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 for the year ended September 30, 2018 filed with the SEC on November 16, 2018 (the 2018 Form 10-K).
Except for the changes below, no material changes have been made to our significant accounting policies disclosed in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of the 2018 Form 10-K.
Revenue from Contracts with Customers
Pursuant to Accounting Standard Codification Topic 606,
Revenue from Contracts with Customers
(ASC 606)
,
we
recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Typically, our master purchase contracts with our customer run for three to five years without minimum purchase requirements annually or for over the term of the contract, and contain termination for convenience provisions, which generally allow for our customers to terminate their contracts on short notice without meaningful penalties. Pursuant to ASC 606, we have concluded that for revenue recognition purposes, our customers’ purchase orders (P.O.'s) are considered contracts, which are supplemented by certain contract terms such as service fee arrangements and variable price considerations in our master purchase contracts. The P.O.'s are typically fulfilled within
one
year.
Our Contracts for hardware and chemical product sales have a single performance obligation. Revenues from these Contract sales are recognized when the customer obtains control of our products, which occurs at a point in time, typically upon delivery in accordance with the terms of the sales contract. Services under our hardware just-in-time (JIT) arrangements are provided by us contemporaneously with the delivery of these products and are not separately identifiable from the products, and as such, once the products are 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 products. Payment is generally due within
30
to
90
days of delivery; therefore, our contracts do not create significant financing components. Warranties are limited to replacement of goods that are defective upon delivery. The Company does not provide service-type warranties.
Our chemical management services (CMS) contracts include the sale of chemical products as well as services such as product procurement, receiving and quality inspection, warehouse and inventory management, and waste disposal. The CMS contracts represent an end-to-end integrated chemical management solution. While each of the products and various services benefits the customer, we determined that they are a single output in the context of the CMS contract due to the significant
commercial integration of these products and services. Therefore, chemical products and services provided under a CMS contract represent a single performance obligation and revenue is recognized over time for these contracts using product deliveries as our output measure of progress under the CMS contract to depict the transfer of control to the customer.
We report revenue on a gross or net basis in our presentation of net sales and costs of sales based on management’s assessment of whether we act as a principal or agent in the transaction. If we are the principal in the transaction and have control of the specified good or service before that good or service is transferred to a customer, 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 earnings and comprehensive income. This assessment requires significant judgment to evaluate indicators of control within our contracts. We base our judgment on various indicators that include whether we take possession of the products, whether we are responsible for their acceptability, whether we have inventory risk, and whether we have discretion in establishing the price paid by the customer. The majority of our revenue is recorded on a gross basis with the exception of certain gas, energy and chemical management service contracts that are recorded on a net basis.
With respect to variable consideration,
we apply judgment in estimating its impact to determine the amount of revenue to recognize.
Sales rebates and profit-sharing arrangements 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.
Returns and refunds are allowed only for materials that are defective or not compliant with the customer’s order.
Sales tax collected from customers is excluded from net sales in the consolidated statements of comprehensive income.
We have determined that sales backlog is not a relevant measure of our business. Few, if any, of our contracts include minimum purchase requirements, annually or over the term of the agreement. As a result, we have no material sales backlog.
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 (Topic 350): 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). ASU 2016-02
is amended by ASU 2018-01, ASU2018-10, ASU 2018-11 and ASU 2018-20, which FASB issued in January 2018, July 2018, July 2018 and December 2018, respectively (collectively, the amended ASU 2016-02). The amended ASU 2016-02 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. The amended 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. The amended 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 the amended ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. The amended 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, 2018, total future minimum payments under our operating leases amounted to
$50.8 million
.
Adopted Accounting Standards
On October 1, 2018, we adopted 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. The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements.
Revenue from Contracts with Customers
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 the 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.
Effective October 1, 2018, we adopted the amended ASU 2014-09 (ASC 606)
using the modified retrospective method of adoption, which resulted in no changes to our opening consolidated balance sheet at the beginning of October 1, 2018. Our initial and incremental contract acquisition costs including sign up commissions and set up costs, which are required to be capitalized under ASC 606, are insignificant and expensed as incurred. Our revenues recognized under ASC 606 for the
three months ended December 31, 2018
were not materially different from what would have been recognized under the previous revenue standard, ASC 605, that is superseded. Prior period consolidated statements of earnings and comprehensive income remain unchanged.
We have designed and implemented internal controls, policies and processes to comply with ASC 606
.
The additional disclosures required by ASC 606 are included in Note 1 and Note 9.
Note 3. Inventory
Our inventory is comprised solely of finished goods. We record provisions to write down excess and obsolete (E&O) inventory to estimated realizable value.
We continually assess and refine our methodology for evaluating E&O inventory based on current facts and circumstances. Our hardware inventory E&O assessment requires the use of subjective judgments and estimates including the forecasted demand for each part. The forecasted demand considers a number of factors, including historical sales trends, current and forecasted customer demand, including customer liability provisions based on selected contractual rights, consideration of available sales channels and the time horizon over which we expect the hardware part to be sold.
During the
three months ended December 31,
2018
and
2017
, charges to cost of sales related to provisions for E&O inventory related expenses were
$5.0 million
and
$4.4 million
, respectively. We believe that these amounts appropriately write-down E&O inventory to its net realizable value.
