2016. See Note 13.
Earnings or Loss per Share of Successor
Basic EPS which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common shares and the proceeds from such activities, if any, were used to acquire shares of common stock at the average market price during the reporting period. During a net loss period, the assumed exercise of in-the-money stock options and unvested stock has an anti-dilutive effect, and therefore such potential shares are excluded from the diluted EPS computation.
Per share information is based on the weighted average number of common shares outstanding during each period for the basic computation and, if dilutive, the weighted average number of potential common shares resulting from the assumed conversion of outstanding stock options, unvested stock and unvested stock units for the diluted computation.
For both the three and nine months ended June 30, 2016, there were 12,476,250 Founder Shares that were not included in the computation because market conditions were not yet satisfied and 1,547,500 PSU awards that were not included in the computation of diluted shares outstanding because performance targets and/or market conditions were not yet met for these awards. Diluted shares outstanding also did not include 25,012,500 shares based on the exercise of 50,025,000 outstanding out-of-the-money warrants as their impact on the Company’s net loss is anti-dilutive for both the three and nine months ended June 30, 2016.
The Predecessor was organized as a limited liability company, therefore EPS for the predecessor periods was not applicable.
Concentrations of Credit Risk
All of the Company’s financial instruments involve elements of credit and market risk. The most significant portion of this credit risk relates to nonperformance by counterparties. To manage counterparty risk associated with financial instruments, the Company selects and monitors counterparties based on its assessment of their financial strength and on credit ratings, if available.
Foreign Currency
The reporting currency of the Company is the U.S. dollar. With few exceptions, the local currency is the functional currency for the Company's foreign subsidiaries. In consolidating the results of operations, income and expense accounts are translated into U.S. dollars at average exchange rates in effect during the period and asset and liability accounts are translated at period-end exchange rates. Translation gains or losses are recorded in the foreign currency translation component in Accumulated other comprehensive income (loss) in shareholders’ equity and are included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company.
Transactions undertaken in currencies other than the functional currency of a subsidiary are translated using the exchange rate in effect as of the transaction date and give rise to foreign currency transaction gains and losses. Foreign currency transaction gains and losses are recorded as a component of Selling, general and administrative expenses. Net foreign currency transaction losses from various currencies were $0.4 million for the three and nine months ended June 30, 2016 for the Successor. Net foreign currency transaction losses were $1.3 million and $1.6 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $0.3 million and $0.9 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.
Revenue Recognition
Revenues are recognized when persuasive evidence of an arrangement exists, products are shipped and title is transferred or services are provided to customers, the sales price is fixed or determinable and collectability is reasonably assured. Revenue for product sales is recognized at the time title and risk of loss transfer to the customer, based on the terms of the sale. For products delivered under the Company’s standard shipping terms, title and risk of loss transfer when the product is delivered to the customer’s delivery site. For sales transactions designated Freight on Board shipping point, the customer assumes risk of loss and title transfers at the time of shipment. Deferred revenues may result from (i) delivery delays for products delivered under the Company’s standard shipping terms or (ii) from other arrangements with its customers. Sales are reported net of tax assessed by qualifying governmental authorities.
The Company is generally the primary obligor in sales transactions with its customers, retains inventory risk during transit and assumes credit risk for amounts billed to its customers. Accordingly, the Company recognizes revenue primarily based on the gross amount billed to its customers. In sales transactions where the Company is not the primary obligor and does not retain inventory risk, the Company recognizes revenue on a net basis by recognizing only the commission the Company retains from such sales and including that commission in sales and operating revenues in the condensed consolidated statements of operations.
Consistent with industry standards, the Company may offer volume-based rebates to large customers if the customer purchases a specified volume with the Company over a specified time period. The determination of these rebates at an interim date involves management judgment. As a result, the Company’s revenues may be affected if a customer earns a rebate toward the end of a year that the Company had not expected or if its estimate of customer purchases are less than expected. The Company has the experience and access to relevant information that the Company believes are necessary to reasonably estimate the amounts of such deductions from gross revenues. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly if and when actual experience differs from previous estimates. The Company recognizes the rebate obligation as a reduction of revenue based on its estimate of the total volume of purchases from a given customer over the specified period of time. Customer rebates totaled $0.6 million for the three and nine months ended June 30, 2016 for the Successor. Customer rebates totaled $1.1 million and $4.0 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor and $1.1 million and $3.9 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively. Customer rebates due to customers were $3.6 million at June 30, 2016 for the Successor and $4.0 million at September 30, 2015 for the Predecessor. These payables are included in Accrued expenses and other liabilities in the condensed consolidated balance sheets.
Supplier Rebates
Certain of the Company's vendor arrangements provide for purchase incentives based on the Company achieving a specified volume of purchases. The Company records the volume-based purchase incentives as a reduction of inventory costs (and related cost of sales) based on its purchases to date and its estimates of purchases for the remainder of the calendar year. The Company receives these incentives in the form of rebates that are payable only when the Company's purchases equal or exceed the relevant calendar year target. Supplier rebates are recorded as a reduction of inventory costs and accrued as part of cost of sales for products sold based on progress towards earning the supplier rebates, taking into consideration cumulative
purchases of inventory to date and projected purchases through the end of the applicable calendar year. Supplier rebates totaled $0.5 million for the three and nine months ended June 30, 2016 for the Successor. Supplier rebates totaled $1.8 million and $6.5 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $3.4 million and $11.2 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively. Supplier rebates due to the Company were $2.4 million at June 30, 2016 for the Successor and $3.4 million at September 30, 2015 for the Predecessor. These receivables are included in Accounts and notes receivable in the condensed consolidated balance sheets.
Shipping and Handling
All shipping and handling amounts billed to customers are included in revenues. Costs incurred related to the shipping and handling of products are included in cost of sales.
Expense Recognition
Cost of sales include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, internal transfers and all other distribution network costs. Selling, general and administrative expenses include sales and marketing costs, advertising, research and development, customer support, environmental remediation and administrative costs. Because products and services are generally sold without any extended warranties, liabilities for product warranties are not significant. There were no material advertising expenses for each of the three and nine months ended June 30, 2016 for the Successor. Advertising expenses totaled $0.5 million and $1.3 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $0.4 million and $1.7 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively. There were no material research and development expenses incurred during any of the periods presented.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The provision for income taxes includes income taxes paid, currently payable or receivable, and those deferred.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
The Predecessor was organized as a limited liability company and was taxed as a partnership for U.S. income tax purposes. As such, with the exception of a limited number of state and local jurisdictions, the Predecessor was not subject to U.S. income taxes. Accordingly, the members of the Predecessor reported their share of the Predecessor’s taxable income on their respective U.S. federal tax returns. The Predecessor’s sole active U.S. corporate subsidiary, Sub Holding, was subject to tax at the entity level in the U.S. The net earnings for financial statement purposes differed from taxable income reportable by the Predecessor to the members as a result of differences between the tax basis and financial reporting basis of certain assets and liabilities and other factors. The Predecessor was required to make quarterly distributions to members to fund their tax obligations, if any, attributable to the Predecessor’s taxable income. In some jurisdictions, the Predecessor made such distributions in the form of tax payments paid directly to the taxing authority on behalf of its members. Controlled foreign corporations are subject to tax at the entity level in their respective jurisdictions.
Due to related party pursuant to Contingent Consideration Obligations
As described in Note 3, as part of the consideration for the Business Combination, the Company entered into the TRA and agreed to pay the Deferred Cash Consideration pursuant to the Merger Agreement. The Company’s obligation for these contingent consideration amounts was initially measured at fair value as of the Closing Date. The Company’s contingent consideration liabilities are required to be recorded at fair value as of the end of each reporting period with any changes in fair value recorded in operating income. Changes in the estimates and inputs used in determining the fair value of the contingent consideration could have a material impact on the amounts recognized.
Share-Based Compensation
The Company accounts for share-based compensation expense for equity instruments granted in exchange for employee and director services. Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the vesting period of the equity award grant.
The Company’s PSU awards contain both market and performance-based conditions. At the grant date, market conditions are incorporated into the fair value measurement using a Monte Carlo simulation model under the assumptions that performance-based conditions are met and not met. The Company then determines the probability that performance-based conditions will be met and incorporates this into the grant date fair value of the award.
The compensation cost for the PSU awards is amortized over the vesting period on a straight-line basis, net of estimated forfeitures. Forfeiture rates are estimated based on consideration of historical forfeitures of the Predecessor’s actual forfeitures of its share-based compensation awards and a peer group of companies.
Recent Accounting Pronouncements Adopted
In June 2014,October 2016, the FASB issued ASU 2014-12, Compensation-Stock Compensation2016-16, Income Taxes (Topic 718)740): Accounting for Share-Based Payments When the TermsIntra-Entity Transfers of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and an entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The Company adopted these amendments on January 1, 2016,Assets Other than Inventory, which did not have a material impact on the Company’s financial position or results of operations.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirementexception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an acquireroutside party. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existedretained earnings as of the acquisition date and that, if known, would have affected measurement or recognitionbeginning of amounts initially recognized. The amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.of adoption. The Company adopted this standard during the three months ended June 30, 2016. Any future adjustments to the amounts initially recognized for assets and liabilities acquired as a result of the Business Combination will be recognized in the period in which they are identified.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify all deferred tax assets and liabilities as noncurrent. These amendments are effective for fiscal years beginning after December 15, 2016 and interim periods within those years and early adoption is permitted. The Company adopted this standard during the three months ended June 30,31, 2016 on a prospective basis and its adoption did not have a material impact on the Company’s financial position or results of operations or on the Predecessor’s financial position or results of operations for the periods presented.
In April and August 2015,January 2017, the FASB issued ASU No. 2015-03 and2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. The amendments in this ASU No. 2015-15, “Interest-Imputation of Interest,” respectively, to simplify the presentation of debt issuance costs. These amendments require debt issuance costsspecify for an acquisition to be presented inconsidered a business, it must include an input and a substantive process that together significantly contribute to the balance sheet as a direct deduction fromability to create outputs. The amendments also further define outputs, and specify that an acquisition where the carryingfair value of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as angross assets acquired is concentrated in a single asset and amortized over the termor group of the arrangement.similar assets would not constitute a business. The Company adopted these amendments on January 1,this standard during the three months ended December 31, 2016 on a retrospective basis. As a result,prospective basis and applied the Predecessor financial statements have been adjustedamendments to reclassify $9.1 million of debt issuance costs from Other non-current assets and into Long-term debt and capital lease obligations, less current portion, net on the condensed consolidated balance sheets as of September 30, 2015.asset acquisition that occurred during the three months ended December 31, 2016. See Note 3.
New Accounting Pronouncements Not Yet Adopted
In May 2014,January 2017, the FASB issued ASU 2014-9,2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU removed step two of the goodwill impairment test and specify that an entity will recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value. The Company is evaluating this ASU and intends to early adopt the new guidance during the second quarter of fiscal 2017.
The Company continues the evaluation of the potential effects on its financial position or results of operations of the accounting pronouncements disclosed in its consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on December 8, 2016, including ASU 2014-09, Revenue from Contracts with Customers, (Topic 606).and ASU 2016-02, Leases.
3. Acquisitions
Asset Acquisition
In December 2016, the Company entered into an asset purchase agreement whereby it acquired certain customer contracts and a customer list. Additionally, in connection with this transaction, the Company entered into a supply agreement and a licensing agreement granting the Company the non-exclusive use of a certain trademark. The amendments intotal consideration associated with this ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and require that revenue be recognized to depict the transfertransaction was $8.5 million, of promised goods or services to customers in an amount that reflects thewhich $5.1 million was paid at closing. The remaining consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-9 for all entities by one year. These amendments will be effectivepaid in annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. Earlier applicationequal amounts on or before January 1, 2018 and January 1, 2019. The remaining consideration is permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting periods within that reporting period. The Company isincluded in the process of evaluating the provisions of this ASUAccrued expenses and assessing the potential effect other liabilities and Other non-current liabilities on the Company’s financial position or resultscondensed consolidated balance sheet. In connection with this transaction, the Company recognized intangible assets totaling $8.5 million which are included in Other intangible assets, net of operations.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure inventory at the lower of cost or net realizable value, whereas guidance previously required an assessment of market value of inventory, with different possibilities as to determining market value. This ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those years and early adoption is permitted. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effectamortization on the Company’s financial position or results of operations.condensed consolidated balance sheet. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 10 and 13 years.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU (i) requires all equity investments in unconsolidated entities other than those measured using the equity method of accounting, to be measured at fair value through earnings; (ii) when the fair value option has been elected for financial liabilities, requires that changes in fair value due to instrument specific credit risk be recognized separately in other comprehensive income and accumulated gains and losses due to these changes and will be reclassified from accumulated other comprehensive income to earnings if the liability is settled before maturity; and (iii) amends certain fair value disclosure provisions related to financial instruments carried at amortized cost. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is in the process of evaluating the provisions of the ASU and assessing the potential effect on the Company’s financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires all leases with terms greater than 12 months, whether finance or operating, to be recorded on the balance sheet, reflecting a liability to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current GAAP. These amendments are effective for the reporting periods beginning after December 15, 2018 with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its consolidated financial statements due, in part, to its substantial number of operating lease obligations.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance simplifies several aspects of accounting for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the provisions of this ASU and assessing the potential effect on the Company’s financial position and results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used to better inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning December 15, 2020 including interim periods within those years. Early adoption is permitted. The Company is currently in the process of evaluating the provisions of this ASU, and assessing the potential effect on the Company’s financial position or results of operations.
3. Business Combination
On June 9, 2016, the Company consummated the Business Combination pursuant to the Merger Agreement, whereby WLRH acquired Holdings (including the portion of Holdings held by Blocker) through a series of two mergers. As a result of the transactions contemplated by the Merger Agreement, Holdings and Blocker became wholly-owned subsidiaries of WLRH.
The estimated purchase consideration for the Business Combination was as follows:
| | | Cash | $ | 424.9 |
| $ | 424.9 |
|
| Less: cash acquired | (64.3 | ) | (64.3 | ) |
Equity(1) | 276.7 |
| 276.7 |
|
Founder Shares transferred to Selling Equityholders(1) | 30.2 |
| 30.2 |
|
| Contingent consideration - Fair value of Deferred Cash Consideration | 49.6 |
| 45.4 |
|
| Contingent consideration - Fair value of TRA | 94.9 |
| 84.2 |
|
Total purchase consideration(2)(1) | $ | 812.0 |
| $ | 797.1 |
|
(1) See Note 11.
(2) In addition to the total purchase consideration above, the Company assumed the outstanding indebtedness of the Predecessor, including related accrued interest through the Closing Date, totaling $774.3 million. The proceeds of the New Credit Facilities were used to repay such indebtedness and accrued interest immediately following the consummation of the Business Combination.
The total purchase consideration described above is preliminary and subject to finalization of fair value assessment for the contingent consideration liabilities. Additionally, the total purchase consideration is subject to completion of the final working capital adjustment, which is expected to be completed within 75 days after the Closing Date.
Contingent Consideration - Deferred Cash Consideration
The contingent consideration associated with the Deferred Cash Consideration will be an amount in cash equal to the prevailing price of the Company’s common stock at the time that the Company pays such deferred cash payment multiplied by the number of Excess Shares. CertainShares (5,178,642 Excess Shares as of December 31, 2016). 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. In such circumstances,If any Excess Shares remain on June 30, 2021, the Company alternatively hasmust elect to either (i) within five business days of such date, pay the option to conduct offerings of common stock at leastSelling Equityholders an amount in cash equal to the product of the number of any remaining Excess Shares at that time,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 remitpay the gross proceeds thereof (less any underwriting discounts and commissions) to the Selling Equityholders. However, to the extent the number of shares issued in such offerings does not equal the full amount of Excess Shares remaining at the time of the offering, the Company’s obligations with respect to any remaining Excess Shares, including the obligation to continue to complete any necessary additional offerings, shall continue.
In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model. The estimated fair value of the Deferred Cash Consideration liability as of the Closing Date was $45.4 million. See Note 9.
Contingent Consideration - TRA
Concurrent with the completion of the Business Combination, the Company incurred the liability for the contingent consideration related to the TRA, which reflects amounts owed to the Selling Equityholders. This liability generally provides for the payment by the Company to the Selling Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date as a result of (i) certain increases in tax basis resulting from the Company Merger, (ii) certain tax attributes of Holdings existing prior to the Mergers, (iii) net operating losses and certain other tax attributes of Blocker available to the Company as a result of the Blocker Merger and (iv) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments the Company makes under the TRA. The Company will retain the benefit of the remaining 15% of the net cash savings, if any. The Company estimated the fair value of the TRA liability based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. The estimated fair value of the TRA liability as of the Closing Date was $94.9$84.2 million. The undiscounted cash flows associated with the TRA liability as of the Closing Date were estimated to be between $190.0$180.0 million and $230.0$220.0 million over the time period during which the tax benefits are expected to be realized, currently estimated at over 20 years.
The amount and timing of any payments due under the TRA will vary depending upon a number of factors, including the amount and timing of the taxable income the Company generates in the future and the U.S. federal, state and local income tax rates then applicable. In addition, payments made under the TRA will give rise to additional tax benefits for the Company and therefore to additional potential payments due under the TRA. The term of the TRA commenced upon the consummation of the Mergers and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless the Company exercises its right to terminate the TRA early. If the Company elects to terminate the TRA early, its obligations under the TRA would accelerate and it generally would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by it under the TRA, calculated in accordance with certain valuation assumptions set forth in the TRA.
The liabilities related to the Deferred Cash Consideration and the TRA are included in Due to related party pursuant to contingent consideration obligations on the Company’s condensed consolidated balance sheets.
Preliminary Purchase Consideration Allocation
The Business Combination is accounted for under the acquisition method, with WLRH determined to be the accounting acquirer of Holdings, which requires the Company to perform an allocation of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase consideration over the estimated fair values is recorded as goodwill. The following table summarizes the Company’s preliminary allocation of the purchase consideration to assets acquired and liabilities assumed at the acquisition date:Closing Date:
| | | | Preliminary Purchase Consideration Allocation | | | |
| | | Preliminary Purchase Consideration Allocation |
| Accounts receivable | $ | 470.0 |
| $ | 470.0 |
|
| Inventory | 328.5 |
| 328.5 |
|
| Other current assets | 24.5 |
| 25.8 |
|
| Property, plant and equipment | 339.5 |
| 328.3 |
|
| Customer-related intangible | 197.0 |
| 201.0 |
|
| Trade name | 20.5 |
| 21.0 |
|
| Below-market leases | | 0.7 |
|
| Other non-current assets | 3.3 |
| 3.2 |
|
| Deferred tax assets | 1.2 |
| 1.2 |
|
| Goodwill | 695.6 |
| 666.9 |
|
| Total assets acquired | 2,080.1 |
| 2,046.6 |
|
| | |
| |
|
| Short-term borrowings and current portion of capital leases | 40.6 |
| 40.6 |
|
| Accounts payable | 338.0 |
| 335.9 |
|
| Other current liabilities | 52.7 |
| 52.8 |
|
| Long-term portion of capital leases | 23.0 |
| 23.0 |
|
| Long-term debt | 767.3 |
| 767.3 |
|
| Deferred tax liability | 41.3 |
| 24.4 |
|
| Other non-current liabilities | 5.2 |
| 5.5 |
|
| Total liabilities assumed | 1,268.1 |
| 1,249.5 |
|
| | |
| |
|
| Net assets acquired | $ | 812.0 |
| $ | 797.1 |
|
During the three months ended December 31, 2016, the Company recorded an adjustment to the fair value of accounts payable of $2.1 million. The total purchase consideration and the related purchase consideration allocation above areis preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment, intangibles contingent consideration and the related tax impacts on these items. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the amount of the purchase consideration allocable to goodwill. The fair value and related tax impact assessments are to be completed within twelve months of the Closing Date, and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.
Transaction costs incurred by the Company associated with the Business Combination were $15.9$0.8 million and $18.0$1.0 million forduring the three and nine months ended June 30, 2016 for the Successor, respectively. The Company also incurred a total of $25.3 million of debt issuance costs related to the New Credit Facilities in connection with the consummation of the Business Combination.
Transaction costs incurred by the Predecessor associated with the Business Combination were $26.1 million and $33.4 million for the period from April 1, 2016 through June 8,December 31, 2016 and the period from October 1, 2015, through June 8, 2016, respectively.
A summary and description of the acquired assets and assumed liabilities fair valued in conjunction with applying the acquisition method of accounting follows:
Accounts Receivable
Accounts receivable consists of receivables related to the customers of the acquired business, as well as various other miscellaneous receivables. The accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on expected collections of the Predecessor. Accordingly, accounts receivable included a fair valuean adjustment of $4.2$4.1 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Closing Date.
Inventory
Inventory consists primarily of finished products to be distributed to the acquired business’s customers. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability that is expected to be generated once the inventory is sold (net realizable value). The inventory fair value step up of $13.8 million will bewas recognized in income as the inventory is sold, which is expected to be within two months of the Closing Date. The Company recognized $6.9 million of the inventory fair value step up during the three monthsfiscal year ended JuneSeptember 30, 2016, which is included inCost of sales and operating expenses in the condensed consolidated statement of operations.
Other Current Assets
Other current assets consist primarily of prepaid expenses, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
Property, Plant and Equipment
Property, plant and equipment consists primarily of: 42 owned distribution locations in the United States,U.S., Puerto Rico and Canada; 11 leased locations in the United States,U.S., Canada, Puerto Rico, Mexico, Europe and China (excluding third-party operated warehouses); office equipment and other similar assets used in the Predecessor's operations. The preliminary allocation of the purchase consideration for property, plant and equipment was based on the fair market value of such assets determined using the cost approach. The cost approach consisted of estimating the fixed assets’ replacement cost less all forms of depreciation. The fair value of land was determined using the comparable sales approach. The fair value adjustment to property, plant and equipment was $107.3$96.1 million. The Company's assessment of replacement cost of certain property and equipment is preliminary, and will be completed within twelve months of the Closing Date.
Customer-Related Intangible
Customer relationships were valued through the application of the income approach. Under this approach, revenue, operating expenses and other costs associated with existing customers were estimated in order to derive cash flows attributable to the existing customer relationships. The resulting estimated cash flows were then discounted to present value to arrive at the fair value of existing customer relationships as of the valuation date. The value associated with customer relationships will be amortized on a straight-line basis over a 12-year period, which represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. The Company recognized $197.0$201.0 million for these intangible assets as part of the preliminary allocation of the purchase consideration allocation.consideration. The Company's assessment of the expected future cash flows related to the customer intangibles is preliminary, and will be completed within twelve months of the Closing Date.
Trade Name
The Nexeo"Nexeo" trade name was valued through application of the income approach, involving the estimation of likely future sales and an estimated royalty rate reflective of the rate that a market participant would pay to use the Nexeo name. The fair value of this asset will be amortized on a straight-line basis over a period of four years, estimated based on the period in which the Company expects a market participant would use the name prior to rebranding and the length of time the name would be expected to maintain recognition and value in the marketplace. The Company recognized $20.5$21.0 million for this intangible asset as part of the preliminary allocation of the purchase consideration allocation.consideration. The Company's assessment of these future cash flows is preliminary and will be completed within twelve months of the Closing Date.
Below-Market Leases
The Company recognized an intangible asset related to favorable lease terms of certain properties under operating leases where rental payments were determined to be less than current market rates. The intangible asset will be amortized over the remaining life of the operating leases, which ranges from one to seven years. The Company recognized $0.7 million for this intangible asset as part of the preliminary allocation of the purchase consideration.
Other non-current assets
Other non-current assets acquired representsrepresent certain long-term deposits, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
Goodwill
Goodwill represents the excess of the total purchase consideration over the fair value of the underlying net assets acquired, largely arising from the workforce and extensive efficient distribution network that has been established by the acquired business. Of the total amount of goodwill recognized as part of the preliminary allocation of the purchase consideration allocation above, the Company expects approximately $284.6$191.5 million to be deductible for tax purposes.purposes as of December 31, 2016. As the fair value assessments of the acquired assets and liabilities are finalized within twelve months of the Closing Date, the amount of goodwill recognized as of the Closing Date is subject to change.
Short-term borrowings and current portion of capital leases.leases
Short-term borrowings and current portion of capital leases includes short term borrowings of Nexeo Plaschem and the current portion of capital leases, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
Accounts Payable
Accounts payable represent short-term obligations owed to the vendors of the acquired business, which were assumed in the Business Combination. These obligations did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
Other Current Liabilities
Other current liabilities represent primarily accrued expenses, including accrued payroll, accrued interest on long-term debt, certain accrued taxes and various other liabilities arising out of the normal operations of the acquired business. The majority of these liabilities did not have a fair value adjustment because their carrying value approximated fair value. However, no fair value was recognized for certain recorded liabilities that did not meet the definition of a liability under the acquisition method of accounting.
Long-term Portion of Capital Leases
The long-term portion of capital leases includes the non-current portion of capital leases for machinery and equipment, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
Long-term Debt
Long-term debt represents the outstanding principal balance at the Closing Date of the Predecessor Term Loan Facility and the Notes which did not have a fair value adjustment as part of acquisition accounting since the carrying value approximated fair value.
Deferred Taxes
Deferred tax assets and liabilities are attributable to the difference between the estimated fair values allocated to inventory, property, plant and equipment and identified intangibles acquired for financial reporting purposes and the amounts determined for tax reporting purposes and give rise to temporary differences. The deferred tax assets and liabilities will reverse in future periods or have reversed as the related tangible and intangible assets are amortized, acquired inventory is sold, or if goodwill is impaired. The estimates of the deferred taxes are preliminary as they are dependent on the final fair values allocated to property, plant and equipment and identified intangibles. Additionally, the Company’s entity structure includes several partnerships. The estimates of deferred taxes are preliminary as the evaluation of the tax basis of each individual partner's interest in the partnerships has not been fully completed.
Impact of the Business Combination on the Company’s Consolidated Financial Information
For the three and nine months ended June 30, 2016, the Company’s consolidated sales and operating revenues and net loss include $214.3 million and $1.4 million, respectively, related to the operations of the acquired business since the closing date of the Business Combination.
Unaudited Consolidated Pro Forma Financial Information
The consolidated pro forma results presented below include the effects of the Business Combination as if they had occurred as of October 1, 2014, the beginning of the previous fiscal year or October 1, 2014.prior to the year the Business Combination was consummated. The consolidated pro forma results reflect certain adjustments related to this acquisition, primarily the amortization expense associated with estimates for the acquired intangible assets, inventory adjustments to fair value, depreciation expense based on the new fair value of property, plant and equipment, transaction costs, interest expense and income taxes.
The consolidated pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Business Combination been completed on October 1, 2014.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2016 | | Nine Months Ended
June 30, 2016 | | Three Months Ended
June 30, 2015 | | Nine Months Ended
June 30, 2015 |
| Sales and operating revenues | $ | 864.5 |
| | $ | 2,554.4 |
| | $ | 988.8 |
| | $ | 3,019.3 |
|
| Operating income (loss) | 21.4 |
| | 54.8 |
| | 24.6 |
| | (28.1 | ) |
| Net income (loss) from continuing operations | 6.6 |
| | 14.9 |
| | 13.8 |
| | (35.7 | ) |
| Net income (loss) | 6.6 |
| | 15.0 |
| | 13.8 |
| | (36.4 | ) |
| Basic and diluted net income (loss) per share | 0.09 |
| | 0.19 |
| | 0.18 |
| | (0.47 | ) |
|
| | | | | | | |
| | Three Months Ended December 31, 2016 | | Three Months Ended December 31, 2015 |
| Sales and operating revenues | $ | 794.8 |
| | $ | 827.7 |
|
| Operating income (loss) | (0.8 | ) | | 6.5 |
|
| Net loss from continuing operations | (7.8 | ) | | (2.4 | ) |
| Net loss | (7.8 | ) | | (2.4 | ) |
| Basic and diluted net loss per share | (0.10 | ) | | (0.03 | ) |
For all periods presented above, the basic and diluted net income (loss)loss per share amounts were computed using weighted average shares outstanding of 76,746,168, which assumes all shares issued as a result of the Business Combination would have been issued on October 1, 2014. There were 12,476,250 Founder Shares not included in the basic or diluted computations because market conditions are assumed to be not satisfied. Additionally, 1,547,5001,582,500 outstanding PSU awards were not included in the computation of diluted shares outstanding because performance targets and/or market conditions are assumed not to have been met for these awards. Diluted shares outstanding also did not include 25,012,500 shares based on the exercise of 50,025,000 warrants because the warrants were out-of-the-money, and the 64,518 shares of unvested restricted stock awards issued to directors were not included as their impact on the Company’s pro forma net income (loss) for all periods presented.loss would have been anti-dilutive. Additionally, the 28,000 RSUs granted during the three months ended December 31, 2016 were not included in the computation of pro forma diluted shares outstanding as their impact on the Company’s pro forma net loss would have been anti-dilutive.
