| Acquisitions | Acquisitions Ultra Chem Acquisition On April 3, 2017, the Company completed the Ultra Chem Acquisition for approximately $56.8 million , net of cash acquired of $0.5 million , pursuant to the Ultra Chem Stock Purchase Agreement. This amount excludes the settlement of the final net working capital adjustment. Of the purchase price, approximately $10.7 million was placed in escrow. Of this amount, approximately $1.0 million was designated for the settlement of the final net working capital adjustment, expected to be completed in the fourth quarter of fiscal year 2017. The remaining balance of approximately $9.7 million may remain in escrow for a period of up to five years and relates to indemnification obligations under the Ultra Chem Stock Purchase Agreement. The escrow amount will be released as under the terms of the Ultra Chem Stock Purchase Agreement and related documentation. The Ultra Chem Acquisition was financed with approximately $58.0 million of borrowings under the ABL Facility. There is no contingent consideration related to the Ultra Chem Acquisition. Preliminary Purchase Consideration Allocation The Ultra Chem Acquisition is accounted for under the acquisition method, which requires the Company to perform an allocation of the preliminary purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the preliminary purchase consideration over the estimated fair values is recorded as goodwill. The following table summarizes the Company’s preliminary allocation of the preliminary purchase consideration to assets acquired and liabilities assumed at the Ultra Chem Closing Date: Preliminary Purchase Consideration Allocation Accounts receivable $ 14.4 Inventory 10.5 Other current assets 2.0 Property and equipment 0.4 Customer-related intangible 22.0 Trade name 0.3 Non-compete agreements 3.7 Other non-current assets 0.4 Goodwill 22.5 Total assets acquired 76.2 Short-term borrowings 0.9 Accounts payable 13.0 Other current liabilities 4.1 Other non-current liabilities 1.4 Total liabilities assumed 19.4 Net assets acquired $ 56.8 The total purchase consideration allocation above is preliminary as the Company has not yet completed the necessary fair value assessments, including the assessments of inventory, intangibles and the related tax impacts on these items. Any changes within the measurement period may change the amount of the purchase consideration allocable to goodwill. The fair value and tax impact assessments are to be completed within twelve months of the Ultra Chem Closing Date and could have a material impact on the components of the total purchase consideration allocation. Transaction costs incurred by the Company associated with the Ultra Chem Acquisition were $0.3 million and $1.2 million during the three and nine months ended June 30, 2017 , respectively. Of this amount, approximately $0.3 million and $0.5 million were recorded in Transaction Costs during the three and nine months ended June 30, 2017 , respectively, and $0.7 million were recorded in S elling, general and administrative expenses during the nine months ended June 30, 2017 in the condensed consolidated statement of operations. A summary and description of the acquired assets and assumed liabilities fair valued in conjunction with applying the acquisition method of accounting follows: Accounts and Notes Receivable Accounts and notes receivable consisted of receivables related to the customers of the acquired business, as well as various other miscellaneous receivables. The accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on expected collections of Ultra Chem. Accordingly, accounts receivable included an adjustment of $0.8 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Ultra Chem Closing Date. Inventory Inventory consisted primarily of finished products to be distributed to the acquired business’s customers. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability expected to be generated once the inventory is sold (net realizable value). The inventory fair value step up of $1.2 million was recognized in income during the three months ended June 30, 2017, which is included in Cost of sales and operating expenses in the condensed consolidated statements of operations. The Company’s assessment of the fair value of inventory is preliminary, and will be completed within twelve months of the Ultra Chem Closing Date. Other Current Assets Other current assets consisted primarily of prepaid expenses and did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Property and Equipment Property, plant and equipment acquired consists primarily of leasehold improvements, computer and office equipment as well as furniture and fixtures. The preliminary purchase price allocation for property, plant and equipment was based on the carrying value of such assets as it was determined to approximate fair value. The Company's assessment of fair value of the property and equipment is preliminary, and will be completed within twelve months of the Ultra Chem 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 ten -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 $22.0 million for these intangible assets as part of the preliminary allocation of the purchase consideration. The Company's assessment of the expected