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EX-32.1 - EXHIBIT 32.1 - Nexeo Solutions, Inc.a09302017ex321.htm
EX-31.2 - EXHIBIT 31.2 - Nexeo Solutions, Inc.a09302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - Nexeo Solutions, Inc.a09302017ex311.htm
EX-23.1 - EXHIBIT 23.1 - Nexeo Solutions, Inc.a09302017ex231.htm
EX-21.1 - EXHIBIT 21.1 - Nexeo Solutions, Inc.a09302017ex211.htm
EX-12.1 - EXHIBIT 12.1 - Nexeo Solutions, Inc.a09302017ex121.htm
EX-10.12 - EXHIBIT 10.12 - Nexeo Solutions, Inc.a09302017ex1012.htm
EX-10.7 - EXHIBIT 10.7 - Nexeo Solutions, Inc.a09302017ex107.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017 
or 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                 to             
Commission File Number: 001-36477 
 
 
NEXEO SOLUTIONS, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
46-5188282
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3 Waterway Square Place, Suite 1000
The Woodlands, Texas
 
77380
(Address of principal executive offices)
 
(Zip Code)
 
(281) 297-0700
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Units, each consisting of one share of Common Stock,
 
NASDAQ Capital Market
$0.0001 par value, and one Warrant to purchase Common Stock
 
 
Common Stock, $0.0001 par value
 
NASDAQ Capital Market
Warrants to purchase Common Stock
 
NASDAQ Capital Market
 
Securities registered pursuant to Section 12(g) of the Act:
None.
 
 
  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  ý No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o Yes ý  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes  o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).  ý Yes  o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 299.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
(Do not check if a smaller reporting company)
 
Smaller reporting company  o
 
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No  ý
The aggregate market value of the voting stock held by non-affiliates of Nexeo Solutions, Inc. was $294,545,118 as of March 31, 2017, using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended, and excluding shares held by directors and executive officers. As of December 5, 2017, there were 89,753,662 shares of the Company's common stock issued and 89,741,309 shares outstanding, par value $0.0001 per share.
 
 



DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 2018 Annual Meeting of Stockholders of Nexeo Solutions, Inc., which will be filed with the Securities and Exchange Commission within 120 days of September 30, 2017, are incorporated by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of this Form 10-K.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



i


GLOSSARY

The following terms and abbreviations appearing in the text of this Annual Report on Form 10-K have the meanings indicated below.

2016 LTIP
The Nexeo Solutions, Inc. 2016 Long Term Incentive Plan
ABL Borrowers
Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation
ABL Facility
The asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, Bank of America, N.A., as administrative agent and the lenders party thereto and the other parties thereto
ADA Purchase Agreement
The Ashland Distribution Acquisition purchase agreement
Archway Acquisition
The acquisition by the Predecessor of 100% of the outstanding shares of capital stock of Archway Sales, Inc. and substantially all of the assets of JACAAB, a related business of Archway Sales, Inc., that closed on April 1, 2014
ASC
The FASB Accounting Standards Codification
Ashland
Ashland Inc. and its subsidiaries
ASU
Accounting Standards Update issued by the FASB
Blocker
TPG Accolade Delaware, L.P.
Blocker Merger
The merger of Blocker Merger Sub into Blocker on June 9, 2016, immediately following the Company Merger, with Blocker continuing as the surviving entity
Blocker Merger Sub
Neon Acquisition Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Blocker Merger
Business Combination
The business combination between WLRH and Holdings pursuant to the Merger Agreement, which was consummated on the Closing Date
CAA
U.S. Federal Clean Air Act
CAD
Canadian dollar
Canadian Tranche
Canadian tranche of the ABL Facility
CERCLA
U.S. Comprehensive Environmental Response, Compensation and Liability Act
CFATS
U.S. Chemical-Facility Anti-Terrorism Standards
Closing Date
June 9, 2016
Company / Successor / Nexeo
Nexeo Solutions, Inc. (f/k/a WL Ross Holding Corp.) and its consolidated subsidiaries
Company Merger
The merger of Company Merger Sub with and into Holdings consummated on June 9, 2016, with Holdings continuing as the surviving entity
Company Merger Sub
Neon Holding Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Company Merger
Company's 2018 Proxy Statement
The Company's proxy statement relating to its 2018 Annual Meeting of Stockholders
Credit Facilities
The ABL Facility and the Term Loan Facility, collectively
CWA
U.S. Clean Water Act
Deferred Cash Consideration
The deferred payment to be made in cash to the Selling Equityholders pursuant to the Merger Agreement, where such deferred cash payments will generally be in an amount equal to the Company’s prevailing stock price at the time that the Company pays such deferred cash payments multiplied by the number of Excess Shares or as otherwise set forth in the Merger Agreement
DHS
U.S. Department of Homeland Security
Director Founder Shares
The 30,000 original Founders Shares transferred to the Company’s prior independent directors
Distribution Business
The global distribution business purchased by the Predecessor from Ashland
DTSC
California Department of Toxic Substances Control
EBITDA
Earnings before interest, tax, depreciation and amortization
EMEA
Europe, Middle East and Africa
EPA
U. S. Environmental Protection Agency
EPCRA
U.S. Emergency Planning and Community Right-To-Know Act

ii


EPS
Earnings or loss per share
ERP
Enterprise resource planning
Excess Shares
The 5,178,642 shares of Company common stock used to calculate the Deferred Cash Consideration payable to the Selling Equityholders pursuant to the Merger Agreement
Exchange Act
U.S. Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FCPA
U.S. Foreign Corrupt Practices Act
FHMTL
U.S. Federal Hazardous Material Transportation Law
FILO Tranche
$30.0 million tranche within the ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit
FPA
First Pacific Advisors, LLC
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
HMR
U.S. Hazardous Materials Regulations
IPO
The initial public offering of WLRH, consummated on June 11, 2014
Merger Agreement
Agreement and Plan of Merger, as amended, by and among WLRH, Blocker Merger Sub, Company Merger Sub, Holdings, Blocker, and New Holdco dated as of March 21, 2016
Mergers
The Company Merger and the Blocker Merger, collectively
Montgomery Lease
The Company’s leased facility in Montgomery, Illinois commencing in the first fiscal quarter of 2017
NASDAQ
NASDAQ Stock Market
New Holdco
Nexeo Holdco, LLC
Nexeo Plaschem
Nexeo Plaschem (Shanghai) Co., Ltd., a wholly-owned subsidiary of the Company
NLRB
U.S. National Labor Relations Board
Notes
8.375% Senior Subordinated Notes of the Predecessor due 2018
OSH Act
U.S. Occupational Safety and Health Act of 1970
OSHA
U.S. Occupational Safety and Health Administration which administers the OSH Act
Other Retained Remediation Liabilities
Under the ADA Purchase Agreement, Ashland agreed to retain environmental remediation liabilities unknown at the closing of the Ashland Distribution Acquisition related to the Distribution Business for which Ashland receives notice prior to the fifth anniversary of the closing of the ADA Purchase Agreement
Performance-Based Units
Units within the Predecessor Equity Plan that vest in accordance with a performance-based schedule
Peso
Mexican peso
Predecessor
Holdings and its subsidiaries for the periods prior to the Closing Date
Predecessor ABL Facility
Holdings asset-based credit facility which was terminated in connection with the Business Combination
Predecessor 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
Retained Specified Remediation Liabilities
Under the ADA Purchase Agreement, Ashland agreed to retain all known environmental remediation liabilities as of the date of closing of the ADA Purchase Agreement
RMB
Chinese renminbi

iii


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 with payments of approximately $35.0 million over seven year term.
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.
Term Loan Facility
Term loan credit facility pursuant to that certain credit agreement by and among Holdings, Solutions, Sub Holding, Bank of America, N.A., as administrative and collateral agent, the other agents party thereto and the lenders party thereto
Time-Based Units
Units within the Predecessor’s Equity Plan
TLB Amendment No. 1
The amendment to the Term Loan Facility dated March 22, 2017
TPG
TPG Capital, L.P. together with its affiliates, including TPG Accolade
TPG Accolade
TPG Accolade, L.P.
TPG Restricted Stock Grants
Restricted stock agreements entered into between TPG and certain of the Company’s officers and employees
TRA
The Tax Receivable Agreement entered into in connection with the Business Combination, by and between the Company and the Selling Equityholders, dated as of June 9, 2016
TSCA
U.S. Toxic Substances Control Act
U.K.
The United Kingdom
Ultra Chem Acquisition
The April 3, 2017 acquisition of the equity interests of the Mexico City, Mexico based chemicals distribution business of the Ultra Chem Group pursuant to the Ultra Chem Stock Purchase Agreement
Ultra Chem Closing Date
April 3, 2017
Ultra Chem Group
The Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities
Ultra Chem Stock Purchase Agreement
The Stock Purchase Agreement dated March 9, 2017 related to the purchase of the equity interests of Ultra Chem Group
U.S.
United States of America
USD
U.S. Dollar
U.S. GAAP
U.S. Generally accepted accounting principles
U.S. Tranche
U.S. Tranche of the ABL Facility
WLRH
WL Ross Holding Corp.


iv



Unless the context otherwise requires, the financial information presented in this Annual Report on Form 10-K (this "Form 10-K") is the financial information of the Company on a consolidated basis together with its subsidiaries.

The terms "the Company," "us," "our" and "we" and similar terms in this Annual Report on Form 10-K refer to Nexeo Solutions, Inc. and its consolidated subsidiaries.

TRADEMARKS AND TRADE NAMES
 
We own or have rights to various trademarks, service marks, and trade names that we use in connection with the operation of our business. This Form 10-K may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Third party trademarks, services marks, trade names or products used or displayed in this Form 10-K belong to the holders and are not intended to, and do not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this Form 10-K may appear without the ®, TM or SM symbols, but omission of these references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our right or the right of the applicable licensor to these trademarks, service marks and trade names.


v


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain information and statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of the PSLRA codified in Section 27A of the Securities Act, and Section 21E of the Exchange Act, as amended. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as "anticipate," "assume," "believe," "estimate," "expect," "intend," "plan," "project," "may," "will," "could," "would" and similar expressions. Certain forward-looking statements are included in this Annual Report on Form 10-K, principally in the sections captioned "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."
 
These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Unless otherwise indicated or the context otherwise requires, comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our and our Predecessor’s historical experience and our present expectations or projections.
 
Our future results will depend upon various other risks and uncertainties, including those described in "Item 1A. Risk Factors." Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.
 



vi


PART I

Item 1. Business
 
Company Overview
 
We are a global chemicals distributor in North America and Asia and a global plastics distributor in North America, EMEA and Asia. In connection with the distribution of chemicals products, we provide value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. We also provide on-site and off-site environmental services, including waste collection, recovery, disposal services and recycling in North America, primarily the U.S., through our Environmental Services line of business. During fiscal year 2017, we distributed over 24,000 products in more than 80 countries for approximately 1,400 suppliers to approximately 28,100 customers.

We have long-standing relationships with major chemicals and plastics producers and suppliers, a strong geographic presence and supply chain network and a balanced customer base that benefits from the service and distribution value we provide. The products we distribute are used in various end markets and customer segments within a broad cross section of manufacturing industries, including 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 broad product offerings allow for product customization, cost savings to customers on transaction and transportation costs and reliance on a single supplier to source all of a customer's diverse product requirements.
 
We believe we provide a compelling value proposition to suppliers as a single bulk buyer of their products and acting as an extension of their sales force by representing their brands and providing technical support to customers. Our deep understanding of key end markets presents suppliers with additional market reach and penetration opportunities, while our operating platform supports supplier visibility into the marketing and distribution of their products. We also believe we provide value to suppliers by distributing to larger customers through dedicated strategic accounts sales and marketing programs designed to solidify key relationships through enhanced customer service, efficient delivery and specialized value-added solutions. In addition to the value-added services mentioned above, we also provide dedicated stocking programs, vendor-managed inventory, quarterly customer demand forecasting, technical support and supply chain services. 
 
We have an experienced management team with deep knowledge of the industry. We continue to implement strategies and invest to build upon our strengths by creating industry-leading marketing capabilities, including our focus on specific end markets, sales force effectiveness tools, market-based pricing and geographic expansion.

We distribute our product portfolio through a global supply chain consisting of approximately 180 owned, leased or third party warehouses, rail terminals and tank terminals with a private fleet of approximately 1,100 units, including tractors and trailers, primarily in North America. We currently employ approximately 2,640 employees globally. At September 30, 2017, we had approximately 500 sales professionals in North America, EMEA and Asia, including technical support, field managers and strategic account managers who assist our customers in the selection and application of commodity and specialty products for their end products and processes.


1


Company History
 
We were formed as a Delaware corporation on March 24, 2014, under the name WL Ross Holding Corp., as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. We completed our IPO in June 2014, raising approximately $500.0 million in cash proceeds. We neither engaged in any operations nor generated any revenue prior to the Business Combination.

We acquired the business of Nexeo Solutions Holdings, LLC on June 9, 2016 through the Business Combination. In connection with the closing of the Business Combination, we changed our name from "WL Ross Holding Corp." to "Nexeo Solutions, Inc." and changed our ticker symbol for our common stock on NASDAQ from "WLRH" to "NXEO".

See Note 3 to our consolidated financial statements for further discussion on the Business Combination.

Industry Overview

The global market for industrial materials encompasses the products we offer. This market contains both products distributed directly to customers by suppliers and indirectly by distribution channel partners. Indirect distribution channel partners, like us, serve as intermediaries between suppliers and customers representing an additional step in the distribution supply chain. Suppliers leverage their distribution partners to administer the complexity of servicing the small and mid-size customer base while providing needed technical product expertise. The total available market of distribution is driven by macroeconomic factors, as well as suppliers’ decisions to either serve markets or customers directly or use a distribution partner. By creating and executing superior distribution services and related capabilities, we hope to influence the decision of suppliers to increase the magnitude of business being served by us as a distribution partner in the global market.
 
The chemicals and plastics materials distribution industry is characterized by increasingly complex regulatory, environmental and safety landscapes, the need for market intelligence that requires time and effort to develop and, in some cases, significant capital investments for transportation and storage infrastructure. Adding to the complexity of this business environment is the increasing demand by end customers for individualized solutions. These solutions are generally comprised of essential products and value-added services including blending, packaging and other special handling and special logistics requirements such as 24/7 delivery. We believe our ability to serve these complex needs as a result of our capabilities and scale will encourage suppliers to further leverage distributors like us.


2


Company Operations

Business Strategy
    
We strive to become a brand extension partner for key suppliers, provide best-in-class service, and align our sales force expertise with our customers' needs. Our value proposition focuses on supplier needs and direct customer activities. We have established four main strategies that drive our formula for success.

Go-To-Market Strategy. We aspire to use our technical capabilities, expertise and experience to commercially align with supplier strategies to operate as a brand extension while leveraging tools and systems to drive long-term loyalty through trust and transparency. Our sales force drives our customer-focused growth by utilizing technical expertise. The customer's journey is enhanced with a customized interface tailored for each customer's individual needs.

Profitability Growth & Margin Expansion. We seek to form strategic partnerships by leveraging foundational capabilities to demonstrate value propositions. We plan to optimize our portfolio by eliminating low profit business, expanding specialty product mix and executing ongoing productivity initiatives. To supplement growth, we plan to pursue accretive bolt-on acquisitions of product lines and businesses complementary to our current offerings.

Operational Excellence. We are committed to continued operational excellence by broadening our value-added service capabilities and delivering best-in-class service through a culture of continuous improvement. We focus on pricing strategies to optimize profit and efficient cash utilization through fully integrated purchasing and global enterprise cash management. Our commitment to high quality service is demonstrated by dedicated customer service representatives, Company-owned warehouses, a private fleet having an on-time delivery percentage of 99.1% and sophisticated inventory management practices.

Driving Scale & Fostering Innovation.  We benefit from data-driven decision making and focus on scalable, long-term growth drivers. We continuously drive synergies by leveraging our centralized platform.

Competitive Strengths

We operate in a competitive industry and strive to differentiate ourselves from our competition by providing true end-to-end solutions, which requires using the right combination of integrated services that have the capacity and sophistication to serve larger customers while maintaining enough versatility to serve smaller customers. We believe our strengths include the following:

Centralized, scalable technology platform that allows us to efficiently manage the inherent complexity of our business and supports value creation by unlocking scale and scope efficiencies from both organic growth and strategic acquisitions;

Exceptional distribution network with strategically located facilities optimizing route density; and

Extensive product knowledge and end market expertise allowing us to act as an extension of our suppliers while providing application-based, value-added services to our customers.
 