4. Certain Balance Sheet Information
Cash and Cash Equivalents
Cash and cash equivalents were $38.6$33.3 million as of June 30,December 31, 2016 for the Successor and $127.7$47.5 million as of September 30, 2015 for the Predecessor.2016. These amounts included the following:
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2016 | | | September 30, 2015 | December 31, 2016 | | September 30, 2016 |
| Cash held by foreign subsidiaries | $ | 35.4 |
| | | $ | 54.1 |
| $ | 28.8 |
| | $ | 41.9 |
|
| Non-U.S. dollar denominated currency held by foreign subsidiaries | $ | 33.0 |
| | | $ | 45.0 |
| $ | 25.3 |
| | $ | 36.9 |
|
| Currency denominated in RMB | $ | 8.9 |
| | | $ | 4.7 |
| $ | 9.0 |
| | $ | 6.5 |
|
Non-U.S. dollar denominated currency held by foreign subsidiaries was primarily in euros and RMB. While the RMB is convertible into U.S. dollars, foreign exchange transactions are subject to approvals from SAFE. The Company does not anticipate any significant adverse impact to overall liquidity from restrictionspotential limitations on the transfer or conversion of cash and cash equivalents.
Inventories
Inventories at June 30,December 31, 2016 and September 30, 20152016 consisted of the following:
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2016 | | | September 30, 2015 | December 31, 2016 | | September 30, 2016 |
| Finished products | $ | 317.2 |
| | | $ | 320.9 |
| $ | 296.6 |
| | $ | 311.7 |
|
| Supplies | 4.3 |
| | | 4.2 |
| 4.5 |
| | 4.1 |
|
| Total | $ | 321.5 |
| | | $ | 325.1 |
| $ | 301.1 |
| | $ | 315.8 |
|
The Company’s inventories in the U.S. and Canada are collateral under the New Credit Facilities.
Other Non-Current Assets
Other non-current assets at June 30,December 31, 2016 and September 30, 20152016 consisted of the following:
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | June 30, 2016 | | | September 30, 2015 |
| Debt issuance costs of revolving credit facilities | $ | 6.7 |
| | | $ | 5.4 |
|
| Other | 3.2 |
| | | 3.4 |
|
| Total | $ | 9.9 |
| | | $ | 8.8 |
|
In connection with the New Credit Facilities, the Company incurred debt issuance costs of $25.3 million during the nine months ended June 30, 2016. Of these, $6.8 million related to the New ABL Facility and were recorded in Other non-current assets on the condensed consolidated balance sheet. The remaining $18.5 million of debt issuance costs related to the New Term Loan Facility and were recorded as a reduction of the debt. See Note 7. |
| | | | | | | |
| | December 31, 2016 | | September 30, 2016 |
| Debt issuance costs of the ABL Facility | $ | 6.1 |
| | $ | 6.4 |
|
| Other | 4.0 |
| | 4.3 |
|
| Total | $ | 10.1 |
| | $ | 10.7 |
|
Amortization of debt issuance costs related to the New ABL Facility recorded in Interest expense in the condensed consolidated income statementsstatement of operations was $0.1$0.3 million for the three and nine months ended June 30, 2016 for the Successor.
In connection with the Business Combination, debt issuance costs totaling $9.3 million, associated with the Predecessor were derecognized as part of the purchase consideration allocation.December 31, 2016. Amortization of debt issuance costs related to the Predecessor ABL Facility recorded in interest expense were $0.6 million and $2.1 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, andwas $0.8 million and $2.3 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.
Investments and Cash Previously Held in Trust
Prior to the Business Combination, the Company held in a trust account securities which the Company had the ability and intent to hold until maturity. Held-to-maturity treasury securities were recorded at amortized cost and adjusted for the amortization of the original discount. During the nine months ended June 30, 2016, the Company recognized $0.6 million of amortization related to the original discount, which was recorded in Interest income in the condensed consolidated income statement. As part of the Business Combination, the Company withdrew all proceeds from the trust account.December 31, 2015.
5. Property, Plant and Equipment
Property, plant and equipment at June 30,December 31, 2016 and September 30, 20152016 consisted of the following:
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2016 | | | September 30, 2015 | December 31, 2016 | | September 30, 2016 |
| Land | $ | 55.7 |
| | | $ | 41.2 |
| $ | 50.3 |
| | $ | 50.4 |
|
| Plants and buildings | 93.7 |
| | | 78.3 |
| 103.4 |
| | 89.8 |
|
Machinery and equipment (1) | 135.2 |
| | | 167.8 |
| 132.9 |
| | 130.5 |
|
| Software and computer equipment | 43.5 |
| | | 68.8 |
| 49.3 |
| | 49.0 |
|
| Construction in progress | 14.0 |
| | | 12.9 |
| 20.5 |
| | 16.5 |
|
| Total | 342.1 |
| | | 369.0 |
| 356.4 |
| | 336.2 |
|
| Less accumulated depreciation | (3.0 | ) | | | (137.8 | ) | |
Less accumulated depreciation (2) | | (24.4 | ) | | (13.6 | ) |
| Property, plant and equipment, net | $ | 339.1 |
| | | $ | 231.2 |
| $ | 332.0 |
| | $ | 322.6 |
|
(1) Includes $25.1$39.0 million and $13.1$25.2 million, respectively, related to facilities and equipment acquired under capital leases.
In connection with the Business Combination, property, plant(2) Includes $1.8 million and $1.1 million, respectively, related to facilities and equipment of the Predecessor was adjusted to fair market value. See Note 3.acquired under capital leases.
Depreciation expense recognized on the property, plant and equipment described above was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended June 30, 2015 | | Nine Months Ended June 30, 2015 |
| Depreciation expense | 3.0 |
| | 3.0 |
| | | 7.5 |
| | 27.1 |
| | 9.2 |
| | 27.8 |
|
Equipment Lease
In May 2015, the Predecessor entered into the Ryder Lease for transportation equipment. The Ryder Lease covers the rental of 202 tractors, which replaced a significant portion of the Company’s private fleet of tractors and has a term of seven years. The Ryder Lease is accounted for as a capital lease and requires minimum annual payments of approximately $5.5 million per year. The Company is permitted to terminate the lease of an individual tractor on the anniversary of its delivery date, provided that certain conditions are met. In the event the Company terminates the lease of an individual tractor in accordance with the terms of the Ryder Lease, the Company may elect to purchase the individual tractor at a predetermined residual value or return the tractor to Ryder, subject to an adjustment based on the then-current market value of the individual tractor.
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Depreciation expense | $ | 11.2 |
| | | $ | 9.7 |
|
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, 2016 and $1.2 million as of September 30, 2016. The facilities do not currently meet the criteria for held-for-sale classification; accordingly, they remain classified as held and used.
Facility Lease
The Company is currently in discussions withCompany’s sale of its Franklin Park facility to the Illinois Tollway Authority regarding the sale of one of the Company’s facilities under an eminent domain proceeding numbered Illinois State Tollway Authority v. Nexeo Solutions, LLC, Case No. 15 L 50521, Parcel No. WA-12-012. The sale is expected to be finalized during fiscal year 2017. The Company does not expect to record a losswas completed in connection with this transaction.September 2016.
In March 2016, in connection with the relocationAs a result of the sale of this facility, the Company is relocating operations currently managed at the facility described above, the Predecessor entered into a lease agreement forto a new leased facility in Montgomery, Illinois. The leaseMontgomery Lease has a term of 15 years, with annual payments beginning at $1.1 million per year, excluding executory costs, and annual escalations of 2.5% per year. The lease agreementMontgomery Lease includes three renewal options of five years each. The lease termMontgomery Lease is expected to begin in November 2016. This lease agreement will be accounted for as a capital lease.lease and began in the first quarter of fiscal year 2017 at an initial cost of $13.2 million. In connection with the relocation of these operations, the Company has incurred and will incur certain capital expenditures for which it has received and will receive reimbursements from the Illinois Tollway Authority. During the three months ended December 31, 2016, the Company received proceeds and recorded a gain of $2.5 million related to such capital expenditures incurred to date, which is included in Other Income on the condensed consolidated statement of operations.
6. Goodwill and Other Intangibles
Goodwill
The following is a progression of Successor goodwill by reportable segment:
|
| | | | | | | | | | | | | | | |
| Successor | Chemicals | | Plastics | | Other | | Total |
| Balance September 30, 2015 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Business Combination | 335.3 |
| | 295.0 |
| | 65.3 |
| | 695.6 |
|
| Foreign currency translation | (0.1 | ) | | (2.1 | ) | | — |
| | (2.2 | ) |
| Balance at June 30, 2016 | $ | 335.2 |
| | $ | 292.9 |
| | $ | 65.3 |
| | $ | 693.4 |
|
Goodwill by reportable segment as of September 30, 2015 for the Predecessor was $269.7 million for Chemicals, $91.5 million for Plastics and $12.5 million for Other. |
| | | | | | | | | | | | | | | |
| | Chemicals | | Plastics | | Other | | Total |
| Balance at September 30, 2016 | $ | 331.6 |
| | $ | 271.1 |
| | $ | 63.0 |
| | $ | 665.7 |
|
| Measurement period adjustment | (1.3 | ) | | (0.6 | ) | | (0.2 | ) | | (2.1 | ) |
| Foreign currency translation | (0.3 | ) | | (5.3 | ) | | — |
| | (5.6 | ) |
| Balance at December 31, 2016 | $ | 330.0 |
| | $ | 265.2 |
| | $ | 62.8 |
| | $ | 658.0 |
|
Goodwill amounts by reportable segment at June 30,December 31, 2016 are based on the preliminary allocation of the purchase consideration allocation of the Business Combination which is based on preliminary valuations performed to determine the fair value of the acquired assets and assumed liabilities as of the Closing Date. Accordingly, the amounts allocated to goodwill are subject to adjustments to reflect the completion of the fair value assessments related to the Business Combination,purchase price allocation, which are expected towill be completed within twelve months of the Closing Date. These final valuationsDate and could have a material impact on total goodwill and goodwill by reportable segment. See Note 3.
Goodwill Impairment Test
Goodwill is tested for impairment annually as of March 31 and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, or operating segment, for the Company.
Significant management judgment is required in the estimates and assumptions made for purposes of the Company’s goodwill impairment testing. If actual results differ from these estimates and assumptions or market conditions materially change, the analysis could be negatively impacted and could result in an impairment charge in future periods.
Other Intangible Assets
During the three months ended December 31, 2016, the Company recognized a new intangible asset class. See Note 3. Definite-lived intangible assets at June 30,December 31, 2016 and September 30, 20152016 consisted of the following:
|
| | | | | | | | | | | | | |
| | | | Successor |
| | | | June 30, 2016 |
| | Estimated
Useful Life
(years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer-related | 12 | | $ | 197.0 |
| | $ | (1.0 | ) | | $ | 196.0 |
|
| Trade name | 4 | | 20.5 |
| | (0.3 | ) | | 20.2 |
|
| Total | | | $ | 217.5 |
| | $ | (1.3 | ) | | $ | 216.2 |
|
|
| | | | | | | | | | | | | |
| | | | Predecessor |
| | | | September 30, 2015 |
| | Estimated Useful Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer-related | 5-14 | | $ | 121.3 |
| | $ | (33.6 | ) | | $ | 87.7 |
|
| Supplier-related | 10 | | 17.0 |
| | (2.6 | ) | | 14.4 |
|
| Leasehold interest | 1-20 | | 2.1 |
| | (1.3 | ) | | 0.8 |
|
| Non-compete agreements | 3-5 | | 10.0 |
| | (4.5 | ) | | 5.5 |
|
| Trademarks and trade names | 2-6 | | 6.2 |
| | (3.2 | ) | | 3.0 |
|
| Total | | | $ | 156.6 |
| | $ | (45.2 | ) | | $ | 111.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2016 | | September 30, 2016 |
| | Estimated
Useful Life
(years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer-related | 12 | | $ | 198.6 |
| | $ | (9.3 | ) | | $ | 189.3 |
| | $ | 200.3 |
| | $ | (5.2 | ) | | $ | 195.1 |
|
| Trade name | 4 | | 21.0 |
| | (2.9 | ) | | 18.1 |
| | 21.0 |
| | (1.7 | ) | | 19.3 |
|
| Below-market leases | 1-7 | | 0.7 |
| | (0.2 | ) | | 0.5 |
| | 0.7 |
| | (0.1 | ) | | 0.6 |
|
| Asset purchase - acquired intangibles | 10-13 | | 8.5 |
| | ��� |
| | 8.5 |
| | — |
| | — |
| | — |
|
| Total | | | $ | 228.8 |
| | $ | (12.4 | ) | | $ | 216.4 |
| | $ | 222.0 |
| | $ | (7.0 | ) | | $ | 215.0 |
|
Amortization expense recognized on the intangible assets described above was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended June 30, 2015 | | Nine Months Ended June 30, 2015 |
| Amortization expense | $ | 1.3 |
| | $ | 1.3 |
| | | $ | 2.8 |
| | $ | 10.6 |
| | $ | 3.9 |
| | $ | 11.8 |
|
Expected amortization expense for the years ending September 30, 2017 through 2021 is $21.5 million, $21.5 million, $21.5 million, $19.9 million, and $16.4 million, respectively.
Other intangible assets at June 30, 2016 are based on the preliminary purchase consideration allocation of the Business Combination, which is based on preliminary valuations performed to determine the fair value of the acquired assets and assumed liabilities as of the Closing Date. The amounts allocated to other intangible assets are preliminary and therefore subject to adjustments to reflect the completion of the fair value assessments related to the Business Combination, which are expected to be completed within twelve months of the Closing Date. These final valuations could have a material impact on other intangible assets. See Note 3. |
| | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Amortization expense | $ | 5.6 |
| | | $ | 3.9 |
|
7. Debt
Short-term borrowings outstanding and the current portion of long-term debt and capital lease obligations at June 30,December 31, 2016 and September 30, 20152016 are summarized below:
|
| | | | | | | | | |
| | | Successor | | | Predecessor |
| | | June 30, 2016 | | | September 30, 2015 |
| Short-term borrowings | | $ | 41.0 |
| | | $ | 34.9 |
|
| Current portion of long-term debt and capital lease obligations | | 9.0 |
| | | 37.5 |
|
| Total short-term borrowings and current portion of long-term debt and capital lease obligations, net | | $ | 50.0 |
| | | $ | 72.4 |
|
|
| | | | | | | |
| | December 31, 2016 | | September 30, 2016 |
| Short-term borrowings | $ | 39.0 |
| | $ | 38.4 |
|
| Current portion of long-term debt and capital lease obligations | 9.1 |
| | 9.3 |
|
| Total short-term borrowings and current portion of long-term debt and capital lease obligations, net | $ | 48.1 |
| | $ | 47.7 |
|
Long-term debt outstanding at June 30,December 31, 2016 and September 30, 20152016 is summarized below:
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | June 30, 2016 | | | September 30, 2015 |
| New ABL Facility | $ | 131.1 |
| | | $ | — |
|
| New Term Loan Facility | 655.0 |
| | | — |
|
| Predecessor ABL Facility | — |
| | | 85.5 |
|
| Predecessor Term Loan Facility | — |
| | | 647.2 |
|
| Notes | — |
| | | 159.2 |
|
Capital lease obligations (1) | 25.2 |
| | | 12.7 |
|
| Total long-term debt | 811.3 |
| | | 904.6 |
|
Less: unamortized debt discount (2) | (3.3 | ) | | | (3.6 | ) |
Less: debt issuance costs(3) | (18.4 | ) | | | (9.1 | ) |
| Less: current portion of long-term debt and capital lease obligations | (9.0 | ) | | | (37.5 | ) |
| Long-term debt and capital lease obligations, less current portion, net | $ | 780.6 |
| | | $ | 854.4 |
|
|
| | | | | | | |
| | December 31, 2016 | | September 30, 2016 |
| ABL Facility | $ | 123.7 |
| | $ | 117.7 |
|
| Term Loan Facility | 651.7 |
| | 653.4 |
|
Capital lease obligations (1) | 37.3 |
| | 24.8 |
|
| Total long-term debt | 812.7 |
| | 795.9 |
|
Less: unamortized debt discount (2) | (3.0 | ) | | (3.2 | ) |
Less: debt issuance costs (3) | (17.3 | ) | | (17.8 | ) |
| Less: current portion of long-term debt and capital lease obligations | (9.1 | ) | | (9.3 | ) |
| Long-term debt and capital lease obligations, less current portion, net | $ | 783.3 |
| | $ | 765.6 |
|
| |
(1) | Capital lease obligations exclude executory costs and interest payments associated with the underlying leases. See “Capital Lease Obligations” below. |
| |
(2) | At June 30, 2016, included $3.3 million ofThe unamortized debt discount is related to the New Term Loan Facility for the Successor. At September 30, 2015, included $1.9 million of unamortized debt discount related to the Predecessor’s Term Loan Facility, with the remainder related to the Notes. Debt discount isand amortized to interest expense over the life of the respective instrumentsinstrument using the effective interest rate method. |
| |
(3) | See discussion below under New Term Loan Facility and Debt Issuance Cost Amortization and Note 2 related to the adoption of ASU 2015-03 and ASU 2015-15. Amortization. |
Short-Term Borrowings
Short-termThe 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 | | Facility Limit | | Outstanding Borrowings Balance | | Weighted Average Interest Rate on Borrowings | | Outstanding LOC and Bankers’ Acceptance Bills | | Remaining Availability |
June 30, 2016 - Successor | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
Bank of America - China (1) | | $ | 28.8 |
| | $ | 27.2 |
| | 3.7% | | $ | — |
| | $ | 1.6 |
| | $ | 28.4 |
| | $ | 27.3 |
| | 4.1 | % | | $ | — |
| | $ | 1.1 |
|
Bank of Communications - China (2) | | 22.6 |
| | 13.8 |
| | 5.3% | | 8.5 |
| | 0.3 |
| | 21.6 |
| | 11.7 |
| | 5.2 | % | | 9.8 |
| | 0.1 |
|
| Total | | $ | 51.4 |
| | $ | 41.0 |
| | $ | 8.5 |
| | $ | 1.9 |
| | $ | 50.0 |
| | $ | 39.0 |
| | | | $ | 9.8 |
| | $ | 1.2 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
September 30, 2015 - Predecessor | | | | | | | | | |
| Bank of America - China | | $ | 23.8 |
| | $ | 23.0 |
| | 3.5% | | $ | — |
| | $ | 0.8 |
| |
| Bank of Communications - China | | 23.6 |
| | 11.9 |
| | 6.1% | | 7.1 |
| | 4.6 |
| |
| September 30, 2016 | | | | | | | | | | | |
Bank of America - China (1) | | | $ | 28.4 |
| | $ | 27.3 |
| | 4.0 | % | | $ | — |
| | $ | 1.1 |
|
Bank of Communications - China (2) | | | 22.5 |
| | 11.1 |
| | 5.2 | % | | 10.5 |
| | 0.9 |
|
| Total | | $ | 47.4 |
| | $ | 34.9 |
| | $ | 7.1 |
| | $ | 5.4 |
| | $ | 50.9 |
| | $ | 38.4 |
| | | | $ | 10.5 |
| | $ | 2.0 |
|
| |
(1) | The borrowing limit of this facility is denominated in U.S. dollars. This line of credit is secured by a standby letter of credit drawn on the New ABL Facility covering at least 110% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance. |
| |
(2) | The borrowing limit of this facility is denominated in RMB. This line of credit is secured by a standby letter of credit drawn on the New ABL Facility covering at least 100% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance. |
In addition to the above lines of credit, Nexeo Plaschem has an arrangement through which it makes borrowings on a short-term basis, usually six months, by using its line of credit with the bank or by pledging the proceeds of its notes receivable. The borrowings under this arrangement are used to fund Nexeo Plaschem’s working capital requirements. At June 30, 2016 and September 30, 2015, there were no outstanding borrowings, no notes receivable pledged and no outstanding bankers’ acceptance bills issued to suppliers under this arrangement.
Nexeo Plaschem has another similar arrangement whereby it is able to pledge proceeds from its notes receivable in exchange for bankers’ acceptance bills issued to suppliers. No notes receivable were pledged under this arrangement at June 30, 2016 and September 30, 2015.
Long-Term Debt
New ABL Facility
On June 9, 2016, theThe ABL Borrowers entered into the New ABL Facility which provides for revolving credit financing including a U.S. Tranche of up to $505.0 million, and a Canadian Tranche of up to the U.S. dollar equivalent of $40.0 million and a FILO Tranche up to $30.0 million. Under the New ABL Facility, up to $50.0 million in the case of the U.S. Tranche and $10.0 million in the case of the Canadian Tranche may be short-term borrowings upon same-day notice, referred to as swingline loans. The New ABL Facility is unconditionally guaranteed, jointly and severally, by Holdings and its wholly-owned subsidiary, Sub Holding. Additionally, Solutions, Holdings and Sub Holding are also co-borrowers under the U.S. Tranche and the FILO Tranche of the New ABL Facility on a joint and several basis, and Nexeo Solutions Canada Corp. is the borrower under the Canadian Tranche. The New ABL Facility matures on June 9, 2021. Provided no default or event of default then exists or would arise therefrom, the ABL Borrowers have the option at the beginning of each quarter, to request that the New ABL Facility be increased by an aggregate amount, when included with any incremental borrowings issued under the New Term Loan Facility, not to exceed $175.0 million.
The New ABL Facility includes a letter of credit sub-facility, which permits up to $200.0 million of letters of credit under the U.S. Tranche (which may be denominated in U.S. dollars, euros or other currencies approved by the administrative agent and the issuing bank) and up to the U.S. dollar equivalent of $10.0 million of letters of credit under the Canadian Tranche (which may be denominated in CAD only). The New ABL Facility also contains a FILO Tranche which can be used by any non-Canadian foreign subsidiary for loans or letters of credit up to an aggregate amount not to exceed $30.0 million.
Obligations under the New ABL Facility are also secured by a first priority lien on inventory and accounts receivable of the ABL Borrowers and a second priority lien on outstanding equity interests of Holdings and certain of its subsidiaries.
The amount of available credit changes every month, depending on the amount of eligible receivables and inventory the ABL Borrowers have available to serve as collateral. In general, the facility is limited to the lesser of (i) the aggregate commitment or (ii) the sum of (a) 90% of eligible accounts receivable, as defined, and (b) 85% of the orderly liquidation value of the eligible inventory and (c) 100% of cash and cash equivalents held in blocked accounts, as defined, maintained by the ABL Agent, for each ABL Borrower. Available credit for the U.S. and Canadian Tranches are calculated separately, and the borrowing base components are subject to customary reserves and eligibility criteria.
Borrowings under the U.S. Tranche and the Canadian Tranche of the New ABL Facility bear interest, at the ABL Borrowers’ option, at either an alternate base rate or Canadian prime rate, as applicable, plus an applicable margin (ranging from 0.25% to 0.75% pursuant to a grid based on average excess availability) or LIBOR or Canadian BA rate (as defined therein), as applicable, plus an applicable margin (ranging from 1.25% to 1.75% pursuant to a grid based on average excess availability). Loans under the FILO Tranche, within the New ABL Facility, bear interest at an alternate base rate plus an applicable margin (ranging from 1.00% to 1.50% pursuant to a grid based on average excess availability) or LIBOR plus an applicable margin (ranging from 2.00% to 2.50% pursuant to a grid based on average excess availability). In addition to paying interest on outstanding principal amounts under the New ABL Facility, the ABL Borrowers are required to pay a commitment fee in respect of the unutilized commitments, which commitment fee is 0.250% or 0.375% per annum and is determined based on average utilization of the New ABL Facility (increasing when utilization is low and decreasing when utilization is high). The ABL Borrowers are required to pay customary letters of credit fees.
The New ABL Facility requires that if the sum of (i) excess availability, as defined (for the ABL Borrowers) and (ii) the amount by which the then-current borrowing base exceeds the aggregate commitments under the New ABL Facility (for the ABL Borrowers) is less than the greater of (a) $40.25 million and (b) 10.0% of the Line Cap (as defined in the New ABL Facility), the ABL Borrowers shall comply with a minimum fixed charge coverage ratio of at least 1.0 to 1.0. In addition, the New ABL Facility contains negative covenants that restrict Holdings and its subsidiaries, including the ABL Borrowers from, among other things, incurring additional debt, granting liens, entering into guarantees, entering into certain mergers, making certain loans and investments, disposing of assets, prepaying certain debt, declaring dividends, modifying certain material agreements or changing the business it conducts.
The New ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, including among other things payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, as amended from time to time, material judgments, actual or asserted failure of any guaranty or security document supporting the New ABL Facility to be in full force and effect, and change of control. If such an event of default occurs, the lenders under the New ABL Facility are entitled to take various actions, including the acceleration of amounts due under the New ABL Facility and all actions permitted to be taken by a secured creditor.
The weighted average interest rate on borrowings under the New ABL Facility was 2.6%2.25% at June 30,December 31, 2016. Solutions had the U.S. dollar equivalent of $73.7$74.3 million in outstanding letters of credit under the New ABL Facility at June 30,December 31, 2016. The collective credit availability under the U.S. and Canadian Tranches of the New ABL Facility was $125.2the U.S. equivalent of $222.8 million at June 30,December 31, 2016. There was no$0.5 million availability under the FILO Tranche at December 31, 2016. The ABL Facility matures on June 30, 2016.9, 2021.
Obligations under the ABL Borrowers’Facility are secured by a first priority lien on all ABL first lien collateral, including eligible inventory and accounts receivable of the ABL Borrowers, and inventorya second priority lien on all Term Loan first lien collateral including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, in each case, subject to certain limitations; provided, that no ABL Facility first lien collateral or Term Loan Facility first lien collateral owned by the Canadian Borrower secure the obligations owing under the U.S. and Canada are collateral undertranche of the New ABL Facility. These accounts receivable and inventory totaled $601.1$566.2 million in the aggregate as of June 30, 2016 for the Successor.December 31, 2016.
Fees paid to the lenders during the fiscal year ended September 30, 2016 in connection with the New ABL Facility totaled $6.8 million and were recorded as debt issuance costs in Other non-current assets on the condensed consolidated balance sheets to be amortized as interest expense over the remaining term of the New ABL Facility. See Note 4.
As of June 30,December 31, 2016, the ABL Borrowers were in compliance with the covenants of the New ABL Facility.
New Term Loan Facility
On June 9, 2016, Neon Finance Company LLC (which was subsequently merged with and into Solutions) entered into a NewThe Term Loan Facility that provides secured debt financing in an aggregate principal amount of up to $655.0 million and the right, at Solutions’ option, to request additional tranches of term loans in an aggregate principal amount, when included with any incremental borrowings issued under the New ABL Facility, of up to $175.0 million, plus unlimited additional amounts such that the aggregate principal amount of indebtedness outstanding at any onethe time of incurrence does not cause the consolidated net senior secured leverage ratio,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 areis subject to the absence of any default and, among other things, the receipt of commitments by existing or additional financial institutions. Borrowings under the New Term Loan Facility bear interest at the borrower’s option at either (i) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which shall be no less than 1.0%, plus an applicable margin of 4.25% or (ii) a base rate determined by reference to the highest of (a) the prime commercial lending rate published by Bank of America, N.A. as its "prime rate," (b) the federal funds effective rate plus 0.50% and (c) a one-month LIBOR rate plus 1.0%, plus an applicable margin of 3.25%. Commencing with the quarter endingended September 30, 2016, Solutions is required to make scheduled quarterly payments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the initial term loans made on the Closing Date of the Mergers, with the balance due at maturity. The Newinterest rate for the Term Loan Facility was 5.25% at December 31, 2016. The Company amortized $0.2 million of debt discount to interest expense during the three months ended December 31, 2016. The Term Loan Facility matures on June 9, 2023. The interest rate for the New Term Loan Facility was 5.25% at June 30, 2016. Proceeds of $651.7 million, net of discount of $3.3 million were received in connection with the New Term Loan Facility.
Additionally, the New Term Loan Facility agreement requires Solutions to make earlymandatory principal payments on an annual basis, commencing with the first required calculation determined at fiscal year ended Septemberend (September 30, 2017,2017), if cash flows for the year, as defined in the agreement,Term Loan Facility exceed certain levels specified in the agreement.Term Loan Facility. Solutions generally has the right to prepay loans in whole or in-part, without incurring any penalties for early payment. Solutions is not required to make an early principal payment for the fiscal year ended September 30, 2016.
The New Term Loan Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict Holdings’ ability and the ability of its subsidiaries to incur additional indebtedness, pay dividends on its capital stock or redeem, repurchase or retire its capital stock or other indebtedness, make investments, loans and acquisitions, create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries, engage in transactions with its affiliates, sell assets, including capital stock of its subsidiaries, alter the business it conducts, consolidate or merge, incur liens. The credit agreement governing the New Term Loan Facility does not require Solutions to comply with any financial maintenance covenants and contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default. As of June 30,December 31, 2016, Solutions was in compliance with the covenants of the New Term Loan Facility.
