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 statement 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. Our financial statements have been prepared under the assumption that our Company will continue as a going concern.
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 (the 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 29, 2017 (the 2017 Form 10-K).
Certain reclassifications have been made to the amounts in prior periods to conform to the current period’s presentation.
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 May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,
which specifies the modification accounting applicable to any entity that changes the terms or conditions of a share-based payment award. ASU 2017-09 is effective for the Company in fiscal year 2019. Early adoption is permitted. We do not anticipate the adoption of ASU 2017-09 will have a significant impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment
, which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company in fiscal year 2021, including interim reporting periods within that reporting period, and all annual and interim reporting periods thereafter. Early adoption is 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. As of September 30, 2017, total future minimum payments under our operating leases amounted to
$51.4 million
.
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 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, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which FASB issued in
August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017, 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.
The amended ASU 2014-09 may have an impact on the timing and amount of revenues and cost of sales in our industry due primarily to changes in whether certain performance obligations are accounted for on a gross or net basis, separating service revenue from the related product revenue, reporting costs currently included in operating expense as costs of services, and capitalizing certain up-front costs related to contracts and amortizing them over the service period. We have completed reviewing our major contracts and are in the process of reviewing the remaining contracts on a sampling basis to determine the extent to which these and other issues may impact our results after adoption. We plan to adopt the amended ASU 2014-09 in fiscal 2019 using the modified retrospective method.
Adopted Accounting Standards
Effective October 1, 2017, we adopted 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. The adoption of ASU 2016-07 did not have a material impact on our consolidated financial statements.
Effective October 1, 2017, we adopted 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. The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.
Note 3. Inventory
Our inventory is comprised solely of finished goods.
Charges to cost of sales related to provisions for excess and obsolete (E&O) inventory and related items were
$4.4 million
and
$2.2 million
during the
three months ended December 31, 2017
and
2016
, respectively. We believe that these amounts appropriately write-down E&O inventory to its net realizable value.
Note 4. Goodwill
As of
December 31, 2017
, goodwill consists of the following (in thousands):
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|
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|
|
|
|
|
|
|
|
Americas
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|
EMEA
|
|
APAC
|
|
Total
|
Goodwill as of September 30, 2017, gross
|
|
$
|
773,384
|
|
|
$
|
51,190
|
|
|
$
|
16,955
|
|
|
$
|
841,529
|
|
Accumulated impairment
|
|
(569,201
|
)
|
|
—
|
|
|
(5,684
|
)
|
|
(574,885
|
)
|
Goodwill as of September 30, 2017, net
|
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
|
|
|
|
|
|
|
|
|
Changes during the period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of December 31, 2017, gross
|
|
773,384
|
|
|
51,190
|
|
|
16,955
|
|
|
841,529
|
|
Accumulated impairment
|
|
(569,201
|
)
|
|
—
|
|
|
(5,684
|
)
|
|
(574,885
|
)
|
Goodwill as of December 31, 2017, net
|
|
$
|
204,183
|
|
|
$
|
51,190
|
|
|
$
|
11,271
|
|
|
$
|
266,644
|
|
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. We have
one
interest rate swap agreement outstanding, which we have designated as a cash flow hedge, in order to reduce our exposure to variability in cash flows related to interest payments on a portion of our outstanding debt. The interest rate swap agreement has an amortizing notional amount, which was
$350.0 million
on
December 31, 2017
, and matures on September 30, 2019, giving us the contractual right to pay a fixed interest rate of
2.2625%
plus the applicable margin under the term loan B facility (as defined in Note 6 below; see Note 6 for the applicable margin).
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, 2017
, 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, 2017
, 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, 2017
, we expect to reclassify approximately
$1.3 million
from accumulated other comprehensive loss and the related deferred tax to earnings as an increase to interest expense over the next
12 months
when the underlying hedged item impacts earnings.
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. Both foreign currency forward contracts expired on December 28, 2016. The derivatives were 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. We did not have foreign currency forward contracts as of
December 31, 2017
and
September 30, 2017
.
The following table summarizes the notional principal amounts at
December 31, 2017
, and
September 30, 2017
of our outstanding interest rate swap agreement discussed above (in thousands).