Segment Overview
 
We operate through three lines of business, or operating segments: Chemicals, Plastics and Environmental Services. Our lines of business market to different sets of customers operating in an array of different industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, our Chemicals and Plastics lines of business constitute separate reportable segments, while our Environmental Services line of business, which does not meet the materiality threshold for separate disclosure, is included in an "Other" category.
 
Chemicals. Our Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via railcars, barges and bulk tanker trucks and as packaged goods in trucks. Our chemicals products are distributed in more than 50 countries worldwide, primarily in North America and Asia. In connection with the distribution of chemicals products, we provide value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. While our Chemicals line of business serves multiple end markets, the key end markets within the industrial space are household, industrial and institutional, performance coatings (including architectural coatings, adhesives, sealants and elastomers), lubricants, oil and gas and personal care.

3


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

Environmental Services. Our Environmental Services line of business, in connection with certain waste disposal service companies, provides customers with comprehensive on-site and off-site hazardous and non-hazardous waste collection, recovery, disposal services or recycling in North America, primarily in the U.S. These environmental services are offered through our network of distribution facilities used as transfer facilities and through a staff of dedicated on-site waste professionals. Our Environmental Services line of business serves multiple end markets such as aerospace and defense, automotive, chemical manufacturing, industrial manufacturing and oil and gas.
 
The table below provides a summary by line of business of the approximate number of customers served and key product offerings as of September 30, 2017:
 
 
Chemicals
 
Plastics
 
Environmental Services
 
Approximate Customers: 14,200(1)
 
Approximate Customers: 11,700(1)
 
Approximate Customers: 2,200(1)
 
 
 
 
 
 
Key Products
ž Alcohols
ž Blends
ž Esters
ž Glycols
ž Hydrocarbons
ž Ketones
ž Resins
ž Silicones
ž Surfactants
 
ž Engineered Thermoplastics
ž Polyolefins (including Polypropylene)
ž Specialty Thermoplastics
ž Styrenics
 
ž On-Site Services
ž Non-Hazardous and Hazardous Waste Disposal
ž Non-Hazardous Waste Treatment/Recycling
(1) Customer duplication between lines of business is immaterial
 
 
 
 

In each of the past three fiscal years, polypropylene was the only product that accounted for over 10.0% of our consolidated net revenue. During the fiscal years ended September 30, 2017 and 2016, polypropylene accounted for 15.5% and 17.6%, respectively, of total consolidated net revenue. For the period from October 1, 2015 through June 8, 2016 and the fiscal year ended September 30, 2015, polypropylene accounted for 17.7% and 14.4%, respectively, of the Predecessor total consolidated net revenue.
 
The charts below provide a summary of the proportional revenue contributions from our lines of business and our primary geographic markets during the fiscal year ended September 30, 2017, based on the jurisdiction of the subsidiary entity receiving revenue credit for the sale. It was not practical to provide a summary of the revenue contributions of our primary geographic markets based on external customer location. The substantial majority of our sales to customers in the geographic markets described below are made by entities located within the applicable geographic market.
                

4


chart-3208f9d3637402d08eb.jpg
chart-98771a9509342b32291.jpg

Our lines of business generally leverage the same infrastructure, distribution networks, information technology and operational processes, but are differentiated by the products they distribute, their geographic footprints and their distinct customer and supplier relationships. See Note 16 to our consolidated financial statements for additional financial information with respect to our reportable segments.


5


Supplier Relationships
 
We source chemicals and plastics from a wide array of suppliers, including many leading global chemicals and plastics producers. We generally purchase and take possession of these products and then resell and deliver them to our customers. While our top ten suppliers generally fulfill approximately 50% of total product procured by value on an annual basis, we source products from approximately 1,400 suppliers. Two suppliers accounted for 12.1% and 9.9%, respectively, of consolidated purchases during the fiscal year ended September 30, 2017, and 11.9% and 10.4%, respectively, for the fiscal year ended September 30, 2016. Two suppliers accounted for 12.0% and 9.8%, respectively, for the period from October 1, 2015 through June 8, 2016 for the Predecessor consolidated purchases. During the fiscal year ended September 30, 2015 one of these suppliers accounted for 11.9% of the Predecessor consolidated purchases. Although this supplier serves both our Plastics and Chemicals lines of business, they primarily serve the Plastics line of business.

We maintain multiple sourcing options for most key products that we distribute to help ensure supply continuity and competitive pricing for our customers. We believe the depth of our supplier base ensures that we are able to satisfy the needs of all of our customers in all of our key geographic regions.
 
Our Chemicals and Plastics lines of business generally source products from distinct sets of suppliers.
 
Chemicals. We source chemicals from many suppliers, including several of the largest global chemical companies such as BASF, DowDuPont, Dow Corning, Eastman Chemical, LyondellBasell and Methanex. Our ten largest suppliers generally account for approximately 50% by value of the chemical products procured on an annual basis.
 
Plastics. Our plastics suppliers include several of the largest global chemical companies and plastics producers, such as BASF, Borealis, ExxonMobil Chemical Co., LyondellBasell and SABIC. Our ten largest suppliers generally account for approximately 80% by value of the plastics products procured on an annual basis.

In developing our supplier relationships, we evaluate prospective suppliers to determine the value they offer to the supply chain. We focus on suppliers that manufacture products utilized within the end markets we serve and provide opportunities that maintain healthy demand. Our key suppliers must also demonstrate a proven track record of reliability and commitment to invest in their businesses, as well as product price leadership.

We believe we provide value to suppliers in numerous ways, including the following:
 
We serve as an aggregator of customer demand, enabling us to act as a single bulk buyer of our suppliers’ products;

We act as an extension of suppliers’ sales force by representing their brands and providing technical support to customers, particularly those that are small and mid-sized, as well as larger customers through our strategic accounts program;

We develop compelling value propositions in various end markets by providing core commodity products, core specialty products and value-added services to target certain customer segments we believe can generate sustainable and profitable revenue growth;

We provide quarterly customer demand forecasting and visibility into the marketing and distribution of the suppliers’ products; and

We have leading pricing technology to capture maximum value for our suppliers' brands in the marketplace.
 
Product Line Management and Purchasing
 
Our supplier relationships are managed by separate product management teams within our Chemicals and Plastics lines of business. These teams focus on developing and maintaining supplier relationships, monitoring existing product lines and trends, and analyzing potential new products. Product management teams work in close coordination with our sales and marketing teams, allowing them to quickly and effectively identify customer buying and demand trends.
 
Our purchasing department is generally responsible for executing purchase orders to suppliers through our ERP system. For the majority of our operations, this system provides a centralized control platform throughout the entire supply chain, enabling the purchasing department to optimize procurement decisions. See "—Proprietary Operating Systems" below.


6


Contracts
 
Our supply agreements allow flexibility, to help ensure product availability and our ability to set the specific terms of any purchase in accordance with prevailing market conditions. The agreements include commonly expected general terms and conditions such as volume expectations, pricing, price change mechanisms and guidelines for conflict resolution. Many of the agreements with key suppliers also provide for rebates upon achievement of specified volume purchase levels. Purchase prices are generally market-based and fluctuate in accordance with the costs of the relevant raw materials. We do not usually enter into contracts that are non-terminable, are "take or pay" or have other similar requirements.

Global Distribution Channels

We are organized around the philosophy that key operating processes, such as demand forecasting, purchasing and supplier selection, can be optimized for cost and efficiency when concentrated in a centralized business model. Accordingly, we operate our distribution network under a "hub-and-spoke" model by processing large volumes of inventory at our main regional hubs and shipping them to smaller local warehouses on a demand-driven basis from where they are delivered to customers. Products are transported to smaller customers in mixed truckloads or less-than-truckload quantities.
 
Facilities
 
Our facilities are strategically placed to optimize route density in an effort to balance high-quality customer service with execution costs. In North America, we operate several "hub-and-spoke" models as described above. We believe this model is beneficial, as it enables us to efficiently aggregate customer demand, and allows us to match a large number of suppliers and customers at a lower cost. This system also supports economies of scale, which is a key driver of our profitability, as the aggregation of inventory at the "hubs" reduces inventory procurement costs and permits fleet optimization and efficient route planning through shipment consolidation and frequent deliveries to the "spokes." During fiscal year 2017, these facilities served approximately 21,300 customers.
 
In EMEA, our international plastics business operates through 25 third party operated warehouses and eight sales offices. These warehouses are located across EMEA, and during fiscal year 2017 they served approximately 4,700 customers. 

In Asia, our international chemicals and plastics businesses operate through 17 third party operated warehouses and eight sales offices. These warehouses are located in China and served approximately 1,900 customers during fiscal year 2017.
 
The following table lists each of the active distribution facilities we own or lease and does not include third party operated facilities. We classify a facility as a "bulk facility" if it is engaged in delivering goods in bulk to our customers.

Distribution Facilities as of September 30, 2017  
North American Facilities
 
Facility Type
 
Owned/Leased
 
Line(s) of Business
Birmingham, Alabama
 
Bulk/Warehouse
 
Owned
 
All
Mobile, Alabama
 
Bulk/Warehouse
 
Owned
 
All
Edmonton, Alberta
 
Bulk/Warehouse
 
Owned
 
All
Chandler, Arizona
 
Bulk/Warehouse
 
Owned
 
All
Richmond, British Columbia
 
Warehouse
 
Leased
 
All
Carson, California (1)
 
Bulk/Warehouse
 
Leased
 
All
Fairfield, California
 
Bulk/Warehouse
 
Owned/Leased
 
All
Denver, Colorado
 
Bulk/Warehouse
 
Owned
 
All
Miami, Florida
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Tampa, Florida
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Doraville, Georgia
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Cropa, Guatemala
 
Warehouse
 
Leased
 
Chemicals
Montgomery, Illinois
 
Bulk/Warehouse
 
Leased
 
Chemicals and Plastics
Willow Springs, Illinois
 
Bulk/Warehouse
 
Owned
 
All
Kansas City, Kansas
 
Bulk/Warehouse
 
Owned
 
All
Kansas City, Kansas
 
Bulk/Warehouse
 
Leased
 
Plastics

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Baton Rouge, Louisiana
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Baton Rouge, Louisiana
 
Warehouse
 
Owned
 
Chemicals and Plastics
Winnipeg, Manitoba
 
Warehouse
 
Owned
 
All
Tewksbury, Massachusetts
 
Warehouse
 
Owned
 
Chemicals and Plastics
Guadalajara, Mexico
 
Warehouse
 
Leased
 
Chemicals
Merida, Mexico
 
Warehouse
 
Leased
 
Chemicals
Nuevo Leon, Mexico
 
Warehouse
 
Leased
 
Chemicals
Tepotzotlán, Mexico
 
Warehouse
 
Leased
 
Chemicals and Plastics
Tepotzotlán, Mexico
 
Warehouse
 
Leased
 
Chemicals
Querétaro, Mexico
 
Warehouse
 
Leased
 
Chemicals
Lansing, Michigan
 
Bulk/Warehouse
 
Owned
 
All
Warren, Michigan
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Saint Paul, Minnesota
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Shakopee, Minnesota
 
Bulk/Warehouse
 
Owned
 
All
St. Louis, Missouri
 
Bulk/Warehouse
 
Owned
 
All
St. Louis, Missouri
 
Warehouse
 
Leased
 
Chemicals and Plastics
Carteret, New Jersey
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Charlotte, North Carolina
 
Bulk/Warehouse
 
Owned
 
All
Binghamton, New York
 
Warehouse
 
Owned
 
Plastics and Environmental Services
Tonawanda, New York
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Columbus, Ohio
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Dayton, Ohio
 
Warehouse
 
Owned
 
Plastics and Environmental Services
Evendale, Ohio
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Grove City, Ohio
 
Bulk/Warehouse
 
Owned
 
Plastics
Twinsburg, Ohio
 
Bulk/Warehouse
 
Owned
 
Chemicals
Twinsburg, Ohio
 
Warehouse
 
Leased
 
Chemicals and Plastics
Tulsa, Oklahoma
 
Warehouse
 
Owned
 
Chemicals and Plastics
Mississauga, Ontario
 
Bulk/Warehouse
 
Leased
 
All
Morrisville, Pennsylvania
 
Bulk/Warehouse
 
Owned
 
All
Catano, Puerto Rico
 
Warehouse
 
Owned
 
All
Anderson, South Carolina
 
Bulk/Warehouse
 
Owned
 
Plastics
Columbia, South Carolina
 
Bulk/Warehouse
 
Owned
 
All
Knoxville, Tennessee
 
Bulk/Warehouse
 
Owned
 
All
Memphis, Tennessee
 
Bulk/Warehouse
 
Owned
 
All
Nashville, Tennessee
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Conroe, Texas
 
Bulk/Warehouse
 
Owned
 
Chemicals and Plastics
Garland, Texas
 
Bulk/Warehouse
 
Owned
 
All
Houston, Texas
 
Bulk/Warehouse
 
Owned
 
All
Midland, Texas
 
Bulk/Warehouse
 
Owned
 
All
Clearfield, Utah
 
Bulk/Warehouse
 
Leased
 
All
(1) During fiscal year 2018, we plan to acquire the land currently being leased.

Our principal executive offices are located in The Woodlands, Texas. We believe that our facilities are adequate for our current operations.


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Private Fleet
 
Transportation of products to and from customers and suppliers is a fundamental component of our business. During fiscal year 2017, our North American distribution service relied on our private fleet of trucks, tankers and trailers for 66% of volume delivered from our warehouses to our customers. We relied on common carriers for the remainder of our deliveries.
 
At September 30, 2017, our private fleet consisted of approximately 1,100 owned and leased units that carry solid, bulk and liquid materials.
 
Private Fleet Characteristics as of September 30, 2017
 
Vehicle Type
 
Number of Vehicles
 
Average Age (years)
 
Average Transport
Capacity (lbs.)
Tractors
 
353

 
3

 
45,000

Bulk Liquid Tankers
 
336

 
18

 
42,000

Van Trailers
 
350

 
11

 
45,000

Straight Trucks
 
10

 
5

 
6,500

Dry Bulk Trailers
 
13

 
11

 
45,000

 
In addition, we currently lease approximately 400 railcars, which are primarily used for supplier shipments to our locations, stock transfers between our locations and occasional shipments to customers.

Our private fleet characteristics change constantly based on our market needs. We believe that we maintain an advantage over many of our competitors with our private fleet enterprise wide on-time delivery percentage of 99.1%. Our private fleet permits us to meet our customers’ demand and reduces their inventory risk through "just-in-time" delivery. Moreover, our ability to service our customers is less encumbered by the commercial transportation market providing reliability of service to customers, especially during periods of undersupply.
 
Direct Supply
 
In certain circumstances, we deliver full truckloads or large quantities of commodity products directly from a supplier to a customer, primarily via common carrier, and provide sourcing and supply chain support in connection with the delivery. Although the products move directly from supplier to customer, we remain the sole point of contact for both the customer and the supplier and generally take ownership of the products while in transit, bearing the risk of loss during transportation. Direct supply sales accounted for 15.9% of sales for the fiscal year ended September 30, 2017.

Sales and Marketing
 
For the fiscal year ended September 30, 2017, we served approximately 28,100 customers from a broad range of end markets resulting in approximately 480,000 orders for over 24,000 products. We have developed a sales and marketing organization with a broad scope of sales coverage to ensure we can service a diverse customer base.
 
As of September 30, 2017, our sales team consisted of approximately 500 sales professionals situated throughout North America, EMEA and Asia, including customer-facing personnel, such as technical support and corporate account managers, located in local markets. There are approximately 390 sales professionals based in North America, while approximately 60 sales professionals are based in EMEA and 50 sales professionals are based in Asia.

Our sales force compensation and incentive structure is designed to ensure alignment between the goals of the sales representatives and those of our overall business. All sales representatives earn a fixed base salary and variable rewards based on performance. We believe sales force compensation alignment is a key driver for the success of our business.
 