Obligations under the New Term Loan Facility are secured by a first priority lien on all Term Loan first lien collateral, including outstanding equity interests of Holdingsthe Borrower and certain of the other subsidiaries of Holdings, and a second priority lien on all ABL first lien collateral, including accounts receivablesreceivable and inventory that areof the loan parties under the Term Loan Facility, subject to the New ABL Facility first priority lien.certain limitations.
Fees paid to the lenders during the fiscal year ended September 30, 2016 in connection with the New Term Loan Facility totaled $18.5 million and were recorded as a reduction of the debt balance to be amortized as interest expense over the remaining term of the New Term Loan Facility.
Redemption of Predecessor 8.375% Senior Subordinated Notes due 2018
On June 9, 2016, all of the approximately $149.7 million principal amount of the Notes outstanding were redeemed at a redemption price equal to 100% of the principal amount. The Issuers and the guarantors under the Notes were released from their respective obligations under the Notes and the Indenture (as defined in the Merger Agreement) governing the Notes.
During the second quarter of fiscal year 2016, the Predecessor acquired $9.5 million in aggregate principal amount of its Notes for $8.7 million in cash and recorded a gain on early extinguishment of $0.6 million, inclusive of the write-off of related debt issuance costs and original issue discount which was recorded in Other income in the condensed consolidated statement of operations.
Debt issuance costs totaling $1.4 million were derecognized as part of the purchase consideration allocation.
Predecessor ABL Facility
On June 9, 2016, the Predecessor’s $540.0 million multicurrency ABL Facility was terminated. There was no outstanding balance at the time of termination. Solutions provided notice to the administrative agent and settled all remaining commitments under the facility. Accordingly, the administrative agent released the credit parties from their respective obligations under the facility, effective June 9, 2016.
Predecessor debt issuance costs totaling $3.3 million were derecognized as part of the purchase consideration allocation.
The weighted average interest rate on borrowings under the Predecessor ABL Facility was 1.8% at September 30, 2015. At September 30, 2015, the Predecessor had $67.4 million in outstanding letters of credit under the Predecessor ABL Facility. Collective credit availability under the U.S. and Canadian tranches of the Predecessor ABL Facility was $321.4 million at September 30, 2015.
Predecessor Term Loan Facility
On June 9, 2016, the principal outstanding balance of $617.5 million related to all three tranches of the term loans under the Credit Agreement was paid and the facility was terminated. Accordingly, the administrative agent released the credit parties from their respective obligations and all other commitments under the facility, effective June 9, 2016.
Related debt issuance costs totaling $4.6 million were derecognized as part of the purchase consideration allocation.
Debt Issuance Cost Amortization
Amortization expense included in interest expense related to debt issuance costs of the New Term Loan Facility was $0.1$0.5 million for the three and nine months ended June 30, 2016 for the Successor, $0.8 million and $3.0 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 forDecember 31, 2016. Amortization expense included in interest expense related to debt issuance costs of the Predecessor respectively,Term Loan Facility and $1.0 million and $3.1the Notes were $1.1 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.December 31, 2015.
Capital Lease Obligations
The capital lease obligation balance of $25.2$37.3 million as of June 30,December 31, 2016 is primarily associated with tractors delivered under the Ryder Lease and the Montgomery Lease. See Note 5. ThisThe Ryder Lease obligation excludes future executory costsdecreasing annual interest payments of $2.1ranging from $1.1 million per year,to $0.4 million, for aggregate executory costs of $13.2 million, as well asinterest payments totaling $4.5 million. The Montgomery Lease obligation excludes decreasing annual interest payments ranging from $1.0 million to $0.3$0.1 million, for aggregate interest payments totaling $4.7of $14.4 million. See Note 5.
8. Derivatives
Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements of varying expiration dates through March 2017, to help manage the exposure to interest rate risk related to the variable-rate Predecessor Term Loan Facility. As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished, the related swap agreements were terminated and an early termination payment penalty of $0.3 million was paid in the Successor period and recorded in Transaction related costs in the condensed consolidated statements of operations. No new swaps have been entered into.
The interest rate swaps were accounted for as cash flow hedges. Accordingly, gains or losses resulting from changes in the fair value of the swaps were recorded in other comprehensive income to the extent that the swaps are effective as hedges. Gains and losses resulting from changes in the fair value applicable to the ineffective portion, if any, were reflected in income. Gains and losses recorded in other comprehensive income were reclassified into and recognized in income when the interest expense on the Predecessor Term Loan Facility was recognized.
Gains During the three months ended December 31, 2015 the Predecessor reclassified $0.2 million into and recognized in income realized losses net of reclassifications into income related toon the Predecessor’s interest rate swaps, which were as follows: |
| | | | | | | | | | | | | | | | | |
| | | | Predecessor |
| | Recorded to | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended
June 30, 2015 | | Nine Months Ended
June 30, 2015 |
| Realized loss | Interest expense | | $ | 0.1 |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | 0.4 |
|
| Unrealized gain | Other comprehensive income | | $ | 0.1 |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.1 |
|
See Note 9 for additional information on the fair value of the Predecessor’s derivative instruments.
9. Fair Value Measurements
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is as follows:
● Level 1—Observable inputs that reflect unadjustedUnadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities in active markets.liabilities.
● Level 2—OtherQuoted prices in markets that are not active or inputs thatwhich are observable, either directly or indirectly, observable infor substantially the marketplace.full term of the asset or liability.
● Level 3—UnobservablePrices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity.activity).
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Fair value of financial instruments
The carrying amountvalues of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term borrowings approximate their fair value due to the short-term maturity of those instruments.
The carrying values of borrowings outstanding under the New Credit Facilities approximate fair value at JuneDecember 31, 2016 and September 30, 2016, primarily due to their variable interest rate. The estimated fair value of these instruments is classified by the Company as a Level 3 measurement within the fair value hierarchy due to the varying interest rate parameters as outlined in the respective loan agreements. The carrying values of borrowings under the Predecessor Credit Facilities approximated fair value at September 30, 2015 primarily due to their variable interest rate.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
In addition to the financial instruments that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a non-recurring basis as required by U.S. GAAP, suchGAAP. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges or as part of a business combination. SeeAs discussed in Note 3, for further discussion ofduring the three months ended December 31, 2016, the Company recorded non-recurring fair value measurements related to its asset acquisition. In addition, in the fiscal year ended September 30, 2016, the Company recorded non-recurring fair value measurements related to the Business Combination. These fair value measurements were classified as Level 3 within the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Contingent Consideration
The preliminary fair value of the contingent consideration related to the Deferred Cash Consideration as discussed in Note 3 was $49.6$42.9 million at the Closing Date. The fair value of the contingent consideration related to the Deferred Cash Consideration was $46.7and $35.0 million as of JuneDecember 31, 2016 and September 30, 2016.2016, respectively. The measurement of the contingent consideration related to the Deferred Cash Consideration is classified by the Company as a Level 3 measurement within the fair value hierarchy. In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model with the market price of the Company’s common stock at each valuation date being the most importanta significant input to this model. Unobservable inputs to the valuation are the expected volatility during the applicable period as well as a marketability discount to reflect the illiquidity of the Excess Shares given their terms. An increase in the market price of the Company’s common stock has the same directional effect on the value of the liability related to the Deferred Cash Consideration. An increase in the volatility and marketability discount will lower the value of the liability related to the Deferred Cash Consideration.
The preliminary fair value of the liability for the contingent consideration related to the TRA as discussed in Note 3 was $94.9$86.1 million at the Closing Date. The fair value of the liability for the contingent consideration related to the TRA was $95.5and $83.4 million as of JuneDecember 31, 2016 and September 30, 2016.2016, respectively. The liability for the contingent consideration related to the TRA is classified by the Company as a Level 3 measurement within the fair value hierarchy. The Company estimates the fair value of the liability for the contingent consideration related to the TRA based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. Key inputs to the valuation are prevailing tax rates and market interest rates impacting the discount rate. An increase in the discount rate has the opposite directional effect onwill lower the value of the liability related to the TRA. AnTRA and an increase in prevailing tax rates has the same directional effect onwill increase the value of the liability related to the TRA.
The fair value measurements of the contingent consideration above at the Closing Date are preliminary. Any changes within the measurement period in the estimated fair values of these liabilities may change the amount of the purchase price allocable to goodwill. Any subsequent changesChanges in the fair value of the contingent consideration from their initial fair value recognition atobligations for the Closing Date will be recognized as a component ofthree months ended December 31, 2016 are included in Operating income (loss)in the condensed consolidated statementsstatement of operations. Changesoperations and were as follows:
|
| | | | | | | | | | | |
| | TRA | | Deferred Cash Consideration | | Total Fair Value |
| Contingent consideration as of September 30, 2016 | $ | 83.4 |
| | $ | 35.0 |
| | $ | 118.4 |
|
| Change in fair value of contingent consideration | 2.7 |
| | 7.9 |
| | 10.6 |
|
| Contingent consideration as of December 31, 2016 | $ | 86.1 |
| | $ | 42.9 |
| | $ | 129.0 |
|
Significant changes in the estimates and inputs used in determining the fair value of the contingent consideration could have a material impact on the amounts recognized as a component of Operating income (loss) in future periods.
Predecessor Interest Rate Swaps
Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements of varying expiration dates through March 2017 to help manage the Predecessor’s exposure to interest rate risk related to its variable-rate Predecessor Term Loan Facility. As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished, the related swap agreements were terminated and an early termination payment of $0.3 million was made and recorded in Transaction related costs in the condensed consolidated statements of operations. No new swaps have been put in place to manage interest rate exposure associated with the New Term Loan Facility. At September 30,December 31, 2015, the PredecessorCompany recorded $0.4$0.3 million in Accrued expenses and other liabilities and less than $0.1 million in Other non-current liabilities in the condensed consolidated balance sheet related to these instruments.
As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished and the related interest rate swap agreements were terminated. No new interest rate swap agreements have been put in place to manage interest rate exposure associated with the Term Loan Facility.
During the three and nine months ended June 30,December 31, 2016 and 2015, the Company and the Predecessor did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.
10. Share-based Compensation
Successor and Employee Benefit Plans
On June 8, 2016, the Company’s shareholdersstockholders approved the 2016 LTIP, with an effective date of March 30, 2016, covering approximately a ten-year period. No awards may be granted after March 20, 2026. The 2016 LTIP permits the grant of up to 9,000,000 shares of common stock for various types of awards to employees, directors and consultants of the Company or its subsidiaries, including incentive and non-incentive stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, stock awards, conversion awards and performance awards.
Vesting conditions of awards under the 2016 LTIP are determined by the Compensation Committee of the Board of Directors of the Company, including treatment upon the occurrence of a change of control of the Company. Upon a change of control, the Compensation Committee has the discretion to remove forfeiture restrictions, accelerate vesting, require recipients of awards to surrender the awards for cash consideration, cancel unvested awards without payment of consideration, cause any surviving entity to assume and continue any outstanding awards, or make other such adjustments as the Compensation Committee deems appropriate to reflect such change of control.
If any change is made to the Company’s capitalization, appropriate adjustments will be made by the Compensation Committee as to the number and price of shares awarded under the 2016 LTIP, the securities covered by such awards, the aggregate number of shares of common stock of the Company available for the issuance of awards under the 2016 LTIP and the maximum annual per person compensation limits on share-based awards under the 2016 LTIP.
Other than in connection with a change in capitalization or other transaction where an adjustment is permitted or required under the terms of the 2016 LTIP, the Compensation Committee is prohibited from making any adjustment or approving any amendment that reduces or would have the effect of reducing the exercise price of a stock option or stock appreciation right previously granted under the 2016 LTIP unless the Company’s shareholdersstockholders have approved such adjustment or amendment.
In each calendar year during any part of which the 2016 LTIP is in effect, an employee may not receive awards under the plan in excess of 1,000,000 shares of common stock, or a value of greater than $12.0 million if an award is to be paid in cash or if settlement is not based on shares of common stock, in each case, multiplied by the number of full or partial calendar years in any performance period established with respect to an award, if applicable. A non-employee member of the Board of Directors of the Company may not be granted awards with a cumulative value of greater than $1.0 million during any calendar year for services rendered in their capacity as a director. This limit does not apply to grants made to a non-employee director for other reasons not related to their services as a director.
During the three and nine months ended June 30,December 31, 2016, the Company granted 1,547,50050,000 PSUs to certain officers and employees.an employee. The performance aspect of the PSUs vestvests on June 30, 2019, entitling the recipient to receive a certain number of shares of the Company’s common stock, based on the Company’s achievement of the performance goals included in the PSUs. Depending on the performance of the Company’s common stock during the approximate three yearthree-year performance period, a recipient of the award is entitled to receive a number of common shares equal to a percentage, ranging from 0% to 200%, of the initial award granted, with a 35% total shareholder return entitling the recipient to receive 100% of the award granted. As a result, the Company may issue up to 3,095,000100,000 shares of the Company’s common stock related to these awards. If the Company’s total shareholder return for the performance period is negative, then the number of units ultimately awarded is based on the Company’s achievement of its cumulative Adjusted EBITDA target, as defined by the PSU agreement, during the performance period. If total shareholder return is between negative 15% and 0%, a recipient is entitled to receive a number of shares of stock between 70%50% and 50%70% of the number of PSUs granted. If the cumulative Adjusted EBTIDA target is not met, or the total shareholder return is less than negative 15%, no shares of the Company’s common stock will be issued. The Company used the Monte Carlo simulation model to estimate the fair value of the PSU awards at the grant date, considering the probability of satisfying the various performance criteria. The resulting grant date fair value is recognized as expense on a straight-line basis from the grant date through the end of the performance period. The assumptions used in the Monte Carlo simulation model for PSUs included an expected stock price volatility of 35%40% based on a peer group of similar companies, an expected dividend yield of 0%, an expected term of approximately three years, and a risk-free interest rate of 0.92%0.93%.
The following table summarizes PSU activity during the ninethree months ended June 30,December 31, 2016:
| | | | Units | | Average Grant Date Fair Value Per Unit | PSUs | | Average Grant Date Fair Value Per Unit |
| Unvested PSUs at September 30, 2015 | — |
| | $ | — |
| |
| Unvested PSUs at September 30, 2016 | | 1,542,500 |
| | $ | 9.12 |
|
| Grants | 1,547,500 |
| | 9.13 |
| 50,000 |
| | 6.09 |
|
| Vested | — |
| | — |
| — |
| | — |
|
| Forfeited/Canceled | — |
| | — |
| (10,000 | ) | | 9.13 |
|
| Unvested PSUs at June 30, 2016 | 1,547,500 |
| | $ | 9.13 |
| |
| Unvested PSUs at December 31, 2016 | | 1,582,500 |
| | $ | 9.02 |
|
The PSU awards are accounted for as equity instruments, and the Company recognized compensation costexpense of $0.3$1.1 million as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended June 30,December 31, 2016 for the Successor related to the PSUs. As of June 30,December 31, 2016, the outstanding PSUs had a weighted-average remaining contract life of three2.6 years. As of June 30,December 31, 2016, there was $13.2$11.2 million of total unrecognized compensation expense related to non-vested PSUs.
During the fiscal year ended September 30, 2016, the Company also granted 64,518 shares of restricted stock to certain of the Company's non-employee directors under the 2016 LTIP. The restricted stock will vest on the anniversary of the grant date provided the director continues his services as a director of the Company. The fair value of the restricted stock was determined by the closing price of the Company's common stock on the date of grant.
The following table summarizes restricted stock activity during the three months ended December 31, 2016:
|
| | | | | | |
| | Shares of Restricted Stock | | Average Grant Date Fair Value Per Unit |
| Restricted stock at September 30, 2016 | 64,518 |
| | $ | 9.27 |
|
| Grants | — |
| | — |
|
| Vested | — |
| | — |
|
| Forfeited/Canceled | — |
| | — |
|
| Restricted stock at December 31, 2016 | 64,518 |
| | $ | 9.27 |
|
The restricted stock awards are accounted for as equity instruments, and the Company recognized compensation expense of $0.2 million as a component of Selling, general and administrative expenses on the condensed consolidated statement of operations during the three months ended December 31, 2016 related to the restricted stock. As of December 31, 2016, there was $0.3 million of total unrecognized compensation expense related to restricted stock, and a weighted average remaining life of 0.6 years.
During the fiscal year ended September 30, 2016, TPG entered into agreements with certain of the Company's officers and employees to award a total of 100,000 shares of restricted stock to such officers and employees from shares of the Company's common stock owned by TPG. These awards vest in equal amounts over a three-year period provided that such officers and employees continue their employment with the Company. The Company recognized compensation cost of $0.1 million as a component of Selling, general and administrative expenses on the condensed consolidated statement of operations during the three months ended December 31, 2016 related to these awards. As of December 31, 2016, there was $0.8 million of total unrecognized compensation cost related to non-vested PSUs.these awards, and a weighted average remaining life of 2.4 years.
While these awards were not made pursuant to the 2016 LTIP, they constitute equity-based compensation and therefore will count against the 2016 LTIP's share reserve to the extent the awards vest.
During the three months ended December 31, 2016, the Company granted certain employees a total of 28,000 RSUs that vest equally over a three year period on the anniversary of the grant date provided the employee remains employed by the Company. Upon vesting, the recipients will receive a share of common stock in the company for each RSU awarded. The fair value of these RSUs was determined based on the closing price of the Company’s stock on the grant date.
The following table summarizes restricted stock activity during the three months ended December 31, 2016:
|
| | | | | | |
| | RSUs | | Average Grant Date Fair Value Per Unit |
| Unvested RSUs at September 30, 2016 | — |
| | $ | — |
|
| Grants | 28,000 |
| | 7.28 |
|
| Vested | — |
| | — |
|
| Forfeited/Canceled | — |
| | — |
|
| Unvested RSUs at December 31, 2016 | 28,000 |
| | $ | 7.28 |
|
The RSUs are accounted for as equity instruments, and the Company recognized compensation cost of less than $0.1 million as a component of Selling, general and administrative expenses on the condensed consolidated statement of operations during the three months ended December 31, 2016 related to the RSUs. As of December 31, 2016, there was $0.3 million of total unrecognized compensation cost related to the RSUs, and a weighted average remaining life of 2.9 years.
The Company also awarded 10,500 phantom RSU awards and 10,000 phantom PSU awards to certain non-U.S. employees. The phantom RSUs vest equally over a three-year period on the anniversary of the grant date while the phantom PSUs vest under the same conditions as the PSU awards described above. Upon vesting and provided the employee remains employed by the Company at that time, the awards will be settled in cash. In accordance with ASC 718, these specific phantom RSU and phantom PSU awards are accounted for as a liability, with the awards remeasured at the end of each reporting period based on the closing price of the Company’s common stock or using a Monte Carlo simulation model, as applicable. Compensation expense is recognized ratably on a straight-line basis over the requisite service period. An immaterial amount of compensation expense was recognized during three months ended December 31, 2016 related to these awards.
As of December 31, 2016, there were 7,204,482 shares of the Company’s common stock available for issuance under the 2016 LTIP.
Defined Contribution Plans
Qualifying employees of the Predecessor wereCompany are eligible to participate in the Solutions 401(k) Plan. The 401(k) Plan wasis a defined contribution plan designed to allow employees to make tax deferred contributions as well as company contributions, designed to assist employees of the PredecessorCompany and its affiliates in providing for their retirement. The Predecessor matchedCompany matches 100% of employee contributions up to 4.0%. The Predecessor madeCompany makes an additional contribution to the 401(k) Plan of 1.5%, 3.0%, or 4.5%, based upon years of service of one to ten years, eleven to twenty years and twenty-one years or more, respectively. A version of the 401(k) Plan wasis also available for qualifying employees of the PredecessorCompany in its foreign subsidiaries. These plans are unchanged as a result of the Business Combination.
The following summarizes contributions to the plans described above:
| | | | Successor | | | Predecessor | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended June 30, 2015 | | Nine Months Ended June 30, 2015 | Three Months Ended December 31, 2016 | | | Three Months Ended December 31, 2015 |
| Contributions recorded as a component of cost of sales and operating expenses | $ | 0.2 |
| | $ | 0.2 |
| | | $ | 0.8 |
| | $ | 2.7 |
| | $ | 1.0 |
| | $ | 3.0 |
| $ | 1.0 |
| | | $ | 1.0 |
|
| Contributions recorded as a component of selling, general and administrative expenses | 0.4 |
| | 0.4 |
| | | 1.5 |
| | 4.8 |
| | 1.6 |
| | 5.1 |
| 1.6 |
| | | 1.5 |
|
| Total contributions | $ | 0.6 |
| | $ | 0.6 |
| | | $ | 2.3 |
| | $ | 7.5 |
| | $ | 2.6 |
| | $ | 8.1 |
| $ | 2.6 |
| | | $ | 2.5 |
|
Predecessor Equity Plan
The Predecessor previously issued unregistered Series B units in Holdings to directors and certain officers and employees of the Predecessor.employees. The units issued were initially unvested, and with respect to units issued to certain officers and employees, 50% of the Series B units would vest 20% annually over a five yearfive-year period (“Time-Based Units”) and 50% of the Series B units would vest in accordance with a performance-based schedule that was divided into five separate and equal twelve month periods (“Performance-Based Units”). The Board of Directors of the Predecessor established EBITDA-based performance targets for purposes of determining vesting of the Performance-Based Units. Further, all Performance-Based Units would automatically vest upon a liquidity event, of the Predecessor, provided the award holder remained employed with the Predecessor or its subsidiaries through the date of the liquidity event.
Immediately prior to and in connection with the closing of the Business Combination, certain The Series B units vested, including 368,136 units granted to Directors,Units were accounted for as equity instruments, and as a result, the Predecessor recognized $2.0 million of expense related to Performance-Based Units during the period from April 1, 2016 to June 8, 2016, which is included in Transaction related costs in the condensed consolidated statement of operations. The Predecessor recognized an additional $0.1 million and $0.7 million of compensation expense of $0.3 million as a component of Selling, general and administrative expenses inon the condensed consolidated statementsstatement of operations during the three months ended December 31, 2015 related to the Time-Based Units during the period from April 1, 2016 through June 8, 2016 and the period from October 1, 2015 through June 8, 2016, respectively.these awards.
All vested and unvested Series B units of the Predecessor in existence as of the closing of the Business Combination were exchanged for equity interests of New Holdco, which received a portion of the consideration paid to the Selling Equityholders in the Company Merger in exchange for such Series B Units.
The following table summarizes Series B unit activity during the period from October 1, 2015 through June 8, 2016:
|
| | | | | | |
| | Units | | Average Grant
Date Fair Value
Per Unit |
| Outstanding at September 30, 2015 | 38,466,624 |
| | $ | 0.28 |
|
| Granted | 1,028,571 |
| | 0.16 |
|
| Forfeited/Canceled | (1,597,000 | ) | | 0.25 |
|
| Outstanding at June 8, 2016 | 37,898,195 |
| | $ | 0.22 |
|
The following table summarizes non-vested Series B unit activity during the period from October 1, 2015 through June 8, 2016:
|
| | | | | | |
| | Units | | Average Grant
Date Fair Value
Per Unit |
| Nonvested at September 30, 2015 | 23,116,625 |
| | $ | 0.26 |
|
| Granted | 1,028,571 |
| | 0.16 |
|
| Vested | (19,871,696 | ) | | 0.16 |
|
| Forfeited | (1,345,000 | ) | | 0.23 |
|
| Nonvested at June 8, 2016 | 2,928,500 |
| | $ | 0.26 |
|
11. Equity
Common Stock
The authorized common stock of the Company consists of 300,000,000 shares. Holders of the Company’s common stock are entitled to one vote for each share of common stock. As of June 30,December 31, 2016, there were 89,222,41889,286,936 shares of common stock issued and outstanding, and warrants to purchase 25,012,500 shareswhich includes the 12,476,250 Founder Shares.
Founder Shares
As of common stock at a strike price of $11.50.
Prior to the completion of the Business Combination, the Company had 62,531,250 shares of common stock issued and outstanding, consisting of 50,025,000 shares originally sold as part of units issued in the Company’s IPO, consummated on June 11, 2014, and 12,506,250 shares ofDecember 31, 2016 there were 12,476,250 Founder Shares. These Founder Shares that were issued to Sponsor prior to the IPO.
All of the 50,025,000 shares of common stock sold as part of the units in the IPO contained a redemption feature which allowed for the redemption of such shares. These redemption provisions generally required the Company to classify these shares outside of permanent equity, except for certain provisions related to ordinary liquidations involving the redemption and liquidation of all of the Company’s equity instruments that allowed the Company to classify a certain amount related to these shares as permanent equity at each reporting period. At March 31, 2016, 47,512,924 of the 50,025,000 public shares with a value of $475.2 million were classified outside of permanent equity at their redemption value.
On June 9, 2016, in connection with the completion of the Business Combination, 47,512,924 shares were reclassified into equity and 29,793,320 shares were redeemed at $10.02 per share. Additionally, the Company issued (i) 27,673,604 new shares of common stock at $10.00 per share to the Selling Equityholders as consideration, (ii) 23,492,306 new shares of common stock at a price of $10.00 per share in private placements with eligible purchasers, (iii) 3,078,578 new shares of common stock to settle the payment of an aggregate of $30.8 million in fees and disbursements outstanding and due to certain of WLRH’s advisors in connection with services and work performed by the advisors, including shares issued to pay the liability of $18.3 million for deferred underwriting fees due upon the completion of a Business Combination from the original IPO and (iv) 2,240,000 new shares of common stock in exchange for 22,400,000 warrants to purchase shares of common stock privately placed to Sponsor at the time of the IPO. In connection with the completion of the Business Combination, the Sponsor (on behalf of the Company) transferred 30,000 original Founder Shares to the Company’s prior independent directors (“Director Founder Shares”) in connection with services previously rendered to the Company and 3,554,240 Founder Shares with a fair value of $30.2 million to the Selling Equityholders. The fair value of the Founder Shares transferred to the Company’s prior independent directors was recorded as an equity contribution and a transaction related costs for the three months ended June 30, 2016. The fair value of the Founder Shares transferred to the directors and Selling Equityholders was estimated using a Monte Carlo simulation model. The 3,554,240 of Founder Shares that were transferred to the Selling Equityholders was a component of the Business Combination purchase consideration and was recorded by the Company as an equity contribution and included in the purchase consideration. See Note 3.
In connection with the consummation of the Business Combination, the Founder Shares other than the Director Founder Shares becameare subject to forfeiture on the tenth anniversary of the Closing Date unless:
•with respect to 50% of such Founder Shares, the last sale price of the Company’s common stock as quoted on NASDAQ equals or exceeds $12.50 per share (as adjusted for stock splits, dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period; and
•with respect to the remaining 50% of such Founder Shares, the last sale price of the Company’s common stock equals or exceeds $15.00 per share (as adjusted for stock splits, dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period; or
•the post-combination company completes a liquidation, merger, stock exchange or other similar transaction that results in all or substantially all of its shareholdersstockholders having the right to exchange their shares of common stock for consideration in cash, securities or other property or any transaction involving a consolidation, merger, proxy contest, tender offer or similar transaction in which the post-combination company is the surviving entity which results in a change in the majority of the Company’s board of directors or management team or the Company’s post-combination shareholdersstockholders immediately prior to such transaction ceasing to own a majority of the surviving entity immediately after such transaction.
Such Founder Shares other than the DirectorThe Founder Shares will not participate in dividends or other distributions with respect to the shares prior to these targets being met, whereupon the Founder Shares shall be entitled to all dividends and distributions paid on the common stock after the Business Combination as if they had been holders of record entitled to receive distributions on the applicable record date.
Warrants
As of December 31, 2016 there were 50,025,000 warrants outstanding to purchase 25,012,500 shares of common stock at an exercise price of $11.50 per share.
Preferred Stock
The authorized preferred stock of the Company consists of 1,000,000 shares. As of June 30,December 31, 2016, there were no shares of preferred stock issued and outstanding.
The Company’s amended and restated certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. The Board of Directors is able, without shareholder approval, to issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the Common Stock and could have anti-takeover effects. The ability of the Board of Directors to issue preferred stock without shareholder approval could have the effect of delaying, deferring or preventing a change of control of the Company.
Offering Costs
Offering costs associated with the IPO, consummated on June 11, 2014, consisting principally of professional and registration fees incurred of $28.5 million (including $27.5 million in underwriters’ fees) were charged to shareholders’ equity upon the completion of the IPO. The Company paid upfront underwriting fees of approximately 1.84% ($9.2 million) of the per unit offering price to the underwriters at the close of the IPO with an additional fee of 3.66% ($18.3 million) of the gross offering proceeds payable upon the Company’s completion of a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination. These deferred underwriting costs were paid with the issuance of common stock in connection with the Business Combination.