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Derivative Notional
|
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|
December 31, 2017
|
|
September 30, 2017
|
Instruments designated as accounting hedges:
|
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|
|
|
Interest rate swap contract
|
|
$
|
350,000
|
|
|
$
|
375,000
|
|
The following table provides the location and fair value amounts of our financial instrument, which is reported in our consolidated balance sheets as of
December 31, 2017
and
September 30, 2017
(in thousands).
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Fair Value
|
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Balance Sheet Locations
|
|
December 31, 2017
|
|
September 30, 2017
|
|
Instrument designated as accounting hedge:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,269
|
|
|
$
|
2,462
|
|
|
Interest rate swap contract
|
|
Other liabilities
|
|
101
|
|
|
903
|
|
|
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, 2017
and
2016
(in thousands).
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Location in Consolidated Statement of Comprehensive Income
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|
Three Months Ended
December 31,
|
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|
|
|
|
Cash Flow Hedge
|
|
|
2017
|
|
2016
|
|
Interest rate swap contracts
|
|
Interest expense, net
|
|
$
|
557
|
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
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, 2017
and
2016
(in thousands).
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
|
Cash Flow Hedge
|
|
2017
|
|
2016
|
|
Interest rate swap contracts
|
|
$
|
1,370
|
|
|
$
|
2,182
|
|
|
The following table provides a summary of changes to our AOCI related to our cash flow hedging instrument (net of income taxes) during the
three
months ended
December 31, 2017
(in thousands).
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AOCI - Unrealized Gain (Loss) on Hedging Instruments
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|
Three Months Ended December 31, 2017
|
Balance at beginning of period
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|
|
$
|
(2,133
|
)
|
Change in fair value of hedging instruments
|
|
|
813
|
|
Amounts reclassified to earnings
|
|
|
557
|
|
Net current period other comprehensive income
|
|
|
1,370
|
|
Balance at end of period
|
|
|
$
|
(763
|
)
|
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, 2017
and
2016
(in thousands).
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Location in Consolidated Statement of Comprehensive Income
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|
Three Months Ended
December 31,
|
Instruments Not Designated As Hedging Instruments
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|
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
|
Other income (loss), net
|
|
$
|
—
|
|
|
$
|
(2,595
|
)
|
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|
|
|
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|
|
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 duration. 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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|
December 31, 2017
|
|
September 30, 2017
|
|
Principal
Amount
|
|
Fair
Value
|
|
Principal
Amount
|
|
Fair
Value
|
Term loan A facility
|
$
|
375,000
|
|
|
$
|
372,000
|
|
|
$
|
380,000
|
|
|
$
|
376,960
|
|
Term loan B facility
|
440,562
|
|
|
429,107
|
|
|
440,562
|
|
|
428,667
|
|
Total long-term debt
|
$
|
815,562
|
|
|
$
|
801,107
|
|
|
$
|
820,562
|
|
|
$
|
805,627
|
|
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, 2017
. 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, 2017
and
September 30, 2017
(in thousands).
