Notes to the Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts of Wesco Aircraft Holdings, Inc. and its wholly owned subsidiaries (referred to herein as “Wesco” or the “Company”) prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements presented herein have not been audited by an independent registered public accounting firm, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for fair presentation of the financial position, results of operations and cash flows for the period. However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year. The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. Actual amounts could differ from these estimates.
Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on November 28, 2016, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on December 14, 2016 (collectively, the “2016 Form 10-K”).
Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation.
Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of our long-term debt are capitalized and amortized to interest expense over the term of the debt using the straight-line method, which approximates the effective interest method. The unamortized amount is presented as a reduction of long-term debt on the balance sheet.
Debt issuance costs incurred in connection with our revolving line-of-credit (LOC) agreement are capitalized and amortized to interest expense over the term of the LOC agreement using the straight-line method. The unamortized amount is presented as a non-current asset on the balance sheet.
Note 2. Recent Accounting Pronouncements
Changes to 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 (“ASC”).
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 Issued
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 the Company in fiscal year 2018, with early adoption permitted. We are currently evaluating the impact of this guidance 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 the Company in fiscal year 2020 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 the Company in fiscal year 2019, 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 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 the Company in fiscal year 2018, and interim periods therein. 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 consolidated financial statements.
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 the Company in fiscal year 2018, 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 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 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 as 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 for the Company is fiscal year 2019, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal year 2018, 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
Effective October 1, 2016, we elected to early adopt ASU 2016-09,
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. The primary impacts of adoption are (1) the recognition of excess tax benefits in our provision for income tax instead of paid-in capital and (2) the presentation of excess tax benefits in the statement of cash flows as cash provided by operating activities instead of cash provided by financing activities. The first requirement is required to be applied prospectively. For the
three months ended December 31, 2016
, we recorded
$1.2 million
of excess tax benefits as a reduction to our provision for income tax. For the second requirement, we elected to adopt this update prospectively. For the
three months ended December 31, 2016
, we presented the
$1.2 million
in our consolidated statements of cash flows as cash provided by operating activities.
ASU 2016-09 also addresses cash flow statement presentation. Since we have historically presented cash flows related to employee taxes paid for withheld shares as a financing activity, ASU 2016-09 had no impact on our consolidated statements of cash flows. As permitted by ASU 2019-09, we have elected to continue to estimate forfeitures to determine the amount of compensation cost to be recognized in each period.
Effective October 1, 2016, we adopted, on a prospective basis, ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,
which 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. As of
December 31, 2016
, we did not have any provisional amounts outstanding from prior acquisitions. Therefore, the adoption of ASU 2015-16 did not have any impact on our consolidated financial statements.
Effective October 1, 2016, we adopted 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. As of December 31, 2016 and September 30, 2016, we had
$3.6 million
and
$1.1 million
, respectively, of deferred financing costs related to our revolving line-of-credit facility.
Effective October 1, 2016, we adopted ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost
. ASU 2015-03 requires that we change the presentation of debt issuance costs on our consolidated balance sheets. Effective October 1, 2016, our unamortized debt financing costs are presented as a reduction of long-term debt instead of being presented as an asset on our consolidated balance sheet. As required by ASU 2015-03, we reclassified
$7.6 million
of deferred debt financing costs from non-current assets to reduce our
$841.9 million
long-term debt as of September 30, 2016. As of
December 31, 2016
, deferred debt financing costs of
$12.4 million
is presented as a reduction of our long-term debt. See Note 6 for further information.
Effective October 1, 2016, we adopted, on a prospective basis, 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. The adoption of ASU 2014-12 did not have any impact on our consolidated financial statements.
Note 3. Inventory
Our inventory is comprised solely of finished goods. During the
three months ended December 31, 2016
and
2015
, we recorded a charge to cost of sales of
$2.2 million
and
$2.0 million
, respectively, to write down excess inventory to its net realizable value.
Note 4. Goodwill
During the
three
months ended
December 31, 2016
, goodwill declined
$3.1 million
as a result of the strengthening of the U.S. dollar compared to the British pound.