12. Earnings per Share
A reconciliation of the numerators and denominators of the basic and diluted per share computation follows. No such computation is necessary for the Predecessor periodsperiod as the Predecessor was organized as a limited liability company and did not have publicly traded common shares.
|
| | | | | | | | |
| | | Successor |
| | | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 |
| Basic: | | | | |
| Net loss | | $ | (15.5 | ) | | $ | (17.1 | ) |
| Weighted average number of common shares outstanding during the period | | 34,072,056 |
| | 21,241,897 |
|
| Net loss per common share - basic | | $ | (0.45 | ) | | $ | (0.81 | ) |
| | | | | |
| Diluted: | | | | |
| Net loss | | $ | (15.5 | ) | | $ | (17.1 | ) |
| Denominator for diluted earnings per share: | | | | |
| Weighted average number of common shares outstanding during the period | | 34,072,056 |
| | 21,241,897 |
|
| Incremental common shares attributable to outstanding dilutive options and unvested restricted shares | | — |
| | — |
|
| Denominator for diluted earnings per common share | | 34,072,056 |
| | 21,241,897 |
|
| Net loss per common share - diluted | | $ | (0.45 | ) | | $ | (0.81 | ) |
The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. A large number of shares were issued in connection with the Business Combination on the Closing Date and the weighted average shares outstanding only incorporates these shares from that date through June 30, 2016, or 22 days. |
| | | | |
| | | Three Months Ended
December 31, 2016 |
| Basic: | | |
| Net loss | | $ | (8.3 | ) |
| Weighted average number of common shares outstanding during the period | | 76,746,168 |
|
| Net loss per common share - basic | | $ | (0.11 | ) |
| | | |
| Diluted: | | |
| Net loss | | $ | (8.3 | ) |
| Denominator for diluted earnings per share: | | |
| Weighted average number of common shares outstanding during the period | | 76,746,168 |
|
| Incremental common shares attributable to outstanding dilutive options and unvested restricted shares | | — |
|
| Denominator for diluted earnings per common share | | 76,746,168 |
|
| Net loss per common share - diluted | | $ | (0.11 | ) |
For the three and nine months ended June 30,December 31, 2016, there were 12,476,250 Founder Shares excluded from the basic and diluted computations commencing on the Closing Date because such shares were subject to forfeiture, 1,547,5001,582,500 PSU awards which were not included in the computation of diluted shares outstanding because performance targets and/or market conditions were not yet met for these awards. Diluted shares outstanding also did not include 25,012,500 shares basedof common stock issuable on the exercise of 50,025,000 warrants because the warrants were out-of-the-money and their impact on the Company’s net loss is anti-dilutive for both the three and nine months ended June 30,December 31, 2016. As of December 31, 2016, the 64,518 shares of unvested restricted stock awards issued to directors and 28,000 shares of restricted stock units awarded to employees were not included in the diluted share calculation as their impact on the Company’s net loss would have been anti-dilutive.
13. Commitments, Contingencies and Litigation
Operating Leases
The Company is a lessee of office buildings, retail outlets, transportation equipment, warehouses and storage facilities, other equipment, facilities and properties under operating lease agreements that expire at various dates. Rent expense (including rentals under short-term leases) was $6.4 million for the three months ended December 31, 2016 and $6.2 million for the three months ended December 31, 2015.
Future minimum non-cancellable rental payments as of December 31, 2016 are as follows:
|
| | | |
| 2017 | $ | 14.9 |
|
| 2018 | 12.7 |
|
| 2019 | 9.5 |
|
| 2020 | 5.8 |
|
| 2021 | 5.3 |
|
| Thereafter | 6.0 |
|
| Total | $ | 54.2 |
|
Capital Leases
The Company leases certain equipment and facilities under capital lease agreements. As of December 31, 2016 future minimum lease payments under capital leases were as follows:
|
| | | |
| 2017 | $ | 7.1 |
|
| 2018 | 7.1 |
|
| 2019 | 7.2 |
|
| 2020 | 7.0 |
|
| 2021 | 6.9 |
|
| Thereafter | 40.4 |
|
| Total minimum capital lease payments | 75.7 |
|
| Less amount representing executory costs | (19.1 | ) |
| Less amount representing interest | (18.9 | ) |
| Present value of net minimum capital lease payments | $ | 37.7 |
|
Environmental Remediation
Due to the nature of its business, the Company is subject to various laws and regulations pertaining to the environment and to the sale, handling, transportation and disposal of chemicals and hazardous materials. These laws pertain to, among other things, air and water, the management of solid and hazardous wastes, transportation and human health and safety.
On March 31, 2011, Holdingsthe Predecessor purchased certain assets of the global distribution business (the “Distribution Business”"Distribution Business") from Ashland (the “Ashland"Ashland Distribution Acquisition”Acquisition"), evidenced by the ADA Purchase Agreement. In the ADA Purchase Agreement, Ashland agreed to retain all known environmental remediation liabilities (“("the Retained Specified Remediation Liabilities”Liabilities") and other environmental remediation liabilities unknown at the closing of the Ashland Distribution Acquisition related to the Distribution Business for which Ashland receives notice prior to the fifth anniversary of the closing (“Other(the "Other Retained Remediation Liabilities”Liabilities") (collectively, “Retainedthe "Retained Remediation Liabilities”Liabilities"). Ashland’s liability for the Retained Remediation Liabilities is not subject to any claim thresholds or deductibles other than expenses the Predecessor incurs arising out of the Other Retained Remediation Liabilities; ifLiabilities. Had the Predecessor incursincurred expenses arising out of the Other Retained Remediation Liabilities, for which Ashland received notice prior to March 31, 2016, Ashland’s indemnification obligation iswould have been subject to an individual claim threshold of $0.2 million and an aggregate claim deductible of $5.0 million. Ashland’s indemnification obligation for the Retained Remediation Liabilities is subject to an aggregate ceiling of $75.0 million. Ashland’s indemnification obligations resulting from its breach of any representation, warranty or covenant related to environmental matters (other than for liabilities relating to taxes or the breach of any fundamental representation or warranty) are generally limited by an individual claim threshold of $0.2 million, an aggregate claim deductible of $18.6 million and a ceiling of $93.0 million. Collectively, Ashland’s indemnification obligations resulting from or relating to the Retained Remediation Liabilities, retained litigation liabilities, and the breach of Ashland’s representations, warranties and covenants contained in the ADA Purchase Agreement (other than for liabilities relating to taxes or the breach of any fundamental representation or warranty) is subject to an aggregate ceiling of $139.5 million, and Ashland’s total indemnification obligation under the ADA Purchase Agreement (other than for liabilities relating to taxes or any retained indebtedness) is subject to an aggregate ceiling in the amount of the purchase price for the Distribution Business net assets. Ashland’s indemnification obligations under the ADA Purchase Agreement as described above terminated as of March 31, 2016, other than for Retained Specified Remediation Liabilities and for Other Retained Remediation liabilities reported to Ashland prior to March 31, 2016 for which Ashland retains liability pursuant to the ADA Purchase Agreement. As a result, any environmental remediation liabilities reported to the Company after March 31, 2016 and not arising out of a Retained Remediation Liability will be liabilities of the Company.
In July 2014, Ashland filed a lawsuit numbered Ashland Inc. v. Nexeo Solutions, LLC,, Case No. N14C-07-243 JTV CCLD, in the Superior Court for the State of Delaware in and for New Castle County. In the suit, Ashland seeks a declaration that, pursuant to the ADA Purchase Agreement, Solutions is obligated to indemnify Ashland for losses Ashland incurs pertaining to the Other Retained Remediation Liabilities, up to the amount of the aggregate $5.0 million deductible applicable to expenses incurred by Solutions, whether or not Solutions incurs any expenses or obtains any indemnity from Ashland. Ashland further alleges that Solutions has breached duties related to the ADA Purchase Agreement by not having so indemnified Ashland for amounts Ashland has incurred for Other Retained Remediation Liabilities at sites where Ashland disposed of wastes prior to the Ashland Distribution Acquisition, and on that basis seeks unspecified compensatory damages, costs and attorney’s fees. The Company disagrees with Ashland’s construction of the ADA Purchase Agreement and is vigorously defending the lawsuit.
The Company does not currently have any environmental or remediation reserves for matters covered byunder the ADA Purchase Agreement. However, if the Company had incurred expenses related to Other Retained Remediation Liabilities, the Company would have been responsible for the first $5.0 million in aggregate expenses relating thereto prior to receiving any indemnification from Ashland. Ashland’s indemnification obligations for Other Retained Remediation Liabilities ended on March 31, 2016 and, as of that date, the Company had not incurred any expenses related to Other Retained Remediation Liabilities. In addition, if any Retained Remediation Liability ultimately exceeds the liability ceilings described above, the Company would be responsible for such excess amounts. In either of these scenarios, the Company would be required to either expense the cost of the liabilities or take an appropriate environmental or remediation reserve. The Company could also be required to take remediation or environmental reserves for remediation or other environmental liabilities reported after March 31, 2016 related to facilities acquired in the Ashland Distribution Acquisition; for remediation of spills or releases caused by the Company’s operations including those related to the Company’s Environmental Services line of business; and for remediation or other environmental liabilities related to facilities acquired from parties other than Ashland (i.e., acquisitions made by the Predecessor after the Ashland Distribution Acquisition).
The Company’s reserves will be subject to numerous uncertainties that affect its ability to accurately estimate its costs, or its share of costs if multiple parties are responsible. These uncertainties involve the legal, regulatory and enforcement parameters governing environmental assessment and remediation, the nature and extent of contamination, the extent of required remediation efforts, the choice of remediation methodology, availability of insurance coverage and, in the case of sites with multiple responsible parties, the number and financial strength of other potentially responsible parties.
Other Legal Proceedings
The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities, including product liability claims. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
Other Contingencies
In June 2014, the Predecessor self-disclosed to the California DTSC that an inventory of its Fairfield facility had revealed potential violations of the Resource Conservation and Recovery Act and the California Health and Safety Code. Although no formal proceeding has been initiated, the Company expects the DTSC to seek payment of fines or other penalties for non-compliance. The Company does not expect the amount of any such fine or other penalty to have a material adverse effect on its business, financial position or results of operations.
14. Related Party Transactions
FPA Subscription Agreement
On May 23, 2016, the Company entered into a Subscription Agreement (the “FPA Subscription Agreement”) with Sponsor and First Pacific Advisors, LLC (“FPA”), on behalf of certain clients pursuant to which FPA agreed to purchase 18,260,000 shares of the Company’s common stock on a private placement basis in connection with the Business Combination.
Sponsor Subscription Agreement
On June 6, 2016, the Company entered into a Subscription Agreement with Sponsor, pursuant to which Sponsor agreed to purchase 1,000,000 shares of common stock on a private placement basis for $10 per share in connection with the Business Combination. Wilbur L. Ross, Jr. is a manager of Sponsor.
PWPI and PWIMF Commitment Agreements
On June 6, 2016, the Company entered into a Commitment Agreement with Sponsor and Park West Investors Master Fund, Ltd. (“PWIMF”) and a second Commitment Agreement with Sponsor and Park West Partners International, Ltd. (“PWPI”) (such agreements collectively, the “PW Commitment Agreements”), pursuant to which PWIMF and PWPI agreed to purchase from redeeming shareholders and withdraw from redemption an aggregate of 3,000,000 public shares of common stock.
FPA Commitment Agreement
On June 6, 2016, the Company entered into a Commitment Agreement (the “FPA Commitment Agreement”) with Sponsor and FPA, pursuant to which FPA agreed not to redeem 2,094,727 public shares of common stock of the Company currently owned by FPA in connection with the closing of the Business Combination.
Sponsor Convertible Notes and Promissory Note
On March 31, 2016, the Company issued the March 2016 promissory note to Sponsor pursuant to which the Company could borrow up to $750,000. The March 2016 promissory note was interest bearing at 5% per annum and was due and payable on the first to occur of (1) the consummation of Business Combination or (2) June 11, 2016 (or such later date as would have been approved by the Company’s shareholders by amendment of the Company’s charter to complete the Business Combination). Sponsor loaned the Company $0.2 million to cover expenses related to daily operations. In connection with the consummation of the Business Combination, the March 2016 promissory note balance of $0.2 million, including unpaid interest, was paid in full.
On January 5, 2016, the Company issued a convertible promissory note, referred to as the “January 2016 convertible note” to Sponsor pursuant to which the Company borrowed $0.4 million from Sponsor for operating expenses. The January 2016 convertible note was interest bearing at 5% per annum and was due and payable on June 11, 2016. At the option of Sponsor, any amounts outstanding under the January 2016 convertible note could have been converted into warrants to purchase shares of common stock at a conversion price of $0.50 per warrant. Each warrant would have entitled Sponsor to purchase one-half of one share of the Company’s common stock at an exercise price of $5.75 per half share ($11.50 per whole
share). Each warrant would have contained other terms identical to the terms contained in the private placement warrants previously issued to Sponsor. Through March 31, 2016, the Company incurred an insignificant amount of interest expense which, under the terms of the January 2016 convertible note, was added to the principal amount. In connection with the consummation of the Business Combination, the January 2016 convertible note balance of $0.4 million, including unpaid interest, was paid in full.
On March 26, 2015, the Company issued a convertible promissory note, referred to as the “March 2015 convertible note”, to Sponsor pursuant to which, on April 16, 2015, the Company borrowed $0.3 million from Sponsor for operating expenses. The March 2015 convertible note was interest bearing at 5% per annum and was due and payable on June 11, 2016. At the option of Sponsor, any amounts outstanding under the March 2015 convertible note could have been converted into warrants to purchase shares of the Company’s common stock at a conversion price of $0.60 per warrant. Each warrant would have entitled Sponsor to purchase one-half of one share of the Company’s common stock at an exercise price of $5.75 per half share ($11.50 per whole share). Each such warrant would have contained other terms identical to the terms contained in the private placement warrants previously issued to Sponsor. Through March 31, 2016, the Company incurred $14 thousand of interest expense which under the terms of the March 2015 convertible note was added to the principal amount. In connection with the consummation of the Business Combination, the March 2015 convertible note balance of $0.3 million, including unpaid interest, was paid in full.
Director Founder Shares
In connection with the consummation of the Business Combination, certain directors of the Company were paid 10,000 Founder Shares each by Sponsor (on behalf of the Company) for past service on the Company’s board of directors. These shares were paid in lieu of cash board fees because the Company was not permitted to pay board fees directly to its directors pursuant to the underwriting agreement the Company entered into with the underwriters at the time of the IPO. The value of these shares is included in Transaction related costs on the Company’s condensed consolidated statement of operations.
Administrative Service Agreement
The Company had an agreement to pay $10 thousand a month for office space, administrative services and secretarial support to WL Ross & Co. LLC, an affiliate of the Sponsor. On March 26, 2015, Sponsor irrevocably and unconditionally waived the $10 thousand per month payment obligations of the Company for office space, administrative services and secretarial support for the year beginning on January 1, 2015 to December 31, 2015. On January 13, 2016, Sponsor irrevocably and unconditionally waived the $10 thousand per month payment obligations for the period beginning on January 1, 2016 and ending on December 31, 2016. This agreement was terminated prior to the completion of the Business Combination.
Contingent Consideration Obligations Pursuant to the TRA and the Merger Agreement
Subsequent to the Business Combination, TPG beneficially owns approximately 35% of the Company’s common stock, including Founder Shares, and is considered a related party of the Successor. In connection with the Business Combination, TPG became a party to the TRA and obtained the right to receive the Deferred Cash Consideration pursuant to the Merger Agreement. The fair value of these contingent consideration liabilities was $142.2$129.0 million as of June 30,December 31, 2016, and is recorded in Due to related party pursuant to contingent consideration obligations on the Company’s condensed consolidated balance sheet.sheets. See Note 3 and Note 9.
Predecessor - Letter Agreement for Chairman’s Services
On January 16, 2012, the Predecessor and Dan F. Smith, a member of the Predecessor Board of Directors, entered into a Letter Agreement for Chairman’s Services (together with subsequent extensions, the “Letter Agreement”). In connection with the closing of the Business Combination, the parties agreed to terminate the Letter Agreement and their rights and obligations thereunder. The termination of the Letter Agreement entitled Mr. Smith to a fee of $0.2 million in cash, which is included in Transaction related costs on the Company’s condensed consolidated statement of operations.
Predecessor - Other Agreements with TPG
The Predecessor entered into agreements with TPG, including a management services agreement with TPG, the indirect majority owner of the Predecessor, pursuant to which it provided the Predecessor with ongoingpaid TPG management advisory, specialized operationalfees and also consulting services.fees for services provided. The fees incurred in connection with this agreement were recorded in Selling, general and administrative expenses in the condensed consolidated statements of operations.
Pursuant to the management services agreement, the Predecessor also paid TPG fees in connection with consulting services it provided in relation to certain corporate transactions. TPG received reimbursements for out-of-pocket expenses incurred by TPG in connection with these transactions. These fees were recorded in Selling, general and administrative expenses in the condensed consolidated statements of operations.
As a result of the Business Combination on the Closing Date, TPG and the Predecessor terminated the management services agreement and their rights and obligations thereunder. Pursuant to the management services agreement, the Predecessor paid TPG a success fee
The table below summarizes activity recorded during the respective periods related to the items described above:
| | | | | Successor | | | Predecessor | Successor | | | Predecessor |
| | | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended
June 30, 2015 | | Nine Months Ended
June 30, 2015 | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Sales to TPG related entities | | $ | 0.3 |
| | $ | 0.3 |
| | | $ | 1.3 |
| | $ | 3.1 |
| | $ | 1.6 |
| | $ | 7.1 |
| $ | 0.7 |
| | | $ | 1.0 |
|
Amounts included in Selling, general and administrative expenses | | | | | | | | | | | | | | | | | |
| Management fees to TPG | | $ | — |
| | $ | — |
| | | $ | 0.5 |
| | $ | 2.1 |
| | $ | 1.1 |
| | $ | 2.5 |
| $ | — |
| | | $ | 0.9 |
|
Consulting fees to TPG | | $ | — |
| | $ | — |
| | | $ | 0.2 |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | 0.7 |
| $ | — |
| | | $ | 0.1 |
|
Amounts included in Transaction related costs | | | | | | | | | | | | | | |
| Fee paid in connection with the Business Combination | | $ | — |
| | $ | — |
| | | $ | 9.9 |
| | $ | 9.9 |
| | $ | — |
| | $ | — |
| |
There were no purchases from TPG related entities in the Successor or Predecessor periods.
TPG related entities owed the Company $0.4$0.7 million at June 30,December 31, 2016 for the Successor and $0.3$0.6 million at September 30, 2015 for the Predecessor2016 which were included in Accounts and notes receivable in the Company’s condensed consolidated balance sheets.
Predecessor - Consulting Services Agreement
The Predecessor had a strategic consulting services agreement with Steven B. Schwarzwaelder, a member of the Board of Directors of the Predecessor, under which it paid an annual fee of $0.175 million. The Predecessor recorded less than $0.1 million for each respective period April 1 through June 8, 2016 and October 1, 2015 through June 8, 2016, as well as the three and nine months ended June 30, 2015 related to this agreement. This fee was recorded in Selling, general and administrative expenses in the condensed consolidated statements of operations. As a result of the Business Combination, the parties terminated the consulting services agreement and their rights and obligations thereunder.
15. Income Taxes
The Company and its two active U.S. corporate subsidiaries, Blocker and Sub Holding, arewere both incorporated in the U.S. and as such are subject to U.S. income taxes. The Company and Blocker will file a consolidated U.S. Federal income tax return and both will file various state returns. Sub Holding will file a separate U.S. Federal income tax return and various state tax returns. The Company’s controlled foreign corporations are subject to taxation at the entity level in their respective jurisdictions.
Income tax benefit for the three months ended June 30, 2016 for the Successor was $1.3 million. The tax benefit for the three months ended June 30, 2016 for the Successor reflects an effective tax rate of a benefit of 7.7%.
Income tax benefit for the nine months ended June 30, 2016 for the Successor was $1.3 million. The tax benefit for the nine months ended June 30, 2016 for the Successor reflects an effective tax rate of a benefit of 7.1%.
Holdings is organized as a limited liability company and is taxed as a partnership for U.S. income tax purposes. As such, with the exception of a limited number of state and local jurisdictions, Holdings is not subject to U.S. income taxes. Accordingly, Blocker and the Selling Equityholders (other than the holders of equity interests in Blocker) willNexeo Solutions, Inc. report their share of Holdings’ taxable income earned prior toafter the Closing Date on their respective U.S. federal tax returns. Holdings and its subsidiaries made tax distributions of approximately $0.1 million to, or on behalf of, the Selling Equityholders during the three and nine months ended June 30, 2015.return.
Income tax expensebenefit for the period from April 1,three months ended December 31, 2016 through June 8, 2016 for the Predecessor was $1.1$2.7 million on a pre-tax loss of $19.1$11.0 million for the Successor compared to $1.8the income tax expense of $1.3 million on pre-tax income of $20.6$5.6 million for the three months ended June 30,December 31, 2015 for the Predecessor. The current period tax expensebenefit was largely attributable to income tax expensebenefits on profitable foreignU.S. operations primarily Puerto Rico and EMEA.related to deferred taxes. The prior period tax expense was largely attributed to foreign income tax expense on profitable foreign operations.
Income tax expense for the period from October 1, 2015 through June 8, 2016 for the Predecessor was $4.2 million on a pre-tax loss of $9.7 million compared to $2.7 million on pre-tax income of $14.2 million for the nine months ended June 30, 2015 for the Predecessor. The current period tax expense was attributable to income tax expense on profitable foreign operations, primarily Canada, EMEA, Puerto Rico and Mexico. The prior period expense was largely attributed to foreign income tax expense on profitable foreign operations.
For all periods, the Company computed the provision for income taxes based on the actual year-to-date effective tax rate by applying the discrete method. Use of the annual effective tax rate, which relies on accurate projections by legal entity of income earned and taxed in foreign jurisdictions, as well as accurate projections by legal entity of permanent and temporary differences, was not considered a reliable estimate for purposes of calculating year-to-date income tax expense.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As a result of the adoption of ASU 2015-17, deferred tax assets and liabilities and any related valuation allowances are classified as noncurrent on a prospective basis. See Note 2.
At June 30,December 31, 2016 for the Successor and September 30, 2015 for the Predecessor,2016, the valuation allowance was $4.2$3.2 million and $3.6$2.8 million, respectively, primarily relating to Nexeo Plaschem operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management’s expectations at June 30,December 31, 2016, management believes it is more likely than not that it will realize the majority of its deferred tax assets.
Uncertain Tax Positions
U.S. GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured as the amount of benefit that has a greater than 50% likelihood of being realized. Differences between the amount of tax benefits taken or expected to be taken in the income tax returns and the amount of tax benefits recognized in the financial statements represent the Company’s unrecognized income tax benefits, which are recorded as a liability, with the long-term portion included in Other non-current liabilities and the current portion included in Accrued expenses and other liabilities on the Company’s condensed consolidated balance sheet.
The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of incomeIncome tax expense in the condensed consolidated statements of operations. There was an insignificant amount of interest and penalties recognized during all periods. As of June 30,December 31, 2016 for the Successor and September 30, 2015 for the Predecessor,2016, the Company had $1.2$0.6 million and $1.1$1.2 million, respectively, related to uncertain tax positions, including related accrued interest and penalties.
The Company believes it is reasonably possible that within This decrease was related to the next 12 months unrecognizedrelease of uncertain tax benefits may decrease by up to $0.6 million as a result ofprovisions from the expiration of certain statute of limitations periodsprior year and anticipated settlements.lapses in statutory tax periods.
The Company or one of its subsidiaries files income tax returns in various state and foreign jurisdictions. Within the U.S., the Company is subject to federal and state income tax examination by tax authorities for periods after December 2011.2012. With respect to countries outside of the U.S., with certain exceptions, the Company’s foreign subsidiaries are subject to income tax audits for years after 2010.2011.
16. Segment and Geographic Data
The Company operates through three lines of business, or operating segments: Chemicals, Plastics and Environmental Services, thatwhich market to different sets of customers operating in an array of industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, the Chemicals and Plastics lines of business constitute separate reportable segments while the Environmental Services line of business, which does not meet the materiality threshold for separate disclosure and the historical composites products sales in Asia are combined in an “Other”"Other" segment.
Each line of business represents unique products and suppliers, and each line of business focuses on specific end markets within its industry based on a variety of factors, including supplier or customer opportunities, expected growth and prevailing economic conditions. Across the Chemicals and Plastics lines of business there are numerous industry segments, end markets and sub markets that the Company may choose to focus on. These end markets may change from year to year depending on the underlying market economics, supplier focus, expected profitability and the Company’s strategic agenda.
The Chemicals, Plastics and Environmental Services lines of business compete with national, regional and local companies throughout North America. Additionally, the Chemicals and Plastics lines of business compete with other distribution companies in Asia. The Plastics line of business also competes with other distribution companies in EMEA. Competition within each line of business is based primarily on the diversity of the product portfolio, service offerings, reliability of services and supply, technical support, price and price.delivery capabilities. The accounting policies used to account for transactions in each of the lines of business are the same as those used to account for transactions at the corporate level.
The Chemicals and Plastics lines of business are distribution businesses, while the Environmental Services line of business provides hazardous and non-hazardous waste collection, recovery, recycling and arrangement for disposal services.
A brief description of each line of businesssegment follows:
Chemicals. The Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via rail cars,railcars, barges, bulk tanker trucks and as packaged goods in trucks. The Company’s chemical products are distributed in more than 50 countries worldwide, primarily in North America and Asia. In connection with the distribution of chemicals products, the Company provides value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. While the Chemicals line of business serves multiple end markets, key end markets within the industrial space includingare household, industrial and institutional, performance coatings (including architectural coatings, adhesives, sealants and elastomers), lubricants, oil and gas and personal care.
Plastics. The Plastics line of business distributes a broad product line consisting of commodity polymer products and prime engineering resins to plastics processors engaged in blow molding, extrusion, injection molding and rotation molding via rail car,railcars, bulk truck,trucks, truckload boxes and less-than truckloadless-than-truckload quantities. The Company’sCompany's plastics products are distributed in more than 50 countries worldwide, primarily in North America, EMEA and Asia. The Plastics line of business serves a broad cross section of industrial segments with a current focus on the healthcare and automotive end markets.
Other. The Environmental Services line of business, in connection with certain waste disposal service companies, provides customers with comprehensive on-site and off-site hazardous and non-hazardous waste collection, recovery and arrangement for disposal services or recycling in North America, primarily in the U.S. These environmental services are offered through the Company’s network of distribution facilities which are used as transfer facilities. The Other segment also includes historical composites products sales in Asia.facilities or through a staff of dedicated on-site waste professionals.
The Chief Executive Officer is the Chief Operating Decision Maker. The Chief Operating Decision Maker reviews operating results in order to make decisions, assess performance and allocate resources to each line of business. In order to maintain the focus on line of business performance, certain expenses are excluded from the line of business results utilized by the Company’s Chief Operating Decision Maker in evaluating line of business performance. These expenses include certain depreciation and amortization, selling, general and administrative expense, corporate items such as transaction related costs, interest and income tax expense. These items are separately delineated to reconcile to reported net income. No single customer accounted from more than 10% of revenues for any line of business for each of the periods reported. Intersegment revenues were insignificant.
Certain assets are aggregated at the line of business level. The assets attributable to the Company’s lines of business, that are reviewed by the Chief Operating Decision Maker, consist of trade accounts receivable, inventories, goodwill and any specific assets that are otherwise directly associated with a line of business. The Company’s inventory of packaging materials and containers as well as property, plant and equipment are generally not allocated to a line of business and are included in unallocated assets.