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|
|
December 31, 2017
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
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|
|
|
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|
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|
|
|
Instrument designated as accounting hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contract
|
Accrued expenses and other current liabilities
|
|
1,269
|
|
|
—
|
|
|
1,269
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|
|
—
|
|
Interest rate contract
|
Other liabilities
|
|
101
|
|
|
—
|
|
|
101
|
|
|
—
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
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|
|
September 30, 2017
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
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|
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|
|
|
|
Instrument designated as accounting hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contract
|
Accrued expenses and other current liabilities
|
|
$
|
2,462
|
|
|
$
|
—
|
|
|
$
|
2,462
|
|
|
$
|
—
|
|
Interest rate contract
|
Other liabilities
|
|
903
|
|
|
—
|
|
|
903
|
|
|
—
|
|
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, 2017
|
|
September 30, 2017
|
|
|
Principal
Amount
|
|
Deferred Debt Issuance Costs
|
|
Carrying
Amount
|
|
Principal
Amount
|
|
Deferred Debt Issuance Costs
|
|
Carrying
Amount
|
Term loan A facility
|
|
$
|
375,000
|
|
|
$
|
(8,032
|
)
|
|
$
|
366,968
|
|
|
$
|
380,000
|
|
|
$
|
(7,562
|
)
|
|
$
|
372,438
|
|
Term loan B facility
|
|
440,562
|
|
|
(3,857
|
)
|
|
436,705
|
|
|
440,562
|
|
|
(4,162
|
)
|
|
436,400
|
|
Revolving facility
|
|
74,000
|
|
|
—
|
|
|
74,000
|
|
|
55,000
|
|
|
—
|
|
|
55,000
|
|
Less: current portion
|
|
(94,000
|
)
|
|
—
|
|
|
(94,000
|
)
|
|
(75,000
|
)
|
|
—
|
|
|
(75,000
|
)
|
Non-current portion
|
|
$
|
795,562
|
|
|
$
|
(11,889
|
)
|
|
$
|
783,673
|
|
|
$
|
800,562
|
|
|
$
|
(11,724
|
)
|
|
$
|
788,838
|
|
Sixth Amendment to Senior Secured Credit Facilities
As previously disclosed in the 2017 Form 10-K, on November 2, 2017, we entered into the Sixth Amendment to Credit Agreement (the Sixth Amendment) to our credit agreement, dated as of December 7, 2012, by and among the Company, Wesco Aircraft Hardware Corp. and the lenders and agents party thereto (as amended, the Credit Agreement).
The Sixth Amendment modified the Credit Agreement to increase the Excess Cash Flow Percentage (as such term is defined in the Credit Agreement) to
75%
, provided that the Excess Cash Flow Percentage shall be reduced to (i)
50%
, if the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) is less than
4.00
but greater than or equal to
3.00
, (ii)
25%
, if the Consolidated Total Leverage Ratio is less than
3.00
but greater than or equal to
2.50
and (iii)
0%
, if the Consolidated Total Leverage Ratio is less than
2.50
.
The Sixth Amendment further modified the Credit Agreement to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility (as such term is defined in the Credit Agreement) to
zero
, unless the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement), after giving effect to the incurrence of any incremental loans or commitments and the use of proceeds thereof, on a pro forma basis, would be (i) less than
4.00
but greater than or equal to
3.50
, in which case the Capped Incremental Facility would be increased to
$75.0 million
or (ii) less than
3.50
, in which case the Capped Incremental Facility would be increased to
$150.0 million
.
The Sixth Amendment also modified the Credit Agreement to increase the Consolidated Total Leverage Ratio levels in the financial covenant set forth in the Credit Agreement to a maximum
6.25
for the quarters ending September 30, 2017, December 31, 2017 and March 31, 2018, with step-downs to
6.00
for the quarters ending June 30, 2018 and September 30, 2018;
5.75
for the quarter ending December 31, 2018;
5.50
for the quarter ending March 31, 2019;
5.25
for the quarter ending June 30, 2019;
4.75
for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020;
4.00
for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and
3.00
for the quarter ending June 30, 2021 and thereafter.
As a result of the Sixth Amendment, we incurred
$1.9 million
in fees that were capitalized and will be amortized over the remaining life of the related debt,
$1.3 million
of which was related to the term loan A facility and
$0.6 million
of which was related to the revolving facility. Pursuant to GAAP, the Sixth Amendment is accounted for as a debt modification. As a result, the unamortized deferred debt issuance costs related to the term loan A and the revolving facility prior to the Sixth Amendment were added to the
$1.9 million
of deferred debt issuance costs related to the Sixth 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 debt issuance costs for the term loan A facility, the term loan B facility and the revolving facility, which will be amortized over their remaining terms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan A Facility
|
|
Term Loan B Facility
|
|
Revolving Facility
|
|
Total
|
Deferred debt issuance costs as of September 30, 2017
|
|
$
|
7,562
|
|
|
$
|
4,162
|
|
|
$
|
3,676
|
|
|
$
|
15,400
|
|
Deferred debt issuance costs for the Sixth Amendment
|
|
1,295
|
|
|
—
|
|
|
613
|
|
|
1,908
|
|
Amortization of deferred debt issuance costs
|
|
(825
|
)
|
|
(305
|
)
|
|
(386
|
)
|
|
(1,516
|
)
|
Deferred debt issuance costs as of December 31, 2017
|
|
$
|
8,032
|
|
|
$
|
3,857
|
|
|
$
|
3,903
|
|
|
$
|
15,792
|
|
Senior Secured Credit Facilities
The Credit Agreement provides for (1) a
$400.0 million
senior secured term loan A facility (the term loan A facility), (2) a
$180.0 million
revolving facility (the revolving facility) and (3) a
$525.0 million
senior secured term loan B facility (the term loan B facility). We refer to term loan A facility, the revolving facility and the term loan B facility, together, as the “Credit Facilities.”
