Notes to the Consolidated Financial Statements
Note 1. Organization and Business
Our company, Wesco Aircraft Holdings, Inc., is a distributor and provider of comprehensive supply chain management services to the global aerospace industry. Our services range from traditional distribution to the management of supplier relationships, quality assurance, kitting, just-in-time (JIT) delivery, and point-of-use inventory management.
In addition to the central stocking facilities, we use a network of forward-stocking locations to service its customers in a JIT and or ad hoc manner. There are
57
stocking locations around the world with concentrations in North America and Europe. In addition to product fulfillment, we also provide comprehensive supply chain management services for selected customers. These services include procurement and JIT inventory management and delivery services.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Wesco Aircraft Hardware, Wesco Aircraft Europe, Flintbrook Limited, Wesco Aircraft Germany GmbH, Wesco Aircraft France SAS, Wesco Aircraft Israel Limited, Wesco Aircraft Italy SRL, Wesco Aircraft Hardware India Pvt., Limited, Wesco Aircraft Trading Shanghai Co., Limited, Interfast Europe Limited, Interfast USA Inc., Interfast USA Holdings Inc. and Haas. All intercompany accounts and transactions have been eliminated. When we do not have a controlling interest in an entity, but exert significant influence over the entity, we apply the equity method of accounting.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, receivable valuations and allowance for sales returns, inventory valuations of excess and obsolescence (E&O) inventories, the useful lives of long-lived assets including property, equipment and intangible assets, annual goodwill impairment assessment, stock-based compensation, income taxes and contingencies. Actual results could differ from such estimates.
Revision of Supplemental Cash Flow Information
We determined that our 2015 cash paid for interest of
$15.7 million
as reported in our 2015 Annual Report on Form 10-K is understated. The correct amount is
$32.6 million
. We have revised our 2015 cash paid for interest amount to present the correct amount in Note 19. The misstatement had no effect on previously reported income from operations, net income or cash flows for the year ended September 30, 2015 and the interim periods within that year. We have evaluated the misstatement and do not believe it is material to the financial statements for the year ended September 30, 2015.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities from date of purchase of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist of amounts owed to us by customers. We perform periodic credit evaluations of the financial condition of our customers, monitor collections and payments from customers, and generally do not require collateral. Accounts receivable are generally due within
30
to
60 days
. We provide for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. We reserve for an account when it is considered to be uncollectible. We estimate our allowance for doubtful accounts based on historical experience, aging of accounts receivable and information regarding the creditworthiness of our customers. To date, losses have been within the range of management’s expectations. If the estimated allowance for doubtful accounts subsequently proves to be insufficient, additional allowances may be required.
Our allowance for doubtful accounts activity consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
Balance at
Beginning of
Period
|
|
Charges to
Cost and
Expenses
|
|
Write-offs
|
|
Balance at
End of Period
|
Year ended as of September 30, 2016
|
$
|
5,892
|
|
|
$
|
(846
|
)
|
|
$
|
(1,200
|
)
|
|
$
|
3,846
|
|
Year ended as of September 30, 2015
|
5,332
|
|
|
1,121
|
|
|
(561
|
)
|
|
5,892
|
|
Year ended as of September 30, 2014
|
4,464
|
|
|
1,159
|
|
|
(291
|
)
|
|
5,332
|
|
Inventories
Inventories are stated at the lower of cost or market. The method by which amounts are removed from inventory are weighted average cost for all inventory, except for chemical products for which the first-in, first-out method is used. In-bound freight-related costs of
$1.9 million
,
$1.7 million
and
$1.4 million
as of
September 30, 2016
,
2015
, and
2014
, respectively, are included as part of the cost of inventory held for resale. We record provisions, as appropriate, to write-down E&O inventory to estimated net realizable value. The process for evaluating E&O inventory utilizes factors such as historical demand and current inventory quantities, and subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventories will be able to be sold in the normal course of business. During the year ended September 2015, we charged
$33.0 million
and
$62.1 million
to cost of sales for impairment of inventory to net realizable value and for increases in our E&O reserve and related items, respectively, as further described below.
In the
fourth
quarter of 2015, we determined that inventory previously purchased in connection with a specific program which was subsequently terminated, to have no alternative use. During the year ended September 30, 2015, we continued to negotiate a sale of such inventory with our customer for whom such inventory was purchased, as well as market the inventory through other channels, and believed the full cost of this inventory was recoverable. However, in the fourth quarter of 2015, we determined such inventory was not marketable and recorded a reduction in net realizable value of
$33.0 million
.
In the fourth quarter of 2015, management implemented a new strategy of providing integrated supply chain services more tailored to customer demand through long-term contracts and focused forecasted consumption including changes to our inventory purchasing strategy, holding inventory for shorter periods and the planned scrapping of long dated inventory. The new strategy and updates for fiscal 2015 sales activities led to changes in the sell through rates, holding period of aged inventory and others estimates used in the E&O reserve for our hardware inventory, which increased our E&O inventory reserves by
$43.8 million
.
Property and Equipment
Property and equipment are stated at cost, less accumulated amortization and depreciation, computed using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the assets. Expenditures for repair and maintenance costs are expensed as incurred, and expenditures for major renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any gain or loss is reflected in the consolidated statements of comprehensive income. The useful lives for depreciable assets are as follows:
|
|
|
Buildings and improvements
|
1 - 39.5 years
|
Machinery and equipment
|
5 - 7 years
|
Furniture and fixtures
|
7 years
|
Vehicles
|
5 years
|
Computer hardware and software
|
3 years
|
Impairment of Long-Lived Assets
We assess potential impairments of our long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors we consider include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use
of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. We have determined that our asset group for impairment testing is comprised of the assets and liabilities of each of our reporting units, which consists of North America Hardware, Rest of World Hardware, North America Chemical and Rest of World Chemical, as this is the lowest level of identifiable cash flows. We have identified customer relationships as the primary asset because it is the principal asset from which the reporting units derive their cash flow generating capacity and has the longest remaining useful life. Recoverability is assessed by comparing the carrying value of the asset group to the undiscounted cash flows expected to be generated by these assets. Impairment losses are measured as the amount by which the carrying values of the primary assets exceed their fair values. To date, we have not recognized an impairment charge related to the write-down of long-lived assets.
Deferred Financing Costs
Deferred financing costs are amortized using the effective interest method over the term of the related credit arrangement; such amortization is included in interest expense in the consolidated statements of comprehensive income. Amortization of deferred financing costs was
$4.6 million
,
$4.4 million
and
$3.3 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively. As of
September 30, 2016
and
2015
, the remaining unamortized deferred financing costs are
$8.7 million
and
$11.2 million
, respectively.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill, which represents the excess of the consideration paid over the fair value of the net assets acquired in a business combination, and other acquired intangible assets with indefinite lives are not amortized, but are tested for impairment at least annually or more frequently when an event occurs or circumstances change such that it is more likely than not that the carrying amount may be impaired. Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy, or disposition of a reporting unit or a portion thereof. Goodwill and indefinite-lived intangibles asset impairment testing is performed at the reporting unit level on July 1 of each year. Our reporting units are one level below our operating segments.
We test goodwill for impairment by performing a qualitative process, or a two-step quantitative assessment process. The first step of the quantitative process involves comparing the carrying value of net assets, including goodwill, to the fair value of the reporting unit. If the fair value exceeds its carrying amount, goodwill is not considered impaired and the second step of the process is unnecessary. If the carrying amount of a reporting unit’s goodwill exceeds its fair value, the second step measures the impairment loss, if any.
The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The implied fair value of the reporting unit’s goodwill is calculated by creating a hypothetical balance sheet as if the reporting unit had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible assets that may not have any corresponding carrying value in our balance sheet). The implied value of the reporting unit’s goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If the carrying value of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We performed our goodwill impairment tests for the years ended
September 30, 2016
and
2015
, which resulted in
no
goodwill impairment in the year ended September 30, 2016 and a goodwill impairment charge of
$263.8 million
in the year ended September 30, 2015 for our North America Hardware reporting unit. Refer to Note 8 for additional information.
Indefinite-lived intangibles consist of a trademark, for which we estimate fair value and compare such fair value to the carrying amount. If the carrying amount of the trademark exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, we primarily utilize reported market transactions and discounted cash flow analysis. We use a three tier fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs
to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:
|
|
|
|
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2:
|
|
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
|
Level 3:
|
|
Unobservable inputs for the asset or liability.
|
The definition of fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled. For financial assets traded in an active market (Level 1),
the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and
3
), our fair value calculations have been adjusted accordingly.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
We use observable market-based inputs to calculate fair value of our interest rate swap agreements and outstanding debt instruments, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.
Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value.
Derivative Financial Instruments
We periodically enter into cash flow derivative transactions, such as interest rate swap agreements, to hedge exposure to various risks related to interest rates. We recognize all derivatives at their fair value as either assets or liabilities. For cash flow designated hedges, the effective portion of the changes in fair value of the derivative contract are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in net earnings at the time earnings are affected by the hedged transaction. Adjustments to record changes in fair values of the derivative contracts that are attributable to the ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in our consolidated statements of cash flows’ operating, investing, or financing activities consistent with the cash flows of the hedged item.
Comprehensive Loss or Income
Comprehensive loss or income generally represents all changes in stockholders’ equity, except those resulting from investments by or distributions to stockholders. Our comprehensive loss or income consists of foreign currency translation adjustments and fair value adjustments for cash flow hedges.