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Customer Pricing Processes
 
We use data-driven pricing strategies, which enable our product managers to determine product pricing through the use of systems and tools that provide insight on relative market pricing across a number of factors including end markets, geography, packaging type and volume. Product managers, whose main responsibility is to cultivate and build supplier relationships, also develop a broad understanding of suppliers’ product offerings and the market’s needs. We have empowered these managers to make pricing decisions, working closely with our sales team to structure pricing for an optimal balance of price and volume to maximize profitability. The following is a description of our customers by line of business:
 
Chemicals. Our Chemicals customer base ranges from some of the largest global companies to smaller regional, private companies. Generally, no single Chemicals customer accounts for more than 5.0% of Chemicals sales, annually, while the five largest customers by value represent less than 10.0% of Chemicals sales on an annual basis.

Plastics. Our Plastics customer base is diverse and serves a variety of end markets. Generally, no single Plastics customer accounts for more than 5.0% of Plastics sales, annually, while the five largest customers by value represent less than 5.0% of Plastics sales on an annual basis.

Environmental Services. Our Environmental Services line of business includes customers who generate hazardous and non-hazardous waste in North America. One Environmental Services customer accounts for more than 5.0% but less than 10.0% of Environmental Services sales, annually, while the five largest customers generally account for less than 25.0% of Environmental Services sales on an annual basis.

Contracts
 
Our customer contracts for the sale of chemicals and plastics products are generally framework agreements that do not contain an obligation to buy or sell. We use the agreements to define the general terms and conditions of sale and set volume expectations, pricing and price change mechanisms. The final terms of sale for each purchase are negotiated at the time of sale unless otherwise established by the terms of the contract. Consistent with industry standards, we may offer volume-based incentives to large customers if the customer purchases a specified volume with us over a specified time period. Our customer contracts for the provision of environmental services are generally framework agreements pursuant to which we provide environmental services from time to time, with fees agreed at the time the service is provided. These contracts are generally terminable by either party with or without cause upon 30 days’ notice. Additionally, our on-site environmental services contracts are typically term-based arrangements, with fee structures negotiated at the time of execution.
 
Value-Added Services
 
In addition to our products, we provide a range of value-added services, including mixing and blending to specific customer requirements, lab testing and analysis, formulating, repackaging from large to small quantities, vendor inventory management and technical support. We continue to seek opportunities to profitably expand our value-added services to differentiate our value proposition and create competitive advantages.
 
Three key services we offer are repackaging, custom blending and lab services. Our hub facilities handle large quantities of materials, usually receiving shipments by railcar or tank truck. Bulk deliveries are often repackaged into smaller containers, such as gaylords, totes and drums, which are in turn delivered to customers by truck. Our custom blending capabilities include buying in bulk from our large base of suppliers, lab testing for product customization and blending of numerous products to meet customer specifications. Our labs provide product testing services to our customers in the form of chemical analysis and product performance analysis. We employ a team of scientists and experienced formulation experts to help customers with product development, failure analysis and other technical support in a broad range of chemical and product applications.  


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Proprietary Operating Systems

We have developed a highly scalable technology platform with a centralized system and robust data analytics. These highly sophisticated systems enhance operational flexibility and facilitate the volume of customer orders, global sourcing, customer relations, distribution-related logistics, regulatory compliance, risk management controls and financial reporting. The operating platform consists of our transportation management system, pricing system, digital marketing, customer portal and ERP system. Our ERP system is used across the Company, with the exception of our subsidiary in China and the operations recently acquired in the Ultra Chem Acquisition, which will be integrated into our ERP system during fiscal year 2018. The advanced data gathering and analysis capabilities of our ERP system, and the efficiencies it provides, enable us to operate flexibly and create significant advantages across the supply chain. Our ERP system also provides advanced volume forecasting, enabling us to forecast rolling weekly volumes, anticipate demand shift fluctuations and quickly respond to rapidly changing customer needs. This capability helps our suppliers by providing reliable and accurate demand forecasts that result in improved efficiency, flexibility and faster execution. These daily forecasts also translate into better pricing as they allow for optimization of production schedules. We believe that continuous automation implementation drives operational excellence and productivity.

Seasonality
 
Seasonal changes may affect our business and results of operations. We serve a large number of customers in a broad range of end markets and our business trends follow the seasonality patterns exhibited by these end markets and customers. For example, we generally tend to realize lower sales across all of our lines of business in the fourth calendar quarter of each year (which is our first fiscal quarter) because industrial production tends to be seasonally lower during that period. Our business may also be affected by our suppliers’ decisions regarding seasonal capacity and production.
 
Competition
 
The chemicals and plastics distribution markets in which we operate are highly fragmented. The primary competitive factors affecting each of our lines of business are the diversity and quality of the product portfolio, service offerings, reliability of services and supply, technical support and price and delivery capabilities. In addition, producers represent another source of competition, as many elect to distribute products through direct sales as opposed to indirect distributors. For some of the markets in which we operate, if large chemical producers elect to limit or consolidate their outsourcing of distribution, partner with other distributors, or distribute their products directly to end-user customers, competition would increase. Additionally, competition could increase from producers reducing their level of distribution outsourcing to maintain profit margin during periods of poor macroeconomic factors and pricing weakness, particularly for commodity products that require nominal service complexity to the end-user customer. We believe that our reputation, our broad range of product offerings and our speed and responsiveness, coupled with our valued-added services and the breadth of our distribution network, allow us to compete effectively and achieve scale benefits.
 
Chemicals
 
Our principal Chemicals distribution competitors include Azelis, Brenntag AG, Helm, ICC Chemicals, IMCD and Univar Inc. Additionally, our Chemicals line of business competes with many regional and local companies throughout North America as well as a number of smaller companies in certain niche markets.
 
Plastics
 
Our primary Plastics distribution competitors in North America are Channel Prime Alliance, Entec Polymers, M. Holland Company and PolyOne Distribution. Our primary Plastics competitors in EMEA are A. Schulman, Albis, Biesterfeld, Distrupol and two divisions of Ravago: Resinex and Ultrapolymers. Our primary Plastics competitors in Asia are KDF, Nagase and Sinochem.
 
Environmental Services
 
The primary competitors of our Environmental Services line of business are Clean Harbors, Univar Inc. and Veolia.


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Employees
 
At September 30, 2017, we had approximately 2,640 employees worldwide, with approximately 2,070 employees in the U.S., 100 employees in Canada, 180 employees in EMEA, 130 employees in Asia, and 160 employees in Latin America. In the U.S., approximately 140 of our employees are represented by unions in six locations representing seven bargaining units, five of which are affiliated with the International Brotherhood of Teamsters and two of which are affiliated with the United Steelworkers.

Regulatory Matters
 
We are subject to extensive regulation by federal, state and local governments and similar international agencies relating to the sale and distribution of our products. These regulations govern the use, labeling, packaging, transportation, storage and distribution of chemicals and hazardous substances. We are also subject to domestic and international import, export and customs regulations, and statutes and regulations relating to government contracting. In addition, we are subject to extensive environmental laws and other regulations concerning, among other things, emissions to the air, discharges to land, and water and the generation, handling, storage, transportation and disposal of non-hazardous and hazardous waste in various federal, state, local and foreign jurisdictions, including EMEA and Asia. We are also subject to other federal, state, local and foreign laws and regulations regarding health and safety matters. Below is a summary of certain of these regulations.
 
Environmental
 
We operate in a number of domestic and foreign jurisdictions and are subject to various types of governmental regulation relating to the protection of the environment. Such regulation comes in the form of federal, state, local and foreign laws and regulations concerning such issues as the handling, storage and transportation of chemicals, release of pollutants into the air, soil and water, disposal of hazardous and non-hazardous wastes, remediation of contaminated sites, protection of workers from exposure to hazardous substances and the public disclosure of information regarding environmental hazards. Some aspects of our businesses also require us to maintain various environmental permits and licenses. We believe that we are in substantial compliance with all applicable environmental laws, regulations and permits; however, environmental compliance costs in the form of compliance with regulations, remediation obligations, capital improvements, operating expenses and/or limitations on operations can be substantial.
 
Many of the environmental laws and regulations affecting our operations relate to the prevention and remediation of previous impacts to air, soil or water resulting from the release of regulated materials. Past operations at some of our facilities have resulted in the contamination of soil and groundwater, some of which require remediation. Under the ADA Purchase Agreement, Ashland retained liability for known remediation obligations related to its ownership and operation of the Distribution Business before the closing date of the Ashland Distribution Acquisition and all other environmental remediation liabilities arising prior to the closing date of the Ashland Distribution Acquisition for which Ashland received notice, other than for the Retained Remediation Liabilities. Subsequent to the closing date of the Ashland Distribution Acquisition, we assumed responsibility for all newly reported contamination and are required to indemnify Ashland should Ashland incur any expense related to such newly reported contamination. We may also discover new or previously unknown contamination for which we may not be indemnified by Ashland. In those cases, and in situations where Ashland does not fulfill its indemnification obligations to us, we may be responsible for substantial remediation costs at or associated with our facilities or with the Distribution Business. See also Item 3, "Legal Proceedings".
 
Comprehensive Environmental Response, Compensation, and Liability Act
 
In the U.S., CERCLA and analogous state laws regulate the remediation of certain contaminated sites and establish liability for the release of hazardous substances and related damages to natural resources from such sites. Under CERCLA, potentially responsible parties (including waste generators, waste transporters, and parties arranging for waste disposal) are subject to strict and, in certain circumstances, joint and several liability, for the cost of remediating contaminated sites. Our Chemicals and Environmental Services lines of business conduct waste disposal activities and handle products which could subject us to CERCLA liability.
 
In addition, we currently indemnify some of our Environmental Services customers for liabilities related to waste disposal activities that such customers may incur under certain environmental laws, including CERCLA.
 

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Resource Conservation and Recovery Act
 
RCRA and analogous state laws regulate the generation, transportation, treatment, storage and disposal of hazardous waste. RCRA also establishes the regulatory framework for the management of certain non-hazardous wastes. RCRA requires owners and operators of hazardous waste treatment, storage and disposal facilities to obtain a RCRA permit. These permits may include both remedial actions and operational conditions. RCRA requires owners and operators of regulated facilities to investigate and remediate hazardous waste releases and to demonstrate compliance with financial assurance requirements. The financial assurance requirements are designed to ensure that adequate financial resources exist to respond to any releases of hazardous wastes at a permitted site and to perform any necessary corrective action and permanent site closure activities. Several of our facilities are subject to RCRA permits and some are undergoing corrective action to address previous releases of regulated materials as required under their permits. While we were required to assume responsibility for corrective action at a few sites in connection with the transfer of the business from Ashland to the Predecessor, Ashland agreed to continue to perform certain known ongoing corrective actions at these sites until they are completed and to indemnify the Predecessor for any costs necessary to complete these actions. However, we retain responsibility for any RCRA violations resulting from our own operations.

Clean Air Act
 
CAA and analogous state laws establish a variety of programs designed to regulate the discharge of pollutants into the air. Under these laws, permits may be required before construction can commence on any new or modified source that has the potential to emit a significant amount of any regulated pollutant, such as nitrogen oxides and volatile organic compounds. Additionally, we may be required to register with state environmental agencies, monitor and report emissions, and install new or improved emission control equipment in certain situations, including for existing sources of air emissions. Furthermore, CAA may require that we obtain federal operating permits for any major sources of air pollution, which incorporate applicable pollution control requirements and require reporting and certification obligations. CAA also requires owners and operators of facilities that produce, handle, process, distribute, or store threshold quantities of chemicals to implement and update detailed risk management plans, which must be filed with and approved by the EPA. We could be required to incur additional expenditures to comply with CAA, including costs to install and operate emissions control equipment at our facilities.
 
Clean Water Act
 
The EPA regulates discharges of pollutants into waters of the U.S. through the CWA. Pursuant to the CWA, the EPA establishes wastewater standards and water quality standards for contaminants discharged into surface waters such as streams, rivers and lakes. The discharge of any regulated pollutant from point sources (such as pipes and manmade ditches) into the waters of the U.S. is prohibited without a state or federally issued discharge permit. Several of our facilities are currently subject to and must comply with CWA permit limitations on the discharge of industrial wastewater and storm water.
 
Toxic Substances Control Act
 
The TSCA authorizes the EPA to require chemical manufacturers, importers, and exporters to comply with reporting, record keeping, testing, and other requirements relating to chemical substances or mixtures. The TSCA is primarily designed to ensure that certain chemicals do not pose an unreasonable risk to human health or the environment. The TSCA Chemical Substances Inventory, which is maintained by the EPA, lists approximately 85,000 covered chemical substances. Before a chemical substance can enter interstate commerce (either through manufacture or importation), the EPA must review and approve the substance’s pre-manufacture notice. As part of that review process, the EPA may identify conditions—up to and including a ban on production—limiting the use of a chemical substance before it enters commerce. The TSCA also requires the testing of chemicals by manufacturers, importers and processors and requires those importing or exporting chemicals to comply with certification reporting and recordkeeping requirements. The TSCA also requires that any chemical distributor having information reasonably suggesting a substantial risk of injury to health or the environment notify the EPA immediately. The TSCA reform legislation enacted in June 2016 expanded the EPA's authority to review and regulate new and existing chemicals. In addition, when we import chemicals into the U.S. or export chemicals out of the U.S., we must comply with the TSCA’s import certification and export notice requirements. We must also comply with the TSCA’s various recordkeeping requirements.
 

13


Emergency Planning and Community Right-To-Know Act
 
The EPCRA requires facilities manufacturing, processing, or storing designated hazardous chemicals to report certain information about their products to state and local officials and fire departments. These reporting obligations are intended to assist state and local governments in developing emergency response plans in the case of a chemical release and to provide information to the public regarding the type and amount of toxic or hazardous chemicals stored at a particular facility. In addition, facilities releasing toxic chemicals into the environment above certain thresholds must report such releases to the EPA as part of the facilities’ "Toxics Release Inventory." Because many of our chemical distribution facilities handle hazardous chemicals, we are subject to the reporting requirements under the EPCRA.

Chemical Facility Anti-Terrorism Standards
 
DHS regulates the security of certain high-risk chemicals facilities through CFATS. CFATS utilizes a Chemical Security Assessment Tool to identify those chemical facilities potentially deemed "high risk." The first step is user registration, followed by the completion of a top-screen evaluation. The top-screen evaluation analyzes whether a facility stores regulated chemicals above specified thresholds. If it does, the facility must complete a Security Vulnerability Assessment, which examines the likelihood that a threat against a facility will be successful. From there, the facility must develop a Site Security Plan to respond to any identified security vulnerabilities. The Site Security Plan must address such matters as access control, personnel credentialing, recordkeeping, employee training, emergency response, testing of security equipment, reporting of security incidents and suspicious activity, and deterring, detecting and delaying potential attacks. DHS must review and approve or deny all Security Vulnerability Assessments and Site Security Plans. CFATS also requires regulated facilities to keep detailed security records and allow DHS the right to enter, inspect, and audit the property, equipment, operations and records of such facilities. Our facilities handle a number of chemical substances subject to CFATS security requirements, and thus, some of our facilities must comply with its site security requirements. Other legislative and regulatory initiatives designed to minimize the vulnerability of chemical storage and transportation assets could result in increased regulation of our industry, potentially imposing additional limitations on our operations and causing us to incur higher operating and compliance costs.
 
Regulation of the Transportation of Hazardous Materials
 
The transportation of hazardous materials is a significant part of our business and is regulated by the Department of Transportation under the FHMTL and its implementing regulations, the HMR. The HMR regulate the handling of hazardous materials, hazardous wastes, hazardous substances, and marine pollutants, and establish rules applicable to myriad aspects of the transportation process, including employee training, incident notification, labeling and placarding of shipments, shipment preparation, carriage of hazardous materials, emergency response and the development of safety and security plans. Several Department of Transportation agencies, including the Pipeline and Hazardous Materials Safety Administration, the Federal Aviation Administration, the Federal Railroad Administration, the Federal Motor Carrier Safety Administration and the U.S. Coast Guard share responsibility for enforcing the FHMTL.