As of
December 31, 2017
, our outstanding indebtedness under our Credit Facilities was
$889.6 million
, which consisted of (1)
$375.0 million
of indebtedness under the term loan A facility, (2)
$74.0 million
of indebtedness under the revolving facility, and (3)
$440.6 million
of indebtedness under the term loan B facility. As of
December 31, 2017
,
$106.0 million
was available for borrowing under the revolving facility to fund our operating and investing activities without breaching any covenants contained in the Credit Agreement.
During the
three
months ended
December 31, 2017
, we borrowed
$46.0 million
under the revolving facility, and made our required quarterly payment of
$5.0 million
on our term loan A facility and voluntary prepayments totaling
$27.0 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 determined in the most recently delivered financial statements, with the respective margins ranging from
2.00%
to
3.00%
for Eurocurrency loans and
1.00%
to
2.00%
for 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, 2017
, the interest rate for borrowings under the term loan A facility was
4.35%
, 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, 2017
, the interest rate for borrowings under the term loan B facility was
3.84%
, which approximated the effective interest rate. We have an interest rate swap agreement relating to this indebtedness, which is described in greater detail in Note 5 above.
The interest rate for the revolving facility 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
3.00%
for Eurocurrency loans and
1.00%
to
2.00%
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, 2017
, the weighted-average interest rate for borrowings under the revolving facility was
4.45%
.
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 Agreement 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 disclosed above in the description of the Sixth Amendment, our borrowings under the Credit Facilities are subject to a financial covenant based upon our Consolidated Total Leverage Ratio, with the maximum ratio set at
6.25
for the quarter ending
December 31, 2017
. After the Sixth Amendment and as of
December 31, 2017
, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was
4.91
. After the Sixth Amendment, based on our current covenants and forecasts, we expect to be in compliance for the one year period after
February 8, 2018
.
UK Line of Credit
Our subsidiary, Wesco Aircraft EMEA, Ltd., has a
£5.0 million
(
$6.8 million
based on the
December 31, 2017
exchange rate) line of credit that automatically renews annually on October 1 (the UK line of credit). The line of credit bears interest based on the base rate plus an applicable margin of
1.65%
. As of
December 31, 2017
, the full
£5.0 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,
|
|
2017
|
|
2016
|
Net (loss) income
|
$
|
(374
|
)
|
|
$
|
13,107
|
|
Foreign currency translation loss
|
(105
|
)
|
|
(13,439
|
)
|
Unrealized gain on cash flow hedging instruments
|
1,370
|
|
|
2,182
|
|
Total comprehensive income
|
$
|
891
|
|
|
$
|
1,850
|
|
Note 8. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share includes the dilutive effect of both outstanding stock options and restricted stock, if any, calculated using the treasury stock method. Assumed proceeds from in-the-money awards are calculated under the “as-if” method as prescribed by ASC 718,
Compensation—Stock Compensation
. The following table provides our basic and diluted net (loss) income per share for the
three
months ended
December 31, 2017
and
2016
(dollars in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
2017
|
|
2016
|
Net (loss) income
|
|
$
|
(374
|
)
|
|
$
|
13,107
|
|
Basic weighted average shares outstanding
|
|
99,096,914
|
|
|
98,319,926
|
|
Dilutive effect of stock options and restricted stock
|
|
—
|
|
|
501,868
|
|
Dilutive weighted average shares outstanding
|
|
99,096,914
|
|
|
98,821,794
|
|
Basic net (loss) income per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.13
|
|
Diluted net (loss) income per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.13
|
|
For the
three
months ended
December 31, 2017
and
2016
, respectively,
4,160,656
and
1,972,928
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. We conduct our business through
three
reportable segments: the Americas, EMEA and APAC.