Revenue Recognition
We recognize product and service revenue when (1) persuasive evidence of an arrangement exists, (2) title transfers to the customer, (3) the sales price charged is fixed or determinable, and (4) collection is reasonably assured. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
In connection with the sales of our products, we often provide certain supply chain management services to our JIT customers. These services include the timely replenishment of products at the customer site, while also minimizing the customer’s on-hand inventory. We provide these services contemporaneously with the delivery of the product, and as such, once the product is delivered, we do not have a post-delivery obligation to provide services to the customer. Accordingly, the price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the product, at which point we have satisfied our obligations to the customer. We do not account for these services as a separate element, as the services do not have stand-alone value and cannot be separated from the product element of the arrangement. Additionally, we do not present service revenues apart from product revenues, as the service revenues represent less than
10%
of our consolidated net sales.
We report revenue on a gross or net basis, based on management’s assessment of whether we act as a principal or agent in the transaction, in our presentation of net sales and costs of sales. If we are the principal in the transaction and have the risks and rewards of ownership, the transactions are recorded as gross in the consolidated statements of comprehensive income. If we do not act as a principal in the transaction, the transactions are recorded on a net basis in the consolidated statements of comprehensive income. The majority of our revenue is recorded on a gross basis with the exception of certain gas, energy and chemical manager service contracts that are recorded as net revenue.
We also enter into sales rebates and profit sharing arrangements. Such customer incentives are accounted for as a reduction to gross sales and recorded based upon estimates at the time products are sold. These estimates are based upon
historical experience for similar programs and products. We review such rebates and profit sharing arrangements on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.
We provide allowances for credits and returns based on historic experience and adjust such allowances as considered necessary. To date, such provisions have been within the range of our expectations and the allowance established. Sales tax collected from customers is excluded from net sales in the consolidated statements of comprehensive income.
In connection with our JIT supply chain management programs, at times, we assume customer inventory on a consignment basis. This consigned inventory remains the property of the customer but is managed and distributed by us. We earn a fixed fee per unit on each shipment of the consigned inventory; such amounts represent less than
1%
of consolidated net sales.
Shipping and Handling Costs
We record revenue for shipping and handling billed to our customers. Shipping and handling revenues were
$5.1 million
,
$7.8 million
and
$7.0 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively.
Shipping and handling costs are primarily included in cost of sales. Total shipping and handling costs were
$28.0 million
,
$33.2 million
and
$24.8 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which temporary differences become deductible or includible in taxable income. We consider projected future taxable income and tax planning strategies in our assessment. Our foreign subsidiaries are taxed in local jurisdictions at local statutory rates. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.
Concentration of Credit Risk and Significant Vendors and Customers
We maintain our cash and cash equivalents in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts and do not believe we are exposed to any significant credit risk from cash and cash equivalents.
We purchase our products on credit terms from vendors located throughout North America and Europe. For the years ended
September 30, 2016
,
2015
and
2014
, we made
12%
,
13%
, and
15%
, respectively, of our purchases from Precision Castparts Corp. and the amounts payable to this vendor were
3%
and
7%
of total accounts payable at
September 30, 2016
and
2015
, respectively. Additionally, for the years ended
September 30, 2016
,
2015
and
2014
, we made
8%
,
9%
, and
15%
, respectively, of our purchases from Alcoa Fastening Systems and the amounts payable to this vendor were
3%
and
6%
of total accounts payable at
September 30, 2016
and
2015
, respectively. The majority of the products we sell are available through multiple channels and, therefore, this reduces the risk related to any vendor relationship.
For the years ended
September 30, 2016
,
2015
and
2014
, we did not derive
10%
or more of our total net sales from any individual customer. Government sales, which were derived from various military parts procurement agencies such as the
U.S. Defense Logistics Agency, or from defense contractors buying on their behalf, comprised
15%
,
14%
and
9%
of our net sales during fiscal
2016
,
2015
and
2014
, respectively.
Foreign Currency Translation and Transactions
The financial statements of foreign subsidiaries and affiliates where the local currency is the functional currency are translated into U.S. Dollars using exchange rates in effect at each period-end for assets and liabilities and average exchange rates during the period for results of operations. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are reported as other income (expense), net in the consolidated statements of comprehensive income. For the years ended
September 30, 2016
,
2015
and
2014
, realized foreign currency transaction gains were
$3.2 million
,
$0.6 million
and
$1.6 million
, respectively.
Stock-Based Compensation
We recognize all stock-based awards to employees and directors as stock-based compensation expense based upon their fair values on the date of grant.
We estimate the fair value of stock-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense during the requisite service periods. We have estimated the fair value for each option award as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the expected life of the award and the expected volatility of our stock price. We recognize the stock-based compensation expense over the requisite service period (generally a vesting term of
three years
) using the graded vesting method for performance condition awards and the straight line method for service condition only awards, which is generally a vesting term of
three years
. Stock options typically have a contractual term of
10 years
. The stock options granted have an exercise price equal to the closing stock price of our common stock on the grant date. Compensation expense for restricted stock units and awards are based on the market price of the shares underlying the awards on the grant date. Compensation expense for performance based awards reflects the estimated probability that the performance condition will be met. Compensation expense for awards with total stockholder return metrics reflects the fair value calculated using the Monte Carlo simulation model, which incorporats stock price correlation and other variables over the time horizons matching the performance periods.
Net Income or Net Loss Per Share
Basic net income or net loss per share is computed by dividing net income or net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income or net loss per share includes the dilutive effect of both outstanding stock options and restricted shares, calculated using the treasury stock method. Assumed proceeds from the in-the-money options include the tax benefits, net of shortfalls, calculated under the “as-if” method.
Note 3. Recent Accounting Pronouncements
Changes to generally accepted accounting principles in the United States (GAAP) are established by the Financial Accounting Standards Board (FASB), in the form of Accounting Standards Updates (ASUs), to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.
New Accounting Standards Updates
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting
. ASU 2016-07 eliminates the requirement that when an investment subsequently qualifies for use of the equity method as a result of an increase in level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and to adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. In addition, ASU 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We do not anticipate the adoption of ASU 2016-07 will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. ASU 2016-02 also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. A modified retrospective transition approach shall be used when adopting ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods therein, with early application permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted for certain provisions. We are currently evaluating the impact of ASU 2016-01 related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements.
In September 2015, FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. ASU 2015-16 should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. As of September 30, 2016, we did not have any provisional amounts outstanding from prior acquisitions.
In August 2015, the FASB issued ASU 2015-15,
Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. ASU 2015-15 states entities should present debt issuance costs as an asset, and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We do not anticipate the adoption of ASU 2015-15 will have a significant impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which requires an entity to measure inventory at the lower of cost and net realizable value, and eliminates current GAAP options for measuring market value. ASU 2015-11 defines realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-11 can only be applied prospectively. We are currently evaluating the impact of the adoption of ASU 2015-11 on our financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost
. The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU
2105-03 is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 will reduce our non-current assets and non-current debt by the amount of our net deferred financing costs in our consolidated balance sheets but will not impact our consolidated statements of comprehensive income and consolidated statements of cash flow. As of September 30, 2016 and 2015, our deferred financing costs, net was
$8.7 million
and
$11.2 million
, respectively.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which amends ASC Subtopic 205-40 to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. Specifically, ASU 2014-15 (1) provides a definition of the term “substantial doubt,” (2) requires an evaluation every reporting period, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that financial statements are issued. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. We do not anticipate the adoption of ASU 2014-15 will have a significant impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12,
Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period
. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply ASU 2014-12 either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. We do not anticipate the adoption of ASU 2014-12 will have a significant impact on our consolidated financial statements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12, which the FASB issued in
August 2015, March 2016, April 2016, May 2016 and May 2016, respectively (collectively the “amended ASU 2014-09”). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue when each performance obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for the amended ASU 2014-09 is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the effect of the adoption of the amended ASU 2014-09 on our consolidated financial statements and the implementation approach to be used.
Adopted Accounting Standards Updates
Effective July 1, 2016, we elected to early adopt ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
on a prospective basis. This guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The adoption of ASU 2015-17 had no impact on our results of operations or cash flows for the year ended September 30, 2016.
Effective January 1, 2016, we elected to early adopt ASU 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
. This guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with
its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. We elected to adopt the amendments prospectively for all arrangements entered into or materially modified after January 1, 2016. The adoption of ASU 2015-05 does not have a significant impact on our consolidated financial statements. We record the qualified cloud-based software license fees as software intangible assets instead of prepaid expenses, and amortize them over the contract length as software amortization expense instead of service expense. Both amortization expense and service expense are included in the selling, general and administrative expense line of our consolidated statement of comprehensive income, resulting in no significant impact on our income from operations, net income or cash flows.
Note 4. Acquisitions
2014 Acquisition
On February 28, 2014, through our wholly owned subsidiary, Flyer Acquisition Corp., we acquired
100%
of the outstanding shares of Haas. The results of Haas since the acquisition have been included in the consolidated financial statements and are included in the North America and Rest of World segments based on actual results of the reporting units.
Haas consolidated net sales included in the financial statements since the acquisition date was
$591.8 million
and
$356.2 million
in the years ended September 2015 and 2014, respectively. Haas consolidated net loss or income included in the financial statements since the acquisition date was a net loss of
$0.6 million
and a net income of
$2.9 million
in the years ended September 2015 and 2014, respectively.
Pro Forma Consolidated Results
The following pro forma information presents the financial results as if the acquisition of Haas had occurred on October 1, 2013. The pro forma results do not include any anticipated cost synergies, costs or other effects of the planned integration of the acquisition. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated, nor are they indicative of future operating results. We did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination in the reported pro-forma net sales and earnings (in thousands except per share data).
|
|
|
|
|
|
Year Ended September 30,
|
|
2014
|
Pro forma net sales
|
$
|
1,591,538
|
|
Pro forma net income
|
$
|
102,652
|
|
Pro forma net income per common share amounts:
|
|
Basic net income
|
$
|
1.07
|
|
Diluted net income
|
$
|
1.05
|
|
Note 5. Inventory
Our inventory is comprised solely of finished goods.