Goodwill consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
Rest of World
|
|
Total
|
Goodwill as of September 30, 2016, gross
|
|
$
|
779,647
|
|
|
$
|
63,989
|
|
|
$
|
843,636
|
|
Accumulated impairment
|
|
(263,771
|
)
|
|
—
|
|
|
(263,771
|
)
|
Goodwill as of September 30, 2016, net
|
|
515,876
|
|
|
63,989
|
|
|
579,865
|
|
Changes during the period:
|
|
|
|
|
|
|
Foreign currency translation
|
|
—
|
|
|
(3,136
|
)
|
|
(3,136
|
)
|
|
|
|
|
|
|
|
Goodwill as of December 31, 2016, gross
|
|
779,647
|
|
|
60,853
|
|
|
840,500
|
|
Accumulated impairment
|
|
(263,771
|
)
|
|
—
|
|
|
(263,771
|
)
|
Goodwill as of December 31, 2016, net
|
|
$
|
515,876
|
|
|
$
|
60,853
|
|
|
$
|
576,729
|
|
Note 5. Fair Value of Financial Instruments
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 these objectives, we primarily use interest rate swaps as part of our 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
$412.5 million
as of
December 31, 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 6 below; see Note 6 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 (loss) ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the
three months ended December 31, 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
three months ended December 31, 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 AOCI related to derivatives and the related deferred tax are reclassified to interest expense as interest payments are made on our variable-rate debt. As of
December 31, 2016
, we expected to reclassify approximately
$1.2 million
from accumulated other comprehensive loss and the related deferred tax to earnings as an increase to interest expense over the next
12 months
.
Non-Designated Derivatives
On October 3 and October 5, 2016, we entered into two foreign currency forward contracts to partially reduce our exposure to foreign currency fluctuations for a subsidiary's net monetary assets, which are denominated in a foreign currency. The derivatives are not designated as a hedging instrument. The change in their 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. Both foreign currency forward contracts expired on December 28, 2016. We did not have foreign currency forward contracts as of
December 31
and
September 30, 2016
.
The following table summarizes the notional principal amounts at
December 31
and
September 30, 2016
of our outstanding derivative instruments discussed above (in thousands).
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|
|
|
|
|
|
Derivative Notional
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Instruments designated as accounting hedges:
|
|
|
|
|
Interest rate contracts
|
|
$
|
412,500
|
|
|
$
|
425,000
|
|
The following table provides the location and fair value amounts of our financial instruments, which are reported in our consolidated balance sheets as of
December 31
and
September 30, 2016
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet Locations
|
|
December 31, 2016
|
|
September 30, 2016
|
|
Instruments designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,156
|
|
|
$
|
1,057
|
|
|
|
|
Other liabilities
|
|
1,968
|
|
|
5,615
|
|
|
The following table provides the losses of our cash flow hedging instruments (net of income tax benefit), which were transferred from AOCI to interest expense on our consolidated statement of comprehensive income during the
three
months ended
December 31, 2016
and
2015
(in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
Location in Consolidated Statement of Comprehensive Income
|
|
Three Months Ended
December 31,
|
|
|
|
Cash Flow Hedge
|
|
|
2016
|
|
2015
|
Interest rate contracts
|
|
Interest expense, net
|
|
$
|
252
|
|
|
$
|
352
|
|
|
|
|
|
|
|
|
The following table provides the effective portion of the amount of gain recognized in other comprehensive income (net of income taxes) for the
three
months ended
December 31, 2016
and
2015
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Cash Flow Hedge
|
|
2016
|
|
2015
|
Interest rate contracts
|
|
$
|
2,182
|
|
|
$
|
1,240
|
|
The following table provides a summary of changes to our AOCI related to our cash flow hedging instruments (net of income taxes) during the
three
months ended
December 31, 2016
(in thousands).
|
|
|
|
|
|
|
|
AOCI - Unrealized Gain (Loss) on Hedging Instruments
|
|
|
Three Months Ended December 31, 2016
|
Balance at beginning of period
|
|
|
$
|
(4,206
|
)
|
Change in fair value of hedging instruments
|
|
|
1,930
|
|
Amounts reclassified to earnings
|
|
|
252
|
|
Net current period other comprehensive income
|
|
|
2,182
|
|
Balance at end of period
|
|
|
$
|
(2,024
|
)
|
The following table provides the pretax effect of our derivative instruments not designated as hedging instruments on our consolidated statements of earnings and comprehensive income for the
three
months ended
December 31, 2016
and
2015
(in thousands).