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 working capital needs 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, 2017
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Unallocated Corporate Costs
|
|
Consolidated
|
Net sales
|
$
|
289,515
|
|
|
$
|
64,238
|
|
|
$
|
9,338
|
|
|
$
|
—
|
|
|
$
|
363,091
|
|
Income (loss) from operations
|
25,197
|
|
|
5,152
|
|
|
1,498
|
|
|
(7,275
|
)
|
|
24,572
|
|
Interest expense, net
|
(10,648
|
)
|
|
(1,164
|
)
|
|
(26
|
)
|
|
—
|
|
|
(11,838
|
)
|
Capital expenditures
|
958
|
|
|
325
|
|
|
52
|
|
|
—
|
|
|
1,335
|
|
Depreciation and amortization
|
6,376
|
|
|
806
|
|
|
74
|
|
|
—
|
|
|
7,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Unallocated Corporate Costs
|
|
Consolidated
|
Net sales
|
$
|
267,938
|
|
|
$
|
63,905
|
|
|
$
|
7,528
|
|
|
$
|
—
|
|
|
$
|
339,371
|
|
Income (loss) from operations
|
22,027
|
|
|
8,719
|
|
|
436
|
|
|
(4,926
|
)
|
|
26,256
|
|
Interest expense, net
|
(10,117
|
)
|
|
(930
|
)
|
|
(26
|
)
|
|
—
|
|
|
(11,073
|
)
|
Capital expenditures
|
1,037
|
|
|
268
|
|
|
11
|
|
|
—
|
|
|
1,316
|
|
Depreciation and amortization
|
5,934
|
|
|
778
|
|
|
17
|
|
|
—
|
|
|
6,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Consolidated
|
Total assets
|
$
|
1,441,365
|
|
|
$
|
270,023
|
|
|
$
|
46,898
|
|
|
$
|
1,758,286
|
|
Goodwill
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Consolidated
|
Total assets
|
$
|
1,436,840
|
|
|
$
|
275,445
|
|
|
$
|
41,822
|
|
|
$
|
1,754,107
|
|
Goodwill
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
Note 10. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Provision for income taxes
|
|
$
|
(13,368
|
)
|
|
$
|
(2,364
|
)
|
Effective tax rate
|
|
102.9
|
%
|
|
15.3
|
%
|
For the
three months ended December 31, 2017
, our effective tax rate increased
87.6
percentage points compared to the same period in the prior year. The effective tax rates for both the three months ended December 31, 2017 and 2016 were impacted significantly by discrete adjustments recognized during the period. Without consideration of discrete adjustments, our effective tax rate for the three months ended December 31, 2017 and 2016 would have been
28.6%
and
32.4%
, respectively. The change in our effective tax rate without discrete adjustments was primarily caused by a decrease of the U.S. federal statutory tax rate from 35% to 21%, as further described below, which was offset partially by a negative impact associated with foreign taxes.
For the three months ended December 31, 2016, the
17.1
percentage point favorable impact of discrete adjustments was primarily related to the early adoption of ASU 2016-09 and the release of a valuation allowance on a net operating loss of a foreign subsidiary. For the three months ended December 31, 2017, the
74.3
percentage point negative impact of discrete adjustments was primarily related to the enactment of the Tax Cuts and Jobs Act (the Tax Act) on December 22, 2017.
As a fiscal-year taxpayer, certain provisions of the Tax Act will impact the Company for our fiscal year ending September 30, 2018, while other provisions will be effective as of our fiscal year beginning on October 1, 2018. In addition, our first fiscal quarter of the current year, which ended on December 31, 2017, will be taxed at a blended federal tax rate of 24.5%, which is equal to our federal tax rate for our fiscal year ending September 30, 2018. The principal impacts of the Tax Act for our fiscal year ending September 30, 2018 are the reduction of the corporate income tax rate and the imposition of a one-time repatriation tax on accumulated earnings of our foreign subsidiaries (the Transition Tax). Other key provisions of the Tax Act which could impact the Company for our fiscal year beginning on October 1, 2018 include a reduction or limitation on the deduction of business interest, certain executive compensation and entertainment expenses, while also allowing businesses to immediately write off the full cost of certain new equipment. The Tax Act also transitions to a territorial tax system that generally allows for the repatriation of foreign earnings without additional U.S. corporate income tax while maintaining and expanding existing rules regarding the taxation of foreign earnings prior to their repatriation to the U.S.