As of
September 30, 2016
and
2015
, our E&O reserve was
$250.7
million and
$264.1
million, respectively. Charges to cost of sales for increase in our E&O reserves and related items were
$14.6
million,
$95.1
million and
$17.7
million in the years ended
September 30, 2016
,
2015
and
2014
, respectively. We believe that these amounts appropriately reflect the risk of E&O inventory inherent in our business.
In the three months ended September 30, 2015, we determined that inventory previously purchased in connection with a specific program which was subsequently terminated, had no alternative use. Prior to such determination during the year ended September 30, 2015, we attempted to negotiate a sale of such inventory with our customer for whom such inventory was purchased, as well as market the inventory through other channels, and believed the full cost of this inventory was recoverable. However, in the fourth quarter of 2015, we determined such inventory was not marketable and recorded a reserve of
$33.0 million
.
In the fourth quarter of 2015, management implemented a new strategy of providing integrated supply chain services more tailored to customer demand through long-term contracts and focused forecasted consumption including changes to our inventory purchasing strategy, holding inventory for shorter periods and the planned scrapping of long dated inventory. The new strategy and updates for fiscal 2015 sales activities led to changes in the sell through rates, holding period of aged inventory and others estimates used in the E&O reserve for our hardware inventory, which increased our E&O inventory reserves by
$43.8 million
.
Note 6. Related Party Transactions
We entered into a management agreement with The Carlyle Group to provide certain financial, strategic advisory and consultancy services. Under this management agreement, we are obligated to pay The Carlyle Group, or a designee thereof, an annual management fee of
$1.0 million
plus fees and expenses associated with company-related meetings. We incurred expense of
$1.3 million
,
$1.1 million
and
$1.1 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively, related to this management agreement. These amounts were paid to The Carlyle Group during the years ended
September 30, 2016
,
2015
and
2014
.
We lease several office and warehouse facilities under operating lease agreements from entities controlled by our former chief executive officer, who is also our Chairman of the Board. Rent expense on these facilities was
$1.8 million
,
$1.7 million
and
$1.8 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively (see Note 17).
Note 7. Property and Equipment, net
Property and equipment, net, consist of the following at
September 30
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land, buildings and improvements
|
$
|
29,392
|
|
|
$
|
27,152
|
|
Machinery and equipment
|
18,288
|
|
|
17,874
|
|
Furniture and fixtures
|
6,319
|
|
|
5,768
|
|
Vehicles
|
1,288
|
|
|
1,339
|
|
Computer hardware and software
|
36,274
|
|
|
33,226
|
|
Construction in progress
|
11,333
|
|
|
2,186
|
|
|
102,894
|
|
|
87,545
|
|
Less: accumulated depreciation
|
(52,369
|
)
|
|
(40,569
|
)
|
Property and equipment, net
|
$
|
50,525
|
|
|
$
|
46,976
|
|
At
September 30, 2016
and
2015
, property and equipment included assets of
$8.9 million
, and
$7.1 million
respectively, acquired under capital lease arrangements. Accumulated amortization of assets acquired under capital leases was
$5.8 million
and
$4.1 million
as of
September 30, 2016
and
2015
, respectively.
Depreciation and amortization expense for property and equipment was
$12.1 million
,
$11.8 million
and
$8.8 million
during the years ended
September 30, 2016
,
2015
and
2014
, respectively (including amortization expense of
$1.5 million
,
$1.5 million
and
$1.4 million
on assets acquired under capital leases for the years ended
September 30, 2016
,
2015
and
2014
, respectively).
Note 8. Goodwill and Intangible Assets, net
A reconciliation of our goodwill balance is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America,
September 30,
|
|
Rest of World
September 30,
|
|
Consolidated
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Beginning balance, gross
|
$
|
779,647
|
|
|
$
|
779,395
|
|
|
$
|
74,711
|
|
|
$
|
82,180
|
|
|
$
|
854,358
|
|
|
$
|
861,575
|
|
Accumulated impairment
|
$
|
(263,771
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(263,771
|
)
|
|
$
|
—
|
|
Beginning balance, net
|
$
|
515,876
|
|
|
$
|
779,395
|
|
|
$
|
74,711
|
|
|
$
|
82,180
|
|
|
$
|
590,587
|
|
|
$
|
861,575
|
|
Foreign currency translation
|
—
|
|
|
65
|
|
|
(10,722
|
)
|
|
(7,532
|
)
|
|
(10,722
|
)
|
|
(7,467
|
)
|
Haas acquisition
|
—
|
|
|
187
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
250
|
|
Goodwill impairment
|
—
|
|
|
(263,771
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(263,771
|
)
|
Ending balance, gross
|
$
|
779,647
|
|
|
$
|
779,647
|
|
|
$
|
63,989
|
|
|
$
|
74,711
|
|
|
$
|
843,636
|
|
|
$
|
854,358
|
|
Accumulated impairment
|
$
|
(263,771
|
)
|
|
$
|
(263,771
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(263,771
|
)
|
|
$
|
(263,771
|
)
|
Ending balance, net
|
$
|
515,876
|
|
|
$
|
515,876
|
|
|
$
|
63,989
|
|
|
$
|
74,711
|
|
|
$
|
579,865
|
|
|
$
|
590,587
|
|
We performed our Step 1 goodwill impairment tests on July 1, 2016. The results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values.
We performed our Step 1 goodwill impairment test on July 1, 2015. The results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values, with the exception of the North America Hardware reporting unit within our North America segment. The impact of market pressures such as decreasing revenue and underperformance relative to forecast adversely impacted the fair value of this reporting unit. As a result, we proceeded to Step 2 of the goodwill impairment analysis using the most appropriate valuation methods including the income approach, and compared the implied value of North America Hardware’s goodwill with the carrying value of its goodwill, and since the carrying value exceeded the implied fair value, we recorded a non-cash impairment charge of
$263.8 million
in the three months ended September 30, 2015.
As of
September 30, 2016
and
2015
, the gross amounts and accumulated amortization of intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Customer relationships (12 to 20 year life)
|
$
|
173,437
|
|
|
$
|
(53,829
|
)
|
|
$
|
178,858
|
|
|
$
|
(45,057
|
)
|
Trademarks (5 years to indefinite life)
|
53,034
|
|
|
(2,618
|
)
|
|
56,153
|
|
|
(3,661
|
)
|
Backlog (2 year life)
|
4,327
|
|
|
(4,327
|
)
|
|
4,327
|
|
|
(4,327
|
)
|
Non-compete agreements (3 to 4 year life)
|
1,457
|
|
|
(1,457
|
)
|
|
1,457
|
|
|
(1,457
|
)
|
Technology (10 year life)
|
32,481
|
|
|
(8,391
|
)
|
|
33,607
|
|
|
(4,511
|
)
|
Total intangible assets
|
$
|
264,736
|
|
|
$
|
(70,622
|
)
|
|
$
|
274,402
|
|
|
$
|
(59,013
|
)
|
Estimated future intangible amortization expense at
September 30, 2016
is as follows (in thousands):
|
|
|
|
|
2017
|
$
|
14,582
|
|
2018
|
14,582
|
|
2019
|
14,582
|
|
2020
|
14,448
|
|
2021
|
14,045
|
|
Thereafter
|
84,042
|
|
|
$
|
156,281
|
|
Amortization expense included in the statements of comprehensive income for the years ended
September 30, 2016
,
2015
and
2014
was
$15.8 million
,
$15.9 million
and
$12.6 million
, respectively. In addition to amortizing intangibles, we assigned an indefinite life to the Wesco Aircraft trademark. As of
September 30, 2016
and
2015
, the trademark had a carrying value of
$37.8 million
.
Note 9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Accrued compensation and related expenses
|
$
|
10,067
|
|
|
$
|
16,054
|
|
Accrued commissions
|
986
|
|
|
2,127
|
|
Accrual for professional fees
|
1,069
|
|
|
2,438
|
|
Accrued customer rebates
|
3,931
|
|
|
640
|
|
Accrued taxes (property, sales and use)
|
150
|
|
|
1,046
|
|
Accrued interest
|
125
|
|
|
1,241
|
|
Accrual for undermarket contracts
|
1,164
|
|
|
1,671
|
|
Accrued profit sharing
|
325
|
|
|
370
|
|
Accrued freight and duty
|
781
|
|
|
732
|
|
Accrual for restructuring
|
1,164
|
|
|
4,490
|
|
Interest rate swap
|
1,059
|
|
|
1,903
|
|
Other accruals
|
5,603
|
|
|
6,184
|
|
Accrued expenses and other current liabilities
|
$
|
26,424
|
|
|
$
|
38,896
|
|
Note 10. Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable and payable, accrued and other current liabilities and a revolving facility. The carrying amounts of these instruments approximate fair value because of their short-term maturities. The fair value of interest rate swap agreements is determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement. The fair value of the long-term debt instruments is determined using current applicable rates for similar instruments as of the balance sheet date, a Level 2 measurement.