future cash flows related to the customer intangibles is preliminary, and will be completed within twelve months of the Ultra Chem Closing Date. Trade Name The "Ultra Chem" 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 Ultra Chem name. The fair value of this asset will be amortized on a straight-line basis over a two -year period, estimated based on the period in which the Company would expect a market participant to use the name prior to rebranding. The Company recognized $0.3 million for this intangible asset as part of the preliminary allocation of the purchase consideration. The Company's assessment of the estimated future cash flows from the “Ultra Chem” trade name is preliminary and will be completed within twelve months of the Ultra Chem Closing Date. Non-Compete Agreements In connection with the Ultra Chem Acquisition, the former equityholders of the Ultra Chem Group agreed to non-compete agreements. The terms of the non-compete agreements prohibit the equityholders from competing in the chemical distribution space for three years after the Ultra Chem Closing Date. The income approach was used to value the non-compete agreements through a comparative discounted cash flow analysis based on the impact of competition absent these agreements. The Company recognized $3.7 million for this intangible asset as part of the preliminary allocation of the purchase consideration. This intangible is amortized on a straight-line basis over a three -year period. The Company's assessment of these comparative future cash flows is preliminary and will be completed within twelve months of the Ultra Chem Closing Date. Other Non-Current Assets Other non-current assets acquired represented certain long-term deposits and other assets, 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 price over the fair value of the underlying net assets, largely arising from synergies expected as a result of the Ultra Chem Acquisition. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment. The Company does not expect any goodwill from the Ultra Chem Acquisition to be deductible for tax purposes. As the fair value assessments of the acquired assets and liabilities are finalized within twelve months of the Ultra Chem Closing Date, the amount of goodwill recognized as of the Ultra Chem Closing Date is subject to change. Short-Term Borrowings Short-term borrowings included short-term borrowings of Ultra Chem prior to the Ultra Chem Acquisition, which did not have a fair value adjustment as part of acquisition accounting as their carrying value approximated fair value. As described above, the balance was paid off immediately after the closing of the Ultra Chem Acquisition. Accounts Payable Accounts payable represented short-term obligations owed to the vendors of the acquired business, which were assumed in the Ultra Chem Acquisition. These obligations did not have a fair value adjustment as part of acquisition accounting as their carrying value approximated fair value. Other Current Liabilities Other current liabilities represented primarily accrued expenses, including accrued payroll, certain accrued taxes, the current portion of assumed tax-related contingent liabilities 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 as their carrying value approximated fair value. Other Non-Current Liabilities Other non-current liabilities represent assumed tax-related contingent liabilities. The Company's assessment of the fair value of these contingent liabilities is preliminary, and will be completed within twelve months of the Ultra Chem Closing Date. Impact of the Ultra Chem Acquisition on the Company’s Consolidated Financial Information For the three and nine months ended June 30, 2017 , the Company’s consolidated sales and operating revenues and net income include $17.1 million and $0.2 million , respectively, related to the operations of the acquired business since the Ultra Chem Closing Date. Asset Acquisitions In December 2016, the Company completed an asset acquisition whereby it obtained certain customer contracts and a customer list. Additionally, in connection with this transaction, the Company entered into a supply agreement and a licensing agreement granting the Company the non-exclusive use of a certain trademark. The total consideration associated with this transaction was $8.5 million , of which $5.1 million was paid at closing. The remaining consideration will be paid in equal amounts on or before January 1, 2018 and January 1, 2019. The remaining consideration is included in Accrued expenses and other liabilities and Other non-current liabilities on the Company’s condensed consolidated balance sheets. In connection with this transaction, the Company recognized intangible assets totaling $8.5 million which are included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheets. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 10 and 13 years. In April 2017, the Company completed an asset acquisition whereby it obtained certain customer contracts, a customer list and inventory. The total consideration associated with this transaction was approximately $1.9 million , with $1.6 million paid at closing. The remaining consideration is included in Accrued expenses and other liabilities on the Company’s condensed consolidated balance sheet and will be paid on or before April 3, 2018, provided certain conditions are met. In connection with this transaction, the Company recognized an intangible asset related to the customer list of approximately $1.1 million which is included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheet. The customer list will be amortized over an estimated useful life of five years . Business Combination On June 9, 2016, the Company consummated the Business Combination pursuant to the Merger Agreement, whereby WLRH acquired Holdings (including the portion of Holdings held by Blocker) through a series of two mergers. As a result of the transactions contemplated by the Merger Agreement, Holdings and Blocker became wholly-owned subsidiaries of WLRH. The purchase consideration for the Business Combination was as follows: Cash $ 424.9 Less: cash acquired (64.3 ) Equity 276.7 Founder Shares transferred to Selling Equityholders 30.2 Contingent consideration - Fair value of Deferred Cash Consideration 45.4 Contingent consideration - Fair value of TRA (1) 89.8 Total purchase consideration (2) $ 802.7 (1) During the nine months ended June 30, 2017, the Company recorded adjustments of $5.6 million . See below. (2) In addition to the total purchase consideration above, the Company assumed the outstanding indebtedness of the Predecessor, including related accrued interest through the Closing Date, totaling $774.3 million . The proceeds of the Credit Facilities were used to repay such indebtedness and accrued interest immediately following the consummation of the Business Combination. Contingent Consideration - Deferred Cash Consideration The contingent consideration associated with the Deferred Cash Consideration will be an amount in cash equal to the prevailing price of the Company’s common stock at the time that the Company pays such deferred cash payment multiplied by the number of Excess Shares ( 5,178,642 Excess Shares as of June 30, 2017 ). Based on the terms of the Excess Shares, certain circumstances require the Company to pay all or a portion of the Deferred Cash Consideration to the Selling Equityholders, where such cash amount is calculated as set forth in the Merger Agreement, including (i) where the volume weighted average trading price of the Company’s common stock for any period of 20 trading days in any 30 trading day period exceeds $15.00 per share, and (ii) if any Excess Shares remain on June 30, 2021. If any Excess Shares remain on June 30, 2021, the Company must elect to either (i) within five business days of such date, pay the Selling Equityholders an amount in cash equal to the product of the number of remaining Excess Shares multiplied by the volume weighted-average trading price for the 20 trading day period immediately preceding such date or (ii) use reasonable best efforts to sell such shares to a third party in a primary offering and pay the gross proceeds thereof (less any underwriting discounts and commissions) to the Selling Equityholders. However, to the extent the number of shares issued in such offerings does not equal the full amount of Excess Shares remaining at the time of the offering, the Company’s obligations with respect to any remaining Excess Shares, including the obligation to continue to complete any necessary additional offerings, shall continue. In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model. The estimated fair value of the Deferred Cash Consideration liability as of the Closing Date was $45.4 million . See Note 9. Contingent Consideration - TRA Concurrent with the completion of the Business Combination, the Company incurred the liability for the contingent consideration related to the TRA, which reflects amounts owed to the Selling Equityholders. This liability generally provides for the payment by the Company to the Selling Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date as a result of (i) certain increases in tax basis resulting from the Company Merger, (ii) certain tax attributes of Holdings existing prior to the Mergers, (iii) net operating losses and certain other tax attributes of Blocker available to the Company as a result of the Blocker Merger and (iv) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments the Company makes under the TRA. The Company will retain the benefit of the remaining 15% of the net cash savings, if any. The Company estimated the fair value of the TRA liability based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. During the three months ended March 31, 2017, the Company recorded a $2.0 million adjustment to the estimated fair value of the TRA liability as of the Closing Date, related to the assessments of the tax attributes associated with certain entities. The Company completed its fair value assessment of the TRA liability as of the Closing Date during the three months June 30, 2017 , resulting in an additional increase to the TRA liability of $3.6 million . Including these adjustments, the estimated fair value of the TRA liability as of the Closing Date was $89.8 million . Including this adjustment, the undiscounted cash flows associated with the TRA liability as of the Closing Date were estimated to be approximately $215.0 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 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. 