Certain international standards and regulations also govern the transportation of hazardous materials shipments within, to, and from the U.S. Such regulations include the International Civil Aviation Organization’s 132 Technical Instructions for the Safe Transport of Dangerous Goods by Air, the International Maritime Dangerous Goods Code, Transport Canada’s Transportation of Dangerous Goods Regulations and the International Atomic Energy Agency Regulations for the Safe Transport of Radioactive Materials. These standards and regulations prescribe, among other things, requirements for packaging, maximum weight and handling of hazardous materials. U.S. agencies have sought to harmonize their rules with international standards and regulations, but when hazardous materials are transported to, from, and within the U.S. in accordance with one or more of these international standards or regulations, U.S. HMR requirements must still be followed.
 
The majority of our logistics services, including transport of hazardous materials, involve highway transportation. The Transportation Security Administration requires any driver seeking to obtain, renew, or transfer a hazardous materials endorsement on a state-issued commercial driver’s license to undergo a security threat assessment. Additionally, under the Transportation Worker Identification Credential program, workers, including truckers, requiring unescorted access to maritime facilities must be issued tamper-resistant biometric credentials to access such facilities.
 

14


Like environmental regulations, the regulations governing the transportation of hazardous materials are often subject to modification. For example, the Pipeline and Hazardous Materials Safety Administration recently amended the HMR to remove the packing group II designation for certain organic peroxides, self-reactive substances and explosives and revised the requirements for the packaging of nitric acid and for the testing of pressure relief devices on cargo tanks.  Hazardous Materials: Miscellaneous Amendments (RRR), 81 Fed. Reg. 35,484 (June 2, 2016). Portions of the rulemaking are subject to pending administrative appeals with the agency. In addition, the Federal Railroad Administration has strengthened regulations regarding security and control over railcars that transport certain classes of flammable, combustible, or explosive liquids and gases. Compliance with new regulations on the transportation of hazardous materials could adversely affect our business by raising our compliance and operational costs.
 
Occupational Safety and Health Regulations
 
We are subject to the OSH Act, which addresses safety and health in workplace environments. In addition to the OSH Act, we are subject to applicable state occupational safety and health regulations as well as the safety and health rules of applicable jurisdictions outside of the U.S, such as the Workplace Hazardous Materials Information System in Canada.

The OSH Act is administered by OSHA, which has established maximum workplace chemical exposure levels. Manufacturers and distributors of chemicals must employ a hazard communication program utilizing labels and other forms of warnings, as well as safety data sheets, setting forth safety and hazardous materials information to employees and customers. OSHA’s Hazard Communication Standard covers both physical hazards (such as flammability or the potential for explosions) and health hazards. Employers are required to provide a certain level of training to ensure that relevant employees are equipped to properly handle chemicals. OSHA has modified its Hazard Communication Standard to make it consistent with the United Nation’s Globally Harmonized System of Classification and Labeling of Chemicals. The new standards include more specific requirements for hazard classification, as well as standardized label components that provide consistent information and definitions for hazardous chemicals and a standard approach to conveying information on safety data sheets. Our Chemicals line of business has already completed its transition to the revised Hazard Communication Standard.

For our Chemicals and Plastics lines of business in Canada, we are in the process of transitioning to Health Canada's Globally Harmonized System - aligned Hazardous Products Regulations standard. In Canada, a phase-in period is currently underway, culminating in December 2018, during which companies can choose to comply with either the existing or the revised Hazardous Products Regulations, and we expect to complete this transition within the deadline.

Both the U.S. and Canada Hazard Communication Standards remain subject to periodic updates and revisions, and those changes, as well as other regulatory initiatives in occupational health and safety, could result in increased operation and compliance costs.
 
Product Control

We operate in a number of domestic and foreign jurisdictions and are subject to various types of governmental regulation relating to use, labeling, packaging, storage and distribution of chemicals and hazardous substances. Statutes and regulations governing the import, export and control of our products are enforced by government agencies such as the U.S. Customs and Border Protection, the Drug Enforcement Administration, the Department of Homeland Security, the Department of Commerce, the Department of Transportation, the Food and Drug Administration, the Department of Agriculture and similar international agencies.

We believe that we are in compliance in all material respects with federal, state and local regulations relating to the sale, distribution, import and export of our products. We have automated systems, processes and procedures in place to support compliance with these regulations, and because we have these automated systems, processes and procedures in place, we believe we conduct our global business in compliance in all material respects with applicable statutes and regulations as promulgated in the countries into which we sell our products. Although we believe we are in compliance in all material respects with such laws and regulations, any non-compliance could result in substantial fines or otherwise restrict our ability to conduct our business.

Intellectual Property
 
We are not substantially dependent upon patents, trademarks or licenses.
 

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Insurance
 
Our operations are subject to significant hazards and risks inherent in the transportation, storage and disposal of chemicals and other potentially hazardous materials. We seek to mitigate these risks with effective industry-specific risk management techniques that include continuing and improving upon current loss prevention, claims management and training programs as well as a comprehensive insurance program. We have insurance coverage at levels that we consider adequate for our worldwide facilities and activities. Our insurance policies cover, among others, the following categories of risk: property damage and business interruption; marine cargo throughput, product and general liability; environmental liability; directors’ and officers’ liability and fraud and crime/theft.
 
Available Information
 
We electronically file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Additionally, information about us, including our reports filed with the SEC, is available through our website at www.nexeosolutions.com. Such reports are accessible at no charge through our website and are made available as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated by reference into this Annual Report on Form 10-K.

Item 1A. Risk Factors
 
We are subject to certain risks and hazards due to the nature of the business activities we conduct. Although it is not possible to identify all of the risks we encounter, we have identified the following significant risk factors that could materially adversely affect our business, financial condition, cash flows or results of operations.

Risks Related to Our Business and Industry

We face competition from other companies, which places downward pressure on prices and profitability.
 
We operate in highly competitive markets and compete against a large number of domestic and foreign companies. Competitiveness is based on several key criteria, including product performance and quality, product price, product availability, product handling and storage capabilities, the ability to understand customer product development processes and respond to their needs, delivery capabilities and customer service, including technical support. In addition, competitors’ pricing decisions could compel us to decrease our prices, which could negatively affect our profitability. Furthermore, producers sometimes elect to distribute their products directly to end-user customers, rather than rely on indirect distributors like us. While we do not believe that our results depend materially on access to any individual supplier's products, a significant increase in the number of suppliers electing to serve customers directly could result in less revenue and gross profit for us either due to competitive pressure from suppliers or products becoming unavailable to us or both.
 
Certain competitors are significantly larger than we are and may have greater financial resources. As a result, these competitors may be better able to withstand changes in market and industry conditions, including changes in the prices of raw materials and general economic conditions.
 
The prices of the products we purchase and sell are volatile.
 
Rising or otherwise volatile raw material prices for our suppliers, especially those of hydrocarbon derivatives, may cause costs to increase or may result in volatility in our profitability. Also, costs associated with the distribution of our products fluctuate in the same direction as fuel and other transport-related costs. Our ability to pass on increases in our costs to our customers is dependent upon market conditions, such as the presence of competitors in particular geographic and product markets and of the prevailing pricing mechanisms in customer contracts.
 

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Many of our products are commodities or include significant commodity content; however, we have no control over the changing market value of the commodities. For example, excess supplies or changes in demand of crude oil-based and/or natural gas-based feedstocks may cause base commodity chemical product prices to fall. This could subsequently result in a drop in prices for propylene and ethylene-based plastics products. We also typically maintain significant inventories of the products we sell in order to meet our customers’ service level requirements. Declining prices, particularly rapid declines like those that occurred at times during fiscal year 2015 and 2016, typically cause customers to reduce inventories and wait for lower prices in anticipation of continued falling prices. Additionally, rapidly declining prices can cause our inventory value to be higher than market and subject us to impairment charges. As a result of these factors, we are subject to price risk with respect to our product inventories. Significant unanticipated changes in market conditions can affect future product demand, which could materially and adversely affect the value of our inventory. If we overestimate demand and purchase too much of a particular product when customers are reducing/minimizing their purchases, we face a risk that the price of that product will fall, leaving us with inventory that we cannot profitably sell. As a result, our sales volumes and gross profit may decline.
 
If we underestimate demand and do not purchase sufficient quantities of a particular product and prices of that product rise, we could be forced to purchase that product at a higher price in order to satisfy customer demand for that product, but we may not be able to increase pricing to our customers resulting in reduced profitability.

Volatility in product prices also affects our borrowing base under the ABL Facility. A decline in prices of our products reduces the value of our product inventory collateral, which, in turn, may reduce the amount available for us to borrow under the ABL Facility.

Many of our contracts with suppliers and customers are terminable upon notice.
 
Our revenue stream is variable because it is primarily generated as customers place orders and customers may change their requirements or cancel their orders. We generally enter into framework agreements with customers and suppliers that set out volume and other performance expectations over the term of the contract, but purchases and sales of products are usually made by placing individual purchase orders based on customer demand or forecasts. Since many of our contracts with both suppliers and customers do not include firm obligations to buy or sell products or are otherwise terminable upon notice, we might, in certain instances, be unable to meet our customers’ orders, which could harm our business relationships and reputation and result in reduced profitability. In circumstances where customers terminate contracts or cancel orders, we may be unable to find alternative buyers for the materials we purchased and may be forced to hold such materials in inventory. Our gross profit could be negatively affected if suppliers or customers renegotiate contractual terms to our disadvantage. Additionally, while some of our relationships for the distribution and sale of specialty chemicals have exclusivity or preference provisions, we may be unable to enforce these provisions effectively for legal or business reasons.

We are affected by demand fluctuations and other developments in the broader economy, including any prolonged economic crisis.
 
Our businesses mainly service clients in North America, EMEA and Asia, specifically China, making us vulnerable to downturns in those economies. Our sales and gross profits could decline as a result of economic recessions, changes in industrial production processes or consumer preferences, significant episodes of inflation, fluctuations in interest and currency exchange rates, and changes in the fiscal or monetary policies of governments in North America, EMEA and Asia, specifically China. See also "—We are exposed to fluctuations in foreign exchange rates" and "—Our substantial international operations subject us to risks of doing business in foreign countries."
 
General economic conditions and macroeconomic trends could also negatively affect the creditworthiness of our customers, which could increase our credit risk with respect to our trade receivables. Similarly, volatility and disruption in financial markets could limit our customers’ ability to obtain financing necessary to maintain or expand their own operations, thereby reducing demand for our products.

Disruptions in the supply of or an inability to supply the products that we distribute could result in a loss of customers or damage to our reputation.
 
Our business depends on access to adequate supplies of the products that our customers purchase from us. From time to time, we may be unable to access adequate quantities of certain products because of supply disruptions due to natural disasters, extreme weather, industrial accidents, scheduled and unscheduled production outages, high demand leading to allocation, port closures and other transportation disruptions and other circumstances beyond our control. These types of events could negatively affect our results of operations.
 

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We purchase certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to fulfill our orders timely or choose to terminate or otherwise avoid contractual arrangements, we may not be able to obtain the products from alternate sources. The loss of one or more significant suppliers or a supplier of certain key products, or a significant change in the business strategies of our suppliers could disrupt our supply of the products our customers purchase from us. If we are unable to obtain and retain qualified suppliers under commercially acceptable terms, our ability to deliver products in a timely, competitive and profitable manner could be adversely affected.

Further, if our forecasts are below actual market demand, or if market demand increases significantly beyond our forecasts, then we may not be able to satisfy customer product needs, which may cause our customers to purchase their products from our competitors and could result in a loss of market share.

Additionally, domestic and global government regulations related to the manufacture or transport of certain products may impede our ability to obtain those products on commercially reasonable terms.

If for any reason we experience widespread, systemic difficulties in filling our customers’ orders, we face the risk of customer dissatisfaction, possible loss of customers, damage to our reputation, or paying a supplier a higher price in order to obtain the needed products on short notice, any of which could result in loss of revenues and lower profitability.
 
We are exposed to fluctuations in foreign exchange rates.
 
A portion of our sales and costs of sales are denominated in currencies other than the functional currency of our subsidiaries, exposing us to currency transaction risk.  Additionally, because we report our consolidated results in USD, the results of operations and the financial position of our international operations, which are generally reported in the relevant local currencies, are then translated into USD at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  Further, we have exposure to foreign exchange fluctuations arising from the remeasurement of certain foreign operations where the USD is the functional currency but accounting records are kept in local currency. Consequently, any change in exchange rates between our foreign subsidiaries' functional currencies and the USD will affect our consolidated statements of operations and balance sheets when the results of those operating companies are translated/remeasured into USD for reporting purposes. During fiscal year 2017, our most significant currency exposures were to the Euro, the CAD and the RMB and our results of operations were negatively impacted due to these exposures. The exchange rates between these and other foreign currencies and the USD may fluctuate substantially, and these fluctuations may have an adverse effect on our results of operations in future periods. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk."
    
We require significant working capital.
 
We have significant working capital needs, as the nature of our business requires us to purchase and maintain inventories that enable us to fulfill customer demand. In addition, we extend a significant amount of trade credit to our customers to purchase our products. Increases in the price of the products we purchase from suppliers or our selling prices to customers could result in increased working capital needs, as it is more expensive to maintain inventories and extend trade credit, which could adversely affect our liquidity and cash flows. We generally finance our working capital needs through cash flows from operations and borrowings under our ABL Facility. If we are unable to finance our working capital needs on the same or more favorable terms going forward, or if our working capital requirements increase and we are unable to finance the increase, we may not be able to purchase the products required by our customers or extend them the credit they require to purchase our products, which could result in a loss of sales.

The amount of borrowings permitted under the ABL Facility may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial condition.

The amount of borrowings permitted at any time under the ABL Facility is limited by a borrowing base that is comprised of the value of our and certain of our subsidiaries' eligible inventories and accounts receivable. As a result, our access to credit under the ABL Facility is potentially subject to significant fluctuations depending on the value of the eligible assets in the borrowing base as of any valuation date. The inability to borrow under the ABL Facility may adversely affect our liquidity, results of operations and financial condition.


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We may not be able to generate sufficient cash flows to service all of our indebtedness and may be forced to take other actions in order to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on, or to refinance, our debt obligations will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. There can be no assurance that our business will generate sufficient cash flows from operating activities or that future sources of capital will be available to us in an amount sufficient to permit us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flows to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring some or all of our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold or, if sold, of the timing of the sales and the amount of proceeds that may be realized from these sales, or that additional financing could be obtained on acceptable terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations and our ability to satisfy our obligations under the Credit Facilities.

In addition, if we cannot make scheduled payments on our indebtedness, we will be in default and, as a result:

our debt holders could declare all outstanding principal and interest to be due and payable;

the lenders under the ABL Facility could terminate their commitments to lend us money and foreclose against the assets securing their borrowings;

the lenders under the Term Loan Facility and our other secured lenders could foreclose against the assets securing their borrowings; and

we could be forced into bankruptcy or liquidation.

Despite our current level of indebtedness, we may incur substantially more indebtedness in the future, which could further exacerbate the risks described above. At September 30, 2017, we had $864.5 million of principal amount of debt outstanding. In addition, we have $277.8 million of borrowings available under the ABL Facility, and under the terms of the Credit Facilities and subject to our continued compliance with specified ratios, we have the option:

under the ABL Facility, to raise up to $175.0 million of incremental or increased revolving credit commitments; and

under the Term Loan Facility, to raise incremental term loans.

If borrowed, these incremental commitments and loans would be senior secured indebtedness. Furthermore, we and our subsidiary guarantors are permitted to incur additional unsecured indebtedness under the Credit Facilities, which could intensify the related risks that we and our subsidiaries now face.

Our substantial indebtedness could adversely affect our results of operations and financial condition and prevent us from fulfilling our obligations under our indebtedness.

Our substantial indebtedness could have important consequences with respect to our business, including the following:

increasing our vulnerability to general adverse economic and industry conditions and limiting our ability to adjust rapidly to changing market conditions;

requiring us to dedicate a substantial portion of our cash flows from operations to pay principal and interest on our indebtedness, which would reduce the availability of cash to fund working capital, capital expenditures, acquisitions or other future business opportunities that could affect the execution of our growth strategy;

negatively impacting the terms on which customers or suppliers do business with us or alternatively requiring us to provide such customers or suppliers with credit support;

placing us at a competitive disadvantage as compared to our competitors that have less debt; and


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exposing us to risks associated with interest rate fluctuations, which could result in increased interest expense if interest rates rise and we have to borrow additional funds under our variable interest rate Credit Facilities.