The carrying amounts and fair values of the debt instruments and interest rate swap hedge instrument were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
$625,000 term loan A
|
$
|
401,344
|
|
|
$
|
401,344
|
|
|
$
|
477,344
|
|
|
$
|
476,150
|
|
$525,000 term loan B
|
440,562
|
|
|
435,716
|
|
|
475,562
|
|
|
467,002
|
|
$200,000 revolving facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate swap hedge liabilities
|
6,672
|
|
|
6,672
|
|
|
4,088
|
|
|
4,088
|
|
Note 11. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
$625,000 term loan A
|
$
|
401,344
|
|
|
$
|
477,344
|
|
$525,000 term loan B
|
440,562
|
|
|
475,562
|
|
$200,000 revolving facility
|
—
|
|
|
—
|
|
|
841,906
|
|
|
952,906
|
|
Less: current portion
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
841,906
|
|
|
$
|
952,906
|
|
Aggregate maturities of long-term debt as of
September 30, 2016
are as follows (in thousands):
|
|
|
|
|
Years Ended September 30,
|
|
2017
|
$
|
—
|
|
2018
|
401,344
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
440,562
|
|
|
$
|
841,906
|
|
Existing Senior Secured Credit Facilities
On October 4, 2016, we entered into the Fourth Amendment (the Amendment) to our credit agreement, dated as of December 7, 2012, by and among the Company, Wesco Aircraft Hardware (the Borrower) and the lenders and agents party thereto (as amended prior to the Amendment, the Existing Credit Agreement; the Existing Credit Agreement, as amended by the Amendment, the Credit Agreement). The Amendment modified the Existing Credit Agreement to replace the Borrower’s existing revolving credit facility with a new revolving credit facility in an aggregate principal amount of
$180.0 million
and the Borrower’s existing senior secured term loan A facility with a new senior secured term loan A facility in an aggregate principal amount of
$400.0 million
. (See Note 23 for a discussion of the Credit Facilities as amended by the Amendment).
As of September 30, 2016, our Existing Credit Agreement provided for (1) a
$625.0 million
term loan A facility (the existing term loan A facility), (2) a
$200.0 million
revolving credit facility (the existing revolving facility) and (3) a
$525.0 million
senior secured term loan B facility (the term loan B facility). We refer to the term loan B facility, together with the existing term loan A facility and the existing revolving facility, as the Existing Credit Facilities.
As of
September 30, 2016
, our outstanding indebtedness under our Existing Credit Facilities was
$841.9 million
, which consisted of (1)
$401.3 million
of indebtedness under the existing term loan A facility and (2)
$440.6 million
of indebtedness under the term loan B facility. As of
September 30, 2016
,
$200.0 million
was available for borrowing under the existing revolving facility, of which we could borrow up to
$146.4 million
without breaching any covenants contained in the agreements governing our indebtedness.
The interest rate for the existing term loan A facility was based on our Consolidated Total Leverage Ratio (as defined in the Existing Credit Agreement) as was determined in the most recently delivered financial statements, with the respective margins ranging from
1.75%
to
2.50%
for Eurocurrency loans and
0.75%
to
1.50%
for alternate base rate (ABR) loans. The existing term loan A facility amortized in equal quarterly installments of
1.25%
of the original principal amount of
$625.0 million
for the first year, escalating to quarterly installments of
2.50%
of the original principal amount of
$625.0 million
by the fifth year, with the balance due at maturity on December 7, 2017. As of
September 30, 2016
, the interest rate for borrowings under the existing term loan A facility was
5.00%
.
The interest rate for the term loan B facility had a margin of
2.50%
per annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of
0.75%
per annum) or
1.50%
per annum for ABR loans (subject to a minimum ABR floor
of
1.75%
per annum). The term loan B facility amortized in equal quarterly installments of
0.25%
of the original principal amount of
$525.0 million
, with the balance due at maturity on February 28, 2021. As of
September 30, 2016
, the interest rate for borrowings under the term loan B facility was
3.34%
. In July 2015, we entered into interest rate swap agreements relating to this indebtedness, which are described in greater detail in Note 12.
The interest rate for the existing revolving facility was based on our Consolidated Total Leverage Ratio as determined in the most recently delivered financial statements, with the respective margins ranging from
1.75%
to
2.50%
for Eurocurrency loans and
0.75%
to
1.50%
for ABR loans. The existing revolving facility was due to expire on December 7, 2017.
Our borrowings under the Existing Credit Facilities were guaranteed by us and all of our direct and indirect, wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a first lien on substantially all of our assets and the assets of our guarantor subsidiaries, including capital stock of the subsidiaries (in each case, subject to certain exceptions).
During the year ended
September 30, 2016
, we made voluntary prepayments totaling
$76.0 million
on our existing term loan A facility and
$35.0 million
on our term loan B facility, which, with respect to the term loan B facility, have been applied to future required quarterly payments and to the amount due upon maturity.
Under the terms and definitions applicable to the Existing Credit Facilities as of
September 30, 2016
, our Consolidated Total Leverage Ratio (as defined in the Existing Credit Agreement) could not exceed
4.5
(with step-downs on such ratio during future periods) and our Consolidated Net Interest Coverage Ratio (as defined in the Existing Credit Agreement) could not be less than
2.25
. The Existing Credit Facilities also contained customary negative covenants, including restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions with affiliates. As of
September 30, 2016
, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was
3.78
and our Consolidated Net Interest Coverage Ratio was
6.30
.
UK Line of Credit
Our subsidiary, Wesco Aircraft Europe, Ltd, has a
£7.0 million
(
$9.1 million
based on the
September 30, 2016
exchange rate) line of credit that automatically renews annually on October 1. The line of credit bears interest based on the
base rate
plus an applicable margin of
1.65%
. As of
September 30, 2016
, the full
£7.0 million
was available for borrowing under the UK line of credit without breaching any covenants contained in the agreements governing our indebtedness.
Note 12. Derivative Financial Instruments
We use derivative instruments primarily to manage exposures to foreign currency exchange rates and interest rates. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign exchange rates and changes in interest rates. Our derivatives expose us to credit risk to the extent that the counter-parties may be unable to meet the terms of the agreement. We, however, seek to mitigate such risks by limiting our counter-parties to major financial institutions. In addition, the potential risk of loss with any one counter-party resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counter-parties.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In July 2015, we entered into two interest rate swap agreements, which we designated as cash flow hedges, in order to reduce our exposure to variability in cash flows related to interest payments on a portion of our outstanding debt. The first interest rate swap agreement has an amortizing notional amount, which was
425.0 million
as of
September 30, 2016
, and matures on September 30, 2017, giving us the contractual right to pay a fixed interest rate of
1.21%
plus the applicable margin under the term loan B facility (as defined in Note 11 above; see Note 11 for the applicable margin). The second interest rate swap agreement also has an amortizing notional amount, initially
$375.0 million
, giving us the contractual right to pay a fixed interest rate of
2.2625%
plus the applicable margin under the term loan B facility, which is effective on September 29, 2017 and matures on September 30, 2019.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended
September 30, 2016
, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized immediately in earnings. During the year ended
September 30, 2016
, we did not record any hedge ineffectiveness in earnings. No portion of our interest rate swap agreements is excluded from the assessment of hedge effectiveness.
Amounts reported in accumulated other comprehensive income (loss) (AOCI) related to derivatives are reclassified to interest expense as interest payments are made on our variable-rate debt. As of
September 30, 2016
, we expected to reclassify approximately
$0.7 million
from accumulated other comprehensive loss to earnings as an increase to interest expense over the next
12 months
when the underlying hedged item impacts earnings.
Non-Designated Derivatives
On December 16, 2015, we entered into
one
foreign currency forward contract to partially reduce our exposure to foreign currency fluctuations for a subsidiary's net monetary assets, which are denominated in a foreign currency. The derivative is not designated as a hedging instrument. The change in its fair value is recognized as periodic gain or loss in the other income (loss), net line of our consolidated statement of earnings and comprehensive income. This foreign currency forward contract expired on September 28, 2016.
The following table summarizes the notional principal amounts at
September 30, 2016
and
2015
of our interest rate swap agreements discussed above (in thousands). We did not have foreign exchange forward contracts as of
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Notional
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
Instruments designated as accounting hedges:
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
425,000
|
|
|
$
|
475,000
|
|
The following table provides the location and fair value amounts of our hedge instruments, which are reported in our consolidated balance sheets as of
September 30, 2016
and
2015
(in thousands). We did not have foreign exchange forward contracts as of
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30,
|
Liability Derivatives
|
Balance Sheet Locations
|
|
2016
|
|
2015
|
Instruments designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Accrued expenses and other current liabilities
|
|
$
|
1,057
|
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
5,615
|
|
|
$
|
2,186
|
|
The following table provides the losses of our cash flow hedging instruments (net of income tax benefit), which were transferred from AOCI to our consolidated statement of comprehensive income (loss) for the years ended
September 30, 2016
,
2015
and
2014
(in thousands). We did not have any hedge instruments in the year ended September 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in Consolidated Statement
|
|
Years Ended September 30,
|
Cash Flow Derivatives
|
Of Comprehensive (Loss) Income
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Interest expense, net
|
|
$
|
(1,344
|
)
|
|
$
|
(4
|
)
|
|
—
|
|
The following table provides the effective portion of the losses of our cash flow hedge instruments which are recognized (net of income taxes) in other comprehensive loss for the years ended
September 30, 2016
,
2015
and
2014
(in thousands). We did not have any hedge instruments in the year ended September 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
Cash Flow Derivatives
|
|
2016
|
|
2015
|
|
2014
|
Interest rate swap contracts
|
|
$
|
(2,973
|
)
|
|
$
|
(2,581
|
)
|
|
—
|
|
The following table provides a summary of changes to our accumulated other comprehensive income (loss) related to our cash flow hedging instruments (net of income taxes) during the years ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
AOCI - Unrealized Gain (Loss) on Hedging Instruments
|
|
2016
|
|
2015
|
Balance at Beginning of Period
|
|
$
|
(2,577
|
)
|
|
$
|
—
|
|
Change in fair value of hedging instruments
|
|
(2,973
|
)
|
|
(2,581
|
)
|
Amounts reclassified to earnings
|
|
1,344
|
|
|
4
|
|
Net current period other comprehensive income
|
|
(1,629
|
)
|
|
(2,577
|
)
|
Balance at End of Period
|
|
$
|
(4,206
|
)
|
|
$
|
(2,577
|
)
|
The following table provides the pretax effect of our derivative instruments not designated as hedging instruments on our consolidated earnings and comprehensive income for the years ended
September 30, 2016
,
2015
and
2014
(in thousands). We did not have such derivative instruments in the years ended
September 30, 2015
and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments Not Designated As Hedging Instruments
|
|
Location in Consolidated Statement of Comprehensive Income
|
|
Years Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign exchange contract
|
|
Other income (loss), net
|
|
$
|
(5,606
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Note 13. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for each period were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
Year Ended September 30, 2015
|
|
Year Ended September 30, 2014
|
|
Before Tax
|
|
Tax
|
|
After Tax
|
|
Before Tax
|
|
Tax
|
|
After Tax
|
|
Before Tax
|
|
Tax
|
|
After Tax
|
Change in unrealized holding losses on derivatives
|
(4,716
|
)
|
|
1,743
|
|
|
(2,973
|
)
|
|
(4,094
|
)
|
|
1,513
|
|
|
(2,581
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Less: adjustment for losses on derivatives included in net income
|
2,132
|
|
|
(788
|
)
|
|
1,344
|
|
|
6
|
|
|
(2
|
)
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in net foreign currency translation adjustment
|
(39,211
|
)
|
|
—
|
|
|
(39,211
|
)
|
|
(25,322
|
)
|
|
—
|
|
|
(25,322
|
)
|
|
(633
|
)
|
|
—
|
|
|
(633
|
)
|
Other comprehensive loss
|
$
|
(41,795
|
)
|
|
$
|
955
|
|
|
$
|
(40,840
|
)
|
|
$
|
(29,410
|
)
|
|
$
|
1,511
|
|
|
$
|
(27,899
|
)
|
|
$
|
(633
|
)
|
|
$
|
—
|
|
|
$
|
(633
|
)
|
See Note 12 for the amounts of losses on derivatives reclassified out of accumulated other comprehensive loss into the consolidated statements of income, with presentation location, for each period. We did not have any hedge instruments in the year ended September 30, 2014.