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 allocation of the purchase consideration to assets acquired and liabilities assumed at the Closing Date: Purchase Consideration Allocation Accounts receivable $ 470.0 Inventory 327.9 Other current assets 26.0 Property, plant and equipment 328.2 Customer-related intangible 201.0 Trade name 21.0 Below-market leases 0.7 Other non-current assets 3.2 Deferred tax assets 1.2 Goodwill 673.4 Total assets acquired 2,052.6 Short-term borrowings and current portion of capital leases 40.6 Accounts payable 335.9 Other current liabilities 52.8 Long-term portion of capital leases 23.0 Long-term debt 767.3 Deferred tax liability 24.8 Other non-current liabilities 5.5 Total liabilities assumed 1,249.9 Net assets acquired $ 802.7 During the nine months ended June 30, 2017 , the Company completed its assessment of the fair values of the assets acquired and liabilities assumed in the Business Combination. The Company recorded adjustments to decrease the fair value of inventory by $0.6 million , property, plant and equipment by $0.1 million and an adjustment to accounts payable of $2.1 million , an adjustment to increase the fair value of other current assets by $0.2 million , and adjustments to deferred tax liabilities of $0.4 million . Goodwill was impacted by these adjustments as well as by the $5.6 million adjustment to the fair value of the TRA described above which increased the purchase consideration. Transaction costs incurred by the Company associated with the Business Combination were $(0.1) million and $0.8 million during the three and nine months ended June 30, 2017 , respectively. Transaction costs incurred by the Company associated with the Business Combination were $15.9 million and $18.0 million for the three and nine months ended June 30, 2016 for the Successor, respectively. Transaction costs incurred by the Predecessor associated with the Business Combination were $26.1 million and $33.4 million for the period from April 1, 2016 through June 8, 2016 and the period from October 1, 2015 through June 8, 2016, respectively. A summary and description of the acquired assets and assumed liabilities fair valued in conjunction with applying the acquisition method of accounting follows: Accounts Receivable Accounts receivable consisted of receivables related to the customers of the acquired business, as well as various other miscellaneous receivables. The accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on expected collections of the Predecessor. Accordingly, accounts receivable included an adjustment of $4.1 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Closing Date. Inventory Inventory consisted primarily of finished products to be distributed to the acquired business’s customers. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability that is expected to be generated once the inventory is sold (net realizable value). The inventory fair value step up of $13.8 million was recognized in income during the fiscal year ended September 30, 2016 , which is included in Cost of sales and operating expenses in the condensed consolidated statements of operations. Other Current Assets Other current assets consisted primarily of prepaid expenses, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Property, Plant and Equipment Property, plant and equipment consisted primarily of: 42 owned distribution locations in the U.S., Puerto Rico and Canada; 11 leased locations in the U.S., Canada, Puerto Rico, Mexico, Europe and China (excluding third-party operated warehouses); office equipment and other similar assets used in the Predecessor's operations. The allocation of the purchase consideration for property, plant and equipment was based on the fair market value of such assets determined using the cost approach. The cost approach consisted of estimating the fixed assets’ replacement cost less all forms of depreciation. The fair value of land was determined using the comparable sales approach. The fair value adjustment to property, plant and equipment was $96.0 million . Customer-Related Intangible Customer relationships were valued through the application of the income approach. Under this approach, revenue, operating expenses and other costs associated with existing customers were estimated in order to derive cash flows attributable to the existing customer relationships. The resulting estimated cash flows were then discounted to present value to arrive at the fair value of existing customer relationships as of the valuation date. The value associated with customer relationships will be amortized on a straight-line basis over a 12 -year period, which represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. The Company recognized $201.0 million for these intangible assets as part of the allocation of the purchase consideration. Trade Name The "Nexeo" trade name was valued through application of the income approach, involving the estimation of likely future sales and an estimated royalty rate reflective of the rate that a market participant would pay to use the Nexeo name. The fair value of this asset will be amortized on a straight-line basis over a four -year period, estimated based on the period in which the Company expects a market participant would use the name prior to rebranding and the length of time the name would be expected to maintain recognition and value in the marketplace. The Company recognized $21.0 million for this intangible asset as part of the allocation of the purchase consideration. 