In addition, there can be no assurance that our business will generate sufficient cash flows from our operations in the future to service our indebtedness and to meet our other cash needs.

Restrictive covenants in our financing documents may adversely affect our operations.

Our Credit Facilities contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including our ability to:

incur or assume additional debt or provide guarantees in respect of obligations of other persons;

issue redeemable stock and preferred stock;

pay dividends or distributions or redeem or repurchase capital stock;

prepay, redeem or repurchase debt;

make loans, investments and capital expenditures;

incur liens;

engage in sale/leaseback transactions;

restrict distributions from our subsidiaries;

sell assets and capital stock of our subsidiaries;

consolidate or merge with or into another entity, or sell substantially all of our assets; and

enter into new lines of business.

A breach of the covenants under the Credit Facilities could result in an event of default under the Credit Facilities and our other indebtedness. An event of default under the Credit Facilities would permit the lenders under the facilities to declare all amounts outstanding under the facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the Credit Facilities could proceed against the collateral granted to them to secure the borrowings under the facilities.

We depend on transportation and storage assets, some of which we do not own, in order to store and deliver products to our customers.

Although we maintain a significant portfolio of owned and leased transportation assets in North America, including trucks, tankers, railcars, barges and trailers, we also rely on transportation provided by third parties, such as common carriers, to deliver products to our customers. For the fiscal year ended September 30, 2017, common carriers accounted for approximately 34% of deliveries from our North American warehouses. For the fiscal year ended September 30, 2017, we leased 16 of our 57 distribution facilities and operated through more than 100 third party operated warehouses. In addition, in EMEA and Asia, we operated through third party operated transportation assets and warehouses for the fiscal year ended September 30, 2017.
 

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Our access to third party transportation and storage is not guaranteed, and we may be unable to transport or store products at economically attractive rates or at all in certain circumstances, particularly in cases of adverse market conditions, such as shortages in transportation or storage capacity or disruptions to transportation infrastructure. We could also be subject to increased costs associated with transportation and storage that we may not always be able to recover from our customers, including fluctuating fuel prices, labor shortages and unexpected increases in the charges imposed by common carriers and other third parties involved in transportation. Strikes or other service interruptions by third party transporters could also cause our operating expenses to rise and adversely affect our ability to deliver products on a timely basis. Any condition which results in our inability to store and deliver products to our customers for a prolonged period of time or our failure to deliver products in a timely manner, could harm our business relationships, reputation and brand and render portions of our business unprofitable.
 
We rely on the proper functioning of our computer and data processing systems and a large-scale malfunction could result in disruptions to our business.
 
We use an integrated ERP system to manage complexity across our supply chain by processing transactions and financial data in real-time, including ordering, purchasing, inventory management and delivery information. The proper functioning of our ERP platform and related IT systems is critical to the successful operation of our business and the implementation of our business strategies. Computer and data processing systems are susceptible to malfunctions and disruptions, including due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems. We cannot guarantee that we will not experience any malfunctions or disruptions in the future. A significant or large-scale malfunction or interruption of our computer or data processing systems could adversely affect our ability to keep our operations running effectively, including our ability to process orders, properly forecast customer demand, receive and ship products, maintain inventories, collect account receivables and pay expenses, which could materially adversely affect our business, financial condition, cash flows or results of operations. Any of these risks, if they materialize could significantly harm our reputation, expose us to substantial liabilities and have a material adverse effect on our business, financial condition and results of operations.
 
We may be unable to identify, purchase or integrate desirable acquisition targets. Future acquisitions may not be successful and we may not realize the anticipated cost savings, revenue enhancements or other synergies from any such acquisition.
 
We plan to investigate and acquire strategic businesses with the potential to be accretive to earnings, increase our market penetration, strengthen our market position or enhance our existing product offerings. There can be no assurance that we will identify or successfully complete transactions with suitable acquisition candidates in the future. A failure to identify and acquire desirable acquisition targets may slow our growth.
 
Additionally, if we were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or through other arrangements. There can be no assurance that the necessary acquisition financing would be available to us on acceptable terms if and when required.

There also can be no assurance that any already completed acquisitions will be successful. We could have difficulty integrating the operations, systems, management and other personnel, technology and internal controls of a new acquisition with our own. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Matters related to integration may also delay and/or jeopardize strategic initiatives in place to enhance profitability. We may also experience an adverse impact on our operations and revenues if acquisition or integration activities disrupt key customer and supplier relationships or if we fail to retain, motivate and integrate key management and other employees of acquired businesses. Even if we are able to integrate successfully, we may not be able to realize the potential cost savings, synergies and revenue enhancements that were anticipated from any acquisition, either in the amount or within the time frame that we expected, and the costs of achieving these benefits may be higher than, and the timing may differ from, what we expected. Furthermore, the entities that we acquire in the future may not maintain effective systems of internal controls, or we may encounter difficulties integrating our system of internal controls with those of any acquired entities, which could prevent us from meeting our reporting obligations.

In connection with any acquisitions, we may acquire liabilities that may not adequately be covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty. As a result, we may be responsible for significant out-of-pocket expenditures and these liabilities, if they materialize, could have a material adverse effect on our business, financial condition, cash flows and results of operations.


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The service of key employees or our inability to attract new key employees could adversely affect our business.
 
We may have difficulty locating, hiring and retaining qualified and experienced employees, including managerial, sales, sourcing and technical support personnel. This could have an adverse effect on our ability to operate and grow our business. Additionally, the loss of employees who manage key customer and supplier relationships or key products could negatively affect our ability to sell and support our business effectively, which could negatively impact our results of operations. This could be particularly true in certain foreign jurisdictions or with recent acquisitions where legacy relationships are important to the viability of the business.

We may fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, and disputes with our labor unions may arise or our unionized employees may engage in a strike or other work stoppage.
 
As of September 30, 2017, approximately 140 of our 2,070 employees in the U.S. were represented by unions in six locations and seven separate bargaining units. Five of the local unions are affiliated with the International Brotherhood of Teamsters and two are affiliated with the United Steelworkers.
 
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 2014, dismissed the case with respect to that local union.  We reached a settlement with the remaining union, which also resulted in a collective bargaining agreement keeping the employees in our 401(K) plan, which was approved by the NLRB on June 19, 2017.
 
If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise or if our unionized workers engage in a strike or other work stoppage, we could incur higher operation and labor costs or experience a significant disruption of operations.

Our employees in EMEA are represented by works councils or other labor organizations appointed pursuant to local law consisting of employee representatives who have rights to negotiate working terms and to receive notice of significant actions. These arrangements grant protections to employees and subject us to employment terms that are similar to collective bargaining agreements which may limit operational flexibility and increase operational expenses and labor costs.
 
Our substantial international operations subject us to risks related to doing business in foreign countries.
 
For the fiscal year ended September 30, 2017, we sold products to customers located in over 80 countries and generated 26.3% of total sales outside the U.S. These sales may represent an even larger portion of our net sales in the future. Also, we currently operate through approximately 80 third party warehouses located outside the U.S. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions.
 
Legal and political risks are inherent in the operation of a company with our global scope. For example, it may be more difficult for us to enforce our agreements or collect receivables through foreign legal systems. In addition, the global nature of our business presents difficulties in hiring and maintaining a workforce in some countries and managing and administering an internationally dispersed business. In particular, the management of our personnel across several countries can present logistical challenges, including difficulties related to operating under different business cultures and languages.
 
Foreign countries may also impose additional withholding taxes or otherwise tax our foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. The imposition of tariffs is also a risk that could impair our financial performance.
 

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There is a risk that foreign governments may nationalize private enterprises in countries where we operate. In some countries or regions, terrorist activities and the response to these activities may threaten our operations more than those in the U.S. and may result in limited operations, especially in the event of activities which may threaten the health and safety of our employees. Also, changes in general economic and political conditions in countries where we operate, particularly in emerging markets, are a risk to our financial performance.
 
There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have an adverse effect on us.

Changes in tax laws could have an adverse impact on our earnings.

Changes to tax laws, rules and regulations, including changes in the interpretation or implementation of tax laws, rules and regulations by the Internal Revenue Service or other domestic or foreign governmental bodies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional compliance costs.

We have significant operations in China and the laws and regulations applicable to our operations there are sometimes vague and uncertain. Any changes in such laws and regulations could materially adversely affect our business, financial condition, operating results and cash flows.
 
Our operations in China contributed, in aggregate across all lines of business, $214.2 million and $58.8 million in revenue for the fiscal years ended September 30, 2017 and 2016, respectively, and $125.0 million from October 1, 2015 through June 8, 2016 for the Predecessor. China’s legal system is a civil law system based on written statutes, where decided legal cases have little value as precedents, unlike the common law system prevalent in the U.S. There are substantial uncertainties regarding the interpretation and application of China’s laws and regulations, including among others, the laws and regulations governing the conduct of business in China, or the enforcement and performance of arrangements with customers and suppliers in the event of death, bankruptcy or the imposition of statutory liens or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because the laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation or enforcement of existing or new laws or regulations may have on our business in China. If the relevant authorities find that we are in violation of China’s laws or regulations, they would have broad discretion in dealing with such a violation, including levying fines or requiring that we discontinue any portion or all of our business in China.
 
The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect our business in China. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting China’s political, economic or social life, will not affect China’s government’s ability to continue to support and pursue the promulgation of new laws and changes to existing laws, as described above. Such a shift in leadership, social or political disruption or unforeseen circumstances could have a material adverse effect on our business and prospects.

Our business could be negatively affected by security threats, including cybersecurity threats, and other disruptions.
 
We face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, threats to our facilities, threats from disgruntled employees and terrorist acts. The potential for such security threats subjects our operations to increased risks that could have a material adverse effect on our business. In particular, our implementation of various procedures and controls to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data (either directly or through our vendors) and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from expenses related to remediation actions, loss of business or potential liability.


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Attempts to expand our distribution services into new geographic markets may not achieve profitability for a period of time or at all.
 
We plan to expand our distribution services into new geographic markets, which will require us to make capital investments to extend and develop our distribution infrastructure. If we do not successfully add new distribution centers and routes, if we experience unanticipated costs or delays or if we experience competition in such markets that is greater than we expect, we may not achieve profitability in new regions for a period of time or at all.

Consolidation of our competitors in the markets in which we operate could place us at a competitive disadvantage and reduce our profitability.

We operate in an industry which is highly fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. Consolidation of our competitors may jeopardize the strength of our position in one or more of the markets in which we operate and any advantages we currently have due to the comparative scale of our operations. Losing some of those advantages could adversely affect our business, financial condition, cash flows and results of operations, as well as our growth potential.

Our business is subject to many operational risks that can result in injury or loss of life, environmental damage, exposure to hazardous materials and other events that could potentially lead to the interruption of our business operations and/or the incurrence of significant costs.
 
The operations in our Chemicals and Environmental Services lines of business inherently involve the risk that chemical products or hazardous substances could be released into the environment from our facilities or equipment, either through spills or other accidents. Many of the chemical products and waste we handle, or have handled in the past, are potentially dangerous, and could present the risk of fires, explosions, exposure to hazardous materials and other hazards that could cause property or environmental damage or personal injury to our employees and third parties. Responding to the occurrence of any such incidents could cause us to incur potentially material expenditures related to response actions, government penalties, natural resource damages, business interruption and third party injury or property damage claims.
 
While we utilize extensive safety procedures and protocols in the operation of our businesses, there are risks inherent to the chemical distribution and environmental services industries. These relate primarily to the storage, handling, transportation and disposal of chemicals, wastes and other hazardous substances, which are subject to operational hazards and unforeseen interruptions caused by events beyond our control. These risks include, but are not limited to, accidents, explosions, fires, breakdowns in equipment or processes, acts of terrorism and severe weather. These events can result in injury or loss of life, environmental damage, exposure to hazardous materials and other events that could potentially lead to the interruption of our business operations and/or the incurrence of significant costs. In addition, the handling of chemicals has the potential for serious impacts on human health and the environment from such events as chemical spills, exposures and unintentional discharges or releases of toxic or hazardous substances or gases.

Our insurance policies may not cover all losses, costs or liabilities that we may experience.
 
Although we cover our operational risks with insurance policies in certain instances and to the extent our management deems appropriate, these policies are subject to customary exclusions, deductibles and coverage limits that we believe are in accordance with industry standards and practices. We are not insured against all risks, however, and we cannot guarantee that we will not incur losses beyond the policy limits or outside the coverage of our insurance policies. Moreover, from time to time, various types of insurance for companies involved in chemical distribution and environmental services have not been available on commercially acceptable terms or, in some cases, available at all. There can be no assurance that we will be able to maintain adequate insurance coverage in the future, that premiums, which have increased significantly in the last several years, will not continue to increase in the future, or that we will not be subject to liabilities in excess of available insurance.

Although we maintain liability insurance, there can be no assurance that this type or the level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition, cash flows or results of operations.


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Accidents, environmental damage, misuse of our products, adverse health effects or other harm related to hazardous materials that we carry or store could result in damage to our reputation and substantial remediation obligations.
 
Our business depends to a significant extent on our customers’ and suppliers’ trust in our reputation for quality, safety, reliability and environmental responsibility. Actual or alleged instances of safety deficiencies, inferior product quality, exposure to hazardous materials resulting in illness, injury or other harm to persons or property, environmental damage caused by us or our products, as well as misuse or misappropriation of our products, such as for terrorist activities or in the processing of illegal drugs, could damage our reputation and result in the loss of customers or suppliers. There can be no assurance that we will not incur such problems in the course of our operations. Also, there may be safety, personal injury or other environmental risks related to our products which are not known today. Any of the foregoing events, outcomes or allegations could also subject us to legal claims, and we could incur substantial legal fees and other costs in defending such claims.
 
Accidents or other incidents alleged to have taken place at our facilities, while a product is in transit, in a product’s end use application or otherwise involving our personnel or operations could also expose us to substantial liabilities and have a material adverse effect on our business, financial condition, cash flows and results of operations. Because many of the products we handle are potentially dangerous, we face the ongoing risk of explosions, fires, unintended releases and other hazards that may cause property damage, physical injury, illness or death.  
 
There can be no assurance that these types of events will not occur in the future. If these events occur, whether through our own fault, the fault of a third party, pre-existing conditions at our facilities or among our fleet, natural disaster or other event outside our control, our reputation could be significantly damaged. We could also become responsible, through the application of environmental or other laws or by court order, for substantial monetary damages, costly investigation or remediation obligations and various fines or penalties, which may include liabilities arising from third party lawsuits or environmental clean-up obligations. The amount of any costs we may incur under such circumstances could substantially exceed any insurance we have to cover those losses.
 
Our business exposes us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.
 
We are a distributor of products that third party manufacturers produce. We also sell a limited number of products directly to retail stores. Accordingly, our business involves an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability claim or judgment against us could also result in substantial and unexpected expenditures, affect consumer or customer confidence in our products, and divert management’s attention from other responsibilities. We generally extend to our customers the warranties provided to us by our suppliers and, accordingly, the majority of our warranty obligations to customers are intended to be covered by corresponding supplier warranties. However, there can be no assurance that our suppliers will continue to provide such warranties to us in the future, that warranty obligations to our customers will be covered by corresponding warranties from our suppliers or that our suppliers will be able to financially provide protection.

We are relying upon the creditworthiness of Ashland, which is indemnifying Holdings for certain liabilities associated with the Distribution Business. To the extent Ashland is unable (or unwilling) to satisfy its obligations to us, we may have no recourse under the ADA Purchase Agreement and will bear the risk of the liabilities associated with the Distribution Business.
 
Under the ADA Purchase Agreement, Ashland agreed to retain the Retained Remediation Liabilities. Ashland’s obligation for these liabilities is not subject to any claim thresholds or deductibles other than expenses we incur arising out of the Other Retained Remediation Liabilities; if we incur expenses arising out of the Other Retained Remediation Liabilities, Ashland’s indemnification obligation is subject to an individual claim threshold of $0.2 million and an aggregate claim deductible of $5.0 million. Ashland’s indemnification obligations under the ADA Purchase Agreement as described above terminated as of March 31, 2016, other than for the Retained Remediation Liabilities. As a result, any environmental remediation liabilities reported to Ashland after March 31, 2016 and not arising out of a Retained Remediation Liability will be liabilities of the Company. In addition, the Company is obligated to indemnify Ashland for any remediation liabilities other than the Retained Remediation Liabilities.
 