The changes in accumulated other comprehensive loss by component and related tax effects for each period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized
Losses on
Derivative
Instruments
|
|
Total
|
Balance at September 30, 2013
|
$
|
(10,189
|
)
|
|
$
|
—
|
|
|
$
|
(10,189
|
)
|
Other Comprehensive loss before reclassifications
|
(633
|
)
|
|
—
|
|
|
(633
|
)
|
Tax effects
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive loss
|
(633
|
)
|
|
—
|
|
|
(633
|
)
|
Balance at September 30, 2014
|
$
|
(10,822
|
)
|
|
$
|
—
|
|
|
$
|
(10,822
|
)
|
Other Comprehensive loss before reclassifications
|
(25,322
|
)
|
|
(4,094
|
)
|
|
(29,416
|
)
|
Amounts reclassified out of accumulated other loss
|
—
|
|
|
6
|
|
|
6
|
|
Tax effects
|
—
|
|
|
1,511
|
|
|
1,511
|
|
Other comprehensive loss
|
(25,322
|
)
|
|
(2,577
|
)
|
|
(27,899
|
)
|
Balance at September 30, 2015
|
(36,144
|
)
|
|
(2,577
|
)
|
|
(38,721
|
)
|
Other Comprehensive loss before reclassifications
|
(39,211
|
)
|
|
(4,716
|
)
|
|
(43,927
|
)
|
Amounts reclassified out of accumulated other loss
|
—
|
|
|
2,132
|
|
|
2,132
|
|
Tax effects
|
—
|
|
|
955
|
|
|
955
|
|
Other comprehensive loss
|
(39,211
|
)
|
|
(1,629
|
)
|
|
(40,840
|
)
|
Balance at September 30, 2016
|
$
|
(75,355
|
)
|
|
$
|
(4,206
|
)
|
|
$
|
(79,561
|
)
|
Note 14. Net Income (Loss) Per Share
The following table presents net income (loss) per share and related information (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
Net income (loss)
|
$
|
91,378
|
|
|
$
|
(154,744
|
)
|
|
$
|
102,102
|
|
Basic weighted average shares outstanding
|
97,634,155
|
|
|
96,955,043
|
|
|
95,950,994
|
|
Dilutive effect of stock options and restricted shares
|
531,701
|
|
|
—
|
|
|
1,654,789
|
|
Dilutive weighted average shares outstanding
|
98,165,856
|
|
|
96,955,043
|
|
|
97,605,783
|
|
Basic net income (loss) per share
|
$
|
0.94
|
|
|
$
|
(1.60
|
)
|
|
$
|
1.06
|
|
Diluted net income (loss) per share
|
$
|
0.93
|
|
|
$
|
(1.60
|
)
|
|
$
|
1.05
|
|
Shares of common stock equivalents of
2.0 million
,
2.3 million
, and
0.5 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.
Note 15. Income Taxes
Income (loss) before benefit or provision for income taxes for the years ended
September 30, 2016
,
2015
and
2014
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
U.S. (loss) income
|
$
|
63,614
|
|
|
$
|
(242,864
|
)
|
|
$
|
112,841
|
|
Foreign income
|
61,976
|
|
|
1,248
|
|
|
44,067
|
|
Total
|
$
|
125,590
|
|
|
$
|
(241,616
|
)
|
|
$
|
156,908
|
|
The components of our income tax provision (benefit) for the years ended
September 30, 2016
,
2015
and
2014
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current provision
|
|
|
|
|
|
Federal
|
$
|
7,315
|
|
|
$
|
24,797
|
|
|
$
|
32,204
|
|
State and local
|
1,134
|
|
|
1,726
|
|
|
1,920
|
|
Foreign
|
12,482
|
|
|
13,247
|
|
|
9,625
|
|
Subtotal
|
20,931
|
|
|
39,770
|
|
|
43,749
|
|
Deferred provision (benefit)
|
|
|
|
|
|
Federal
|
10,979
|
|
|
(105,748
|
)
|
|
9,756
|
|
State and local
|
1,108
|
|
|
(12,543
|
)
|
|
1,497
|
|
Foreign
|
1,194
|
|
|
(8,351
|
)
|
|
(196
|
)
|
Subtotal
|
13,281
|
|
|
(126,642
|
)
|
|
11,057
|
|
Provision (benefit) for income taxes
|
$
|
34,212
|
|
|
$
|
(86,872
|
)
|
|
$
|
54,806
|
|
The tax impact associated with the exercise of employee stock options and vesting of restricted stock units for the year ended
September 30, 2016
will be recognized in the current tax return. For the year ended
September 30, 2016
,
$1.1 million
of tax benefit has been credited to additional paid in capital. For the years ended
September 30, 2015
and
2014
, a reduction to paid in capital of
$0.1 million
was recorded, and
$10.2 million
of tax benefit has been credited to additional paid in capital, respectively.
A reconciliation of our provision (benefit) for income taxes to the U.S. federal statutory rate is as follows for the years ended
September 30, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Provision(benefit) for income taxes at statutory rate
|
$
|
43,956
|
|
|
35.00
|
%
|
|
$
|
(84,566
|
)
|
|
35.00
|
%
|
|
$
|
54,917
|
|
|
35.00
|
%
|
State taxes, net of tax benefit
|
1,458
|
|
|
1.16
|
%
|
|
(7,002
|
)
|
|
2.90
|
%
|
|
2,221
|
|
|
1.42
|
%
|
Deemed foreign dividends
|
3,963
|
|
|
3.16
|
%
|
|
4,289
|
|
|
(1.78
|
)%
|
|
7,091
|
|
|
4.52
|
%
|
Nondeductible items
|
(1,912
|
)
|
|
(1.52
|
)%
|
|
(642
|
)
|
|
0.27
|
%
|
|
1,114
|
|
|
0.71
|
%
|
Other
|
(251
|
)
|
|
(0.21
|
)%
|
|
2,357
|
|
|
(0.98
|
)%
|
|
1,176
|
|
|
0.75
|
%
|
Impact of foreign operations
|
(8,015
|
)
|
|
(6.38
|
)%
|
|
2,125
|
|
|
(0.88
|
)%
|
|
(5,707
|
)
|
|
(3.64
|
)%
|
Foreign tax credit
|
(4,313
|
)
|
|
(3.43
|
)%
|
|
(4,205
|
)
|
|
1.74
|
%
|
|
(5,329
|
)
|
|
(3.40
|
)%
|
Tax contingencies
|
(674
|
)
|
|
(0.54
|
)%
|
|
772
|
|
|
(0.32
|
)%
|
|
(677
|
)
|
|
(0.43
|
)%
|
Actual provision(benefit) for income taxes
|
$
|
34,212
|
|
|
27.24
|
%
|
|
$
|
(86,872
|
)
|
|
35.95
|
%
|
|
$
|
54,806
|
|
|
34.93
|
%
|
In November 2015, The FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new accounting guidance amends the presentation of deferred income taxes on our Consolidated Balance Sheet such that they are presented entirely as non-current assets and liabilities. As permitted by the standard, we early adopted the new presentation prospectively, beginning July 1, 2016. Consistent with our prospective adoption, the presentation of deferred income tax assets and liabilities as of September 30, 2015 was not restated.