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|
|
|
|
|
|
|
|
|
|
|
Location in Consolidated Statement of Comprehensive Income
|
|
|
Three Months Ended
December 31,
|
Instruments Not Designated As Hedging Instruments
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|
|
|
|
|
|
2016
|
|
2015
|
Foreign currency forward contracts
|
|
Other income (loss), net
|
|
|
$
|
(2,595
|
)
|
|
$
|
(490
|
)
|
|
|
|
|
|
|
|
|
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable and payable, accrued expenses and other current liabilities, and a line of credit. The carrying amounts of these instruments approximate fair value because of their short-term maturities. 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 (as defined below). The principal amounts and fair values of the debt instruments were as follows (in thousands):
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|
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|
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|
|
December 31, 2016
|
|
September 30, 2016
|
|
Principal Amount
|
|
Fair Value
|
|
Principal Amount
|
|
Fair Value
|
Term loan A facility
|
$
|
395,000
|
|
|
$
|
393,815
|
|
|
$
|
401,344
|
|
|
$
|
401,344
|
|
Term loan B facility
|
440,562
|
|
|
432,632
|
|
|
440,562
|
|
|
435,716
|
|
Total long-term debt
|
$
|
835,562
|
|
|
$
|
826,447
|
|
|
$
|
841,906
|
|
|
$
|
837,060
|
|
Fair Value Measurement
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. 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:
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|
|
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 counter-party 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.
There were no transfers between the assets and liabilities under Level 1 and Level 2 during the
three
months ended
December 31, 2016
. The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring basis in our consolidated balance sheets as of
December 31
and
September 30, 2016
(in thousands).
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|
|
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|
|
|
|
|
|
December 31, 2016
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Instruments designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Accrued expenses and other current liabilities
|
|
$
|
1,156
|
|
|
—
|
|
|
$
|
1,156
|
|
|
—
|
|
|
|
Other liabilities
|
|
1,968
|
|
|
—
|
|
|
1,968
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Instruments designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Accrued expenses and other current liabilities
|
|
$
|
1,057
|
|
|
—
|
|
|
$
|
1,057
|
|
|
—
|
|
|
|
Other liabilities
|
|
5,615
|
|
|
—
|
|
|
5,615
|
|
|
—
|
|
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.
Note 6. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
Principal
Amount
|
|
Deferred Financing Costs
|
|
Carrying
Amount
|
|
Principal
Amount
|
|
Deferred Financing Costs
|
|
Carrying
Amount
|
Term loan A facility
|
|
$
|
395,000
|
|
|
$
|
(7,308
|
)
|
|
$
|
387,692
|
|
|
$
|
401,344
|
|
|
$
|
(2,247
|
)
|
|
$
|
399,097
|
|
Term loan B facility
|
|
440,562
|
|
|
(5,075
|
)
|
|
435,487
|
|
|
440,562
|
|
|
(5,380
|
)
|
|
435,182
|
|
Less: current portion
|
|
(20,000
|
)
|
|
—
|
|
|
(20,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-current portion
|
|
$
|
815,562
|
|
|
$
|
(12,383
|
)
|
|
$
|
803,179
|
|
|
$
|
841,906
|
|
|
$
|
(7,627
|
)
|
|
$
|
834,279
|
|
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 facility with a new revolving 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
(the "term loan A facility").
The Credit Agreement provides for (1) a
$400.0 million
term loan A facility, (2) a
$180.0 million
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 term loan A facility and the revolving facility, as the "Credit Facilities."
As of
December 31, 2016
, our outstanding indebtedness under our Credit Facilities was
$855.6 million
, which consisted of (1)
$395.0 million
of indebtedness under the term loan A facility, (2)
$20.0 million
of indebtedness under the revolving
facility, and (3)
$440.6 million
of indebtedness under the term loan B facility. As of
December 31, 2016
,
$160.0 million
was available for borrowing under the revolving facility, of which we could borrow up to
$60.0 million
without breaching any covenants contained in the agreements governing our indebtedness.