Summarized financial information relating to the Company’s lines of business is as follows. The Successor periods in the summarized financial information for the three and nine months ended June 30, 2016 includes 22 days (June 9, 2016 through June 30, 2016) of the combined operating results, as well as the full three and nine months ended June 30, 2016 of WLRH’s operating results, which consisted primarily of transaction related costs.follows:
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| Sales and operating revenues | | | | |
| Chemicals | $ | 352.4 |
| | | $ | 378.7 |
|
| Plastics | 412.5 |
| | | 418.5 |
|
| Other | 29.9 |
| | | 30.5 |
|
| Total sales and operating revenues | $ | 794.8 |
| | | $ | 827.7 |
|
| Gross profit | | | | |
| Chemicals | $ | 42.7 |
| | | $ | 47.3 |
|
| Plastics | 36.0 |
| | | 40.6 |
|
| Other | 5.7 |
| | | 7.3 |
|
| Total gross profit | $ | 84.4 |
| | | $ | 95.2 |
|
| Selling, general & administrative expenses | 74.5 |
| | | 74.7 |
|
| Transaction related costs | 0.8 |
| | | 1.0 |
|
| Change in fair value related to contingent consideration obligations | 10.6 |
| | | — |
|
| Operating income (loss) | (1.5 | ) | | | 19.5 |
|
| Other income | 2.4 |
| | | 1.7 |
|
| Interest income (expense) | | | | |
| Interest income | 0.1 |
| | | — |
|
| Interest expense | (12.0 | ) | | | (15.6 | ) |
| Income (loss) before income taxes | $ | (11.0 | ) | | | $ | 5.6 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended June 30, 2015 | | Nine Months Ended June 30, 2015 |
| Sales and operating revenues | | | | | | | | |
| | | | |
|
| Chemicals | $ | 94.2 |
| | $ | 94.2 |
| | | $ | 298.7 |
| | $ | 1,066.4 |
| | $ | 482.6 |
| | $ | 1,503.9 |
|
| Plastics | 109.9 |
| | 109.9 |
| | | 329.8 |
| | 1,192.2 |
| | 477.4 |
| | 1,429.6 |
|
| Other | 10.2 |
| | 10.2 |
| | | 21.7 |
| | 81.5 |
| | 28.8 |
| | 85.8 |
|
| Total sales and operating revenues | $ | 214.3 |
| | $ | 214.3 |
| | | $ | 650.2 |
| | $ | 2,340.1 |
| | $ | 988.8 |
| | $ | 3,019.3 |
|
| | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | |
| Chemicals | $ | 9.6 |
| | $ | 9.6 |
| | | $ | 38.8 |
| | $ | 136.2 |
| | $ | 59.9 |
| | $ | 168.1 |
|
| Plastics | 6.7 |
| | 6.7 |
| | | 32.2 |
| | 117.6 |
| | 44.8 |
| | 113.3 |
|
| Other | 2.5 |
| | 2.5 |
| | | 4.4 |
| | 18.1 |
| | 6.6 |
| | 21.1 |
|
| Total gross profit | $ | 18.8 |
| | $ | 18.8 |
| | | $ | 75.4 |
| | $ | 271.9 |
| | $ | 111.3 |
| | $ | 302.5 |
|
| | | | | | | | | | | | | |
| Selling, general & administrative expenses | $ | 19.1 |
| | $ | 19.2 |
| | | $ | 57.5 |
| | $ | 208.9 |
| | $ | 82.9 |
| | $ | 248.5 |
|
| Transaction related costs | 15.9 |
| | 18.0 |
| | | 26.1 |
| | 33.4 |
| | — |
| | 0.1 |
|
| Change in fair value related to contingent consideration | (2.3 | ) | | (2.3 | ) | | | — |
| | — |
| | — |
| | — |
|
| Total operating income (loss) | (13.9 | ) | | (16.1 | ) | | | (8.2 | ) | | 29.6 |
| | 28.4 |
| | 53.9 |
|
| Other income | — |
| | — |
| | | 0.3 |
| | 2.9 |
| | 8.4 |
| | 9.1 |
|
| Interest income (expense) | | | | | | | | | | | | |
| Interest income | 0.3 |
| | 0.9 |
| | | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Interest expense | (3.2 | ) | | (3.2 | ) | | | (11.2 | ) | | (42.3 | ) | | (16.2 | ) | | (48.9 | ) |
| Income (loss) from continuing operations before income taxes | $ | (16.8 | ) | | $ | (18.4 | ) | | | $ | (19.1 | ) | | $ | (9.7 | ) | | $ | 20.6 |
| | $ | 14.2 |
|
|
| | | | | | | |
| | December 31, 2016 | | September 30, 2016 |
| IDENTIFIABLE ASSETS | |
| | |
|
| Chemicals | $ | 646.0 |
| | $ | 656.8 |
|
| Plastics | 677.2 |
| | 708.7 |
|
| Other | 83.1 |
| | 85.0 |
|
| Total identifiable assets by reportable segment | 1,406.3 |
| | 1,450.5 |
|
| Unallocated assets | 624.1 |
| | 628.4 |
|
| Total assets | $ | 2,030.4 |
| | $ | 2,078.9 |
|
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | June 30, 2016 | | | September 30, 2015 |
| IDENTIFIABLE ASSETS | |
| | | |
|
| Chemicals | $ | 667.2 |
| | | $ | 696.9 |
|
| Plastics | 726.9 |
| | | 530.2 |
|
| Other | 91.3 |
| | | 35.1 |
|
| Total identifiable assets by segment | 1,485.4 |
| | | 1,262.2 |
|
| Unallocated assets | 632.6 |
| | | 446.7 |
|
| Total assets | $ | 2,118.0 |
| | | $ | 1,708.9 |
|
Goodwill amounts by reportable segment at June 30,December 31, 2016 are based on the preliminary allocation of the purchase consideration allocation of the Business Combination which is based on preliminary valuations performed to determine the fair value of the acquired assets and assumed liabilities as of the Closing Date. Accordingly, the amounts allocated to goodwill are subject to adjustments that could have a material impact on total goodwill and goodwill by reportable segment. See Note 3.
Revenues by geographic location, based on the jurisdiction of the subsidiary entity receiving revenue credit for the sale, are presented below:
| | | | Successor | | | Predecessor | Successor | | | Predecessor |
| | Three Months Ended
June 30, 2016 | | Nine Months Ended
June 30, 2016 | | | April 1 Through June 8, 2016 | | October 1, 2015 Through June 8, 2016 | | Three Months Ended
June 30, 2015 | | Nine Months Ended June 30, 2015 | Three Months Ended
December 31, 2016 | | | Three Months Ended
December 31, 2015 |
| North America | $ | 174.4 |
| | $ | 174.4 |
| | | $ | 535.9 |
| | $ | 1,917.2 |
| | $ | 816.2 |
| | $ | 2,507.5 |
| |
| U.S. | | $ | 587.4 |
| | | $ | 625.4 |
|
| Canada | | 36.9 |
| | | 36.0 |
|
| Other North America | | 12.5 |
| | | 12.4 |
|
| Total North America Operations | | $ | 636.8 |
| | | $ | 673.8 |
|
| EMEA | 29.3 |
| | 29.3 |
| | | 78.8 |
| | 291.9 |
| | 129.7 |
| | 374.1 |
| 96.9 |
| | | 104.7 |
|
| Asia | 10.6 |
| | 10.6 |
| | | 35.5 |
| | 131.0 |
| | 42.9 |
| | 137.7 |
| 61.1 |
| | | 49.2 |
|
| Total | $ | 214.3 |
| | $ | 214.3 |
| | | $ | 650.2 |
| | $ | 2,340.1 |
| | $ | 988.8 |
| | $ | 3,019.3 |
| $ | 794.8 |
| | | $ | 827.7 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with the Successor and PredecessorCompany’s Annual ReportsReport on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on January 14, 2016 and December 7, 2015, respectively.8, 2016. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Forward-Looking Statements” elsewhere in this Quarterly Report.Report on Form 10-Q.
The terms “the Company,” “us,” “our” and “we” and similar terms in this report refer to Nexeo Solutions, Inc. and its consolidated subsidiaries.
Overview
The Company is the result of the Business Combination between WLRH and Holdings that closed on June 9, 2016. The “Successor” financial information reflects the combined operations of WLRH for the three and nine months ended June 30, 2016 and is referred to as the operations of Holdings after the Closing Date, after purchase price allocations.“Successor.” The “Predecessor” financial information reflects the operations of Holdings prior to the Closing Date of the Business Combination.
We are a global distributor of chemicals products in North America and Asia and plastics products in North America, EMEA, and Asia. In connection with the distribution of chemicals products, we provide value-added services such as custom blending, packaging and re-packaging,repackaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. We also provide environmental services, including waste collection, recovery and arrangement for disposal services and recycling in North America, primarily in the U.S., through our Environmental Services line of business. The Predecessor was a distributor of composites products in North America until July 1, 2014, when these operations were sold and as a result, activity associated with these operations is reflected as discontinued operations for all periods presented.
Based on revenues for fiscal year 2015, the Predecessor was ranked third in North America and fifth globally among the top 100 chemical distributors, as reported by the Independent Chemical Information Service (or ICIS), one of the largest petrochemical market information providers.
We distribute approximately 23,000 products into over 80 countries for approximately 1,300 suppliers to approximately 27,500 customers.
We have long-standing relationships with major chemicals and plastics producers and suppliers, a strong geographic presence and supply chain network and a relatively stable customer base that benefits from the service and distribution value we provide. The products we distribute are used in a broad cross section of manufacturing industries, in various end markets and customer segments within those industries, including the household, industrial and institutional, lubricants, performance coatings (including architectural coatings, adhesives, sealants and elastomers), automotive, healthcare, personal care, oil and gas and construction end markets.
Our diverse array of product 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 full product offering allow for product customization, cost savings to customers on transaction and transportation costs and reliance on a single supplier to source all of their diverse product requirements.
We believe that we provide a compelling value proposition to suppliers as a single bulk buyer of their products and by acting as an extension of their sales force by representing their brands and providing technical support to customers. We also 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 provide other services including dedicated stocking programs, vendor-managed inventory, quarterly customer demand forecasting, technical support and supply chain services. In addition, our understanding of key end markets presents additional opportunities with suppliers whose products are in substantial demand by customers situated in these end markets.
We have an experienced management team with deep knowledge of the industry. We continue to implement strategies and invest significantly 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 broad product portfolio through a supply chain consisting of approximately 170 owned, leased or third-party warehouses, rail terminals and tank terminals globally. We haveglobally with a private fleet of overapproximately 1,000 units, primarily located in North America, including the addition of new tractors obtained through the Ryder Lease. These new vehicles have replaced older vehicles in our fleet, and provide cost savings in fuel usage and maintenance and significantly enhance our delivery capabilities. See Note 5 to our condensed consolidated financial statements.America.
We currently employ approximately 2,550 employees globally and have approximately 500 sales professionals situated in North America, EMEA and Asia, including technical support, field managers and strategic account managers to assist our customers in the selection and application of commodity and specialty products for their end products and processes.globally.
While certain market conditions have improved during the three months ended June 30, 2016 as compared to the three months ended March 31, 2016 as a result of crude oil prices surpassing $45 per barrel in the three months ended June 30, 2016. Although we anticipated increases in crude oil prices would result in increases in average selling prices, crude oil price increases did not result in increases in average selling prices during the three months ended June 30, 2016, or increased purchasing behavior, primarily due to oversupply in the market. Macro industrial demand is lower than expected and has affected all areas of our business. While crude oil prices have improved in the current quarter, they are still lower in comparison to last year and pricing overall has decreased in both commodities and specialties in the current fiscal year to date in comparison to the comparable period in the prior fiscal year. Even with these factors, we have established initiatives to increase our market share, further develop our sales team and our supply chain services.
Significant Events in Fiscal Year 2016
Business Combination
On June 9, 2016, we consummated the Business Combination pursuant to the Merger Agreement, whereby WLRH acquired Holdings and Blocker for a total consideration of approximately $812.0 million, consisting of cash, stock and other consideration through a series of two mergers. As a result of the Business Combination, Holdings and Blocker became wholly-owned subsidiaries of WLRH.
In connection with the closing of the Business Combination, we changed our name from “WL Ross Holding Corp.” to “Nexeo Solutions, Inc.” and changed the ticker symbol for our common stock on NASDAQ from “WLRH” to “NXEO”.
Our Board of Directors approved a change in our fiscal year end from December 31 to September 30 in connection with the closing of the Business Combination.
Segment Overview
We are organized into three lines of business, or operating segments: Chemicals, Plastics and Environmental Services. Our lines of business market to different sets of customers operating in an array of industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, our Chemicals and Plastics lines of business constitute separate reportable segments while the Environmental Services line of business, which does not meet the materiality threshold for separate disclosure and is included in the “Other”"Other" segment.
Each line of business represents unique products and suppliers, and each line of business focuses on specific end markets within its industry based on a variety of factors including supplier or customer opportunities, expected growth and prevailing economic conditions. Across our Chemicals and Plastics lines of business there are numerous industry segments, end markets and sub markets that we may choose to focus on. These end markets may change from year to year depending on the underlying market economics, supplier focus, expected profitability and its strategic agenda.
Our Chemicals, Plastics and Environmental Services lines of business compete with national, regional and local companies throughout North America. Our Chemicals and Plastics lines of business compete with other distribution companies in Asia, and the Plastics line of business also competes with other distribution companies in EMEA. In addition, in some of the markets in which we operate, large chemical producers may elect to distribute their products directly to end-user customers. Competition is based primarily on the diversity and quality of the product portfolio, service offerings, reliability of supply, technical support, price and delivery capabilities. The accounting policies used to account for transactions in each of the lines of business are the same as those used to account for transactions at the corporate level.
A brief description of each of our lines of business follows:
Chemicals. The Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via rail cars,railcars, barges, bulk tanker trucks, and as packaged goods in trucks. While our chemicals products are distributed in more than 50 countries worldwide, we primarily distribute our chemicals products in North America and Asia. In connection with the distribution of our chemicalchemicals products, we provide value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. While our Chemicals line of business serves multiple end markets, key end markets within the industrial space are household, industrial and institutional, performance coatings (including architectural coatings, adhesives, sealants and elastomers), lubricants, personal care and oil and gas.gas and personal care.
Plastics. The Plastics line of business suppliesdistributes a broad product line consisting of commodity polymer products and prime engineering resins forto plastics processors engaged in blow molding, extrusion, injection molding and rotation molding via rail car,railcars, bulk truck,trucks, truckload boxes and less-than-truckload quantities. While our plastics products are distributed in more than 50 countries worldwide, we primarily distribute our plastics products in North America, EMEA and Asia. The Plastics line of business serves a broad cross section of industrial segments with a current focus on the healthcare and automotive end markets.
Environmental Services. The Environmental Services line of business, in connection with certain waste disposal service companies, provides customers with comprehensive on-site and off-site hazardous and non-hazardous waste collection, recovery recycling and arrangement for disposal services or recycling in North America, primarily in the U.S. These environmental services are offered through our network of distribution facilities which are used as transfer facilities.facilities or through a staff of dedicated on-site waste professionals.
Key Factors Affecting our Results of Operations and Financial Condition
General and regional economic conditions. The consumption of chemicals and plastics in the broad industry segments and end markets that we serve generally corresponds to the level of production of goods and services in the global economy, amplified by the regional economies where we have commercial operations. As a result, when general economic conditions improve or deteriorate, our volumes tend to fluctuate accordingly. We manage our cost structure in line with general economic conditions, but our volumes and profitability are ultimately correlated with the underlying demand for the end-products of the industries we serve.
Price fluctuations. The prices at which we resell the products we distribute in our Chemicals and Plastics lines of business generally fluctuate in accordance with the prices that we pay for these products. Product prices we pay are largely driven by the underlying global and regional economic conditions that drive the prices of two primary raw materials of production: crude oil (primarily naphtha) and natural gas (primarily ethane). These two raw material sources are used in the production of propylene and ethylene which are key feedstocks used in over 90% of organic-based commodity and specialty chemicals, as well as in the subsequent production of the intermediate plastics products we distribute. The prices of these feedstocks are also affected by other factors including choices made by feedstock producers for uses of these feedstocks (e.g., as an ingredient in gasoline versus a feedstock to the chemical industry), the capacity devoted to production of these feedstocks and other macroeconomic factors that impact the producers. As a distributor, the prices of these feedstocks are not in our control. However, we are generally able to pass on finished good price increases and decreases to our customers in accordance with the fluctuations in our product costs and transportation-related costs (e.g., fuel costs). As a result, movements in our sales revenue and cost of sales tend to correspond with changes in our product prices. Additionally, as capacity or demand patterns change, we typically experience a corresponding change in the average selling prices of the products we distribute. Our gross profit margins generally decrease in deflationary price environments because we are selling inventory that was previously purchased at higher prices. Alternatively, our gross profit margins generally increase during inflationary pricing environments because we are able to sell inventory that was previously purchased at lower prices. The extent to which profitability increases or decreases, however, also depends on the relative speed at which selling prices adjust in relation to inventory costs. As a logistics provider, oil price movements also typically impact our transportation and delivery costs.
Volume based pricing. We generally procure chemicals and plastics raw materials through purchase orders rather than under long-term contracts with firm commitments. Our arrangements with key producers and suppliers are typically embodied in agreements that we refer to as framework supply agreements. We work to develop strong relationships with a select group of producers and suppliers that complement our strategy based on a number of factors, including price, breadth of product offering, quality, market recognition, delivery terms and schedules, continuity of supply and each producer’s strategic positioning. Our framework supply agreements with producers and suppliers typically renew annually and, while they generally do not provide for specific product pricing, some, primarily those related to our Chemicals line of business, include volume-based financial incentives through supplier rebates, which we earn by meeting or exceeding target purchase volumes.
Inflation. Our average selling prices generally rise when commodity prices increasein inflationary price environments as producers and suppliers raise the market prices of the products that we distribute. During inflationary periods our customers maximize the amount of inventory they carry in anticipation of even higher prices and consequently, this environment of excess demand favorably impacts our volumes sold, revenues and gross profit due to the lag between rising prices and our cost of goods sold. The reverse is true in periods of decreasing commodity prices. This condition createsdeflationary price environments. Deflationary forces create an environment of overcapacity, driving market prices of products downward, and we must quickly adjust inventories and buying patterns to respond to price declines. Our primary objective is to replace inventories at lower costs while maintaining or enhancing unit profitability.
Some of our assets and liabilities, primarily cash, receivables, inventories and accounts payable, are impacted by commodity price inflation because they are indirectly affected by market prices of raw materials for our products. ToHowever, to the extent that we are able to manage our working capital in periods of changing prices, the overall impact of inflation on our net working capital is generally not significant.
Currency exchange rate fluctuations. We conduct our business on an international basis in multiple currencies. A portion of our sales and costs of sales are denominated in currencies other than the functional currency of our subsidiaries. Strengthening of our subsidiaries’ functional currency relative to the other currencies in which some transactions are denominated creates a negative impact on sales, but a positive impact on costs. Additionally, because we report our consolidated results in U.S. dollars, the results of operations and the financial position of our local international operations, which are generally reported in the relevant local currencies, are translated into U.S. dollars at the applicable exchange rates for inclusion in our condensed consolidated financial statements. Strengthening of the U.S. dollar relative to our subsidiaries’ functional currencies causes a negative impact on sales but a positive impact on costs.
Outlook
Economic Outlook.General. We operatehave operations in North America, EMEA and Asia. As a result, our business is subject to broad, global and regional macroeconomic factors. These factors include:
the general state of the economy, specifically inflationary or deflationary trends, GDP growth rates and commodity/feedstock price movements;
unemployment levels;
government regulation and changes in governments;
fiscal and monetary policies of governments, including import and export tariffs, duties and other taxes;
general income growth and the consumption rates of products; and
rates of technological change in the North American, Europeanindustries we serve.
We monitor these factors routinely for both strategic and Asian regions. Globaloperational impacts.
Our operations are most impacted by regional market price fluctuations of the primary feedstock materials, including crude oil and natural gas, and the downstream derivatives of these primary raw materials. Market price fluctuations of these primary raw materials directly impact the decisions of our product suppliers, specifically the manufacturing capacity made available for production of the products we distribute. As capacity or demand patterns change, we may experience a corresponding change in the average selling prices of the products we distribute.
The global markets have generally been sluggish and recovery has been slow, withstabilized during the uncertainty surrounding the citizensfirst quarter of the United Kingdom (the “U.K.”) approving the exit of the U.K. from the European Unionour fiscal year 2017 and the Asia-Pacific economy projected for a decline. Thedecline in U.S. economyindustrial production has improved somewhat in the past quarter however, industry demand has decreased in this region as well. Although the overallslowed. However, global market has been bearish,pricing remains weak as supply and demand imbalances continue to create pricing compression which negatively impacts gross margin on the products we distribute. Nonetheless, through theour diversified customer base and use of our proprietary pricing tools and discipline,tool we have been able to offsetmitigate some of the effects of the recent global deflationarymarket environment.
The following is a summary of GDP, and oil price and U.S. Industrial Production Index fluctuations in our various regions of operations by fiscal quarter.
| | | | | Q3 16 v Q3 15 | | Q2 16 v Q2 15 | | Q1 16 v Q1 15 | | Q4 15 v Q4 14 | | Q1 17 v Q1 16 | | Q4 16 v Q4 15 | | Q3 16 v Q3 15 | | Q2 16 v Q2 15 |
| North America | | | | | | | | | | | | | | | | |
| U.S. GDP Growth | | 1.2 | % | | 1.6 | % | | 1.9 | % | | 2.2 | % | | 1.9 | % | | 1.7 | % | | 1.3 | % | | 1.6 | % |
| West Texas Intermediate Crude Oil Price Decrease | | (18.8 | )% | | (22.6 | )% | | (30.5 | )% | | (50.6 | )% | |
| | | | | | | | | | |
| U.S. Industrial Production Index | | | (0.3 | )% | | (1.0 | )% | | (1.1 | )% | | (1.6 | )% |
| West Texas Intermediate Crude Oil Average Price Increase (Decrease) | | | 16.9 | % | | (3.4 | )% | | (21.2 | )% | | (30.8 | )% |
| EMEA | | | | | | | | | | | | | | | | |
| Euro Area GDP Growth | | 1.6 | % | | 1.7 | % | | 1.7 | % | | 1.6 | % | | 1.8 | % | | 1.8 | % | | 1.6 | % | | 1.7 | % |
| Brent Crude Oil Price Decrease | | (20.3 | )% | | (31.6 | )% | | (33.8 | )% | | (50.0 | )% | |
| | | | | | | | | | |
| Brent Crude Oil Average Price Increase (Decrease) | | | 14.3 | % | | (8.4 | )% | | (25.9 | )% | | (36.1 | )% |
| Asia | | | | | | | | | | | | | | | | |
China GDP Growth (1) | | 6.7 | % | | 6.7 | % | | 6.8 | % | | 6.9 | % | | 6.7 | % | | 6.7 | % | | 6.7 | % | | 6.7 | % |
(1) As reported by the Chinese government.
Overall GDP growth remains below 2.0% for many of the countries in which we operate. This slow recovery, together withThe stagnant economic environment translated into flat sales volumes, while oversupply drove lower oilaverage selling prices during the three months ended June 30,December 31, 2016 as compared to the three months ended June 30, 2015, has resulted in lower demand, and by extension, lower sales volumes and average selling prices when compared to the previous comparable year to date period.December 31, 2015. In terms of currency, the U.S. dollar has continued to strengthen over the prior two comparable annual periodsperiod against most other currencies in which we transact. As a result of these factors, reported dollar revenues and gross profit have been negatively impacted in many of our regions’regional operations.
North America
The North American recovery that began in 2013 continued through 2015. The North American economic environment continued to stabilize during the first quarter of fiscal year 2017. U.S. GDP has been relatively stable throughincreased in the nine months ended June 30, 2016.first fiscal quarter of 2017 as compared to first fiscal quarter of 2016, and the inflation rate has increased to 2.1% for the first fiscal quarter of 2017, driven in part by energy prices.
In terms of currency, the strength of the CAD strengthened slightlyremained unchanged when compared against the U.S. dollar from March 31, 2016 to June 30, 2016; however,in the CAD has weakenedfirst fiscal quarter of 2017 following slight declines during the nine monthsfiscal year ended JuneSeptember 30, 2016 compared to2016. The Peso weakened in value against the comparable periodU.S. dollar in the prior year, which affected, among other items,first fiscal quarter of 2017, although the reported dollar revenues and gross profit fromimpact associated with this weakening has not been material to our Canadianresults of operations.
When compared to fiscal year 2015, we continue to see declining selling prices for the products we distributed during fiscal year 2016. We expect market forces and the intensity of competition to continue to drive pricing pressure during the current fiscal year.
EMEA
In Europe, we conduct business primarily in the Western European countries. While the outlook for economicEconomic growth in Europe improved beginning late in 2015 overallis expected to continue at a modest pace through 2018. Overall GDP growth has remained slow with many Western European nations experiencing growth below 2.0% and current developments adding uncertainty to Europe’s economic prospects.3.0%.
In terms of currency, the euro and the other European currencies weakened versus the U.S. dollar from March 31,in the first fiscal quarter of 2017 following declines during fiscal year 2016, to June 30, 2016 and also weakened during the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015, which affected among other items, the reported dollar revenues and gross profit from our European operations.
The market prices for the products we sell in Europe are closelytypically correlated to the cost of Brent Crude as these operations are primarily based on the distribution of commodity plastics products and most products are sourced in Europe. Consistent with the continuous decline inHowever, while oil prices have increased during 2015 and into 2016, our operationsthe first fiscal quarter of 2017, the oversupply in Europe experienced a decline inthe market has not allowed average selling prices.
Asia
Our operations in Asia are concentrated mainly in China. Recent GDP growth in China, as reported by the Chinese government, has been slower than their reported GDP growth over the past five years,remained flat, primarily due to weaker manufacturing, construction and exports, slightly offset by a weaker property sector, lower credit growth in services and weakened industrial production.consumption.
In terms of currency, the RMB declined slightlycontinued to decline against the U.S. dollar during the nine months ended June 30,first fiscal quarter of 2017 following declines during fiscal year 2016, compared to the nine months ended June 30, 2015, which affected, among other items, the reported dollar revenues and gross profit from the Company’s China operations. Consistent with these macroeconomic conditions, we experienced decreasesour operations in sales revenue for fiscal periods in 2016 and 2015 as compared to comparable periods in 2014.China.
Strategic Initiatives
We are focused on initiatives to enhance growth and profitability, including:
Growinggrowing organically by increasing the breadth and depth of our specialty capabilities, expanding our suite of value-added services and driving scale enhancements;
Complementingcomplementing organic growth by pursuing attractive merger and acquisition opportunities and delivering value creation by leveraging our centralized platform while achieving increased geographic reach and providing enhanced product/service offerings;
Expandingexpanding margins through mix enhancement, disciplined pricing execution, platform scalability and end market diversification;
Maintainingmaintaining our efforts on cost improvement through execution of our transportation strategy, warehouse productivity gains, corporate selling, general and administrative operational efficiencies and optimization of our customer coverage model;
Achievingachieving our operational return goals by maximizing cash conversion, optimizing our working capital requirements and maintaining an asset-lite model; and
Attractingattracting and retaining the talent we need to maintain the capabilities that define a market leader.
Certain Factors Affecting Comparability to Prior Period Financial Results
Prior to the Business Combination, WLRH operated as a blank check development stagespecial purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses or assets. As a result, operations were minimal before the Business Combination. After the Business Combination our results of operations are not directly comparable to historical results of the operations for the periods presented, primarily because:
Our fiscal year-end was changed from December 31st to September 30th. As a result of this change, the condensed consolidated financial statements presented within this Quarterly Report on Form 10-Q include the period from October 1, 2015 through June 30, 2016.
In connection with the Business Combination, certain assets and liabilities had fair value adjustments applied to the Predecessor’s condensed consolidated financial statements on the Closing Date, most notably:
| |
◦ | Intangible assetsassets; |
| |
| ◦ | Plant, property and equipment,equipment; |
Further, in connection with the Business Combination, we have recognized certain contingent liabilities. See Note 3 to our condensed consolidated financial statements.
The three and nine months ended June 30, 2016 includes 22 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016.
As a result of the factors listed above, historical results of operations and other financial data, as well as period-to-period comparisons of these results, may not be comparable or indicative of future operating results or future financial condition.