As of
September 30, 2016
and
2015
, the components of deferred income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets - Current
|
|
|
|
Inventories
|
$
|
—
|
|
|
$
|
86,812
|
|
Reserves and other accruals
|
—
|
|
|
417
|
|
Compensation accruals
|
—
|
|
|
2,965
|
|
Other
|
—
|
|
|
1,123
|
|
Deferred tax assets - Non-current
|
|
|
|
Inventories
|
88,000
|
|
|
—
|
|
Reserves and other accruals
|
412
|
|
|
—
|
|
Compensation accruals
|
1,060
|
|
|
—
|
|
Stock options
|
3,674
|
|
|
3,256
|
|
Net operating losses and tax credits
|
16,827
|
|
|
14,523
|
|
Other
|
2,119
|
|
|
419
|
|
Total deferred tax assets
|
112,092
|
|
|
109,515
|
|
Deferred tax (liabilities) - Non-current
|
|
|
|
Property and equipment
|
(355
|
)
|
|
(1,937
|
)
|
Deferred financing costs
|
(38
|
)
|
|
4
|
|
Goodwill and intangible assets
|
(52,072
|
)
|
|
(36,069
|
)
|
Total deferred tax liabilities - non-current
|
(52,465
|
)
|
|
(38,002
|
)
|
Valuation allowance
|
(5,548
|
)
|
|
(5,961
|
)
|
Net deferred tax assets (liabilities)
|
$
|
54,079
|
|
|
$
|
65,552
|
|
As of
September 30, 2016
, we had state net operating loss carryforwards of
$3.0 million
which will begin to expire in 2025, and foreign net operating loss carryforwards of
$11.8 million
which will begin to expire in 2021. As of
September 30, 2016
, we had U.S. foreign tax credit carryforwards of
$13.6 million
which will begin to expire in 2021.
We are subject to U.S. federal income tax as well as income taxes in various state and foreign jurisdictions. The earliest tax year still subject to examination by a significant taxing jurisdiction is September 30, 2012.
The undistributed earnings of our foreign subsidiaries, which amount to
$87.0 million
are considered to be indefinitely reinvested and
no
provision for federal or state and local taxes or foreign withholding taxes has been provided on such earnings. The taxes associated with the undistributed earnings would be between
$15.0 million
and
$20.0 million
.
We determine whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We classify gross interest and penalties and unrecognized tax benefits as non-current liabilities in the consolidated balance sheets. As of
September 30, 2016
, the total amount of gross unrecognized tax benefits was
$2.5 million
, including
$0.3 million
of interest and
$42,000
of penalties, all of which would impact the effective tax rate if recognized. It is reasonably possible that within the next twelve months,
$86,000
may be recognized as a result of the lapsing of the statute of limitations.
The unrecognized tax benefits, which exclude interest and penalties, for the years ended
September 30, 2016
,
2015
and
September 30, 2014
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
$
|
2,725
|
|
|
$
|
1,901
|
|
|
$
|
—
|
|
Increases related to tax positions taken during a prior year
|
—
|
|
|
1,716
|
|
|
2,491
|
|
Decreases related to tax positions taken during a prior year
|
—
|
|
|
—
|
|
|
(590
|
)
|
Increases related to tax positions taken during the current year
|
—
|
|
|
—
|
|
|
—
|
|
Decreases related to settlements with taxing authorities
|
(579
|
)
|
|
—
|
|
|
—
|
|
Decreases related to expiration of statute of limitations
|
(113
|
)
|
|
(892
|
)
|
|
—
|
|
Changes due to translation of foreign currencies
|
133
|
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
2,166
|
|
|
$
|
2,725
|
|
|
$
|
1,901
|
|
We determine whether it is more likely than not that some or all of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which temporary differences become deductible or includible in taxable income. We consider projected future taxable income and tax planning strategies in our assessment. Based upon the level of historical income and projections for future taxable income, we believe it is more likely than not that we will not realize the benefits of the temporary differences related to certain Haas foreign tax credits and Haas foreign net operating losses. Therefore, a valuation allowance has been recorded against these deferred tax assets (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Valuation
Allowance
Recorded
During
The Period
|
|
Ending
Balance
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
Year ended September 30, 2016
|
$
|
5,961
|
|
|
$
|
(413
|
)
|
|
$
|
5,548
|
|
Year ended September 30, 2015
|
4,930
|
|
|
1,031
|
|
|
5,961
|
|
Year ended September 30, 2014
|
—
|
|
|
4,930
|
|
|
4,930
|
|
Note 16. Stock-Based and Other Compensation Arrangements
On January 27, 2015, our stockholders approved the 2014 Plan, which amended and restated our 2011 Equity Incentive Award Plan and authorized the issuance of a total of
5,717,584
shares. As of
September 30, 2016
, there were
4,399,512
shares remaining available for issuance under the 2014 Plan.
Stock Options
Our stock options are eligible to vest over
three years
in three equal annual installments, subject to continued employment on each vesting date. Vested options are exercisable at any time until
10 years
from the date of the option grant, subject to earlier expirations under certain terminations of service and other conditions. The stock options granted have an exercise price equal to the closing stock price of our common stock on the grant date.
Continuous Employment Conditions
At
September 30, 2016
, we have outstanding
598,665
unvested time-based stock options under the 2014 Plan or our prior equity incentive plans (collectively, the Plans), which will vest on the basis of continuous employment. All of the time-based options vest ratably during the period of service.
The following table sets forth the summary of options activity under the Plans (dollars in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Aggregate
Intrinsic
Value(1)
|
Options outstanding at September 30, 2015
|
3,242,018
|
|
|
$
|
12.09
|
|
|
5.15
|
|
$
|
8,954
|
|
Granted
|
656,247
|
|
|
$
|
12.07
|
|
|
|
|
|
Exercised
|
(798,740
|
)
|
|
$
|
7.94
|
|
|
|
|
|
Forfeited options
|
(399,368
|
)
|
|
$
|
17.12
|
|
|
|
|
|
Options outstanding at September 30, 2016
|
2,700,157
|
|
|
$
|
12.59
|
|
|
6.07
|
|
$
|
6,833
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2016
|
2,101,492
|
|
|
$
|
12.32
|
|
|
5.10
|
|
$
|
6,274
|
|
|
|
(1)
|
Aggregate intrinsic value is calculated based on the difference between our closing stock price at year end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised all their options on the fiscal year end date.
|
The total intrinsic value of options exercised during the years ended
September 30, 2016
,
2015
and
2014
was
$4.5 million
,
$1.5 million
and
$34.6 million
, respectively. For the years ended
September 30, 2016
,
2015
and
2014
, we recorded
$3.2 million
,
$3.6 million
and
$2.9 million
, respectively, of stock-based compensation expense related to these options that is included within selling, general and administrative expenses. At
September 30, 2016
, the unrecognized stock-based compensation related to these options was
$2.8 million
and is expected to be recognized over a weighted-average period of
1.5
years. Cash received from the exercise of stock options by us during the years ended
September 30, 2016
,
2015
and
2014
was
$6.3 million
,
$0.8 million
and
$9.6 million
, respectively.
Restricted Stock Units and Restricted Stock
In the year ended
September 30, 2016
, we granted
506,943
shares of restricted common stock to employees. These shares are eligible to vest over
three years
in three equal annual installments, subject to continued employment on each vesting date. During the years ended
September 30, 2016
,
2015
and
2014
, we granted
57,759
,
73,662
and
26,874
, respectively, of restricted common shares to our directors. During fiscal year
2016
, we granted performance-related restricted stock to certain executives, which vest after three years based on the achievement of a certain operational goal. The stock-based compensation expense for the performance awards is determined based on the probability of achieving the performance goal which is assessed by management on a quarterly basis until vesting. For the years ended
September 30, 2016
,
2015
and
2014
, we recorded
$5.3 million
,
$4.3 million
and
$2.6 million
, respectively, of stock-based compensation expense related to restricted stock that is included within selling, general and administrative expenses. The restricted stock awards do not contain any redemption provisions that are not within our control. Accordingly, these restricted stock awards have been accounted for as our stockholders’ equity. At
September 30, 2016
, the unrecognized stock-based compensation related to restricted stock awards was
$6.6 million
and is expected to be recognized over a weighted-average period of
1.8
years.
Restricted share activity during the year ended
September 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Fair Value
|
Outstanding at September 30, 2015
|
371,395
|
|
|
$
|
16.56
|
|
Granted(1)
|
564,702
|
|
|
12.29
|
|
Vested
|
(263,499
|
)
|
|
14.51
|
|
Forfeited
|
(66,154
|
)
|
|
15.15
|
|
Outstanding at September 30, 2016
|
606,444
|
|
|
$
|
13.63
|
|
|
|
(1)
|
Under the terms of their respective restricted stock award agreements, holders of restricted stock have the same voting rights as common stock shareholders; such rights exist even if the shares of restricted stock have not vested.
|
Fair value of our restricted shares is based on our closing stock price on the date of grant. The fair value of shares that were vested during the years ended
September 30, 2016
,
2015
and
2014
was
$3.5 million
,
$3.1 million
and
$2.8 million
, respectively. The fair value of shares that were granted during the years ended
September 30, 2016
,
2015
and
2014
was
$6.9 million
,
$8.8 million
and
$4.3 million
, respectively. The weighted average fair value at the grant date for restricted shares issued during the years ended
September 30, 2016
,
2015
and
2014
was
$12.29
,
$16.05
and
$20.88
, respectively. Due to tax deductions associated with option exercises and restricted share activities, we realized tax benefits of
$1.0 million
, a tax shortfall of
$0.1 million
and tax benefits of
$10.2 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively. The realized tax benefits were recorded to the additional paid in capital account in our stockholders’ equity.
Stock-Based Compensation
We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, risk-free interest rate and expected dividends.
We estimated expected volatility based on historical data of comparable public companies. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on guidelines provided in U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 110 and represents the average of the vesting tranches and contractual terms. The risk-free rate assumed in valuing the options is based on the U.S. Treasury rate in effect at the time of grant for the expected term of the option. We do not anticipate paying any cash dividends in the foreseeable future and, therefore, used an expected dividend yield of zero in the option pricing model. Compensation expense is recognized only for those options expected to vest with forfeitures estimated based on our historical experience and future expectations. Stock-based compensation awards are amortized on a straight line basis over a
three
year period.