Recognizing the complexity of the Tax Act, the staff of the US Securities and Exchange Commission has issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies the accounting for income taxes under ASC 740 if information is not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provides for a measurement period of up to a one year during which the required analyses and accounting must be completed. During the measurement period, (1) income tax effects of the Tax Act must be reported if the accounting has been completed, (2) provisional amounts must be reported for income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined and (3) provisional amounts are not required to be reported for income tax effects of the Tax Act for which a reasonable estimate cannot be determined.
For the three months ended December 31, 2017, the Company recorded as a result of the Tax Act (1) a provisional
$37.7 million
of charge to tax expense related to the remeasurement of deferred tax assets and liabilities which resulted in a
290.4%
increase in our effective tax rate, (2) a provisional
$37.7 million
tax benefit related to the partial reversal of its deferred tax liability for unremitted foreign earnings which resulted in a
290.3%
decrease in our effective tax rate and (3) a provisional
$9.1 million
charge to the tax expense related to the Transition Tax which resulted in a
69.7%
increase in our effective tax rate. The determination of the impact of the income tax effects of the items reflected as provisional amounts may change, possibly materially, following review of historical records, refinement of calculations, modifications of assumptions and further interpretation of the Tax Act based on U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax
authorities. The Company will report revised provisional amounts in accordance with SAB 118 when additional information and guidance has become available.
Effective January 1, 2018, the U.S. corporate federal statutory income tax rate was reduced from 35% to 21%. The federal tax rate applicable to the Company for our fiscal year ending September 30, 2018 will be a blended rate of
24.5%
, reflecting a rate of 35% for the three months ended December 31, 2017 and a rate of 21% for the remainder of the fiscal year. The
24.5%
blended tax rate is applied to each quarter during our fiscal year ending September 30, 2018. The federal tax rate applicable to the Company for our fiscal year beginning October 1, 2018 will be 21%. ASC 740 requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. For the three months ended December 31, 2017, the Company has remeasured deferred tax assets and liabilities based on the Company’s estimate as to when temporary differences are expected to be realized and the applicable federal tax rates at the time of realization. For the three months ended December 31, 2017, the Company recorded a provisional charge of
$37.7 million
to income tax expense as a result of the remeasurement of deferred tax assets and liabilities.
The Transition Tax imposes a one-time Federal repatriation tax on accumulated earnings and profits, determined at prescribed measurement dates, of the Company’s foreign subsidiaries. The tax rate is 15.5% on the foreign subsidiaries’ cash and cash equivalents, at prescribed measurement dates, and 8% on the foreign subsidiaries’ earnings and profits other than cash and cash equivalents. For the three months ended December 31, 2017, the Company recorded a provisional Transition Tax net of foreign tax credits of
$9.1 million
to income tax expense. The Transition Tax was recorded as a non-current liability since the Company intends to elect to pay the Transition Tax over an 8-year period, with the first payment required to be made during the three months ending March 31, 2019.
As previously disclosed, during the three months ended September 30, 2017, we reassessed the potential need to repatriate foreign earnings and determined it was likely that we would, in the future, repatriate approximately
$126.5 million
of previously earned and undistributed earnings. Accordingly, we provided for a
$38.7 million
deferred tax liability for U.S. Federal and state taxes that will become due upon such repatriation. Since the Transition Tax imposes a one-time Federal tax on the Company’s undistributed foreign earnings, no further taxes would be imposed upon the future repatriation of such earnings. Accordingly, for the three months ended December 31, 2017, the Company recorded a provisional
$37.7 million
partial reversal of its deferred tax liability as a tax provision benefit. The remaining
$1.0 million
deferred tax liability represents the Company’s estimated state tax liability which will be payable to states which, in the Company’s current estimate, are not expected to adopt the Transition Tax of the Tax Act and which will impose tax on foreign earnings at the time when such earnings are repatriated.
Note 11. Commitments and Contingencies
We are involved in various legal matters that arise in the ordinary course of 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.