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 allocation of the purchase consideration. Other Non-Current Assets Other non-current assets acquired represented certain long-term deposits, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Goodwill Goodwill represents the excess of the total purchase consideration over the fair value of the underlying net assets acquired, largely arising from the workforce and extensive efficient distribution network that has been established by the acquired business. Of the total amount of goodwill recognized as part of the preliminary allocation of the purchase consideration above, the Company expects approximately $253.4 million to be deductible for tax purposes as of June 30, 2017 . Short-Term Borrowings and Current Portion of Capital Leases Short-term borrowings and current portion of capital leases included short-term borrowings of Nexeo Plaschem and the current portion of capital leases, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Accounts Payable Accounts payable represented short-term obligations owed to the vendors of the acquired business, which were assumed in the Business Combination. These obligations did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Other Current Liabilities Other current liabilities represented primarily accrued expenses, including accrued payroll, accrued interest on long-term debt, certain accrued taxes and various other liabilities arising out of the normal operations of the acquired business. The majority of these liabilities did not have a fair value adjustment because their carrying value approximated fair value. However, no fair value was recognized for certain recorded liabilities that did not meet the definition of a liability under the acquisition method of accounting. Long-Term Portion of Capital Leases The long-term portion of capital leases included the non-current portion of capital leases for machinery and equipment, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Long-Term Debt Long-term debt represented the outstanding principal balance at the Closing Date of the Predecessor Term Loan Facility and the Notes which did not have a fair value adjustment as part of acquisition accounting as 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. Additionally, the Company’s entity structure includes several partnerships. The amounts recorded for deferred taxes reflect the evaluation of the tax basis of each individual partner's interest in the partnerships . Unaudited Consolidated Pro Forma Financial Information The consolidated pro forma results presented below include the effects of the Business Combination as if they had occurred as of October 1, 2014, the beginning of the fiscal year prior to the year the Business Combination was consummated, and the Ultra Chem Acquisition as if it had occurred as of October 1, 2015. The consolidated pro forma results reflect certain adjustments related to these acquisitions, primarily reflecting a full period of Ultra Chem Group’s results of operations for each period presented, the estimated changes in fair value of the contingent consideration liability from the Business Combination, amortization expense associated with estimates for the acquired intangible assets, depreciation expense based on the new fair value of property, plant and equipment, the effects of inventory step ups from the acquisitions, 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 or the Ultra Chem Acquisition on October 1, 2015. Three Months Ended June 30, 2017 Nine Months Ended June 30, 2017 Three Months Ended June 30, 2016 Nine Months Ended June 30, 2016 Sales and operating revenues $ 942.6 $ 2,690.4 $ 879.4 $ 2,598.5 Operating income 25.3 39.6 15.6 32.9 Net income from continuing operations 11.2 3.8 5.0 1.5 Net income 11.2 3.8 5.0 1.5 Basic and diluted net income per share 0.15 0.05 0.07 0.02 Pro forma weighted average number of common shares outstanding Basic 76,743,853 76,745,396 76,746,168 76,746,168 Diluted 76,828,868 76,830,296 76,810,686 76,800,051 For all periods presented above, the pro forma weighted average number of common shares outstanding were computed assuming 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, 1,567,000 outstanding PSU awards were not included in the computation of diluted shares outstanding because performance targets and/or market conditions are assumed not to have been met for these awards. Diluted shares outstanding also did not include 25,012,500 shares based on the exercise of 50,025,000 warrants because the warrants were out-of-the-money. The impact of unvested restricted stock awards issued to directors shortly after the Business Combination was included in all diluted share calculations above. The 24,500 of outstanding RSUs as of June 30, 2017 were not included in the computation of pro forma diluted shares outstanding for the three and nine months ended June 30, 2016 as they were awarded subsequent to the Business Combination. |