Results of Operations
Three Months Ended June 30,December 31, 2016 (Successor) compared with Three Months Ended June 30,December 31, 2015 (Predecessor)
The Successor period includesand Predecessor periods include operating results of the acquired business from June 9, 2016 through June 30, 2016 and operating results of WLRH for the full three months ended June 30,December 31, 2016 whereas, the predecessor period includes the operating results of the Predecessor for the full three months ended June 30, 2015.and December 31, 2015, respectively.
| | | | Successor | | | Predecessor | | | | | | % of Sales and Operating Revenues For the | Successor | | | Predecessor | | | | | | Percentage of Sales and Operating Revenues For the |
| | Three Months Ended
June 30, | | | Three Months Ended
June 30, | | Period Over Period Favorable (Unfavorable) | | Three Months Ended
June 30, | Three Months Ended
December 31, | | | Three Months Ended
December 31, | | Period Over Period Favorable (Unfavorable) | | Three Months Ended
December 31, |
| (in millions) | 2016 | | | 2015 | | $ Change | | % Change | | 2016 | | 2015 | 2016 | | | 2015 | | $ Change | | % Change | | 2016 | | 2015 |
| Sales and operating revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Chemicals | $ | 94.2 |
| | | $ | 482.6 |
| | $ | (388.4 | ) | | (80.5 | )% | | 44.0 | % | | 48.8 | % | $ | 352.4 |
| | | $ | 378.7 |
| | $ | (26.3 | ) | | (6.9 | )% | | 44.3 | % | | 45.8 | % |
| Plastics | 109.9 |
| | | 477.4 |
| | (367.5 | ) | | (77.0 | )% | | 51.3 | % | | 48.3 | % | 412.5 |
| | | 418.5 |
| | (6.0 | ) | | (1.4 | )% | | 51.9 | % | | 50.6 | % |
| Other | 10.2 |
| | | 28.8 |
| | (18.6 | ) | | (64.6 | )% | | 4.7 | % | | 2.9 | % | 29.9 |
| | | 30.5 |
| | (0.6 | ) | | (2.0 | )% | | 3.8 | % | | 3.6 | % |
| Total sales and operating revenues | $ | 214.3 |
| | | $ | 988.8 |
| | $ | (774.5 | ) | | (78.3 | )% | | 100.0 | % | | 100.0 | % | $ | 794.8 |
| | | $ | 827.7 |
| | $ | (32.9 | ) | | (4.0 | )% | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | | | | | | | | | | | | | |
| Chemicals | $ | 9.6 |
| | | $ | 59.9 |
| | $ | (50.3 | ) | | (84.0 | )% | | 10.2 | % | | 12.4 | % | $ | 42.7 |
| | | $ | 47.3 |
| | $ | (4.6 | ) | | (9.7 | )% | | 12.1 | % | | 12.5 | % |
| Plastics | 6.7 |
| | | 44.8 |
| | (38.1 | ) | | (85.0 | )% | | 6.1 | % | | 9.4 | % | 36.0 |
| | | 40.6 |
| | (4.6 | ) | | (11.3 | )% | | 8.7 | % | | 9.7 | % |
| Other | 2.5 |
| | | 6.6 |
| | (4.1 | ) | | (62.1 | )% | | 24.5 | % | | 22.9 | % | 5.7 |
| | | 7.3 |
| | (1.6 | ) | | (21.9 | )% | | 19.1 | % | | 23.9 | % |
| Total gross profit | $ | 18.8 |
| | | $ | 111.3 |
| | $ | (92.5 | ) | | (83.1 | )% | | 8.8 | % | | 11.3 | % | $ | 84.4 |
| | | $ | 95.2 |
| | $ | (10.8 | ) | | (11.3 | )% | | 10.6 | % | | 11.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | $ | 19.1 |
| | | $ | 82.9 |
| | $ | 63.8 |
| | 77.0 | % | | 8.9 | % | | 8.4 | % | $ | 74.5 |
| | | $ | 74.7 |
| | $ | 0.2 |
| | 0.3 | % | | 9.4 | % | | 9.0 | % |
| Transaction related costs | 15.9 |
| | | — |
| | (15.9 | ) | | * |
| | 7.4 | % | | — | % | 0.8 |
| | | 1.0 |
| | 0.2 |
| | 20.0 | % | | 0.1 | % | | 0.1 | % |
| Change in fair value of contingent consideration obligations | (2.3 | ) | | | — |
| | 2.3 |
| | * |
| | (1.1 | )% | | — | % | 10.6 |
| | | — |
| | (10.6 | ) | | * |
| | 1.3 | % | | — | % |
| Operating income (loss) | (13.9 | ) | | | 28.4 |
| | (42.3 | ) | | (148.9 | )% | | (6.5 | )% | | 2.9 | % | (1.5 | ) | | | 19.5 |
| | (21.0 | ) | | (107.7 | )% | | (0.2 | )% | | 2.4 | % |
| Other income | — |
| | | 8.4 |
| | (8.4 | ) | | (100.0 | )% | | — | % | | 0.8 | % | 2.4 |
| | | 1.7 |
| | 0.7 |
| | 41.2 | % | | 0.3 | % | | 0.2 | % |
| Interest expense, net | (2.9 | ) | | | (16.2 | ) | | 13.3 |
| | 82.1 | % | | (1.4 | )% | | (1.6 | )% | (11.9 | ) | | | (15.6 | ) | | 3.7 |
| | 23.7 | % | | (1.5 | )% | | (1.9 | )% |
| Income (loss) from continuing operations before income taxes | (16.8 | ) | | | 20.6 |
| | (37.4 | ) | | (181.6 | )% | | (7.8 | )% | | 2.1 | % | |
| Income (loss) before income taxes | | (11.0 | ) | | | 5.6 |
| | (16.6 | ) | | (296.4 | )% | | (1.4 | )% | | 0.7 | % |
| Income tax expense (benefit) | (1.3 | ) | | | 1.8 |
| | 3.1 |
| | 172.2 | % | | (0.6 | )% | | 0.2 | % | (2.7 | ) | | | 1.3 |
| | 4.0 |
| | * |
| | (0.3 | )% | | 0.2 | % |
| Net income (loss) | $ | (15.5 | ) | | | $ | 18.8 |
| | $ | (34.3 | ) | | (182.4 | )% | | (7.2 | )% | | 1.9 | % | $ | (8.3 | ) | | | $ | 4.3 |
| | $ | (12.6 | ) | | (293.0 | )% | | (1.0 | )% | | 0.5 | % |
* Not meaningful
Sales and operating revenues
Sales and operating revenues for the three months ended June 30,December 31, 2016 decreased $774.5$32.9 million, or 78.3%4.0% as compared to the three months ended June 30,December 31, 2015. The decrease in revenues was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period to operating results of 91 days. Additionally, declines in revenue were driven by lower sales per shipping day and lower average selling prices in both our Chemicalschemicals and Plastics businessesplastics of 4.4% resulting from oversupply market conditions caused by weaker industrial demand. Furthermore, revenue decreased $6.7 million, as a result of the declineweakening of the exchange rates of various currencies versus the U.S. dollar as compared to the same period in oil and other commodity prices as well as weaker industrial demand during the current period.
Chemicals
Sales and operating revenues for the Chemicals line of business for the three months ended June 30,December 31, 2016 decreased $388.4$26.3 million, or 80.5%6.9% as compared to the three months ended June 30,December 31, 2015. Revenues decreased dueThis revenue decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period to operating resultsdecline of 91 days. Sales per shipping day declined 20.7% due to4.8% in average selling prices declineacross multiple product lines as a result of lower oilexcess market supply and commodity prices. Additionally, certain suppliers have elected to supply customers directly.a 2.2% decline in sales volumes in North America and Asia caused by continued sluggish demand.
Plastics
Sales and operating revenues for the Plastics line of business for the three months ended June 30,December 31, 2016 decreased $367.5$6.0 million, or 77.0%1.4% as compared to the three months ended June 30,December 31, 2015. Revenues decreased dueThis revenue decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period to operating results of 91 days. Sales per shipping day decreased 6.5% asdecrease in average selling prices declinedof 5.0% across all of our operating regions as a result of lower oil and other commodity product prices partially offset by an increase in volume of 3.8%. To a lesser extent, revenues also decreased in North America due to a supplier disruption which resulted in limited availability to us of certain products we distribute on a regular basis. Additionally, revenue decreased $6.1 million as well as weaker industrial demand.a result of the weakening of the exchange rates of various currencies versus the U.S. dollar compared to the same period in the prior fiscal year.
Other
Sales and operating revenues for the Other segment for the three months ended June 30,December 31, 2016 decreased $18.6$0.6 million, or 64.6%2.0% as compared to the three months ended June 30,December 31, 2015. The decrease in revenues was primarily due to comparing periods that includea shift in service mix toward on-site services during the acquired business’ operating results for a 22-day period as compared to operating results of 91 days. Sales per shipping day increased 43.9% due to new customer acquisitions as well as expanded operations with existing customers.the same period in the prior fiscal year.
Gross profit
Gross profit declined $92.5$10.8 million or 11.3% for the three months ended June 30,December 31, 2016 compared to the three months ended June 30,December 31, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 91 days.lower average selling prices as previously mentioned. Gross profit as a percentage of sales for the three months ended June 30,December 31, 2016 was 8.8%10.6% as compared to 11.3%11.5% for the three months ended June 30,December 31, 2015. The decrease was primarily attributableFurthermore, gross profit decreased $0.6 million, as a result of the weakening of the exchange rates of various currencies versus the U.S. dollar as compared to the realization of $6.9 million related to half ofsame period in the inventory step up recorded due to the Business Combination.prior fiscal year.
Chemicals
Gross profit declined $50.3$4.6 million or 9.7% for the three months ended June 30,December 31, 2016 compared to the three months ended June 30,December 31, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 91 days. Gross profit as a percentage of sales for the Chemicals line of business for the three months ended June 30,December 31, 2016 was 10.2%12.1% as compared to 12.4%12.5% for the three months ended June 30,December 31, 2015. The decrease in gross profit was primarily attributable to the realizationdecline in volumes and average selling prices. Furthermore, there was additional depreciation expense of $3.0approximately $1.3 million related to halfduring the current period negatively affecting gross profit driven by the step up in fair value of property, plant and equipment as a result of the inventory step up recorded due to the Business Combination. The decrease in gross profit was partially mitigated by product mix favorability, pricing initiatives and supply chain efficiencies.
Plastics
Gross profit declined $38.1$4.6 million or 11.3% for the three months ended June 30,December 31, 2016 compared to the three months ended June 30,December 31, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 91 days. Gross profit as a percentage of sales for the Plastics line of business for the three months ended June 30,December 31, 2016 was 6.1%8.7% as compared to 9.4%9.7% for the three months ended June 30,December 31, 2015. The decrease was primarily attributable to price compression associated with an excess supply in the market for certain commodity products and the impact of the weakening of the exchange rates of various currencies versus the U.S. dollar of $0.5 million as compared to the same period in the prior fiscal year. Additionally, there was a supplier disruption in North America resulting in limited availability to us of certain products we distribute on a regular basis. Furthermore, there was additional depreciation expense of approximately $0.5 million during the period negatively affecting gross profit driven by the step up in fair value of property, plant and equipment as a result of the volumeBusiness Combination. The decrease in gross profit was partially mitigated by pricing initiatives and price decreases described above and the realization of $3.9 million related to half of the inventory step up recorded due to the Business Combination.supply chain efficiencies.
Other
Gross profit declined $4.1$1.6 million or 21.9% for the three months ended June 30,December 31, 2016 compared to the three months ended June 30,December 31, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 91 days. Gross profit as a percentage of sales for the Other segment for the three months ended June 30,December 31, 2016 was 24.5%19.1% as compared to 22.9%23.9% for the three months ended June 30,December 31, 2015. The increasedecrease in gross profit was primarily due to new customer acquisitionsa highly competitive marketplace and a shift in service mix toward on-site services during the period as well as expanded operations with existing customers.compared to the same period in the prior fiscal year.
.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended June 30,December 31, 2016 decreased $63.8$0.2 million, or 77.0%0.3% as compared to the three months ended June 30, 2015. This decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period to operating results of 91 days. Selling, general and administrative expenses per day declined 4.3% for the three months ended June 30, 2016 to the three months ended June 30,December 31, 2015. This decrease was primarily driven by lower employeemarketing and travel costs of $0.8 million and lower consulting costs of approximately $0.5 million as a result of continued execution on keyof productivity and cost management initiatives. These decreases were partially offset by increased depreciation and amortization expense of approximately $1.1 million primarily as a result of the fair value step up in assets associated withBusiness Combination. Selling, general and administrative expenses for the Business Combination in the current period.three months ended December 31, 2016 included certain reorganization expenses of approximately $1.7 million.
Transaction related costs
We incurred transaction related costs of $15.9$0.8 million and $1.0 million in the three months ended June 30, 2016. These costs were primarilyDecember 31, 2016 and 2015, respectively, related to legal and consulting costs incurred in the Business Combination.
Changes in fair value of contingent consideration
We incurred a loss of $10.6 million in the three months ended December 31, 2016 related to the contingent consideration associated with the Deferred Cash Consideration and TRA. See Notes 3 and 9 to our condensed consolidated financial statements.
Other income
Other income for the three months ended June 30, 2015December 31, 2016 was $8.4$2.4 million and was mainlyprimarily due to the gain related to reimbursements received for certain capital expenditures incurred in connection with the relocation of certain operations. See Note 5 to our condensed consolidated financial statements. Other income for the three months ended December 31, 2015 was $1.7 million and was due to a gain on the sale of $8.0 million recorded in connectionold private fleet tractors that were replaced with tractors under the release of escrow funds from a previous acquisition in the second quarter of fiscal year 2015.Ryder Lease.
Interest expense, net
Interest expense, net for the three months ended June 30,December 31, 2016 was $2.9$11.9 million duerelated to the new debt acquired in connection with the Business Combination,Credit Facilities, along with the amortization of the costs associated with issuing the debt. Interest expense, net for the three months ended June 30,December 31, 2015 was $16.2$15.6 million primarily related to the Predecessor debt,Credit Facilities and the Notes, along with the amortization of the costs associated with issuing the debt. The decrease in interest expense netin the current period was primarily due to comparing periods that include operating results for a 22-day period to one consistingthe redemption of 91 days.the Notes in connection with the Business Combination.
Income tax expense
Income tax benefit for the three months ended June 30,December 31, 2016 was $1.3$2.7 million and is directlyprimarily attributable to the loss incurred from continuing operations.U.S. operations related to deferred tax positions. Successor and Predecessor income taxes are generally not comparable as the Predecessor was organized as a limited liability company and taxed as a partnership for U.S. income tax purposes. Predecessor income tax expense for the three months ended June 30,December 31, 2015 was $1.8 million and primarily attributable to foreign income tax expense on profitable foreign operations.
April 1 Through June 8, 2016 (Predecessor) compared with Three Months Ended June 30, 2015 (Predecessor)
|
| | | | | | | | | | | | | | | | | | | | | |
| | Predecessor | | | Predecessor | | | | | | % of Sales and Operating Revenues For |
| | April 1 Through June 8, | | | Three Months Ended
June 30, | | Period Over Period Favorable (Unfavorable) | | April 1 Through June 8, | | Three Months Ended
June 30, |
| (in millions) | 2016 | | | 2015 | | $ Change | | % Change | | 2016 | | 2015 |
| Sales and operating revenues | | | | | | | | | | | | |
| Chemicals | $ | 298.7 |
| | | $ | 482.6 |
| | $ | (183.9 | ) | | (38.1 | )% | | 45.9 | % | | 48.8 | % |
| Plastics | 329.8 |
| | | 477.4 |
| | (147.6 | ) | | (30.9 | )% | | 50.7 | % | | 48.3 | % |
| Other | 21.7 |
| | | 28.8 |
| | (7.1 | ) | | (24.7 | )% | | 3.4 | % | | 2.9 | % |
| Total sales and operating revenues | $ | 650.2 |
| | | $ | 988.8 |
| | $ | (338.6 | ) | | (34.2 | )% | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | |
| Chemicals | $ | 38.8 |
| | | $ | 59.9 |
| | $ | (21.1 | ) | | (35.2 | )% | | 13.0 | % | | 12.4 | % |
| Plastics | 32.2 |
| | | 44.8 |
| | (12.6 | ) | | (28.1 | )% | | 9.8 | % | | 9.4 | % |
| Other | 4.4 |
| | | 6.6 |
| | (2.2 | ) | | (33.3 | )% | | 20.3 | % | | 22.9 | % |
| Total gross profit | $ | 75.4 |
| | | $ | 111.3 |
| | $ | (35.9 | ) | | (32.3 | )% | | 11.6 | % | | 11.3 | % |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | $ | 57.5 |
| | | $ | 82.9 |
| | $ | 25.4 |
| | 30.6 | % | | 8.8 | % | | 8.4 | % |
| Transaction related costs | 26.1 |
| | | — |
| | (26.1 | ) | | * |
| | 4.0 | % | | — | % |
| Operating income (loss) | (8.2 | ) | | | 28.4 |
| | (36.6 | ) | | (128.9 | )% | | (1.3 | )% | | 2.9 | % |
| Other income | 0.3 |
| | | 8.4 |
| | (8.1 | ) | | (96.4 | )% | | — | % | | 0.8 | % |
| Interest expense, net | (11.2 | ) | | | (16.2 | ) | | 5.0 |
| | 30.9 | % | | (1.7 | )% | | (1.6 | )% |
| Income (loss) from continuing operations before income taxes | (19.1 | ) | | | 20.6 |
| | (39.7 | ) | | (192.7 | )% | | (2.9 | )% | | 2.1 | % |
| Income tax expense | 1.1 |
| | | 1.8 |
| | 0.7 |
| | 38.9 | % | | 0.2 | % | | 0.2 | % |
| Net income (loss) | $ | (20.2 | ) | | | $ | 18.8 |
| | $ | (39.0 | ) | | (207.4 | )% | | (3.1 | )% | | 1.9 | % |
* Not meaningful
Sales and operating revenues
Sales and operating revenues from April 1, 2016 through June 8, 2016 decreased $338.6 million, or 34.2% as compared to the three months ended June 30, 2015. The decrease in revenues was primarily attributable to comparing periods that include the Predecessor operating results for a 69-day period as compared to operating results of 91 days. Additionally, declines in revenue were driven by lower sales per shipping day and lower average selling prices in both our Chemicals and Plastics businesses as a result of the decline in oil and other commodity prices, as well as weaker industrial demand during the current period.
Chemicals
Sales and operating revenues for the Chemicals line of business from April 1, 2016 through June 8, 2016 compared to the three months ended June 30, 2015 decreased $183.9 million, or 38.1%. Revenues decreased due to comparing periods that include the Predecessor’s operating results for a 69-day period as compared to operating results of 91 days. Sales per shipping day decreased 17.9% as average selling prices declined driven by lower oil and commodity prices. Additionally, certain suppliers have elected to supply customers directly.
Plastics
Sales and operating revenues for the Plastics line of business from April 1, 2016 through June 8, 2016 decreased $147.6 million, or 30.9% as compared to the three months ended June 30, 2015. Revenues decreased due to comparing periods that include the Predecessor’s operating results for a 69-day period as compared to operating results of 91 days. Sales per shipping day declined 8.4% due to average selling prices decline as a result of lower oil and other commodity prices as well as weaker industrial demand.
Other
Sales and operating revenues for the Other segment from April 1, 2016 through June 8, 2016 as compared to the three months ended June 30, 2015 decreased $7.1 million, or 24.7%. The decrease in revenues was primarily due to comparing periods that include the Predecessor’s operating results for a 69-day period as compared to operating results of 91 days.
Gross profit
Gross profit declined $35.9 million for the period April 1, 2016 through June 8, 2016 compared to the three months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 69-day period to operating results of 91 days. Gross profit as a percentage of sales from April 1, 2016 through June 8, 2016 was 11.6% as compared to 11.3% for the three months ended June 30, 2015. This increase was primarily attributable to the positive impact in the current period of certain profitability initiatives and improved product mix.
Chemicals
Gross profit declined $21.1 million for the period April 1, 2016 through June 8, 2016 compared to the three months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 69-day period to operating results of 91 days. Gross profit as a percentage of sales for the Chemicals line of business from April 1, 2016 through June 8, 2016 was 13.0% as compared to 12.4% for the three months ended June 30, 2015. The increase was primarily attributable to (i) our profitability initiatives, (ii) effective management of product costs in the deflationary environment and (iii) improved product mix.
Plastics
Gross profit declined $12.6 million for the period April 1, 2016 through June 8, 2016 compared to the three months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 69-day period to operating results of 91 days. Gross profit as a percentage of sales for the Plastics line of business from April 1, 2016 through June 8, 2016 was 9.8% as compared to 9.4% for the three months ended June 30, 2015. The increase was primarily the result of the continued impact of certain profitability initiatives that are helping to reduce the impact of the price compression and volume declines we are experiencing and improved product mix.
Other
Gross profit declined $2.2 million for the period April 1, 2016 through June 8, 2016 compared to the three months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 69-day period to operating results of 91 days. Gross profit as a percentage of sales for the Other segment from April 1, 2016 through June 8, 2016 was 20.3% as compared to 22.9% for the three months ended June 30, 2015. The decrease was primarily due to lower margins on recycled materials and some price compression associated with a competitive market.
Selling, general and administrative expenses
Selling, general and administrative expenses for the period from April 1, 2016 through June 8, 2016 decreased by $25.4 million or 30.6% compared to the three months ended June 30, 2015. This decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 69-day period to operating results of 91 days. Selling, general and administrative expenses per day for the period from April 1, 2016 through June 8, 2016 decreased by approximately 8.6% compared to the three months ended June 30, 2015. This decrease was primarily due to lower employee costs and lower consulting costs as a result of execution on key productivity and cost management initiatives.
Transaction related costs
We incurred transaction related costs of $26.1 million from April 1, 2016 through June 8, 2016. These costs were primarily related to legal and consulting costs incurred in the Business Combination, and the success fee of $9.9 million paid to TPG upon consummation of the Business Combination.
Other income
Other income from April 1, 2016 through June 8, 2016 as compared to the three months ended June 30, 2015 decreased $8.1 million. The Company had recognized a gain in the three months ended June 30, 2015 of $8.0 million related to the release of funds initially placed in escrow in connection with a previous acquisition.
Interest expense, net
Interest expense, net from April 1, 2016 through June 8, 2016 decreased $5.0 million, or 30.9% as compared to the three months ended June 30, 2015. Interest expense, net is primarily related to the Predecessor debt, along with the amortization of the costs associated with issuing the debt. The decrease in interest expense, net was primarily due to comparing periods that include operating results for a 69-day period as compared to operating results of 91 days.
Income tax expense
Income tax expense from April 1, 2016 through June 8, 2016 was $1.1 million and attributable to income tax expense on profitable foreign operations, primarily Puerto Rico and EMEA. Income tax expense for the three months ended June 30, 2015 was $1.8 million and largely attributable to foreign income tax expense on profitable foreign operations.
Nine Months Ended June 30, 2016 (Successor) compared with Nine Months Ended June 30, 2015 (Predecessor)
The Successor period includes operating results from June 9, 2016 through June 30, 2016 of the acquired business’ and the full nine months ended June 30, 2016 of WLRH’s operating results, whereas, the predecessor period represents the full nine months ended June 30, 2015 of the Predecessor’s operating results.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | | | | | |
| | Nine Months Ended
June 30, 2016 | | | Nine Months Ended
June 30, 2015 | | Period Over Period Favorable (Unfavorable) | | % of Sales and Operating Revenues For the Nine Months Ended June 30, |
| (in millions) | | | | $ Change | | % Change | | 2016 | | 2015 |
| Sales and operating revenues | | | | | | | | | | | | |
| Chemicals | $ | 94.2 |
| | | $ | 1,503.9 |
| | $ | (1,409.7 | ) | | (93.7 | )% | | 44.0 | % | | 49.8 | % |
| Plastics | 109.9 |
| | | 1,429.6 |
| | (1,319.7 | ) | | (92.3 | )% | | 51.3 | % | | 47.3 | % |
| Other | 10.2 |
| | | 85.8 |
| | (75.6 | ) | | (88.1 | )% | | 4.7 | % | | 2.9 | % |
| Total sales and operating revenues | $ | 214.3 |
| | | $ | 3,019.3 |
| | $ | (2,805.0 | ) | | (92.9 | )% | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | |
| Chemicals | $ | 9.6 |
| | | $ | 168.1 |
| | $ | (158.5 | ) | | (94.3 | )% | | 10.2 | % | | 11.2 | % |
| Plastics | 6.7 |
| | | 113.3 |
| | (106.6 | ) | | (94.1 | )% | | 6.1 | % | | 7.9 | % |
| Other | 2.5 |
| | | 21.1 |
| | (18.6 | ) | | (88.2 | )% | | 24.5 | % | | 24.6 | % |
| Total gross profit | $ | 18.8 |
| | | $ | 302.5 |
| | $ | (283.7 | ) | | (93.8 | )% | | 8.8 | % | | 10.0 | % |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | $ | 19.2 |
| | | $ | 248.5 |
| | $ | 229.3 |
| | 92.3 | % | | 9.0 | % | | 8.2 | % |
| Transaction related costs | 18.0 |
| | | 0.1 |
| | (17.9 | ) | | * |
| | 8.4 | % | | * |
|
| Change in fair value related to contingent consideration obligations | (2.3 | ) | | | — |
| | 2.3 |
| | * |
| | (1.1 | )% | | * |
|
| Operating income (loss) | (16.1 | ) | | | 53.9 |
| | (70.0 | ) | | (129.9 | )% | | (7.5 | )% | | 1.8 | % |
| Other income | — |
| | | 9.1 |
| | (9.1 | ) | | (100.0 | )% | | — | % | | 0.3 | % |
| Net interest expense | (2.3 | ) | | | (48.8 | ) | | 46.5 |
| | 95.3 | % | | (1.1 | )% | | (1.6 | )% |
| Income (loss) before income taxes | (18.4 | ) | | | 14.2 |
| | (32.6 | ) | | (229.6 | )% | | (8.6 | )% | | 0.5 | % |
| Income tax expense (benefit) | (1.3 | ) | | | 2.7 |
| | 4.0 |
| | 148.1 | % | | (0.6 | )% | | 0.1 | % |
| Net income (loss) from continuing operations | (17.1 | ) | | | 11.5 |
| | (28.6 | ) | | (248.7 | )% | | (8.0 | )% | | 0.4 | % |
| Net loss from discontinued operations, net of tax | — |
| | | (0.8 | ) | | 0.8 |
| | 100.0 | % | | — | % | | * |
|
| Net income (loss) | $ | (17.1 | ) | | | $ | 10.7 |
| | $ | (27.8 | ) | | 259.8 | % | | (8.0 | )% | | 0.4 | % |
* Not meaningful
Sales and operating revenues
Sales and operating revenues for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015 decreased $2,805.0 million or 92.9%. This decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period as compared to operating results of 273 days. Additionally, declines in revenue were driven by lower sales per shipping day and lower average selling prices in both our Chemicals and Plastics businesses as a result of the decline in oil and other commodity prices during the current period, as well as, weaker industrial demand.
Chemicals
Sales and operating revenues for the Chemicals line of business for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015 decreased $1,409.7 million or 93.7%. The decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period as compared to operating results of 273 days. Sales per shipping day declined 23.7% as average selling prices declined as a result of lower oil and commodity prices. Additionally, certain suppliers have elected to supply customers directly.
Plastics
Sales and operating revenues for the Plastics line of business for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015decreased $1,319.7 million or 92.3%. The revenue decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period as compared to operating results of 273 days. Sales per shipping day decreased 6.3% as average selling prices declined due to lower oil and other commodity prices as well as weaker industrial demand.
Other
Sales and operating revenues for the Other segment for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015decreased $75.6 million or 88.1%. The decrease in revenues was primarily due to comparing periods that include the acquired business’ operating results for a 22-day period as compared to operating results of 273 days.
Gross Profit
Gross profit declined $283.7 million for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 273 days. Gross profit as a percentage of sales for the nine months ended June 30, 2016 was 8.8% as compared to 10.0% for the nine months ended June 30, 2015. This decrease was attributable to the realization of $6.9 million associated with half of the inventory step up recorded due to the Business Combination.
Chemicals
Gross profit declined $158.5 million for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 273 days. Gross profit as a percentage of sales for the Chemicals line of business for the nine months ended June 30, 2016 was 10.2% as compared to 11.2% for the nine months ended June 30, 2015. The decrease was attributable to the realization of $3.0 million related to half of the inventory step up recorded due to the Business Combination.
Plastics
Gross profit declined $106.6 million for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 273 days. Gross profit as a percentage of sales for the Plastics line of business for the nine months ended June 30, 2016 was 6.1% as compared to 7.9% for the nine months ended June 30, 2015. The decrease was primarily attributable to the realization of $3.9 million related to half of the inventory step up recorded due to the Business Combination.
Other
Gross profit declined $18.6 million for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 22-day period to operating results of 273 days. Gross profit as a percentage of sales for the Other segment for the nine months ended June 30, 2016 was 24.5% as compared to 24.6% for the nine months ended June 30, 2015.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended June 30, 2016 decreased $229.3 million or 92.3% compared to the nine months ended June 30, 2015. The decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 22-day period as compared to operating results of 273 days. Selling, general and administrative expenses per day for the nine months ended June 30, 2016 decreased approximately 4.6% compared to the nine months ended June 30, 2015. This decrease was driven primarily by lower employee and consulting costs as a result of execution on key productivity and cost management initiatives. This decrease was partially offset by increased depreciation and amortization expense as a result of the fair value step up in assets associated with the Business Combination in the current period.
Transaction related costs
We incurred $18.0 million in transaction related costs for the nine months ended June 30, 2016. These costs were primarily related to legal and consulting costs incurred in the Business Combination.
Other income
Other income for the nine months ended June 30, 2015 was $9.1 million and was mainly due to a gain of $8.0 million recorded in connection with the release of escrow funds from a previous acquisition in the second quarter of fiscal year 2015.
Interest expense, net
Interest expense, net for the nine months ended June 30, 2016 was $2.3 million and is primarily related to the new debt acquired due to the Business Combination, along with the amortization of the costs associated with issuing the debt. Interest expense, net for the nine months ended June 30, 2015 was $48.8 million and is primarily related to the Predecessor debt, along with the amortization of the costs associated with issuing the debt. The decrease was primarily due to comparing periods that include operating results for a 22-day period as compared to operating results of 273 days.
Income tax expense
Income tax benefit for the nine months ended June 30, 2016 was $1.3 million and is directly attributable to the loss incurred from continuing operations. Successor and Predecessor income taxes are generally not comparable as the Predecessor was organized as a limited liability company and taxed as a partnership for U.S. income tax purposes. Predecessor income tax expense for the nine months ended June 30, 2015 was $2.7 million and primarily attributable to foreign income tax expense on profitable foreign operations.