The weighted average assumptions used to value the option grants are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected life (in years)
|
6.00
|
|
|
5.93
|
|
|
6.00
|
|
Volatility
|
35.00
|
%
|
|
38.51
|
%
|
|
45.00
|
%
|
Risk free interest rate
|
1.55
|
%
|
|
1.87
|
%
|
|
1.72
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
The weighted average fair value per option at the grant date for options issued during the years ended
September 30, 2016
,
2015
, and
2014
was
$4.38
,
$6.52
and
$9.36
, respectively.
Note 17. Commitments and Contingencies
Operating Leases
We lease office and warehouse facilities (certain of which are from related parties) and warehouse equipment under various non-cancelable operating leases that expire at various dates through October 31, 2026. Certain leases contain escalation clauses based on the Consumer Price Index. We are also committed under the terms of certain of these operating lease agreements to pay property taxes, insurance, utilities and maintenance costs.
Future minimum rental payments under operating leases as of
September 30, 2016
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Party
|
|
Related
Party
|
|
Total
|
Years Ended September 30,
|
|
|
|
|
|
2017
|
$
|
9,265
|
|
|
$
|
1,688
|
|
|
$
|
10,953
|
|
2018
|
8,752
|
|
|
1,701
|
|
|
10,453
|
|
2019
|
7,091
|
|
|
1,655
|
|
|
8,746
|
|
2020
|
5,845
|
|
|
156
|
|
|
6,001
|
|
2021
|
4,485
|
|
|
39
|
|
|
4,524
|
|
Thereafter
|
17,092
|
|
|
—
|
|
|
17,092
|
|
|
$
|
52,530
|
|
|
$
|
5,239
|
|
|
$
|
57,769
|
|
Total rent expense for the years ended
September 30, 2016
,
2015
and
2014
was
$11.9 million
,
$11.4 million
and
$6.6 million
, respectively.
Capital Lease Commitments
We lease certain equipment under capital lease agreements that require minimum monthly payments that expire at various dates through June 30, 2024. The gross amount of these leases at
September 30, 2016
and
September 30, 2015
are
$3.5 million
and
$3.3 million
, respectively.
Future minimum lease payments as of
September 30, 2016
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
1,482
|
|
2018
|
1,043
|
|
2019
|
504
|
|
2020
|
118
|
|
2021
|
89
|
|
Thereafter
|
245
|
|
|
3,481
|
|
Less: Interest
|
(301
|
)
|
Total
|
$
|
3,180
|
|
Indemnifications
In the normal course of business, we provide indemnifications to our customers with regard to certain products and enter into contracts and agreements that may contain representations and warranties and provide for general indemnifications. Our maximum exposure under many of these agreements is not quantifiable as we have a limited history of prior indemnification claims and payments. Payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, we could incur costs in the future as a result of indemnification obligations.
Litigation
We are involved in various legal matters that arise in the ordinary course of business. Management, after consulting with outside legal counsel, believes that the ultimate outcome of such matters will not have a material adverse effect on our financial position, results of operations or cash flows. There can be no assurance, however, that such actions will not be material or adversely affect our business, financial position and results of operations or cash flows.
Note 18. Employee Benefit Plan
We maintain a 401(k) defined contribution plan and a retirement saving plan for the benefit of our eligible employees. All U.S. full-time employees who have completed at least
one
full month of service and are at least
20 years
of age are eligible to participate in the plans. Eligible employees may elect to contribute up to
60%
of their eligible compensation. We made contributions of
$2.4 million
,
$2.1 million
and
$1.6 million
during the years ended
September 30, 2016
,
2015
and
2014
, respectively.
Note 19. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Cash payments for:
|
|
|
|
|
|
Interest
|
$
|
33,349
|
|
|
$
|
32,551
|
|
|
$
|
24,440
|
|
Income taxes
|
$
|
37,193
|
|
|
$
|
16,996
|
|
|
$
|
24,457
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Property and equipment acquired pursuant to capital leases
|
$
|
1,780
|
|
|
$
|
333
|
|
|
$
|
1,528
|
|
Property and equipment disposed of pursuant to termination of capital leases
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,414
|
)
|
Note 20. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for quarters ended December 31, 2014 through
September 30, 2016
is as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30,
2016
|
|
March 31,
2016
|
|
December 31,
2015
|
Quarter Ended:
|
|
|
|
|
|
|
|
Net sales
|
$
|
365,595
|
|
|
$
|
375,186
|
|
|
$
|
376,742
|
|
|
$
|
359,843
|
|
Gross profit
|
95,485
|
|
|
99,241
|
|
|
102,337
|
|
|
96,629
|
|
Net income
|
23,261
|
|
|
24,016
|
|
|
23,492
|
|
|
20,609
|
|
Basic net income per share (2)
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
Diluted net income per share (2)
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
June 30,
2015
|
|
March 31,
2015
|
|
December 31,
2014
|
Quarter Ended:
|
|
|
|
|
|
|
|
Net sales
|
$
|
369,654
|
|
|
$
|
368,706
|
|
|
$
|
385,559
|
|
|
$
|
373,696
|
|
Gross profit
|
6,131
|
|
|
103,355
|
|
|
109,086
|
|
|
105,923
|
|
Net (loss) income (1)
|
(213,999
|
)
|
|
16,479
|
|
|
23,046
|
|
|
19,730
|
|
Basic net (loss) income per share (2)
|
$
|
(2.21
|
)
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
Diluted net (loss) income per share (2)
|
$
|
(2.21
|
)
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
|
1.
|
During the three months ended September 30, 2015, we recorded charges to cost of sales of
$83.4 million
for the increase in our E&O reserve and related items, and a non-cash goodwill impairment charge of
$263.8 million
. See Note 2, Note 5 and Note 8 for additional information.
|
|
|
2.
|
Net income (loss) per share calculations for each quarter are based on the weighted average basic and diluted shares outstanding for that quarter and may not total to the full year amount.
|
Note 21. Segment Reporting
We are organized based on geographic location. Our reportable segments are North America and Rest of World.
We evaluate segment performance based on segment operating earnings or loss. Each segment reports its results of operations and makes requests for capital expenditures and acquisition funding to our chief operating decision-maker (CODM). Our chief executive officer serves as our CODM.
The following table presents net sales and other financial information by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
North
America
|
|
Rest of
World
|
|
Consolidated
|
Net sales
|
$
|
1,185,315
|
|
|
$
|
292,051
|
|
|
$
|
1,477,366
|
|
Income from operations
|
113,426
|
|
|
45,324
|
|
|
158,750
|
|
Interest expense, net
|
(32,584
|
)
|
|
(4,317
|
)
|
|
(36,901
|
)
|
Provision for income taxes
|
(26,134
|
)
|
|
(8,078
|
)
|
|
(34,212
|
)
|
Total assets
|
1,657,716
|
|
|
298,489
|
|
|
1,956,205
|
|
Goodwill
|
515,876
|
|
|
63,989
|
|
|
579,865
|
|
Capital expenditures
|
(12,860
|
)
|
|
(1,132
|
)
|
|
(13,992
|
)
|
Depreciation and amortization
|
24,497
|
|
|
3,483
|
|
|
27,980
|
|
Changes in the goodwill balance in the year ended
September 30, 2016
are due to foreign currency exchange rate changes related to the Rest of World segment. See Note 8 for further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2015
|
|
North
America
|
|
Rest of
World
|
|
Consolidated
|
Net sales
|
$
|
1,198,201
|
|
|
$
|
299,414
|
|
|
$
|
1,497,615
|
|
(Loss) income from operations
|
(222,719
|
)
|
|
16,354
|
|
|
(206,365
|
)
|
Interest expense, net
|
(32,912
|
)
|
|
(4,180
|
)
|
|
(37,092
|
)
|
Benefit (provision) for income taxes
|
94,450
|
|
|
(7,578
|
)
|
|
86,872
|
|
Total assets
|
1,709,904
|
|
|
311,069
|
|
|
2,020,973
|
|
Goodwill
|
515,876
|
|
|
74,711
|
|
|
590,587
|
|
Capital expenditures
|
(8,300
|
)
|
|
(1,331
|
)
|
|
(9,631
|
)
|
Depreciation and amortization
|
23,548
|
|
|
4,178
|
|
|
27,726
|
|
Changes in the goodwill balance in the year ended
September 30, 2015
included a non-cash impairment charge of
$263.8 million
relate to the North America. See Note 8 for further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2014
|
|
North
America
|
|
Rest of
World
|
|
Consolidated
|
Net sales
|
$
|
1,030,511
|
|
|
$
|
325,366
|
|
|
$
|
1,355,877
|
|
Income from operations
|
145,357
|
|
|
38,577
|
|
|
183,934
|
|
Interest expense, net
|
(25,836
|
)
|
|
(3,389
|
)
|
|
(29,225
|
)
|
Provision for income taxes
|
(47,459
|
)
|
|
(7,347
|
)
|
|
(54,806
|
)
|
Capital expenditures
|
(9,763
|
)
|
|
(754
|
)
|
|
(10,517
|
)
|
Depreciation and amortization
|
18,317
|
|
|
3,085
|
|
|
21,402
|
|
Geographic Information
We operated principally in three geographic areas, North America, Europe and emerging markets, such as Asia, Pacific Rim and the Middle East.