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Based on the indemnification discussed above, we do not currently have any environmental or remediation reserves for matters that are covered by the ADA Purchase Agreement. However, if we were to incur expenses related to the Other Retained Remediation Liabilities, we would be responsible for the first $5.0 million in aggregate expenses relating thereto prior to the receipt of any indemnification from Ashland. In addition, if any Retained Specified Remediation Liability ultimately exceeds the liability ceilings described above, we would be responsible for such excess amounts. In either of these scenarios, and for liabilities associated with our operation of the business, we would be required to take appropriate environmental or remediation reserves.
 
Several of our facilities are currently undergoing active remediation for previous impacts to soil and groundwater. Under the ADA Purchase Agreement, Ashland retained liability for all known remediation obligations related to its ownership and operation of the Distribution Business before the closing date of the Ashland Distribution Acquisition and agreed to indemnify us for any losses associated with these liabilities, subject to some limitations. To date, we have not incurred any such costs. We may also discover new or previously unknown contamination which may not be indemnified by Ashland. In those cases and in situations where Ashland is unable or unwilling to fulfill its indemnification obligations, we may be responsible for substantial remediation costs.
 
To the extent Ashland is unable or unwilling to satisfy its indemnification obligations, we may have no recourse under the ADA Purchase Agreement and will bear the risk of the pre-closing liabilities associated with the Distribution Business, including certain known environmental liabilities. See "Item 3. Legal Proceedings."

We may be subject to personal injury claims related to exposure to hazardous materials and asbestos.
 
Our Chemicals and Environmental Services lines of business involve the storage, transportation and handling of hazardous materials, including chemicals and wastes. The nature of these operations could subject us to personal injury claims from individuals or classes of individuals related to exposure to such materials. We may also be subject to personal injury claims related to exposure to asbestos. Although we do not manufacture or distribute any products containing asbestos, asbestos-containing building materials have been identified at some of our facilities; these materials could present an exposure risk if improperly handled. Under the ADA Purchase Agreement, Ashland retained liability for all personal injury claims related to its ownership and operation of the Distribution Business before the closing date of the Ashland Distribution Acquisition filed on or before March 31, 2016, and will indemnify us for certain losses associated with these liabilities, subject to some limitations. Ashland will not indemnify us, however, for any personal injury claims filed after March 31, 2016 and for any personal injury claims arising from our own ownership and operation of the Distribution Business assets after the closing date of the Ashland Distribution Acquisition, nor will Ashland indemnify Holdings for any claims related to the removal or abatement of asbestos-containing materials. There can be no assurance that we will not incur any of these claims that could result in a material impact on our business, financial condition, cash flows or results of operations in the future.

We are exposed to ongoing litigation and other legal and regulatory actions and risks in the course of our business, and we could incur significant liabilities and substantial legal fees.
 
We are subject to the risk of litigation, other legal claims and proceedings and regulatory enforcement actions in the ordinary course of our business. The outcomes of these proceedings cannot be predicted with certainty. In addition, we cannot guarantee that the results of current and future legal proceedings will not materially harm our business, reputation or brand, nor can we guarantee that we will not incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings. Many of the products we sell can cause liabilities to arise many years after their sale and use. Insurance purchased at the time of sale may not be available when costs arise in the future, and suppliers may no longer be available to provide indemnification or stand behind their warranties. There can be no assurance that we will not incur legal or regulatory cost that could result in a material impact on our business, financial condition, cash flows or results of operations in the future.


26


Our international sales and operations require access to international markets and are subject to applicable laws relating to trade, export and import controls and economic sanctions, the violation of which could adversely affect our operations.

We must comply with foreign laws relating to trade, export and import controls and economic sanctions. We may not be aware of all of such laws for the markets in which we do business, which subjects us to the risk of potential violations. Non-compliance could result in the loss of authorizations and licenses to conduct business in these countries or civil or criminal penalties. We must also comply with all applicable export and import laws and regulations of the U.S. and other countries. Such laws and regulations include, but are not limited to, the Export Administration Act, the Export Administration Regulations, the Arms Export Control Act and the International Traffic in Arms Regulations. The applicability of such laws and regulations generally is limited to "U.S. persons" (i.e., U.S. companies organized or registered to do business in the U.S. and to U.S. citizens, U.S. lawful permanent residents and other protected classes of individuals). However, these laws and regulations have certain extraterritorial effect in some instances, particularly with respect to the reexport of U.S.-origin equipment. We must comply with U.S. sanctions laws and regulations, which are primarily administered by the U.S. Department of Treasury’s Office of Foreign Assets Controls, as well as other U.S. government agencies. Transactions involving sanctioned countries, entities and persons are prohibited without U.S. government authorization (which will rarely be granted). The applicability of such sanctions laws and regulations generally is limited to U.S. persons. However, these sanctions laws and regulations have certain extraterritorial effect in some instances, particularly with respect to the reexport of U.S.-origin equipment. Moreover, U.S. sanctions against Cuba are specifically designed to cover foreign companies owned and controlled by U.S. companies and certain U.S. sanctions against Iran are designed to target foreign companies.
 
There can be no assurance that compliance with these laws and regulations will not have a material impact on our results of operations or cash flows in the future. Furthermore, while we have not experienced penalties from the violation of these laws that have materially impacted our results of operations or cash flows in any of the periods presented in this Annual Report on Form 10-K, violations of U.S. laws and regulations relating to trade, export and import controls and economic sanctions could result in significant civil and/or criminal penalties for our U.S. and foreign operations, including fines, onerous compliance requirements, prohibitions on exporting and importing, prohibitions on receiving government contracts or other government assistance and other trade-related restrictions. It should be noted that U.S. enforcement of such laws and regulations continues to increase, along with penalties for violations.
 
If we do not comply with the U.S. Foreign Corrupt Practices Act, we may become subject to monetary or criminal penalties.
 
The FCPA generally prohibits companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. We currently take precautions to comply with this law. However, these precautions may not protect us against liability, particularly as a result of actions that may be taken in the future by agents and other intermediaries through whom we have exposure under the FCPA even though we may have limited or no ability to control such persons. Additionally, we have operations in certain countries, including Mexico, Russia and China, where strict compliance with the FCPA may conflict with local customs and practices. There can be no assurance that we will not be subject to penalties that might materially impact our business, financial condition, cash flows or results of operations in the future. Our competitors include foreign entities not subject to the FCPA, and hence compliance with this law may put us at a competitive disadvantage.

Regulatory compliance may divert our management's attention from day-to-day management of our business, which could have a material adverse effect on our business.

Our management team may not successfully or efficiently manage our continued transition to a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the regulations imposed by NASDAQ. These regulations continue to evolve with the ongoing implementation of requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and other new SEC regulations. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.    


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Our balance sheet includes significant intangible assets, which could become impaired.
 
At September 30, 2017, our intangible assets totaled $934.5 million, including $703.0 million in goodwill resulting from the Business Combination and the Ultra Chem Acquisition. We may also recognize additional goodwill and intangible assets in connection with any future business or asset acquisitions. Under U.S. GAAP, we are required to evaluate goodwill for impairment at least annually. Although we have not had an impairment on these intangible assets, we cannot guarantee that no material impairment will occur, particularly in the event of a substantial deterioration in our future profitability prospects, either in our business as a whole or in a particular segment. If we determine that the carrying value of our long-lived assets, goodwill or intangible assets is less than their fair value, we may be required to record impairment charges in the future which may significantly impact our profitability. The determination of fair value is highly subjective and can produce significantly different results based on the assumptions used and methodologies employed.  

Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time-to-time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our results of operations and financial condition.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results and risk our ability to have such controls attested to by our independent auditors.
 
We are required to comply with Section 404 of the Sarbanes Oxley Act, which requires, among other things, that companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls on a quarterly basis. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increased our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act. Section 404 of the Sarbanes-Oxley Act also requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal controls over financial reporting and/or we may encounter difficulties in implementing or improving our internal controls, which could harm our operating results or cause us to fail to meet our reporting obligations. We cannot assure that we will receive a positive attestation from our independent auditors with respect to our internal controls. In the event we identify significant deficiencies or material weaknesses in our internal control that we cannot remediate in a timely manner or if we are unable to receive a positive attestation from our independent auditors with respect to internal controls, we might be subject to additional scrutiny by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and may also result in delayed filings with the SEC which could cause investors and others to lose confidence in the reliability of our financial statements.

We may incur significant costs and liabilities in the future resulting from new or existing environmental or safety laws or regulations or an accidental release of wastes or other materials into the environment.
 
Our Chemicals line of business, as well as the Predecessor's Composites line of business, involve the storage and distribution of various chemicals, solvents, additives, resins and catalysts to various end markets. Our Environmental Services line of business involves the collection, recovery, recycling and disposal of hazardous and non-hazardous materials. All of these lines of business, and to a lesser extent our Plastics line of business, are subject to increasingly stringent federal, state, local and foreign laws and regulations associated with protection of the environment. These laws and regulations govern such matters as the handling, storage and transportation of chemicals and composites, releases of pollutants into the air, soil, and water disposal of hazardous and non-hazardous wastes, remediation of contaminated sites, protection of workers from exposure to hazardous substances, and public disclosure of information regarding environmental and safety hazards. Our failure to comply with any environmental and safety laws or regulations could result in the assessment of administrative, civil or criminal penalties the imposition of investigatory or remediation liabilities and the issuance of injunctive relief, which could subject us to additional operational costs and constraints. Each of these outcomes could have an adverse effect on our business, financial condition, cash flows or results of operations.

28


 
Environmental and safety laws and regulations are subject to frequent modification, and recent trends indicate a movement towards increasingly stringent environmental and safety requirements. As a result, we may be required to make substantial expenditures to comply with future environmental and safety laws and regulations, and such expenditures could have an adverse effect on our business, financial condition, cash flows or results of operations. For example, the EPA has recently increased its regulation of toxic substances under TSCA. New or increased governmental restrictions on the transportation, use or disposal of certain chemicals, both domestically and abroad, could also reduce demand for our products, adversely affecting our operations.

Risks Related to Our Securities
 
TPG and FPA, collectively, have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
 
TPG and FPA (and their affiliates), collectively, owned approximately 63.5% of our outstanding common stock as of September 30, 2017. Because of the degree of concentration of voting power, the ability to elect members of and representation on our board of directors (the "Board") and influence our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of our common stock or other equity securities, the repurchase or redemption of shares of our common stock and the payment of dividends, may be diminished.
 
Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.
 
In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Annual Report on Form 10-K and our other filings with the SEC such as:

operating results could fluctuate on a quarterly basis as a result of a number of factors, including, among other things, the timing of contracts, orders, the delay or cancellation of a contract, and changes in government regulations;

actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
 
changes in the market’s expectations about our operating results;
 
 our operating results failing to meet the expectation of securities analysts or investors in a particular period;
 
changes in financial estimates and recommendations by securities analysts concerning us or the specialty chemicals industry in general;
 
operating and stock price performance of other companies that investors deem comparable to us;

low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur;
 
our ability to market new and enhanced products on a timely basis;
 
changes in laws and regulations affecting our business;
 
our ability to meet compliance requirements;
 
commencement of, or involvement in, litigation involving us;
 
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
 
the volume of shares of our common stock available for public sale;

29


 
any major change in the Board or management;
 
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
 
general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.

Securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
 
There may be sales of a substantial amount of our common stock by our current stockholders, and these sales could cause the price of our common stock to fall.
 
As of December 5, 2017, there were 89,753,662 shares of common stock issued and 89,741,309 shares outstanding.  Of our issued and outstanding shares that were issued prior to the Business Combination, all are freely transferable, except for any shares held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. Future sales of our common stock may cause the market price of our common stock to drop significantly, even if our business is doing well.
 
We and certain of our current stockholders may sell large amounts of our common stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in our stock price or putting significant downward pressure on the price of our common stock.
 
Sales of substantial amounts of our common stock in the public market, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future.

Future issuances of capital stock could reduce your influence over matters on which stockholders vote.
 
The Board has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.
 
Warrants are exercisable for our common stock, which, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
 
As of December 5, 2017, outstanding warrants to purchase an aggregate of 25,012,500 shares of our common stock became exercisable in accordance with the terms of the warrant agreement governing those securities. These warrants will expire at 5:00 p.m., New York time, on June 9, 2021 or earlier upon redemption or liquidation. The exercise price of these warrants is $5.75 per half share, or $11.50 per one full share, subject to certain adjustments. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.
 

30


If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
 
The trading market for our common stock will likely be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt.
 
Our second amended and restated certificate of incorporation, or charter, and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of the Board. These provisions include:
 
a staggered board providing for three classes of directors, which limits the ability of a stockholder or group to gain control of the Board;
 
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
 
the right of the Board to elect a director to fill a vacancy created by the expansion of the Board or the resignation, death, or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on the Board;
 
the ability of the Board to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
 
a prohibition on stockholder action by written consent upon and following the date when TPG and the Sponsor cease to own more than 30% of the outstanding shares of stock (the "Trigger Date"), which forces stockholder action to be taken at an annual or special meeting of our stockholders;
 
a prohibition on stockholders calling a special meeting upon and following the Trigger Date, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
 
the requirement that a meeting of stockholders may be called only by the Board after the Trigger Date, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
 
providing that after the Trigger Date directors may be removed prior to the expiration of their terms by stockholders only for cause or upon the affirmative vote of 75% of the voting power of all of our outstanding shares of capital stock;
 
a requirement that changes or amendments to the charter or the bylaws must be approved (i) before the Trigger Date, by a majority of the voting power of our outstanding common stock, which such majority shall include at least 65% of the shares then held by the Sponsor and TPG, and (ii) thereafter, certain changes or amendments must be approved by at least 75% of the voting power of our outstanding common stock; and
 
advance notice procedures that stockholders must comply with in order to nominate candidates to the Board or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
 

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These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our management. Any provision of the charter or bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
 
We have no current plans to pay cash dividends on our common stock for the foreseeable future.
 
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of the Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that the Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including the Credit Facilities. As a result, a stockholder may not receive any return on an investment in our common stock unless such stockholder sells our common stock for a price greater than that which it paid for it.
 
Our securities may be delisted from NASDAQ.
 
Our common stock and warrants are currently listed on NASDAQ. However, we cannot assure you that we will be able to comply with the continued listing standards of NASDAQ. If we fail to comply with the continued listing standards of NASDAQ, our securities may become subject to delisting. If NASDAQ delists our common stock or warrants from trading on its exchange for failure to meet the continued listing standards, we and our security holders could face significant material adverse consequences including:
 
a limited availability of market quotations for our securities;
 
a limited amount of analyst coverage; and
 
a decreased ability for us to issue additional securities or obtain additional financing in the future.

Item 1B. Unresolved Staff Comments
 
Not applicable. 

Item 2. Properties
 
See "Item 1. Business—Global Distribution Channels —Facilities" for a description of our principal properties.

Item 3. Legal Proceedings
 
We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows. 
    
In July 2014, Ashland filed a lawsuit -- Ashland Inc. v. Nexeo Solutions, LLC, Case No. N14C-07-243 JTV CCLD, in the Superior Court for the State of Delaware in and for New Castle County. In the suit, Ashland seeks a declaration that Holdings 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 Solutions 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. On June 21, 2017 the Company's Motion for Summary Judgment in this lawsuit was granted. Ashland appealed the ruling on July 20, 2017. The Company will continue to vigorously defend the lawsuit on appeal.


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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.  We reached a settlement with the remaining union, which resulted in a collective bargaining agreement keeping the employees in our 401(K) plan, which was approved by the NLRB on June 19, 2017.     

In June 2014, we self-disclosed to the DTSC that an inventory of our Fairfield facility had revealed potential violations of RCRA and the California Health and Safety Code. Although no formal proceeding has been initiated, we expect the DTSC to seek payment of fines or other penalties for non-compliance. We do not expect the amount of any such fine or penalty to have a material adverse effect on our business, financial position or results of operations.

We expect that, from time to time, we may be involved in lawsuits, investigations and claims arising out of our operations in the ordinary course of business.

Item 4. Mine Safety Disclosures
 
Not applicable.
 