October 1, 2015 Through June 8, 2016 (Predecessor) compared with Nine Months Ended June 30, 2015 (Predecessor)
|
| | | | | | | | | | | | | | | | | | | | | |
| | Predecessor | | | Predecessor | | | | | | % of Sales and Operating Revenues For |
| | October 1, 2015 Through June 8, 2016 | | | Nine Months Ended
June 30, 2015 | | Period Over Period Favorable (Unfavorable) | | October 1, 2015 Through June 8, 2016 | | Nine Months Ended
June 30, 2015 |
| (in millions) | | | | $ Change | | % Change | | |
| Sales and operating revenues | | | | | | | | | | | | |
| Chemicals | $ | 1,066.4 |
| | | $ | 1,503.9 |
| | $ | (437.5 | ) | | (29.1 | )% | | 45.6 | % | | 49.8 | % |
| Plastics | 1,192.2 |
| | | 1,429.6 |
| | (237.4 | ) | | (16.6 | )% | | 50.9 | % | | 47.3 | % |
| Other | 81.5 |
| | | 85.8 |
| | (4.3 | ) | | (5.0 | )% | | 3.5 | % | | 2.9 | % |
| Total sales and operating revenues | $ | 2,340.1 |
| | | $ | 3,019.3 |
| | $ | (679.2 | ) | | (22.5 | )% | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | |
| Chemicals | $ | 136.2 |
| | | $ | 168.1 |
| | $ | (31.9 | ) | | (19.0 | )% | | 12.8 | % | | 11.2 | % |
| Plastics | 117.6 |
| | | 113.3 |
| | 4.3 |
| | 3.8 | % | | 9.9 | % | | 7.9 | % |
| Other | 18.1 |
| | | 21.1 |
| | (3.0 | ) | | (14.2 | )% | | 22.2 | % | | 24.6 | % |
| Total gross profit | $ | 271.9 |
| | | $ | 302.5 |
| | $ | (30.6 | ) | | (10.1 | )% | | 11.6 | % | | 10.0 | % |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | $ | 208.9 |
| | | $ | 248.5 |
| | $ | 39.6 |
| | 15.9 | % | | 8.9 | % | | 8.2 | % |
| Transaction related costs | 33.4 |
| | | 0.1 |
| | (33.3 | ) | | * |
| | 1.4 | % | | * |
|
| Operating income | 29.6 |
| | | 53.9 |
| | (24.3 | ) | | (45.1 | )% | | 1.3 | % | | 1.8 | % |
| Other income | 2.9 |
| | | 9.1 |
| | (6.2 | ) | | (68.1 | )% | | 0.1 | % | | 0.3 | % |
| Net interest expense | (42.2 | ) | | | (48.8 | ) | | 6.6 |
| | 13.5 | % | | (1.8 | )% | | (1.6 | )% |
| Income (loss) before income taxes | (9.7 | ) | | | 14.2 |
| | (23.9 | ) | | (168.3 | )% | | (0.4 | )% | | 0.5 | % |
| Income tax expense | 4.2 |
| | | 2.7 |
| | (1.5 | ) | | (55.6 | )% | | 0.2 | % | | 0.1 | % |
| Net income (loss) from continuing operations | (13.9 | ) | | | 11.5 |
| | (25.4 | ) | | (220.9 | )% | | (0.6 | )% | | 0.4 | % |
| Net income (loss) from discontinued operations, net of tax | 0.1 |
| | | (0.8 | ) | | 0.9 |
| | 112.5 | % | | — | % | | * |
|
| Net income (loss) | $ | (13.8 | ) | | | $ | 10.7 |
| | $ | (24.5 | ) | | 229.0 | % | | (0.6 | )% | | 0.4 | % |
* Not meaningful
Sales and operating revenues
Sales and operating revenues from October 1, 2015 through June 8, 2016 as compared to the nine months ended June 30, 2015decreased $679.2 million, or 22.5%. This decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 252-day period as compared to operating results of 273 days. Additionally, declines in revenue were driven by lower sales per shipping day and lower average selling prices in both our Chemicals and Plastics businesses as a result of the decline in oil and other commodity prices during the current period as well as weaker industrial demand.
Chemicals
Sales and operating revenues for the Chemicals line of business from October 1, 2015 through June 8, 2016 as compared to the nine months ended June 30, 2015 decreased $437.5 million or 29.1%. The decrease was primarily attributable to comparing periods that include the Predecessor’s operating results for a 252-day period as compared to operating results of 273 days. Sale per shipping day declined 23.2% as average selling prices declined as a result of lower oil and commodity prices. Additionally, certain suppliers elected to supply customers directly.
Plastics
Sales and operating revenues for the Plastics line of business from October 1, 2015 through June 8, 2016 as compared to the nine months ended June 30, 2015decreased $237.4 million or 16.6%. The revenue decrease was primarily attributable to comparing periods that include the Predecessor’s operating results for a 252-day period as compared to operating results of 273 days. Sales per shipping day decreased 9.7% as average selling prices declined due to lower oil and other commodity prices as well weaker industrial demand.
Other
Sales and operating revenues for the Other segment from October 1, 2015 through June 8, 2016 as compared to the nine months ended June 30, 2015decreased $4.3 million or 5.0%. The decrease in revenues was primarily due to comparing periods that include the Predecessor’s operating results for a 252-day period as compared to operating results of 273 days. Sales per shipping day increased 2.9% due to new customer acquisitions as well as expanded operations with existing customers.
Gross Profit
Gross profit declined $30.6 million for the period from October 1, 2015 through June 8, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 252-day period to operating results of 273 days. Gross profit as a percentage of sales from October 1, 2015 through June 8, 2016 was 11.6% as compared to 10.0% for the nine months ended June 30, 2015. This increase was primarily attributable to the positive impact in the current period of (i) certain profitability initiatives, (ii) improved product mix and (iii) the decrease in cost of sales and operating expenses driven by the execution of cost saving efforts, including better utilization of our private fleet, better management of certain warehouse costs and other operating improvements and lower costs for certain products, particularly commodities.
Chemicals
Gross profit declined $31.9 million for the period from October 1, 2015 through June 8, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 252-day period to operating results of 273 days. Gross profit as a percentage of sales for the Chemicals line of business from October 1, 2015 through June 8, 2016 was 12.8% as compared to 11.2% for the nine months ended June 30, 2015. The increase was primarily attributable to the positive impact during the current period of (i) our profitability initiatives, (ii) effective management of product costs in the deflationary environment, (iii) improved product mix and (iv) the continued execution of cost saving efforts including better utilization of our private fleet, better management of certain warehouse costs and other operating improvements.
Plastics
Gross profit increased $4.3 million for the period from October 1, 2015 through June 8, 2016 compared to the nine months ended June 30, 2015. Gross profit as a percentage of sales for the Plastics line of business from October 1, 2015 through June 8, 2016 was 9.9% as compared to 7.9% for the nine months ended June 30, 2015. The increase was primarily the result of the continued impact of certain profitability initiatives that are helping to reduce the impact of the price compression and volume declines we are experiencing, improved product mix and the decrease in operating expenses that resulted from the continued execution of cost saving efforts including better utilization of our private fleet, better management of certain warehouse costs and other operating improvements.
Other
Gross profit decreased $3.0 million for the period from October 1, 2015 through June 8, 2016 compared to the nine months ended June 30, 2015. The decrease in gross profit was primarily due to comparing periods that include the acquired business’ operating results for 252-day period to operating results of 273 days. Gross profit as a percentage of sales for the Other segment from October 1, 2015 through June 8, 2016 was 22.2% as compared to 24.6% for the nine months ended June 30, 2015. The decrease was primarily due to higher costs related to new and expanded operations coupled with lower margins on recycled materials as the result of a decline in market value of the materials and some price compression associated with a competitive market.
Selling, general and administrative expenses
Selling, general and administrative expenses for the period from October 1, 2015 through June 8, 2016 decreased from October 1, 2015 through June 8, 2016 decreased $39.6 million or 15.9% compared to the nine months ended June 30, 2015. This decrease was primarily attributable to comparing periods that include the acquired business’ operating results for a 252-day period as compared to operating results of 273 days. Selling, general and administrative expenses per day for the period from October 1, 2015 through June 8, 2016 decreased by approximately 8.9% compared to the nine months ended June 30, 2015. This decrease was primarily driven by lower employee and consulting costs as a result of execution on key productivity and cost management initiatives.
Transaction related costs
We incurred $33.4 million in transaction related costs from October 1, 2015 through June 8, 2016. These costs were primarily related to legal and consulting costs incurred in the Business Combination.
Other income
Other income from October 1, 2015 through June 8, 2016 was $2.9 million and was primarily due to a gain of $2.0 million in the sale of old private fleet tractors that were replaced with tractors under the Ryder Lease and a $0.6 million gain on the repurchase of $9.5 million of Notes. See Notes 5 and 7 to our condensed consolidated financial statements. Other income for the nine months ended June 30, 2015 was $9.1 million and mainly due to a gain of $8.0 million recorded in connection with the release of escrow funds from a previous acquisition in the second quarter of fiscal year 2015.
Interest expense, net
Interest expense, net from October 1, 2015 through June 8, 2016 and nine months ended June 30, 2015 was $42.2 million and $48.8 million, respectively. Interest expense, net is primarily related to the Predecessor debt, along with the amortization of the costs associated with issuing the debt. The decrease was primarily due to comparing periods that include operating results for a 252-day period as compared to operating results of 273 days.
Income tax expense
Income tax expense from October 1, 2015 through June 8, 2016 was $4.2 million and attributable to income tax expense on profitable foreign operations, primarily Canada EMEA, Puerto Rico and Mexico. Income tax expense for the nine months ended June 30, 2015 was $2.7 million and largely attributable to foreign income tax expense on profitable foreign operations.
EMEA.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under our Newthe ABL Facility. Cash flows generated from our operations are influenced by seasonal patterns of our business and other timing circumstances that can result in increases or decreases in working capital requirements for any given period during the course of our fiscal year. Our ability to generate sufficient cash flows from our operating activities will continue to be primarily dependent on purchasing and distributing chemical and plastic materials. Additionally, our ability to generate cash flows in the normal course of business can be significantly influenced by changing global and regional macroeconomic conditions. Borrowing availability under our Newthe ABL Facility is subject to a borrowing base generally comprised of eligible inventory, accounts receivable and cash and cash equivalents held in certain accounts and certain of its subsidiaries. Our availability under the New ABL Facility is, therefore, potentially subject to fluctuations, depending on the value of the eligible assets in the borrowing base on a given valuation date. An inability to borrow under the New ABL Facility may adversely affect our liquidity, results of operations and financial condition.
Our operating cash requirements consist principally of inventory purchases, trade credit extended to customers, labor, occupancy costs and deliverytransportation and transportationdelivery costs. Non-operating cash requirements include debt service requirements, acquisition-related costs and capital expenditures and investor tax payments.expenditures.
Capital Expenditures
Cash capital expenditures for the ninethree months ended June 30,December 31, 2016 for the Successor and from October 1, 2015 through June 8, 2016 for the Predecessor were $1.4$6.6 million and $14.2 million, respectively, and related primarily to facility improvements and additional information technology investments. We expect our aggregate capital expenditures for the remaining fiscal year 20162017 (excluding acquisitions and assets acquired via capital leases) to be approximately $10.0$25.0-$30.0 million. These expenditures are expected to be primarily related to fixed asset replacements, improvements to our information technology infrastructure and additions of equipment and vehicles.
The Predecessor took delivery of 106 tractors under the Ryder Lease during the period from October 1, 2015 through June 8, 2016, and made capital lease payments of $2.9 million. The Successor made capital lease payments of $0.4 million during the nine months ended June 30, 2016. In connection with the delivery of these tractors, $13.9 million of equipment cost and corresponding capital lease obligations were reflected in the condensed consolidated financial statements of the Predecessor. The initial total equipment cost and corresponding capital lease obligations associated with the Ryder Lease are expected to be $25.9 million. We are permitteda party to terminate the lease of an individual tractor on the anniversary of its delivery date, provided that certain conditions are met. In the event we terminate the lease of an individual tractor in accordance with the terms of the RyderMontgomery Lease. The Montgomery Lease we may elect to purchase the individual tractor at a predetermined residual value or return the tractor to Ryder, subject to an adjustment based on the then-current market value of the individual tractor. See Note 5 to our condensed consolidated financial statements.
In March 2016, the Predecessor entered into a lease agreement for a new facility in Montgomery, Illinois. The lease has a term of 15 years, with annual payments beginning at $1.1 million per year. This lease agreement will beThe Montgomery Lease is accounted for as a capital lease and we expect to beginbegan in the first quarter of fiscal year 2017 at an initial cost and capital lease term in November 2016.obligation of $13.2 million. The capital lease obligations balance was $37.3 million as of December 31, 2016 and is primarily associated with the Ryder lease and the Montgomery Lease. See Note 57 to our condensed consolidated financial statements.
Indebtedness
On June 9, 2016, we entered into the New ABL Facility which provides for asset-based secured credit financing. We also entered into the New Term Loan Facility, which allows us to draw secured term loan financing.
New Credit Facilities
New ABL Facility
The New ABL Facility provides for senior secured revolving credit financing including a U.S. Tranche of up to $505.0 million, and a Canadian Tranche of up to the U.S. dollar equivalent of $40.0 million, and a FILO Tranche up to $30.0 million, subject, in each case, to availability under the respective borrowing bases. Other than during the existence of anmillion. The ABL Facility matures on June 9, 2021. Provided no default or event of default then exists or would arise therefrom, the size ofABL Borrowers have the Canadian Tranche or the U.S. Tranche may be increased or decreased with a corresponding decrease or increase, respectively, in the Canadian Tranche or U.S. Tranche,option, at the beginning of each quarter, at our 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.
Obligations under the ABL Facility are secured by a first priority lien on all ABL first lien collateral, including certain eligible inventory and accounts receivable, and a second priority lien on all Term Loan first lien collateral including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, in each case, subject to certain limitations; provided, that no ABL Facility first lien collateral or Term Loan Facility first lien collateral owned by the aggregateCanadian Borrower secure the obligations owing under the U.S. tranche of the Revolving Commitment Increases (as defined in the New ABL Facility) shall not exceed $175.0 million. Facility.
The New ABL Facility includes a letter of credit subfacility,sub-facility, which permits up to $200.0 million of letters of credit under the U.S. Tranche (which may be denominated in U.S. dollars, euros or other currencies approved by the administrative agent and the issuing bank) and up to the U.S. dollar equivalent of $10.0 million of letters of credit under the Canadian Tranche (which may be denominated in CAD only). The New ABL Facility also contains a FILO Tranche which can be used by any non-Canadian foreign subsidiary for loans or letters of credit up to include aan aggregate amount not to exceed $30.0 million initial aggregate amount.
Fees paid to the lenders in connection with the New ABL Facility totaled $6.8 million and were recorded as debt issuance costs in Other non-current assets on the condensed consolidated balance sheets to be amortized as interest expense over the remaining term of the New ABL Facility.
At June 30,December 31, 2016, we had $131.1$123.7 million in borrowings outstanding under the New ABL Facility. Interest expense related to the New ABL Facility, excluding amortization of debt issuance costs, was $0.4$1.3 million and for the three and nine months ending June 30,ended December 31, 2016.
New
As of December 31, 2016, we were in compliance with the covenants of the ABL Facility.
Term Loan Facility
The New Term Loan Facility provides senior secured debt financing in an aggregate principal amount of up to $655.0 million and the right, at our option, to request additional tranches of term loans in an aggregate principal amount, when included with any incremental borrowings issued under the New ABL Facility, amount up to $175.0 million, plus unlimited additional amounts such that the aggregate principal amount of indebtedness outstanding at any onethe time of incurrence does not cause the consolidated net senior secured leverage ratio,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 are subject to the absence of any default, and among other things, the receipt of commitments by existing or additional financial institutions. Proceeds of $651.7 million, net of discount of $3.3 million were received in connection with
Obligations under the New Term Loan Facility.Facility are secured by a first priority lien on all Term Loan first lien collateral, including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, and a second priority lien on all ABL first lien collateral, including accounts receivable and inventory of the loan parties under the Term Loan Facility, subject to certain limitations.
At June 30,December 31, 2016, we had $655.0$651.7 million in borrowings outstanding under the New Term Loan Facility. We are required to make earlymandatory principal payments on an annual basis, commencing with the fiscal year endedending September 30, 2017, if cash flows for the year, as defined in the agreement, exceed certain levels specified in the agreement. Interest expense related to the New Term Loan Facility, excluding original issue discount amortization and amortization of debt issuance costs, was $2.1$8.8 million for the three and nine months ended June 30,December 31, 2016.
Fees paid to the lenders in connection with the New Term Loan Facility totaled $18.5 million and were recorded as a reduction of the debt balance to be amortized as interest expense over the remaining term of the New Term Loan Facility.
We were in compliance at June 30, 2016 with all covenants on the New Credit Facilities.
Predecessor Credit Facilities
In addition to cash flows generated from its operations, the Predecessor’s sources of liquidity included borrowings under the Predecessor Credit Facilities. The Predecessor’s ABL Facility was scheduled to mature on July 11, 2017 and the Predecessor Term Loan Facility was scheduled to mature on September 9, 2017. As of the Closing Date, the Predecessor wasDecember 31, 2016, we were in compliance with the covenants of the Predecessor Credit Facilities. In connection with the completion of the Business Combination, a principal payment of $617.5 million was made and all of the Predecessor’s outstanding indebtedness and other obligations under the Predecessor Credit Facilities were fully discharged.
Predecessor Senior Subordinated Notes due 2018
The Notes were scheduled to mature on March 1, 2018. As of the Closing Date, the Predecessor was in compliance with the covenants of the indenture governing the Notes.
Effective as of the Closing Date, the Issuers redeemed all of the approximately $149.7 million principal amount of the Notes outstanding at a redemption price equal to 100% of the principal amount (plus accrued and unpaid interest up to, but not including the Closing Date). The Issuers had previously notified the holders of the Notes that they had elected to redeem the Notes on the Closing Date. The Issuers and the guarantors under the Notes have been released from their respective obligations under the Notes and the Indenture governing the Notes, effective as of the Closing Date.Term Loan Facility.
Liquidity
The following table summarizes our liquidity position as of June 30,December 31, 2016 and September 30, 2015:2016:
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2016 | | | September 30, 2015 | December 31, 2016 | | September 30, 2016 |
| Cash and cash equivalents | $ | 38.6 |
| | | $ | 127.7 |
| $ | 33.3 |
| | $ | 47.5 |
|
| Predecessor ABL Facility availability | — |
| | | 321.4 |
| |
| New ABL Facility availability | 125.2 |
| | | — |
| |
| ABL Facility availability | | 222.8 |
| | 273.8 |
|
| Total liquidity | $ | 163.8 |
| | | $ | 449.1 |
| $ | 256.1 |
| | $ | 321.3 |
|
Cash and Cash Equivalents
At June 30,December 31, 2016, we had $35.4$33.3 million ofin cash and cash equivalents of which $28.8 million was held by foreign subsidiaries, $33.0$25.3 million of which was denominated in currencies other than the U.S. dollar, primarily in euros and RMB. At June 30,December 31, 2016, we had $8.9$9.0 million in China denominated in RMB. While the RMB is convertible into U.S. dollars, foreign exchange transactions are subject to approvals from the SAFE. We do not anticipate any significant adverse impact to overall liquidity from restrictionspotential limitations on the transfer or conversion of cash and cash equivalents.
New ABL Facility
Under our Newthe ABL Facility, if as of any date of determination when Trigger Event Excess Availability (as defined in the New ABL Facility agreement)Facility) is below certain thresholds or upon certain defaults, the ABL Borrowerswe will be required to deposit cash on a daily basis from certain depository accounts in a collection account maintained with the administrative agent, which will be used to repay outstanding loans and cash collateralized letters of credit. At June 30,December 31, 2016, Trigger Event Excess Availability under our Newthe ABL Facility was $125.2$222.8 million, which was $84.9$182.5 million in excess of the $40.3 million threshold that would trigger the foregoing requirements. The availability under the New ABL Facility is currently capped at $300.0 million until certain lender reporting requirements are satisfied, which are expected to be completed by the end of the current fiscal year.
Based on current and anticipated levels of operations, capital spending projections and conditions in our markets, we believe that cash on hand, together with cash flows from operations and borrowings available under the New ABL Facility, are adequate to meet our working capital and capital expenditure needs as well as any debt service and other cash requirements for at least twelve months.
In addition to operating and non-operating cash requirements previously described, our longer-term liquidity needs are primarily related to our final maturity debt payments due in 2021 and 2023. Depending on market conditions and other factors, we may also consider alternative financing options, including, but not limited to, issuance of equity, issuance of new debt or refinancing of our existing debt obligations.
Cash Flows
The following table sets forth the major categories of our cash flows for the ninethree months ended June 30,December 31, 2016 for the Successor October 1, 2015 to June 8, 2016 forand the Predecessor and ninethree months ended June 30,December 31, 2015 for the Predecessor.Predecessor:
Major Categories of Cash Flows
| | | | Successor | | | Predecessor | | Predecessor | |
| Major Categories of Cash Flows | | Successor | | | Predecessor |
| (in millions) | Nine Months Ended
June 30, 2016 | | | October 1, 2015 Through June 8, 2016 | | Nine Months Ended June 30, 2015 | Three Months Ended
December 31, 2016 | | | Three Months Ended December 31, 2015 |
| Net cash provided by (used in) operating activities from continuing operations | $ | (30.0 | ) | | | $ | 69.5 |
| | $ | 93.6 |
| |
| Net cash provided by (used in) operating activities from discontinued operations | — |
| | | 0.1 |
| | (0.6 | ) | |
| Net cash provided by (used in) operating activities | (30.0 | ) | | | 69.6 |
| | 93.0 |
| $ | (9.8 | ) | | | $ | 16.6 |
|
| Net cash provided by (used in) investing activities | 139.1 |
| | | (11.8 | ) | | (25.0 | ) | |
| Net cash used in financing activities | (70.7 | ) | | | (121.5 | ) | | (65.4 | ) | |
| Net cash used in investing activities | | (8.9 | ) | | | (2.2 | ) |
| Net cash provided by (used in) financing activities | | 5.3 |
| | | (83.4 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | | 0.3 |
| | (1.8 | ) | (0.8 | ) | | | (0.9 | ) |
| Increase (decrease) in cash and cash equivalents | 38.4 |
| | | (63.4 | ) | | 0.8 |
| |
| Decrease in cash and cash equivalents | | (14.2 | ) | | | (69.9 | ) |
| Cash and cash equivalents at the beginning of period | 0.2 |
| | | 127.7 |
| | 88.2 |
| 47.5 |
| | | 127.7 |
|
| Cash and cash equivalents at the end of period | $ | 38.6 |
| | | $ | 64.3 |
| | $ | 89.0 |
| $ | 33.3 |
| | | $ | 57.8 |
|
Nine Month Period ended June 30, 2016 (Successor) Compared with Period October 1, 2015 to June 8, 2016 (Predecessor)
Cash flows from operating activities
Net cash used in operating activities for the nine months ended June 30, 2016 for the Successor was $30.0 million, based on a 22-day operating period. Net loss from continuing operations of $17.1 million, adjusted for significant non-cash items such as depreciation and amortization expenses, debt issuance costs, transaction costs paid in stock, equity based compensation, and changes relating to contingent consideration liabilities, collectively totaling $12.9 million, resulted in $4.2 million of cash outflow from continuing operations during the nine months ended June 30, 2016. Additionally, cash flow from continuing operations was negatively impacted by an increase in accounts and notes receivable of $6.0 million, an increase in inventories of $7.0 million, a decrease in accounts payable of $27.3 million and decrease in accrued expenses and other liabilities of $2.6 million, partially offset by attributable to the decrease in other current assets of $2.8 million and a decrease in other assets and liabilities of $0.3 million.
Net cash provided by operating activities for the period October 1 through June 8, 2016 for the Predecessor was $69.5 million, based on a 252-day operating period. Net loss from continuing operations of $13.9 million, adjusted for significant non-cash items such as depreciation and amortization expenses, debt issuance costs, bad debt, equity based compensation, deferred income taxes, gain on the sale of property and equipment and gain on debt extinguishment, collectively totaling $46.2 million, resulted in $32.3 million of cash inflow from continuing operations for the period October 1, 2015 through June 8, 2016. Additionally, cash flow from continuing operations was positively impacted by a decrease in accounts and notes receivable of $34.4 million, increase in accounts payable of $13.4 million and a decrease in inventory of $8.4 million. These amounts were offset by a decrease in accrued expenses and other liabilities of $9.7 million and a change in other current assets and other operating assets and liabilities of $9.0 million.
Cash flows from investing activities
Investing activities provided $139.1 million for the nine months ended June 30, 2016 for the Successor, primarily due to withdrawing $501.1 million from the trust account offset by the cash paid to effect the Business Combination, net of cash acquired of $360.6 million and the additions of property and equipment of $1.4 million mainly related to facility improvements, additional information technology investments and vehicle additions.
Investing activities used $11.8 million for the period October 1, 2015 through June 8, 2016 for the Predecessor, primarily due to capital expenditures of $14.2 million through the period mainly related to facility improvements, additional information technology investments and vehicle additions. These expenditures were partially offset by net proceeds from the sale of assets of $2.4 million.
Cash flows from financing activities
Financing activities used $70.7 million of cash for the nine months ended June 30, 2016 for the Successor, primarily as a result of repaying Predecessor long-term debt of $767.3 million, repayment of long-term debt of $41.0 million and the payment of debt issuance costs of $25.3 million. These were offset by the issuance of long-term debt of $823.6 million and proceeds of short-term debt of $4.9 million. The Company also issued common stock as consideration for the Business Combination of $234.9 million and redeemed stock of $298.5 million.
Financing activities used $121.5 million for the period October 1, 2015 through June 8, 2016 for the Predecessor, primarily as a result of repaying long-term debt and capital leases of $417.3 million and the repayment of short-term debt of $17.1 million. These were offset by the issuance of long-term debt of $292.1 million and proceeds of short-term debt of $20.9 million.
Nine Month PeriodThree Months Ended June 30,December 31, 2016 (Successor) Compared to Nine Month PeriodThree Months Ended June 30,December 31, 2015 (Predecessor)
Cash flows from operating activities
Net cash used in operating activities for the ninethree months ended June 30,December 31, 2016 for the Successor was $30.0 million, based on a 22-day operating period.$9.8 million. Net loss from continuing operations of $17.1$8.3 million, adjusted for the gain related to reimbursement for certain capital expenditures incurred in connection with the relocation of certain operations and significant non-cash items such as depreciation and amortization expenses, amortization of debt issuance costs, transaction costs paid in stock,provision for bad debt, deferred income taxes, equity based compensation expense, and changes relating to contingent consideration liabilities, collectively totaling $12.9$22.7 million, resulted in $4.2 million of cash outflow from continuing operations during the nine months ended June 30, 2016. Additionally, cash flow from continuing operations was negatively impacted by an increase in accounts and notes receivable of $6.0 million, an increase in inventories of $7.0 million, a decrease in accounts payable of $27.3 million and decrease in accrued expenses and other liabilities of $2.6 million, partially offset by attributable to the decrease in other current assets of $2.8 million and a decrease in other assets and liabilities of $0.3 million.
Net cash provided by operating activities from continuing operations for the nine months ended June 30, 2015 for the Predecessor was $93.6 million, based on a 273-day operating period. Net income from continuing operations of $11.5 million, adjusted for significant non-cash items such as depreciation and amortization expenses, debt issuance costs, provision for bad debt, inventory impairment and deferred income taxes, collectively totaling $50.0 million, resulted in $61.5$14.4 million of cash inflow from continuing operations during the ninethree months ended June 30, 2015.December 31, 2016. Additionally, cash flow from continuing operations was positively impacted by a decrease in accounts and notes receivable of $77.3$15.2 million, partially offset by $59.2a $38.6 million attributable to a decrease in accounts payable and accrued expenses.payable. The decrease in accounts and notes receivable was driven primarily by lower sales volumes and falling selling prices experienced during the current period as well as timing of collections at period end. There have beenwere no significant changes in billing terms or collection processes during the current period. Certain customersThe decrease in accounts payable was driven by lower volumes and purchase prices during the current period. There was a decrease in inventories of Nexeo Plaschem are allowed$10.1 million during the three months ended December 31, 2016, which reflected the impact of improved inventory management and lower prices for inventory purchases. Additionally, there was a decrease in accrued expenses and other liabilities of $9.7 million which included the payment of the annual employee incentive compensation and an increase in other current assets of $0.6 million primarily driven by prepayments on certain inventory purchases. There was an additional decrease in other long-term liabilities of $0.6 million.