In connection with the Amendment, we borrowed
$25.0 million
under the revolving facility. During the
three
months ended
December 31, 2016
, we made our required quarterly payment of
$5.0 million
and a voluntary prepayment of
$1.3 million
on our term loan A facility and a voluntary prepayment of
$5.0 million
on our borrowings under the revolving facility.
The interest rate for the term loan A facility 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 on the earlier of (i) 90 days before the maturity of the term loan B facility, and (ii) October 4, 2021. As of
December 31, 2016
, the interest rate for borrowings under the term loan A facility was
3.27%
, which approximated the effective interest rate.
The interest rate for the term loan B facility 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 amortizes 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
December 31, 2016
, the interest rate for borrowings under the term loan B facility was
3.5%
, which approximated the effective interest rate. In July 2015, we entered into interest rate swap agreements relating to this indebtedness, which are described in greater detail in Note 5 above.
The interest rate for the revolving facility 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 ABR loans. The revolving facility expires on the earlier of (i) 90 days before the maturity of the term loan B facility, and (ii) October 4, 2021. As of
December 31, 2016
, the interest rate for borrowings under the revolving facility was
3.27%
.
The Amendment also (1) removed the Consolidated Net Interest Coverage Ratio (as defined in the Existing Credit Agreement) financial covenant and (2) modified the Consolidated Total Leverage Ratio (as defined in the Credit Agreement) levels in the financial covenant to a maximum of
4.50
for the quarters ended 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 changes, including (1) permitting the corporate consolidation of Wesco’s operations in the United Kingdom, (2) expanding Wesco’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.
As a result of the amendment, we incurred
$10.5 million
in fees that were capitalized,
$7.2 million
of which was related to the term loan A facility and
$3.3 million
of which was related to the revolving facility. Of the
$3.4 million
of the unamortized deferred financing costs related to the Existing Credit Agreement,
$2.3 million
was written off as debt extinguishment loss in the three months ended December 31, 2016, which was included in interest expense for the period. The remaining unamortized deferred financing costs related to the Existing Credit Agreement were added to the
$10.5 million
of deferred financing costs related to the Amendment and will be amortized over the remaining life of the term loan A and the revolving facility. The following table summarizes the total deferred financing costs for term loan A facility and the revolving facility as of October 4, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan A Facility
|
|
Revolving Facility
|
|
Total
|
Deferred financing costs as of September 30, 2016
|
|
$
|
2,247
|
|
|
$
|
1,120
|
|
|
$
|
3,367
|
|
Write off for the Amendment
|
|
(1,769
|
)
|
|
(553
|
)
|
|
(2,322
|
)
|
Deferred financing costs for the Amendment
|
|
7,215
|
|
|
3,247
|
|
|
10,462
|
|
Deferred financing costs as of October 4, 2016
|
|
$
|
7,693
|
|
|
$
|
3,814
|
|
|
$
|
11,507
|
|
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).
As referred to above, our borrowings under the Credit Facilities are subject to a financial covenant based upon our Consolidated Total Leverage Ratio (as defined in the Credit Agreement) with the maximum ratio currently set at
4.50
, which will step down to
4.25
next quarter and will step down gradually during future quarters to
3.50
for the quarter ending September 30, 2018 and thereafter. The Credit Agreement also contains 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
December 31, 2016
, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was
4.19
.