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PART II

Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Company's common stock, warrants and units are currently quoted on NASDAQ under the symbols "NXEO", "NXEOW" and "NXEOU", respectively. Through June 8, 2016, our common stock, warrants and units were quoted under the symbols "WLRH", "WLRHW", and "WLRHU", respectively.

Common Stock, Warrants and Units Prices

    The following table sets forth, for the periods indicated, the reported high and low sales prices for our common stock, warrants and units.
 
 
Common Stock
 
Warrants
 
Units
 
 
Prices
 
Prices
 
Prices
Fiscal Year 2017:
 
High
 
Low
 
High
 
Low
 
High
 
Low
First
 
$
9.33

 
$
7.28

 
$
0.70

 
$
0.44

 
$
10.12

 
$
7.89

Second
 
9.79

 
8.78

 
0.78

 
0.62

 
10.44

 
9.05

Third
 
9.23

 
8.16

 
0.72

 
0.50

 
9.85

 
7.50

Fourth
 
8.45

 
7.02

 
0.57

 
0.44

 
8.94

 
6.76

Year
 
$
9.79

 
$
7.02

 
$
0.78

 
$
0.44

 
$
10.44

 
$
6.76

Fiscal Year 2016:
 
 
 
 
 
 
 
 
 
 
 
 
First
 
$
10.47

 
$
9.93

 
$
0.80

 
$
0.25

 
$
11.22

 
$
10.00

Second
 
10.06

 
9.90

 
0.65

 
0.29

 
10.70

 
10.19

Third(1)
 
10.07

 
8.98

 
0.94

 
0.34

 
10.88

 
9.89

Fourth
 
9.49

 
7.88

 
0.83

 
0.58

 
10.10

 
8.58

Year
 
$
10.47

 
$
7.88

 
$
0.94

 
$
0.25

 
$
11.22

 
$
8.58

(1) WL Ross Holding Corp. changed its name to Nexeo Solutions, Inc. on June 9, 2016.

Holders

As of December 5, 2017, there were 35 holders of record of our common stock, one holder of record for our warrants and one holder of record of our units. Some of our securities are held in "street name" and held of record by banks, brokers and other financial institutions.

Dividends

We have not paid any cash dividends on shares of our common stock to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, capital requirements and general financial condition. In addition, our Credit Facilities currently limit our ability to pay dividends and our board of directors is not currently contemplating and does not anticipate declaring any dividends in the foreseeable future. Further, if we incur any additional indebtedness, our ability to declare dividends may be limited by restrictive covenants that we may agree to in connection therewith.

34


Issuer Purchases of Equity Securities

The table below provides information concerning our repurchase of shares of our common stock during the fiscal year ended September 30, 2017:
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchase as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
 
 
 
 
 
 
 
 
June 9, 2017
9,576

 
$
8.69

 

 

Total
9,576

 
$
8.69

 

 


(1) Shares transferred to the Company to satisfy the officers’ and employees’ tax withholding obligations in connection with the vesting
of the TPG Restricted Stock Grants.




    

35


Item 6. Selected Financial Data
 
The Company is the result of the Business Combination between WLRH and Holdings as of the Closing Date and referred to as the "Successor". The "Predecessor" financial information reflects the operations of Holdings prior to the Closing Date of the Business Combination.
 
This table should be read in conjunction with Item 1 "Business", Item 1A "Risk Factors", Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and the notes thereto included under Item 8 of this Annual Report on Form 10-K.

 
Successor
 
 
Predecessor
 
Fiscal Year Ended September 30,
 
 
October 1, 2015 Through June 8,
 
Fiscal Year Ended September 30,
 
2017
 
2016*
 
 
2016
 
2015
 
2014
 
2013
Statement of Operations Data:
 

 
 
 
 
 

 
 
 
 
 
 
Sales and operating revenues
$
3,636.9

 
$
1,065.7

 
 
$
2,340.1

 
$
3,949.1

 
$
4,514.5

 
$
4,101.4

Gross profit
398.4

 
108.4

 
 
271.9

 
408.0

 
401.7

 
358.1

Net income (loss) from continuing operations
14.4

 
(8.4
)
 
 
(13.9
)
 
21.2

 
(12.2
)
 
(4.6
)
Net income (loss) attributable to Nexeo Solutions, Inc.
14.4

 
(8.4
)
 
 
(13.8
)
 
20.4

 
4.9

 
7.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share available to common stockholders
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.19

 
$
(0.24
)
 
 
 
 
 
 
 
 
 
Diluted
$
0.19

 
$
(0.24
)
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
Basic
76,752,752

 
35,193,789

 
 
 
 
 
 
 
 
 
Diluted
76,839,810

 
35,193,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statement of Cash Flow Data (1):
 

 
 
 
 
 

 
 
 
 

 
 
Net cash provided by (used in):
 

 
 
 
 
 

 
 
 
 

 
 
Operating activities
$
78.6

 
$
3.2

 
 
$
69.6

 
$
154.1

 
$
57.5

 
$
(35.9
)
Investing activities
(84.2
)
 
133.0

 
 
(11.8
)
 
(31.5
)
 
(209.9
)
 
(93.9
)
Financing activities
11.8

 
(88.9
)
 
 
(121.5
)
 
(81.8
)
 
166.5

 
71.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Financial Data(2):
 

 
 
 
 
 
 
 
 
 

 
 
Capital expenditures, excluding acquisitions (3)
$
27.6

 
$
12.7

 
 
$
14.2

 
$
35.6

 
$
49.9

 
$
38.1

Depreciation, amortization and impairment loss
74.6

 
20.6

 
 
37.7

 
52.6

 
53.4

 
38.7


*The fiscal year ended September 30, 2016 includes 114 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016. 
(1) 
Statement of Cash Flow Data for all periods represents total cash flow amounts for each respective line item.
(2) 
Other Financial Data for the Successor and Predecessor periods reflects amounts net of discontinued operations.
(3) 
Excludes non-cash capital expenditures.


36


 
Successor
 
 
Predecessor
 
September 30,
 
 
September 30,
 
2017
 
2016
 
 
2015
 
2014
 
2013
Balance Sheet Data (at period end):
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
53.9

 
$
47.5

 
 
$
127.7

 
$
88.2

 
$
74.6

Working capital (1)
528.7

 
464.8

 
 
507.2

 
582.9

 
541.2

Total assets
2,253.5

 
2,078.9

 
 
1,708.9

 
1,906.1

 
1,613.1

Long term obligations(2)
804.3

 
774.9

 
 
891.9

 
925.2

 
659.3

Total liabilities
1,475.9

 
1,334.1

 
 
1,423.9

 
1,581.3

 
1,191.7

(1) 
Working capital is defined as accounts receivable plus inventory less accounts payable.
(2) 
Long term obligations represent debt, including current portion (net of discount and debt issuance costs) and capital leases. It excludes short-term borrowings under line of credit agreements available to the Company's operations in China and the Contingent Consideration Obligations. See Notes 3, 7 and 9.


37


Item 7. 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 is designed to provide information to better understand, and should be read together with, our consolidated financial statements and related notes included in Part II Item 8 in this Annual Report on Form 10-K. To the extent this discussion and analysis contains forward-looking statements, these statements involve risks and uncertainties. While management believes that these forward-looking statements are reasonable, there can be no assurance that future developments will be those that are anticipated. Actual results may differ materially from those anticipated in these forward-looking statements. See "Item 1A. Risk Factors" and "Cautionary Note Regarding Forward Looking Statements".

Overview
 
The Company is the result of the Business Combination between WLRH and Holdings as of the Closing Date and referred to as the "Successor". The "Predecessor" financial information reflects the operations of Holdings prior to the Closing Date of the Business Combination.

We are a global chemicals distributor in North America and Asia, and a global plastics distributor in North America, EMEA and Asia. We also provide on-site and off-site environmental services, in North America, primarily within the U.S. During fiscal year 2017, we distributed over 24,000 products in more than 80 countries for approximately 1,400 suppliers to approximately 28,100 customers. Based on revenues for calendar year 2016, we were ranked by the Independent Chemical Information Service (ICIS), one of the largest petrochemical market information providers, third in North America and fifth globally among the Top 100 Chemicals Distributors.

We distribute our product portfolio through a global supply chain consisting of approximately 180 owned, leased or third party warehouses, rail terminals and tank terminals with a private fleet of approximately 1,100 units, including tractors and trailers, primarily in North America. We currently employ approximately 2,640 employees globally.

For a detailed overview of our business, refer to Item 1, "Business" of this Annual Report on Form 10-K.

Segment Overview
 
We are organized into three lines of business, or operating segments: Chemicals, Plastics and Environmental Services. Each line of business represents unique products and suppliers focusing on specific end markets. Factors emphasized within each end market include 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 our strategic agenda.

See Note 16 to our consolidated financial statements for detailed information on individual segments.

Key Factors Affecting our Results of Operations and Financial Condition
 
General and regional economic conditions. Consumption of chemicals and plastics in the industries and markets we serve are generally affected by the global economy and amplified by regional conditions. Although we manage our cost structure in line with general economic conditions, our volumes and profitability are ultimately correlated with the underlying demand for the end-products of the industries we serve.
 
Price fluctuations. Selling prices of the products we distribute within our Chemicals and Plastics lines of business fluctuate with changes in the prices we pay for products.  Product costs are largely driven by global and regional economic conditions affecting the prices of two primary raw materials of production: crude oil (primarily naphtha) and natural gas (primarily ethane).  These two raw materials are used in the production of propylene and ethylene, the 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 producers for uses of feedstocks (e.g., as an ingredient in gasoline versus a feedstock to the chemical industry) and the capacity devoted to production and other macroeconomic factors that impact the producers.  As a distributor, the prices of these feedstocks are not in our control.  We are generally able to adjust finished good prices 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.  Through fiscal year 2017, we managed these price fluctuations through effective inventory management to mitigate short-term price fluctuation exposure.


38


As capacity or demand patterns change, there can be a corresponding change in the selling prices of the products we distribute.  Gross profit margins generally decrease in deflationary price environments and increase during inflationary pricing environments, although the extent to which profitability increases or decreases depends on the rate at which selling prices adjust relative to inventory costs.  As a logistics provider, oil prices affect our transportation and delivery costs, along with changes in driver regulation, supply of drivers and common carrier rates. Common carrier costs have been challenging for us in North America through fiscal year 2017 largely due to driver shortages, further compounded as a result of recent federal mandates causing longer lead times and higher delivery costs.

Volume-based pricing. We generally procure chemicals and plastics raw materials through purchase orders and avoid long-term contracts with firm commitments.  Our typical arrangements with key producers and suppliers are framework supply agreements.  We develop relationships with a select group of producers and suppliers who complement our strategy, based on several factors, including price, quality, breadth of product offering, 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. While they generally do not provide for specific product pricing, some include volume-based financial incentives through supplier rebates, earned by meeting or exceeding target purchase volumes. Supplier rebates are recorded as a reduction of inventory costs and accrued as part of cost of sales for products sold based on its purchases to date and estimates of purchases for the remainder of the calendar year. For the fiscal year ended September 30, 2017, our supplier rebates were $9.0 million.
 
Inflation. Our average selling prices rise in inflationary 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 higher prices.  This environment of excess demand favorably impacts our volumes, revenues and gross profit, due to the lag between rising prices and our cost of goods sold.  The reverse is true in deflationary price environments.  Deflationary forces create an environment of overcapacity, driving market prices of products downward, and we must quickly adjust inventories and buying patterns in response to price declines.  Our primary objective is to replace inventories at lower costs while maintaining or enhancing unit profitability. Fiscal year 2017 began in a deflationary environment causing lower sales prices and reduced volumes; however, the environment shifted to an inflationary environment through the year enabling higher prices and volumes.

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 the raw materials that are used to manufacture our products.  We manage our working capital during periods of changing prices, so 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 transactions are denominated in currencies other than the functional currency of our subsidiaries.  Further, we have exposure to foreign exchange fluctuations arising from the remeasurement of certain foreign operations where the USD is the functional currency but accounting records are kept in local currency. Strengthening/weakening of our subsidiaries’ functional currency relative to the other currencies in which some transactions are denominated or recorded creates foreign currency gains/losses, which we include in Selling, general and administrative expenses. Additionally, we report our consolidated results in USD and the results of operations and the financial position of our local international operations are translated into USD at the applicable exchange rates for inclusion in our consolidated financial statements.  Strengthening of the USD relative to our subsidiaries’ functional currencies causes a negative impact on sales but a positive impact on costs. During fiscal year 2017, the strengthening of the USD compared to the functional currencies where we operate caused a negative impact of $11.8 million on consolidated revenues and $1.0 million on consolidated gross profit when compared to fiscal year 2016.

For more information on how the above factors impact us see Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

Outlook
 
General. We have operations in North America, EMEA and Asia and are 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 commodities/feedstocks price movements;

unemployment levels;

39



government regulation and geopolitical changes;

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

technological change in the industries we serve.
 
We monitor these factors routinely for both strategic and operational 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 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 stabilized during the first half of fiscal year 2017 and have begun to show some growth in the second half of fiscal year 2017 as shown by the increases in GDP, oil prices and U.S. Industrial Production Index.

The following is a summary of GDP, oil price and U.S. Industrial Production Index fluctuations in our various regions of operations by fiscal quarter.

 
 
Year over Year Change
 
 
Q4 17 v Q4 16
 
Q3 17 v Q3 16
 
Q2 17 v Q2 16
 
Q1 17 v Q1 16
North America
 
 
 
 
 
 
 
 
U.S. GDP Growth
 
2.3
%
 
2.2
%
 
2.0
%
 
1.8
 %
U.S. Industrial Production Index

 
1.9
%
 
2.1
%
 
0.6
%
 
(0.1
)%
West Texas Intermediate Crude Oil Average Price Decrease
 
7.2
%
 
5.5
%
 
54.0
%
 
16.9
 %
 
 
 
 
 
 
 
 
 
EMEA
 
 
 
 
 
 
 
 
Euro Area GDP Growth
 
2.5
%
 
2.3
%
 
2.0
%
 
1.9
 %
Brent Crude Oil Average Price Increase

 
11.0
%
 
8.0
%
 
55.1
%
 
14.3
 %
 
 
 
 
 
 
 
 
 
Asia
 
 
 
 
 
 
 
 
China GDP Growth (1)
 
6.9
%
 
6.9
%
 
6.9
%
 
6.7
 %
(1) As reported by the Chinese government.
 
 
 
 
 
 
 
 

Overall GDP growth has increased in many of the countries in which we operate. As a result we have experienced an increase in sales volumes. In terms of currency, the USD has continued to strengthen over the prior fiscal year 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 regional operations.

North America
 
The North American economic environment continued to improve during fiscal year 2017. U.S. GDP has increased in fiscal year 2017 as compared to fiscal year 2016, and the inflation rate has increased to 2.2% for fiscal year 2017 over the prior fiscal year, driven primarily by higher energy prices. 

In terms of currency, the CAD strengthened when compared against the USD for fiscal year 2017 following slight declines during fiscal year 2016. The Peso weakened in value against the USD through fiscal year 2017.


40


EMEA
 
In Europe, we conduct business primarily in the Western European countries. Economic growth in Europe is expected to increase through 2018 as the global recovery is expected to gain momentum. 

In terms of currency, the Euro and the majority of other European currencies were relatively flat versus the USD when comparing fiscal year 2017 to fiscal year 2016, which had limited effect on, 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 typically 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 increase in oil prices through fiscal year 2017, we have begun to see an increase in pricing.

Asia
 
Our operations in Asia are concentrated mainly in China. Recent GDP growth in China, as reported by the Chinese government, has continued to increase through fiscal year 2017, primarily due to a rise in industrial output, retail sales and fixed-asset investment with an increase in fiscal spending. 

In terms of currency, the RMB continued to decline against the USD during fiscal year 2017 which affected, among other items, the reported dollar revenues and gross profit from our operations in China.

Certain Factors Affecting Comparability to Prior Fiscal Year Financial Results

After the Business Combination (see Note 3 to our consolidated financial statements) our results of operations are not directly comparable to historical results of the operations for the periods presented, primarily due to:

Certain assets and liabilities had fair value adjustments applied to the Predecessor's consolidated financial statements on the Closing Date.
In connection with the Business Combination, we have recognized certain contingent liabilities.
The fiscal year ended September 30, 2016 only includes 114 days of the acquired business' operating activities as a result of the consummation of the Business Combination.