Net cash provided by operating activities for the three months ended December 31, 2015 for the Predecessor was $16.6 million. Net income of $4.3 million, adjusted for gains on sales of assets and significant non-cash items such as depreciation and amortization expenses, amortization of debt issuance costs, provision for bad debt, deferred income taxes and equity-based compensation expense, collectively totaling $15.2 million, resulted in $19.5 million of cash inflow during the three months ended December 31, 2015. Additionally, cash flow was positively impacted by a decrease in accounts and notes receivable of $56.2 million, partially offset by a $44.8 million decrease in accounts payable. The decrease in accounts payable was driven by lower purchases due to remit paymentlower sales volumes and pricing during athe three months ended December 31, 2015. The decrease in accounts and notes receivable was driven primarily by lower sales volumes and falling selling prices experienced during the three months ended December 31, 2015 as well as timing of collections at period of time ranging from 30 days up to nineend. There were no significant changes in billing terms or collection processes during the three months and these receivables, which are supported by banknotes issued by large banks in China on behalf of these customers, totaled $5.5 million at June 30,ended December 31, 2015. There was a decrease in inventoryinventories of $10.9$7.5 million during the ninethree months ended June 30,December 31, 2015, which reflectsreflected the impact of lower prices for inventory purchases as well as improved inventory management. Additionally, there was a decrease in accrued expenses and other current assetsliabilities of $6.5$19.2 million partially due to a reduction in inventory prepayments.which included the payment of the annual employee incentive compensation.
Cash flows from investing activities
Investing activities provided $139.1used $8.9 million forof cash during the ninethree months ended June 30,December 31, 2016 for the Successor, primarily due to withdrawing $501.1 million from the trust account offset by the $360.6$5.1 million paid to effect the Business Combination, net of cash acquired,asset acquisitions, and the additions of property and equipment of $1.4$6.6 million mainly related to facility improvements and additional information technology investments, and vehicle additions.partially offset by $2.8 million of cash proceeds related to the reimbursement for certain capital expenditures incurred in connection with the relocation of certain operations.
Investing activities used $25.0$2.2 million forof cash during the ninethree months ended June 30,December 31, 2015 for the Predecessor, primarily due to capital expenditures of $27.3$3.9 million through the period mainlyprimarily related to facility improvements and additional information technology investments, and vehicle additions. These expenditures were partially offset by net proceeds from the sale of assets of $2.3$1.7 million.
Cash flows from financing activities
Financing activities used $70.7provided $5.3 million of cash forduring the ninethree months ended June 30,December 31, 2016 for the Successor, primarily as a result of repaying Predecessor long-term debtnet borrowings on the ABL Facility of $767.3 million, repayment of long-term debt of $41.0$6.0 million and the payment of debt issuance costs of $25.3 million. These were offset by the issuance of long-term debt of $823.6 million and proceeds ofnet borrowings on short-term debt of $4.9 million. The Company also issued common stock$1.6 million, partially offset by payments on the Term Loan Facility of $234.9$1.6 million and redeemed stockcapital lease payments of $298.5$0.7 million.
Financing activities used $65.4$83.4 million of cash forduring the ninethree months ended June 30,December 31, 2015 for the Predecessor, primarily as a result of an excess cash flow payment of $29.6 million pursuant to the purchase of the remaining equity interest in Nexeo Plaschem for $34.3 million. In addition, financing activities includedPredecessor Term Loan Facility and net payments on the Predecessor ABL Facility of $15.3$56.3 million, partially offset by net paymentsborrowings of $10.7$3.0 million on short-term lines of credit available to Nexeo Plaschem and payments under the Term Loan FacilityPlaschem.
Contractual Obligations and Commitments
As of June 30,December 31, 2016, amounts due under our contractual commitments were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Less than 1 Year | | 1-3 Years | | 4-5 Years | | More than 5 Years | | Total |
Short-term and long-term debt obligations (1) | $ | 47.5 |
| | $ | 13.1 |
| | $ | 144.1 |
| | $ | 622.2 |
| | $ | 826.9 |
|
Estimated interest payments on long-term debt obligations (2) | 38.4 |
| | 77.3 |
| | 76.5 |
| | 66.8 |
| | 259.0 |
|
Capital lease obligations (3) | 7.5 |
| | 13.6 |
| | 13.5 |
| | 29.9 |
| | 64.5 |
|
Operating lease obligations (4) | 15.5 |
| | 20.7 |
| | 10.7 |
| | 8.0 |
| | 54.9 |
|
Purchase obligations (5) | 7.9 |
| | 0.5 |
| | 0.2 |
| | — |
| | 8.6 |
|
| Employee benefit obligations | — |
| | — |
| | — |
| | 2.5 |
| | 2.5 |
|
Contingent Consideration (6) | — |
| | — |
| | — |
| | 142.2 |
| | 142.2 |
|
| Total | $ | 116.8 |
| | $ | 125.2 |
| | $ | 245.0 |
| | $ | 871.6 |
| | $ | 1,358.6 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period (in millions) |
| | Less than 1 Year | | 1-3 Years | | 4-5 Years | | More than 5 Years | | Total |
Short-term and long-term debt obligations (1) | $ | 45.5 |
| | $ | 13.1 |
| | $ | 136.8 |
| | $ | 619.0 |
| | $ | 814.4 |
|
Estimated interest payments on long-term debt obligations (2) | 39.6 |
| | 77.2 |
| | 73.9 |
| | 50.1 |
| | 240.8 |
|
Capital lease obligations (3) | 7.1 |
| | 14.3 |
| | 13.9 |
| | 40.4 |
| | 75.7 |
|
Operating lease obligations (4) | 14.9 |
| | 22.2 |
| | 11.1 |
| | 6.0 |
| | 54.2 |
|
| Employee benefit obligations | — |
| | — |
| | — |
| | 2.6 |
| | 2.6 |
|
Contingent Consideration (5) | — |
| | 46.7 |
| | 72.5 |
| | 130.5 |
| | 249.7 |
|
Other obligations (6) | 7.1 |
| | 1.9 |
| | — |
| | — |
| | 9.0 |
|
| Total | $ | 114.2 |
| | $ | 175.4 |
| | $ | 308.2 |
| | $ | 848.6 |
| | $ | 1,446.4 |
|
| |
(1) | Short-term obligations primarily include the payment of $41.0$39.0 million outstanding under credit facilities available to Nexeo Plaschem.Plaschem, and $6.5 million in principal installment payments under our Term Loan Facility. Long-term debt obligations include (i) the payment of $131.1$123.7 million in outstanding principal (as of June 30,December 31, 2016) under our New ABL Facility and (ii) the payment of $655.0$645.2 million in outstanding principal under our New Term Loan Facility. See Note 7 to our condensed consolidated financial statements. |
| |
(2) | Estimated interest payments include cash interest payments and estimated commitment fees on long-term debt obligations. Variable rate interest payments were estimated using interest rates as of June 30,December 31, 2016 held constant to maturity. |
| |
(3) | Capital lease obligations represent future payments on capital lease agreements, including lease payments on all tractors under the agreement entered into with Ryder in May 2015.Lease, and the Montgomery Lease. The amounts above include executory costs under these capital leases of $2.1$2.4 million per year, for aggregate executory costs totaling $13.3$19.1 million. Additionally, the amounts include decreasing annual interest payments ranging from $1.2$2.1 million to $0.3$0.1 million, for aggregate interest payments totaling $5.2 million.$18.9 million on all capital leases. We are permitted to terminate the lease of an individual tractor under the Ryder Lease on the anniversary of its delivery date, provided that certain conditions are met. In the event the Company terminateswe terminate the lease of an individual tractor in accordance with the terms of the Ryder Lease, the Companywe may elect to purchase the individual tractor at a predetermined residual value or return the tractor to Ryder, subject to an adjustment based on the then-current market value of the individual tractor. Amounts also include payments under the new facility lease in Montgomery, Illinois, expected to begin in the first quarter of fiscal year 2017. See Notes 5 and 7 to our condensed consolidated financial statements. |
| |
(4) | Operating lease obligations represent payments for a variety of facilities and equipment under non-cancellable operating lease agreements, including office buildings, transportation equipment, warehouses and storage facilities and other equipment. |
| |
(5) | Purchase obligations are related to (i) certain IT-related contracts, (ii) non-cancellable equipment orders and (iii) estimated obligation costs to relocate employees or new hires in various U.S. locations, primarily in The Woodlands, Texas. The relocations are assumed to be completed within one year, although it is not practicable to establish definite completion dates for each employee’s relocation. |
| |
(6) | Liabilities for contingent consideration are related (i) to the TRA that we entered into with the Selling Equityholders and (ii) the Deferred Cash Consideration that will be paid to Selling Equityholders pursuant to the Merger Agreement. Due toThe amount included in the uncertainty regardingtable above for the timingDeferred Cash Consideration is based on the undiscounted expected value of future cash flows associated with these liabilities, the amounts arepayment and is currently included in the More than 54-5 Years column based on the final payment date of June 9, 2021 as defined in the table above.Merger Agreement. However, as further defined in the Merger Agreement, payments could be required to be made by the Company prior to June 9, 2021. The timing of payments associated with the liability for the contingent consideration related to the TRA is based on expected undiscounted cash flows in future periods, and may change based on actual results. The specific timing and amount of the first TRA payment are not currently known. Accordingly, an estimate has been included in the 1-3 Years column and will be reclassified accordingly as a current item as the timing and approximate amount are determined. See NoteNotes 3 and Note 9 to our condensed consolidated financial statements. |
| |
| (6) | Other obligations are related to (i) non-cancellable equipment orders, (ii) certain IT-related contracts, (iii) estimated obligation costs to relocate employees or new hires in various U.S. locations, primarily to The Woodlands, Texas and (iv) remaining payments related to the asset acquisition completed during thethree months ended December 31, 2016 (see Note 3 to our condensed consolidated financial statements). The relocations are assumed to be completed within one year, although it is not practicable to establish definite completion dates for each employee’s relocation. |
Off Balance Sheet Arrangements
We had no off balance sheet arrangements, as defined in Item 303(a) (4) (ii) of Regulation S-K, at June 30,December 31, 2016.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity and Product Price Risk
Our business model is to buy and sell products at current market prices in quantities approximately equal to estimated customer demand. Energy costs are a significant component of raw materials that are included in our product costs. Rising or volatile raw material prices for our suppliers, especially those of hydrocarbon derivatives, may cause our costs to increase or may result in volatility in our profitability. Although we do not speculate on changes in the prices of the products we sell, because we maintain inventories in order to serve the needs of our customers, we are subject to the risk of reductions in market prices for products we hold in inventory. We do not use derivatives to manage our commodity price risk because of the large number of products we sell and the large variety of raw materials used in the production of those products. Inventory management practices are focused on managing product price risk by generally purchasing our inventories via our ERP system which helps us forecast customer demand based on historical practices. Global inventory balances can fluctuate based on variations in regional customer demand forecasts. We collaborate directly with customers in all regions to enhance the ongoing accuracy of these forecasts in order to reduce the number of days sales held in inventories, as well as to lower the amount of any slow moving and older inventories. In addition, we are generally able to pass on price increases to our customers, subject to market conditions, such as declining or otherwise volatile market prices for feedstocks, the presence of competitors in particular geographic and product markets and prevailing pricing mechanisms in customer contracts. We believe that these risk management practices reduce our exposure to changes in product selling prices or costs; however, significant unanticipated changes in market conditions or commodity prices could adversely affect our results of operations, financial condition and cash flows, as the prices of the products we purchase and sell are volatile.
Credit Risk
We are subject to the risk of loss arising from the credit risk related to the possible inability of our customers to pay for the products we resell and distribute to them. We typically have limited risk from a concentration of credit risk as no individual customer represents greater than 5.0% of the outstanding accounts receivable balance. We attempt to limit our credit risk by monitoring the creditworthiness of our customers to whom we extend credit and establish credit limits in accordance with our credit policy. We perform credit evaluations on substantially all customers requesting credit. With the exception of Nexeo Plaschem’s operations, we generally do not require collateral with respect to credit extended to customers; however, we will not extend credit to customers for whom we have substantial concerns and will deal with those customers on a cash basis. Nexeo Plaschem offers billing terms that allow certain customers to remit payment during a period of time ranging from 30 days to nine months. These notes receivables at Nexeo Plaschem ($7.08.7 million at June 30,December 31, 2016) are supported by banknotes issued by large banks in China on behalf of their customers.
At December 31, 2016, no individual customer represented greater than 5.0% of the outstanding accounts receivable balance.
Interest Rate Risk
Interest rate risks can occur due to changes in market interest rates. This risk results from changes in the fair values of fixed-interest rate financial instruments or from changes in the cash flows of variable-interest rate financial instruments. The optimal structure of variable and fixed interest rates is determined as part of interest rate risk management. It is not possible to simultaneously minimize both kinds of interest rate risk.
The Predecessor historically took steps to manage its exposure to interest rate risk in part by entering into interest rate swap agreements. In connection with the Business Combination, all interest rate swap agreements existing at the time were terminated and an early termination penalty of $0.3 million was paid. We will monitor our interest rate risk exposure and may enterconsider entering into new interest rate derivatives from time to time to hedge the exposure. See Note 8 to our condensed consolidated financial statements.
Borrowings under the U.S. Tranche and the Canadian Tranche of the New ABL Facility bear interest, at our option, at either an alternate base rate or Canadian prime rate, as applicable, plus an applicable margin (ranging from 0.25% to 0.75% pursuant to a grid based on average excess availability) or LIBOR or Canadian BA rate (as defined therein)in the ABL Facility), as applicable, plus an applicable margin (ranging from 1.25% to 1.75% pursuant to a grid based on average excess availability). Loans under the FILO Tranche within the New ABL Facility will bear interest, at an alternate base rate plus an applicable margin (ranging from 1.00% to 1.50% pursuant to a grid based on average excess availability) or LIBOR plus an applicable margin (ranging from 2.00% to 2.50% pursuant to a grid based on average excess availability).
Borrowings under the New Term Loan Facility will bear interest at our option at either (a) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which shall be no less than 1.0%, plus an applicable margin of 4.25% or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by Bank of America, N.A. as its “prime rate,” (2) the federal funds effective rate plus 0.50% and (3) a one-month LIBOR rate plus 1.0%, plus an applicable margin of 3.25%.
Changes in market interest rates will have no effect on the New Term Loan Facility interest expense until such time as the interest rate index, which is LIBOR, increases above the floor value of 1.0%. Were that to occur, an additionala 100 basis point increaseincrease/decrease in the interest rate would result in an increaseincrease/decrease of $6.6$6.5 million in annual interest expense based on the New Term Loan Facility balance.
Fair Value Measurements
As a result of the Business Combination, we incurred liabilities related to contingent consideration payable to the Selling Equityholders, which are required to be adjusted to fair value at each reporting period. These measurements are considered Level 3 measurements within the fair value hierarchy. CurrentProjected taxable income, current interest rates, current tax rates and the market price of our common stock are key inputs used to estimate the fair value of these liabilities. As a result, any changes in these inputs will impact the fair value of these liabilities and could materially impact the amount of income or expense recorded each reporting period.
The fair value of the liability for the contingent consideration related to the TRA was $95.5$86.1 million as of June 30,December 31, 2016. The calculation of the liability for the contingent consideration related to the TRA uses a cash flow model which incorporates current interest rates in the discount rate used to discount the obligation to present value. A 100 basis point increase in the discount rate compared to the discount rate used at the June 30,December 31, 2016 valuation would have resulted in a decrease of approximately $4.7$0.7 million in the value of the liability for the contingent consideration related to the TRA. Additionally, this cash flow model is sensitive to changes in applicable tax rates. A 100 basis point increase in the tax rate compared to the tax rate used at the June 30,December 31, 2016 valuation would have resulted in an increase of approximately $2.8$2.4 million in the value of the liability for the contingent consideration related to the TRA.
The fair value of the liability for the contingent consideration related to Deferred Cash Consideration was $46.7$42.9 million as of June 30,December 31, 2016. The liability for the contingent consideration related to the Deferred Cash Consideration is highly sensitive to the price of our common stock at each valuation date. A $1.00 increase/decrease in the price of our common stock from its June 30,December 31, 2016 price would have increased/decreased the fair value of the liability for the Deferred Cash Consideration by approximately $5.2$4.6 million.
Foreign Currency Risk
We may be adversely affected by foreign exchange rate fluctuations since we conduct our business on an international basis in multiple currencies. 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 U.S. dollars, the results of operations and the financial position of our local international operations, which are generally reported in the relevant local currencies, are translated into U.S. dollars at the applicable exchange rates for inclusion in our condensed consolidated financial statements, exposing us to currency translation risk. We currently do not utilize financial derivatives to manage our foreign currency risk, but we continue to monitor our exposure to foreign currency risk, employ operational strategies where practical and may consider utilizing financial derivatives in the future to mitigate losses associated with these risks.
Included in our condensed consolidated statement of operations for the ninethree months ended June 30,December 31, 2016 is a $0.4$0.8 million net loss related to foreign exchange rate fluctuations, arising from the activities of Holdings since the consummation of the Business Combination.fluctuations. The most significant currency exposures during this period were to the RMB, CAD and the Mexican pesoPeso versus the U.S. dollar, and the British pound versus the euro.dollar. These currencies fluctuated to various degrees but such fluctuations did not exceed 3%approximately 4% from their respective values since the consummation of the Business Combination.September 30, 2016. Assuming the same directional fluctuations as occurred during the current period,three months ended December 31, 2016, a hypothetical 10.0% weakening/strengthening in the average exchange rates of these currencies from that date would have generated a net loss/gain of $2.8$1.4 million in our condensed consolidated statement of operations for the ninethree months ended June 30, 2016. The Predecessor incurred a net foreign exchange loss of $1.6 million for the period from October 1, 2015 through June 8,December 31, 2016.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on the evaluation performed, our management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective as of June 30,December 31, 2016.
Changes in Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer evaluated the changes in our internal control over financial reporting that occurred during the quarterly period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, it is concluded that there had been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30,December 31, 2016 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. 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 numbered -- Ashland Inc. v. Nexeo Solutions, LLC,, Case No. N14C-07-243 JTV CCLD, in the Superior Court for the State of Delaware in and for New Castle County. In the suit, Ashland seeks a declaration that we areHoldings is obligated to indemnify Ashland for losses Ashland incurs pertaining to the Other Retained Remediation Liabilities, up to the amount of a $5.0 million deductible, which Ashland contends applies pursuant to the ADA Purchase Agreement. Ashland further alleges that we haveHoldings has breached duties related to that agreement by not having so indemnified Ashland for amounts Ashland has incurred for the Other Retained Remediation Liabilities at sites where Ashland disposed of wastes prior to the Ashland Distribution Acquisition, and on that basis seeks unspecified compensatory damages, costs and attorney’s fees. We disagree with Ashland’s construction of the ADA Purchase Agreement and are vigorously defending the lawsuit.
In April and November 2011, two local unions each filed an unfair labor practice charge against us with the NLRB, alleging that we should be considered a successor of Ashland and, as such, we were obligated to bargain to agreement or impasse with the unions before changing the employment terms that were in effect before commencing operations, including continuing to cover employees under the union-affiliated multi-employer pension plans in which the employees participated as employees of the Distribution Business. In November 2011, the NLRB filed a complaint against us with respect to both cases, and a consolidated hearing was held before an administrative law judge in April and May of 2012. On June 28, 2012, the NLRB administrative law judge found substantially in our favor, holding that we were not obligated to continue to cover employees in the multi-employer pension plans. We reached a settlement with one of the unions resulting in a collective bargaining agreement that keep the employees in our 401(K) plan. The NLRB approved that settlement and, in May of 2014, dismissed the case with respect to that local union. In the remaining case, the assertions against us primarily relate to the claim that we are obligated to continue to cover employees under the union-affiliated multi-employer pension plans in which the employees participated as employees of the Distribution Business. On July 18, 2016, the NLRB issued a decision and order with respect to the remaining case. The NLRB reversed the decision of the administrative law judge and found that, because in the purchase agreement we agreed to make offers of employment to all of the Distribution Business’ employees, we became a perfectly clear successor and were required to bargain to impasse over the unit employees’ initial terms and conditions of employment prior to making any changes. We are currently evaluating our options with respectand the union have both appealed the decision to the decision.Fifth Circuit Court of Appeals and the Ninth Circuit Court of Appeals, respectively. Regardless, we do not believe this case could have a material adverse effect on our business, financial condition or results of operations.
In June 2014, we self-disclosed to the California 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.
From time to time, we are party to ongoing legal proceedings in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not believe the results of these proceedings, other than as is disclosed elsewhere in this Quarterly Report on Form 10-Q, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operation or liquidity.
Item 1A. Risk Factors
We are subject to certain risks and hazards due to the nature of the business activities we conduct. For a discussion of these risks, see “Item 1A. Risk Factors” of the WL Ross Holding Corp.our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on December 31, 2015 filed on January 14, 2016, “Risk Factors” in our Current Report on Form 8-K filed on June 15, 2016 and “Risk Factors” in our Registration Statement on Form S-3 filed on June 23,8, 2016. These risks could materially and adversely affect our business, financial condition, cash flows and result of operations. There have been no material changes to the risk factors described in the Form 8-K10-K described above. We may experience additional risks and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 5, 2014, our Registration Statement on Form S-1 (File No. 333-195854) was declared effective by the SEC and also on June 5, 2014 our subsequent Registration Statement on Form S-1 (File No. 333-196547) became effective upon filing with the SEC each in accordance with Rule 462(b) of the Securities Act, for our IPO. In our IPO, we sold an aggregate 50,025,000 units at an offering price to the public of $10.00 per unit for an aggregate offering price of $500,250,000, with each unit consisting of one share of common stock and one warrant. Each warrant entitles the holder thereof to purchase one-half of one share of our common stock at a price of $5.75 per half share. Deutsch Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as book runners (the “Underwriters”). The IPO commenced as of June 6, 2014 and did not terminate before all of the securities registered in the registration statement were sold. On June 11, 2014, we closed the sale of such units, resulting in net proceeds to us of $500,250,000.
We paid a total of approximately $9.2 million in underwriting discounts and commissions and approximately $1.0 million for other costs and expenses related to the IPO. In addition, the Underwriters agreed to defer up to approximately $18.3 million in underwriting discounts and commissions, which amount was paid in shares of common stock at the time of the consummation of the Business Combination. We also repaid $0.4 million in loans made to us by our Sponsor to cover expenses related to the IPO. The balance of the net proceeds from the IPO were used to pay a portion of the purchase consideration of the Business Combination and to pay expenses incurred in connection with the business combination.
Purchase of Equity Securities
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans |
April 1 to April 30 | | — | | — | | — | | — |
May 1 to May 31 | | — | | — | | — | | — |
June 1 to June 30 | | 29,793,320 (1)
| | $10.02 | | 29,793,320 (1)
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(1) In connection with the closing of the Business Combination, we redeemed a total of 29,793,320 shares of our common stock pursuant to the terms of WLRH’s amended and restated certificate of incorporation, resulting in a total payment to redeeming shareholders of $298,465,296.None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Nexeo Solutions, Inc. |
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AugustFebruary 9, 20162017 | By: | /s/ Ross J. Crane |
| | | Ross J. Crane |
| | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit Index
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Exhibit Number | | Description |
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2.1 | | Amendment No. 1 to the Merger Agreement, dated June 6, 2016, by and among WL Ross Holding Corp., Neon Acquisition Company LLC, Neon Holding Company, LLC, Nexeo Solutions Holdings, LLC, TPG Accolade Delaware, L.P., and Nexeo Holdco, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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3.1 | | Second Amended and Restated Certificate of Incorporation of Nexeo Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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3.2 | | Amended and Restated Bylaws of Nexeo Solutions, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission June 15, 2016 (File No. 001-36477)). |
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4.1 | | Nexeo Solutions, Inc. 2016 Long Term Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 23, 2016 (File No. 333-212199)). |
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10.1 | | Tax Receivable Agreement, dated June 9, 2016, by and between WL Ross Holding Corp. and the Selling Equityholders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.2 | | Form of Joinder to Tax Receivable Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.3 | | Credit Agreement, dated as of June 9, 2016, by and Nexeo Solutions, LLC, the other U.S Borrowers referred to therein, Nexeo Solutions Canada Corp., Nexeo Solutions Holdings, LLC, Nexeo Solutions Sub Holding Corp., Bank of America, N.A. as agent, the other agents party thereto and the others lenders party thereto (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.4 | | Credit Agreement, dated as of June 9, 2016, by and among Nexeo Solutions, LLC, Nexeo Solutions Holdings, LLC, Nexeo Solutions Sub Holding Corp., Bank of America, N.A., as administrative agent and collateral agent, the other agents party thereto and the other lenders party thereto (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.5 | | Employment Agreement, dated June 9, 2016, by and between Nexeo Solutions, Inc., Nexeo Solutions, LLC and David Bradley (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.6 | | Nexeo Solutions, Inc. Severance Plan for U.S. Officers and Executives, as Amended and Restated, Effective as of June 9, 2016 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.7 | | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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| Exhibit Number | | Description |
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10.8 | | Amendment No. 1 to Shareholders’ and Registration Rights Agreement, dated June 6, 2016, by and among WL Ross Holding Corp., WL Ross Sponsor LLC and Nexeo Holdco, LLC (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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10.9 | | Form of Joinder to Shareholders’ and Registration Rights Agreement (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.10 | | Registration Rights Agreement, dated May 23, 2016, by and between WL Ross Holding Corp., WL Ross Sponsor LLC and First Pacific Advisors, on behalf of one or more clients (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2016 (File No. 001-36477)). |
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10.11 | | Registration Rights Agreement, dated June 9, 2016, by and among Nexeo Solutions, Inc., Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.12 | | Form of Performance Share Unit Award Agreement under the Nexeo Solutions, Inc. 2016 Long Term Incentive Plan (incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016 (File No. 001-36477)). |
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10.13 | | Amendment No. 1 to Founder Share Transfer Letter Agreement, dated June 6, 2016, by and among WL Ross Holding Corp, WL Ross Sponsor LLC and Nexeo Holdco, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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10.14 | | Fidelity Subscription Agreement, dated May 9, 2016, by and between the Company and Fidelity Select Portfolios: Chemicals Portfolio, Fidelity Advisor Series I: Fidelity Advisor Value Fund, Fidelity Capital Trust: Fidelity Value Fund, Fidelity Select Portfolios: Materials Portfolio, Fidelity Central Investment Portfolios LLC: Fidelity Materials Central Fund and Variable Insurance Products Fund IV: Materials Portfolio (incorporated by reference to Exhibit 10.6 to the Current Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2016 (File No. 001-36477)). |
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10.15 | | MFS Subscription Agreement, dated May 6, 2016, by and between the Company and MFS Series Trust X on behalf of MFS Global Alternative Strategy Fund, MFS Series Trust I on behalf of MFS New Discovery Fund and MFS Variable Insurance Trust on behalf of MFS New Discovery Series (incorporated by reference to Exhibit 10.7 to the Current Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2016 (File No. 001-36477)). |
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10.16 | | Subscription Agreement, dated May 23, 2016, by and among WL Ross Holding Corp., WL Ross Sponsor LLC and First Pacific Advisors, on behalf of one or more clients (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2016 (File No. 001-36477)). |
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10.17 | | Commitment Agreement, dated June 6, 2016, by and among WL Ross Holding Corp., WL Ross Sponsor LLC and First Pacific Advisors, on behalf of one or more clients (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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10.18 | | Commitment Agreement, dated June 6, 2016, by and among WL Ross Holding Corp., WL Ross Sponsor LLC and Park West Investors Master Fund, Limited (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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Exhibit Number | | Description |
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10.19 | | Commitment Agreement, dated June 6, 2016, by and among WL Ross Holding Corp., WL Ross Sponsor LLC and Park West Partners International, Limited (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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10.20 | | Subscription Agreement, dated June 6, 2016, by and among WL Ross Holding Corp. and WL Ross Sponsor LLC (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2016 (File No. 001-36477)). |
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10.21† | | Vehicle Operating and Service Agreement dated May 22, 2015 by and between Ryder Truck Rental, Inc. d/b/a Ryder Transportation Services, and Nexeo Solutions, LLC. |
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10.22† | | Amendment to Vehicle Operating and Service Agreement dated May 22, 2015 by and between Ryder Truck Rental, Inc., d/b/a Ryder Transportation Services, and Nexeo Solutions, LLC. |
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10.23† | | Separation Agreement and Release of Claims dated effective April 11, 2016 by and among Nexeo Solutions, LLC, Nexeo Solutions Holdings, LLC and Henry E. Harrell. |
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| 31.1† | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2† | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1†† | | Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101** | | Interactive data files pursuant to Rule 405 of Regulation S-T. |
† Filed herewith.
†† Furnished herewith.
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* | The exhibits and schedule to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Registrant agrees to furnish supplementally a copy of all omitted schedules to the Securities and Exchange Commission upon its request. |
** Pursuant to Rule 406T of Regulation S-T, the interactive data files included in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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s | Management contract or compensatory plan or arrangement. |