Net sales by geographic area, for the years ended
September 30, 2016
,
2015
, and
2014
, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
Sales
|
|
% of
Sales
|
|
Sales
|
|
% of
Sales
|
|
Sales
|
|
% of
Sales
|
United States of America
|
$
|
1,087,691
|
|
|
73.6
|
%
|
|
$
|
1,101,385
|
|
|
73.5
|
%
|
|
$
|
950,058
|
|
|
70.1
|
%
|
United Kingdom
|
195,473
|
|
|
13.2
|
%
|
|
190,661
|
|
|
12.7
|
%
|
|
180,535
|
|
|
13.3
|
%
|
Other foreign counties
|
194,202
|
|
|
13.2
|
%
|
|
205,569
|
|
|
13.8
|
%
|
|
225,284
|
|
|
16.6
|
%
|
All foreign counties
|
389,675
|
|
|
26.4
|
%
|
|
396,230
|
|
|
26.5
|
%
|
|
405,819
|
|
|
29.9
|
%
|
Total
|
$
|
1,477,366
|
|
|
100.0
|
%
|
|
$
|
1,497,615
|
|
|
100.0
|
%
|
|
$
|
1,355,877
|
|
|
100.0
|
%
|
We determine the geographic area based on the origin of the sale.
Long-lived assets by geographic area, for the years ended
September 30, 2016
and
2015
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2016
|
|
2015
|
United States of America
|
$
|
198,370
|
|
|
$
|
205,679
|
|
All foreign countries
|
56,947
|
|
|
67,280
|
|
|
$
|
255,317
|
|
|
$
|
272,959
|
|
Product and Services Information
Net sales by product categories, for the years ended
September 30, 2016
,
2015
and
2014
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
Sales
|
|
% of
Sales
|
|
Sales
|
|
% of
Sales
|
|
Sales
|
|
% of
Sales
|
Hardware
|
$
|
711,177
|
|
|
48.2
|
%
|
|
$
|
738,496
|
|
|
49.3
|
%
|
|
$
|
837,615
|
|
|
61.8
|
%
|
Chemicals(1)
|
600,124
|
|
|
40.6
|
%
|
|
591,840
|
|
|
39.5
|
%
|
|
356,154
|
|
|
26.3
|
%
|
Electronic components
|
105,207
|
|
|
7.1
|
%
|
|
107,918
|
|
|
7.2
|
%
|
|
109,616
|
|
|
8.1
|
%
|
Bearings
|
34,662
|
|
|
2.3
|
%
|
|
33,602
|
|
|
2.3
|
%
|
|
31,729
|
|
|
2.3
|
%
|
Machined parts and other
|
26,196
|
|
|
1.8
|
%
|
|
25,759
|
|
|
1.7
|
%
|
|
20,763
|
|
|
1.5
|
%
|
|
$
|
1,477,366
|
|
|
100.0
|
%
|
|
$
|
1,497,615
|
|
|
100.0
|
%
|
|
$
|
1,355,877
|
|
|
100.0
|
%
|
|
|
(1)
|
We did not sell inventory classified as “Chemicals” prior to February 28, 2014.
|
Note 22. Restructuring Activities
We record costs associated with involuntary separation programs when management has approved the plan for separation, the affected employees are identified, and it is unlikely that actions required to complete the separation plan will change significantly.
In September 2015, we committed to a Global Restructuring Plan (GRP), which involved the immediate elimination of redundant positions and the closure and consolidation of various facilities in order to better align our workforce to the growth areas of our business and to streamline our operations in order to increase efficiency and effectiveness. As of
September 30, 2016
, we materially completed the actions under the GRP.
During the year ended
September 30, 2016
, we recorded a net expense reduction of
$185,000
related to the restructuring activities, consisting of
$170,000
of additional employee severance and related costs, which was more than offset by an expense reduction of
$355,000
related to the termination of leases and other expenses. Of these amounts,
$183,000
of additional expenses was recorded in North America and
$368,000
of expense reduction was recorded in Rest of World. Such net expense reduction was recorded in selling, general and administrative expenses in our consolidated statements of comprehensive income.
Our restructuring liabilities were included in the accrued expenses and other current liabilities line of our consolidated balance sheets. The following table summarizes the activities affecting our restructuring liabilities described above during the year ended
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
September 30,
|
|
Additions/
|
|
Cash
|
|
Currency
|
|
September 30,
|
|
|
2015
|
|
Adjustments
|
|
Payments
|
|
Translation
|
|
2016
|
Employee severance
|
|
$
|
2,106
|
|
|
$
|
170
|
|
|
$
|
(2,193
|
)
|
|
$
|
(15
|
)
|
|
$
|
68
|
|
Lease termination costs and other
|
|
2,384
|
|
|
(355
|
)
|
|
(856
|
)
|
|
(77
|
)
|
|
1,096
|
|
Total
|
|
$
|
4,490
|
|
|
$
|
(185
|
)
|
|
$
|
(3,049
|
)
|
|
$
|
(92
|
)
|
|
$
|
1,164
|
|
The following table summarizes the total incurred restructuring costs by segment as of
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
Cash
|
|
Foreign
|
|
Restructuring
|
|
|
Costs Accrued
|
|
Payments
|
|
Currency
|
|
Costs Accrued
|
|
|
Since Inception
|
|
Year-to-date
|
|
Translation
|
|
September 30,
|
North America segment
|
|
$
|
2,747
|
|
|
$
|
(2,095
|
)
|
|
$
|
3
|
|
|
$
|
655
|
|
Rest of World segment
|
|
1,558
|
|
|
(954
|
)
|
|
(95
|
)
|
|
509
|
|
Total
|
|
$
|
4,305
|
|
|
$
|
(3,049
|
)
|
|
$
|
(92
|
)
|
|
$
|
1,164
|
|
The remaining costs to be incurred under the GRP are not expected to differ significantly from the amount accrued as of
September 30, 2016
.
Note 23. Subsequent Event
On October 4, 2016, we entered into the Amendment to the Existing Credit Agreement. The Amendment modified the Existing Credit Agreement to replace the Borrower’s existing revolving credit facility with a new revolving credit facility in an aggregate principal amount of
$180.0 million
(the revolving facility) and the Borrower’s existing senior secured term loan A facility with a new senior secured term loan A facility in an aggregate principal amount of
$400.0 million
(the term loan A facility).
The Amendment also modified the Existing Credit Agreement to (1) remove the Consolidated Net Interest Coverage Ratio (as defined in the Existing Credit Agreement) financial covenant set forth in the Existing Credit Agreement and (2) modify the Consolidated Total Leverage Ratio (as defined in the Credit Agreement) levels in the financial covenant set forth in the Existing Credit Agreement to a maximum of
4.50
for the quarters ending September 30, 2016 and December 31, 2016, with step-downs to
4.25
for the quarters ending March 31, 2017 and June 30, 2017,
4.00
for the quarters ending September 30, 2017 and December 31, 2017,
3.75
for the quarters ending March 31, 2018 and June 30, 2018 and
3.50
for the quarter ending September 30, 2018 and thereafter.
The Amendment also provided for additional amendments to the Existing Credit Agreement, including (1) permitting the corporate consolidation of the Company’s operations in the United Kingdom, (2) expanding the Company’s ability to enter into receivables financings, (3) increasing the maximum amount permitted to be incurred under a Cash-Capped Incremental Facility (as defined in the Credit Agreement) from
$100 million
to
$150 million
and (4) providing increased flexibility for future restructurings.
The Credit Agreement provides for (1) a
$400.0 million
term loan A facility, (2) a
$180.0 million
revolving credit facility and (3) a
$525.0 million
senior secured term loan B facility (the “term loan B facility”). We refer to the term loan B facility, together with the term loan A facility and the revolving facility, as the “Credit Facilities.”
As a result of the Amendment, we incurred
$10.4 million
in fees that were capitalized and will be amortized over the remaining life of the related debt.
$1.9 million
of the unamortized financing fees related to the Existing Credit Agreement will be written off as debt extinguishment loss in the three months ending December 31, 2016.
On October 4, 2016, we repaid
$1.3 million
on our existing term loan A facility prior to the effectiveness of the Amendment, resulting in a
$400.0 million
balance. After the effectiveness of the Amendment, we borrowed
$25.0 million
on October 4, 2016 under our new
$180.0 million
revolving facility to pay the fees of our Amendment and fund our normal operations. As of October 4, 2016, the interest rate for borrowings under the revolving facility was
3.29%
.
The interest rate for the term loan A facility under the Credit Agreement is based on our Consolidated Total Leverage Ratio (as defined in the Credit Agreement) as determined in the most recently delivered financial statements, with the respective margins ranging from
2.00%
to
2.75%
for Eurocurrency loans and
1.00%
to
1.75%
for alternate base rate (ABR) loans. The term loan A facility amortizes in equal quarterly installments of
1.25%
of the original principal amount of
$400.0 million
, with the balance due at maturity on October 4, 2021, subject to certain exceptions.
The interest rate for the term loan B facility under the Credit Agreement has a margin of
2.50%
per annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of
0.75%
per annum) or
1.50%
per annum for ABR loans (subject to a minimum ABR floor of
1.75%
per annum). The term loan B facility continues to amortize in equal quarterly installments of
0.25%
of the original principal amount of
$525.0 million
, with the balance due at maturity on February 28,
2021. In July 2015, we entered into interest rate swap agreements relating to this indebtedness, which are described in greater detail in Note12.
The interest rate for the revolving facility under the Credit Agreement is based on our Consolidated Total Leverage Ratio as determined in the most recently delivered financial statements, with the respective margins ranging from
2.00%
to
2.75%
for Eurocurrency loans and
1.00%
to
1.75%
for ABR loans. The revolving facility expires on October 4, 2021, subject to certain exceptions.
Our borrowings under the Credit Facilities are guaranteed by us and all of our direct and indirect, wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a first lien on substantially all of our assets and the assets of our guarantor subsidiaries, including capital stock of the subsidiaries (in each case, subject to certain exceptions).
The Credit Facilities contain customary negative covenants, including restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions with affiliates.