As of
December 31, 2016
, our subsidiary, Wesco Aircraft Europe, Ltd, has available a
£7.0 million
(
$8.6 million
based on the
December 31, 2016
exchange rate) line of credit that automatically renews annually on October 1 (the "UK line of credit"). The UK line of credit bears interest based on the base rate plus an applicable margin of
1.65%
. As of
December 31, 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 7. Comprehensive Income
Comprehensive income, which is net of income taxes, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
2016
|
|
2015
|
Net income
|
|
$
|
13,107
|
|
|
$
|
20,609
|
|
Foreign currency translation loss
|
|
(13,439
|
)
|
|
(7,537
|
)
|
Unrealized gain on cash flow hedging instruments
|
|
2,182
|
|
|
1,240
|
|
Total comprehensive income
|
|
$
|
1,850
|
|
|
$
|
14,312
|
|
Note 8. Net Income Per Share
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share includes the dilutive effect of both outstanding stock options and restricted shares, calculated using the treasury stock method. Assumed proceeds from in-the-money awards include windfall tax benefits, net of shortfalls, calculated under the “as-if” method as prescribed by ASC 718,
Compensation—Stock Compensation
. The following table provides our basic and diluted net income per share for the
three
months ended
December 31, 2016
and
2015
(dollars in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
2016
|
|
2015
|
Net income
|
|
$
|
13,107
|
|
|
$
|
20,609
|
|
Basic weighted average shares outstanding
|
|
98,319,926
|
|
|
97,217,924
|
|
Dilutive effect of stock options and restricted stock awards/units
|
|
501,868
|
|
|
721,499
|
|
Dilutive weighted average shares outstanding
|
|
98,821,794
|
|
|
97,939,423
|
|
Basic net income per share
|
|
$
|
0.13
|
|
|
$
|
0.21
|
|
Diluted net income per share
|
|
$
|
0.13
|
|
|
$
|
0.21
|
|
For the
three
months ended
December 31, 2016
and
2015
, respectively,
1,972,928
and
2,978,026
shares of common stock equivalents were not included in the diluted calculation due to their anti-dilutive effect.
Note 9. Segment Reporting
We are organized based on geographical location. Our reportable segments are comprised of North America and Rest of World.
We evaluate segment performance based primarily on segment income from operations. 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 tables present operating and financial information by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016
|
|
Three Months Ended December 31, 2015
|
|
North America
|
|
Rest of World
|
|
Consolidated
|
|
North America
|
|
Rest of World
|
|
Consolidated
|
Net sales
|
$
|
270,469
|
|
|
$
|
68,902
|
|
|
$
|
339,371
|
|
|
$
|
286,960
|
|
|
$
|
72,883
|
|
|
$
|
359,843
|
|
Income from operations
|
17,286
|
|
|
8,970
|
|
|
26,256
|
|
|
29,056
|
|
|
8,028
|
|
|
37,084
|
|
Interest expense, net
|
(10,115
|
)
|
|
(958
|
)
|
|
(11,073
|
)
|
|
(7,799
|
)
|
|
(1,198
|
)
|
|
(8,997
|
)
|
Provision for income taxes
|
(548
|
)
|
|
(1,816
|
)
|
|
(2,364
|
)
|
|
(6,412
|
)
|
|
(1,967
|
)
|
|
(8,379
|
)
|
Capital expenditures
|
1,064
|
|
|
252
|
|
|
1,316
|
|
|
1,056
|
|
|
106
|
|
|
1,162
|
|
Depreciation and amortization
|
5,950
|
|
|
779
|
|
|
6,729
|
|
|
5,953
|
|
|
1,044
|
|
|
6,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
North America
|
|
Rest of World
|
|
Consolidated
|
|
North America
|
|
Rest of World
|
|
Consolidated
|
Total assets
|
$
|
1,682,480
|
|
|
$
|
275,565
|
|
|
$
|
1,958,045
|
|
|
$
|
1,699,656
|
|
|
$
|
320,760
|
|
|
$
|
2,020,416
|
|
Note 10. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(dollars in thousands)
|
|
2016
|
|
2015
|
Provision for income taxes
|
|
$
|
2,364
|
|
|
$
|
8,379
|
|
Effective tax rate
|
|
15.3
|
%
|
|
28.9
|
%
|
For the three months ended December 31, 2016, our effective tax rate decreased
13.6
percentage points primarily due to the adoption of ASU 2016-09, which resulted in a decrease of our effective tax rate by
7.9
percentage points, and the release of a valuation allowance on a net operating loss carryforward of a foreign subsidiary, which resulted in a decrease of our effective tax rate by
5.1
percentage points.
Note 11. Commitments and Contingencies
We are involved in various legal matters that arise in the ordinary course of its business. Our management, after consulting with outside legal counsel, believes that the ultimate outcome of such matters will not have a material adverse effect on our business, 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, results of operations or cash flows.