In April 2017, the Company completed the Ultra Chem Acquisition. Accordingly, the consolidated results of operations for the fiscal year ended September 30, 2017 includes the results of the acquired operations since the Ultra Chem Closing Date, as described further below under "Results of Operations". The acquired operations are primarily included in our Chemicals line of business. See Note 3 to our consolidated financial statements.



41



Results of Operations

Fiscal Year Ended September 30, 2017 compared with Fiscal Year Ended September 30, 2016 and the period October 1 through June 8, 2016 (Predecessor)

Our fiscal year ended September 30, 2017 includes operating results for the full twelve months, and our fiscal year ended September 30, 2016 includes operating results from June 9, 2016 through September 30, 2016 for the "Successor". The "Predecessor" period includes the operating results from October 1, 2015 through June 8, 2016.

 
Successor
 
 
Predecessor

Fiscal Year Ended 
 September 30, 2017
 
Fiscal Year Ended
September 30, 2016*
 
 
October 1, 2015 through June 8, 2016
Sales and operating revenues
 

 
 
 
 
 
Chemicals
$
1,667.2

 
$
478.1

 
 
$
1,066.4

Plastics
1,841.7

 
546.7

 
 
1,192.2

Other
128.0

 
40.9

 
 
81.5

Total sales and operating revenues
$
3,636.9

 
$
1,065.7

 
 
$
2,340.1

Gross profit
 
 
 
 
 
 
Chemicals
205.6

 
55.7

 
 
136.2

Plastics
167.2

 
43.6

 
 
117.6

Other
25.6

 
9.1

 
 
18.1

Total gross profit
398.4

 
108.4

 
 
271.9

Selling, general and administrative expenses
312.9

 
91.7

 
 
208.9

Transaction related costs
1.9

 
21.3

 
 
33.4

Change in fair value of contingent consideration obligations
16.2

 
(11.2
)
 
 

Operating income
67.4

 
6.6

 
 
29.6

Other income
8.3

 
0.5

 
 
2.9

Interest expense, net
(50.8
)
 
(14.3
)
 
 
(42.2
)
Income (loss) from continuing operations before income taxes
24.9

 
(7.2
)
 
 
(9.7
)
Income tax expense
10.5

 
1.2

 
 
4.2

Net income (loss) from continuing operations
14.4

 
(8.4
)
 
 
(13.9
)
Net income (loss) from discontinued operations, net of tax

 

 
 
0.1

Net Income (Loss) Attributable to Nexeo Solutions, Inc.
$
14.4

 
$
(8.4
)
 
 
$
(13.8
)

*The fiscal year ended September 30, 2016 includes 114 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016. 

42



Combined financial data:

 
Successor
 
 
Predecessor
 
Combined
 
 
 
 
 
Fiscal Year Ended 
 September 30, 2017
 
Fiscal Year Ended
September 30, 2016*
 
 
October 1, 2015 through June 8, 2016
 
Fiscal Year Ended
September 30, 2016
 
Difference
 
% Change
Sales and operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
$
1,667.2

 
$
478.1

 
 
$
1,066.4

 
$
1,544.5

 
$
122.7

 
7.9
 %
Plastics
1,841.7

 
546.7

 
 
1,192.2

 
1,738.9

 
102.8

 
5.9
 %
Other
128.0

 
40.9

 
 
81.5

 
122.4

 
5.6

 
4.6
 %
Total sales and operating revenues
$
3,636.9

 
$
1,065.7

 
 
$
2,340.1

 
$
3,405.8

 
$
231.1

 
6.8
 %
Gross profit
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
205.6

 
55.7

 
 
136.2

 
191.9

 
13.7

 
7.1
 %
Plastics
167.2

 
43.6

 
 
117.6

 
161.2

 
6.0

 
3.7
 %
Other
25.6

 
9.1

 
 
18.1

 
27.2

 
(1.6
)
 
(5.9
)%
Total gross profit
398.4

 
108.4

 
 
271.9

 
380.3

 
18.1

 
4.8
 %
Selling, general and administrative expenses
312.9

 
91.7

 
 
208.9

 
300.6

 
12.3

 
4.1
 %
Transaction related costs
1.9

 
21.3

 
 
33.4

 
54.7

 
(52.8
)
 
(96.5
)%
Change in fair value of contingent consideration obligations
16.2

 
(11.2
)
 
 

 
(11.2
)
 
27.4

 
(244.6
)%
Operating income
67.4

 
6.6

 
 
29.6

 
36.2

 
31.2

 
86.2
 %

*The fiscal year ended September 30, 2016 includes 114 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016. 

Sales and operating revenues

Sales and operating revenues were $3,636.9 million for the fiscal year ended September 30, 2017, an increase of $231.1 million, or 6.8%, compared to the prior period. Excluding the $37.2 million in revenues from Ultra Chem, the increase in revenues was driven by a 2.5% increase in average selling price resulting primarily from leveraging our centralized pricing platform to manage a volatile market primarily in our Chemicals specialties businesses, and an increase in volume of 3.1% due to growth in our Plastics line of business in the current fiscal year. The increase in revenues was partially offset by an approximately $11.8 million decline as a result of the weakening of the exchange rates of various currencies versus the USD as compared to the prior period.

Chemicals

Sales and operating revenues for the Chemicals line of business were $1,667.2 million for the fiscal year ended September 30, 2017, an increase of $122.7 million, or 7.9%, compared to the prior period. Excluding the $36.6 million in revenues from Ultra Chem, the increase in revenues was driven by a 5.0% increase in the average selling price primarily due to the use of our centralized pricing platform to leverage price execution and order management in response to supply disruptions primarily in our specialties businesses, despite flat volume in the current fiscal year. The increase in revenues was partially offset by a $0.7 million decline as a result of the weakening exchange rates of various currencies versus the USD as compared to the prior period.

Plastics

Sales and operating revenues for the Plastics line of business were $1,841.7 million for the fiscal year ended September 30, 2017, an increase of $102.8 million or 5.9%, compared to the prior period. The increase in revenue was driven by a 6.4% increase in volume driven primarily by strong regional demand in EMEA and Asia. Average selling prices were flat for the current fiscal year. The volume increase was partially offset by a decline of approximately $11.1 million as a result of the weakening exchange rates of various currencies versus the USD as compared to the prior fiscal year. North America revenues were negatively impacted due to a supplier disruption which limited the availability to us of certain products we distribute on a regular basis.

43


 
Other
 
Sales and operating revenues for the Other segment were $128.0 million for the fiscal year ended September 30, 2017, an increase of $5.6 million, or 4.6%, compared to the prior period. The increase in revenues was driven by a more effective pricing strategy.

Gross profit

Gross profit was $398.4 million for the fiscal year ended September 30, 2017, an increase from $380.3 million in the prior period. The $18.1 million increase in gross profit was primarily driven by the increase in average selling prices in our Chemicals line of business and Plastics volumes as discussed.

Gross profit was negatively affected in the current fiscal year by additional depreciation expense of approximately $6.8 million due to the step up in fair value of the property, plant and equipment as a result of the Business Combination, $1.0 million related to the inventory step up as a result of the Ultra Chem Acquisition and an impairment charge of $1.5 million recorded to Cost of sales and operating expenses in our consolidated income statement related to the three major hurricanes which adversely affected our facilities and inventory during the fourth quarter of fiscal year 2017. In addition, gross profit was negatively affected in the current fiscal year by the impact of weakening exchange rates of various currencies versus the USD of approximately $1.0 million and by an increase in common carrier transportation costs driven by driver shortages, and costs associated with recent federal mandates. Further, Plastics operations in North America were negatively impacted due to a supplier disruption which limited the availability to us during the current year of certain products we distribute on a regular basis. In the prior period, gross profit included a one-time $13.8 million charge related to the inventory step up associated with the Business Combination

Chemicals

Gross profit was $205.6 million for the fiscal year ended September 30, 2017, an increase from $191.9 million in the prior period. The $13.7 million increase in gross profit was primarily due to the increase in average selling price as discussed and an increase in total Chemicals volume of 1.6%.

Gross profit was negatively affected in the current fiscal year by additional depreciation expense of approximately $4.9 million due to the step up in fair value of property, plant and equipment as a result of the Business Combination, $1.0 million related to the inventory step up as a result of the Ultra Chem Acquisition and an impairment charge of $1.3 million recorded to Cost of sales and operating expenses in our consolidated income statement related to the three major hurricanes which adversely affected our facilities in the fourth quarter of fiscal year 2017. Additionally, gross profit was negatively affected during the current fiscal year by an increase in common carrier transportation costs driven by driver shortages, and costs associated with recent federal mandates. In the prior period, gross profit included a one-time $6.0 million charge related to the inventory step up in basis associated with the Business Combination.

Plastics

Gross profit was $167.2 million for the fiscal year ended September 30, 2017, an increase from $161.2 million in the prior period. The $6.0 million increase in gross profit was primarily due to the increase in volumes as discussed.

Gross profit was negatively affected in the current fiscal year by additional depreciation expense of approximately $1.9 million due to the step up in fair value of the property, plant and equipment as a result of the Business Combination and by the impact of weakening exchange rates of various currencies versus the USD of approximately $0.8 million. Additionally, our North America revenues were negatively impacted in the current fiscal year due to a supplier disruption which limited the availability to us of certain products we distribute on a regular basis and by an increase in common carrier transportation costs driven by driver shortages, and costs associated with recent federal mandates. In the prior period, gross profit included a one-time $7.8 million charge related to the inventory step up associated with the Business Combination.

Other

Gross profit was $25.6 million for the fiscal year ended September 30, 2017, a decrease from $27.2 million compared to the prior period. As compared to the prior fiscal period, gross profit was negatively affected during the current fiscal year by an increase in common carrier transportation costs driven by driver shortages, and costs associated with recent federal mandates and a shift in service mix through the third quarter of fiscal year 2017 toward on-site services.

44



Selling, general and administrative expenses
 
Selling, general and administrative expenses were $312.9 million for the fiscal year ended September 30, 2017, an increase of $12.3 million compared to the prior period. The increase was primarily attributable to higher depreciation and amortization expense of $8.1 million and higher employee costs of $10.5 million, partially offset by decreased foreign exchange losses of $2.1 million and a decrease in consulting costs of $3.2 million. The increase in depreciation and amortization expense was driven by the effect of the Business Combination of $5.2 million, as well as $2.0 million from the Ultra Chem Acquisition. The $10.5 million increase in employee costs was driven by an increase in stock compensation expense of $3.3 million, an increase in variable selling compensation of $3.0 million, certain reorganization expenses of approximately $1.7 million and additional employee cost of $1.6 million as a result of the Ultra Chem Acquisition, which were partially offset by cost management and productivity initiatives. Foreign exchange losses were primarily driven by fluctuations in the RMB to USD and Peso to USD.

Transaction related costs
 
We incurred transaction related costs of $1.9 million and $21.3 million for the fiscal years ended September 30, 2017 and 2016, respectively, and $33.4 million for the Predecessor period from October 1, 2015 through June 8, 2016. Transaction costs for the fiscal year ended September 30, 2017 were primarily due to the Ultra Chem Acquisition. The prior fiscal year costs were primarily related to the Business Combination.

Changes in fair value of contingent consideration

The net loss of $16.2 million and a net gain of $11.2 million for the fiscal years ended September 30, 2017 and 2016, respectively, was related to the contingent consideration associated with the Deferred Cash Consideration and TRA from the Business Combination. See Notes 3 and 9 to our consolidated financial statements.

Other income
 
Other income for the fiscal year ended September 30, 2017 was $8.3 million primarily due to the gain related to reimbursements of certain capital expenditures in connection with the relocation of certain operations. See Note 5 to our consolidated financial statements. Other income for the fiscal year ended September 30, 2016 was $0.5 million primarily related to a $0.8 million reimbursement of certain capital expenditures in connection with the relocation of certain operations offset by a $0.2 million loss related to sale of property and equipment. Other income for the Predecessor period from October 1, 2015 through June 8, 2016 was $2.9 million, primarily due to a gain of $2.0 million in the sale of old private fleet tractors under the Ryder Lease and a $0.6 million gain on the repurchase of $9.5 million of Notes.

Interest expense, net
 
Interest expense, net was $50.8 million and $14.3 million for the fiscal years ended September 30, 2017 and 2016, respectively, and $42.2 million for the Predecessor period from October 1, 2015 through June 8, 2016. Fiscal year 2017 interest expense is related to the Credit Facilities including the amortization of the costs associated with incurring the debt. Predecessor interest expense was related to the Predecessor Credit Facilities and the Notes, along with the amortization of the costs associated with issuing the debt. The decrease in the current fiscal year compared to the prior fiscal year was primarily due to the redemption of the Notes in connection with the Business Combination, which resulted in a decrease in debt balance and related weighted average interest rate.

Income tax expense
 
Income tax expense was $10.5 million and $1.2 million for the fiscal years ended September 30, 2017 and 2016, respectively. Fiscal year 2017 tax expense was largely attributable to profitable operations in Europe, Canada and the U.S as compared to profitable foreign operations in EMEA and Mexico in the prior fiscal year. Income tax expense of $4.2 million for the Predecessor period from October 1, 2015 through June 8, 2016 was due to profitable foreign operations primarily in Canada, EMEA, Puerto Rico and Mexico. Income taxes for the Company are generally not comparable to the Predecessor as the Predecessor was organized as a limited liability company and taxed as a partnership for U.S. income tax purposes.


45


Fiscal Year Ended September 30, 2016 and the period October 1, 2015 through June 8, 2016 (Predecessor) compared with Fiscal Year Ended September 30, 2015 (Predecessor)

Our fiscal year ended September 30, 2016 includes operating results from June 9, 2016 through September 30, 2016 for the "Successor"; whereas, the "Predecessor" period includes the operating results from October 1, 2015 through June 8, 2016. The Predecessor fiscal year ended September 30, 2015 includes operating results for the full twelve months.

 
Successor
 
 
Predecessor

 
Fiscal Year Ended
September 30, 2016*
 
 
October 1, 2015 through June 8, 2016
 
Fiscal Year Ended 
 September 30, 2015
Sales and operating revenues
 
 
 
 
 
 
 

Chemicals
 
$
478.1

 
 
$
1,066.4

 
$
1,956.1

Plastics
 
546.7

 
 
1,192.2

 
1,876.1

Other
 
40.9

 
 
81.5

 
116.9

Total sales and operating revenues
 
$
1,065.7

 
 
$
2,340.1

 
$
3,949.1

Gross profit
 
 
 
 
 
 
 
Chemicals
 
55.7

 
 
136.2

 
224.4

Plastics
 
43.6

 
 
117.6

 
155.1

Other
 
9.1

 
 
18.1

 
28.5

Total gross profit
 
108.4

 
 
271.9

 
408.0

Selling, general and administrative expenses
 
91.7

 
 
208.9

 
329.5

Transaction related costs
 
21.3

 
 
33.4

 
0.1

Change in fair value of contingent consideration obligations
 
(11.2
)
 
 

 

Operating income
 
6.6

 
 
29.6

 
78.4

Other income
 
0.5

 
 
2.9

 
11.4

Interest expense, net
 
(14.3
)
 
 
(42.2
)
 
(64.7
)
Income (loss) from continuing operations before income taxes
 
(7.2
)
 
 
(9.7
)
 
25.1

Income tax expense
 
1.2

 
 
4.2

 
3.9

Net income (loss) from continuing operations
 
(8.4
)
 
 
(13.9
)
 
21.2

Net income (loss) from discontinued operations, net of tax
 

 
 
0.1

 
(0.8
)
Net Income (Loss) Attributable to Nexeo Solutions, Inc.
 
$
(8.4
)
 
 
$
(13.8
)
 
$
20.4


*The fiscal year ended September 30, 2016 includes 114 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016. 


46


Combined financial data:

 
Successor
 
 
Predecessor
 
Combined
 
Predecessor
 
 
 
 
 
Fiscal Year Ended
September 30, 2016*
 
 
October 1, 2015 through June 8, 2016
 
Fiscal Year Ended
September 30, 2016
 
Fiscal Year Ended 
 September 30, 2015
 
Difference
 
% Change
Sales and operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
$
478.1