Note 4. Goodwill
As of
December 31, 2018
, goodwill consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Total
|
Goodwill as of September 30, 2018, gross
|
|
$
|
773,384
|
|
|
$
|
51,190
|
|
|
$
|
16,955
|
|
|
$
|
841,529
|
|
Accumulated impairment
|
|
(569,201
|
)
|
|
—
|
|
|
(5,684
|
)
|
|
(574,885
|
)
|
Goodwill as of September 30, 2018, net
|
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
|
|
|
|
|
|
|
|
|
Changes during the period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of December 31, 2018, gross
|
|
773,384
|
|
|
51,190
|
|
|
16,955
|
|
|
841,529
|
|
Accumulated impairment
|
|
(569,201
|
)
|
|
—
|
|
|
(5,684
|
)
|
|
(574,885
|
)
|
Goodwill as of December 31, 2018, net
|
|
$
|
204,183
|
|
|
$
|
51,190
|
|
|
$
|
11,271
|
|
|
$
|
266,644
|
|
Note 5. Fair Value of Financial Instruments
Derivative Financial Instruments
Our primary objective in using financial derivatives is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign exchange rates and changes in interest rates. Our use of financial derivatives exposes us to credit risk to the extent that associated counter-parties may be unable to meet the terms of the derivatives. 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
three
interest rate swap agreements outstanding, which we have 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 (the "First Swap Agreement") has an amortizing notional amount, which was
$250.0 million
on
December 31, 2018
, 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 remaining
two
interest rate swap agreements (the “Remaining Swap Agreements”), entered into on May 14, 2018, have variable notional amounts which initially will increase in amount approximately equal to amortization of the notional amount of the First Swap Agreement and then amortize thereafter. The Remaining Swap Agreements totaled
$173.3 million
on
December 31, 2018
, and mature on February 26, 2021, giving us the contractual right to pay a fixed interest rate of
2.79%
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, 2018
, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. 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, 2018
, we expect to reclassify
$0.2 million
from accumulated other comprehensive gain and the related deferred tax to earnings as a decrease to interest expense over the next
12 months
when the underlying hedged item impacts earnings.
Non-Designated Derivatives
From time to time, we enter into 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, net line of our consolidated statements of earnings and comprehensive income. We did not have foreign currency forward contracts as of
December 31, 2018
and
September 30, 2018
.
The following table summarizes the notional principal amounts at
December 31, 2018
, and
September 30, 2018
of our outstanding interest rate swap agreements discussed above (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Notional
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
Instruments designated as accounting hedges:
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
423,300
|
|
|
$
|
435,800
|
|
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, 2018
and
September 30, 2018
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Balance Sheet Locations
|
|
December 31, 2018
|
|
September 30, 2018
|
Instruments designated as accounting hedge:
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other current assets
|
|
$
|
786
|
|
|
$
|
1,045
|
|
Interest rate swap contracts
|
|
Other assets
|
|
—
|
|
|
1,051
|
|
Interest rate swap contracts
|
|
Accrued expenses and other current liabilities
|
|
580
|
|
|
289
|
|
Interest rate swap contracts
|
|
Other liabilities
|
|
1,300
|
|
|
—
|
|
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 statements of earnings and comprehensive income during the
three
months ended
December 31, 2018
and
2017
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in Consolidated
Statements of Earnings and
Comprehensive Income
|
|
Three Months Ended
December 31,
|
|
|
|
Cash Flow Hedge
|
|
|
2018
|
|
2017
|
Interest rate swap contracts
|
|
Interest expense, net
|
|
$
|
82
|
|
|
$
|
557
|
|
|
|
|
|
|
|
|
Total interest expense, net presented in the consolidated statements of earnings and comprehensive income in which the above effects of cash flow hedges are recorded
|
|
$
|
12,914
|
|
|
$
|
11,838
|
|
The following table provides the effective portion of the amount of (loss) gain recognized in other comprehensive income (net of income taxes) for the
three
months ended
December 31, 2018
and
2017
(in thousands).
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Cash Flow Hedge
|
2018
|
|
2017
|
Interest rate swap contracts
|
$
|
(2,194
|
)
|
|
$
|
813
|
|
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, 2018
(in thousands).
|
|
|
|
|
|
AOCI - Unrealized Gain (Loss) on Hedging Instruments
|
Three Months Ended December 31, 2018
|
Balance at beginning of period
|
$
|
1,375
|
|
Change in fair value of hedging instruments
|
(2,194
|
)
|
Amounts reclassified to earnings
|
82
|
|
Net current period other comprehensive loss
|
(2,112
|
)
|
Balance at end of period
|
$
|
(737
|
)
|
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable and payable, accrued expenses and other current liabilities, and a credit facility including two term loans and a revolving line of credit. The carrying amounts of these instruments approximate fair value because of their short-term duration. 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 (as defined below). 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 and interest rate swap agreements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Principal
Amount
|
|
Fair
Value
|
|
Principal
Amount
|
|
Fair
Value
|
Term loan A facility
|
$
|
355,000
|
|
|
$
|
348,787
|
|
|
$
|
360,000
|
|
|
$
|
357,840
|
|
Term loan B facility
|
440,562
|
|
|
429,548
|
|
|
440,562
|
|
|
432,192
|
|
Revolving facility
|
74,000
|
|
|
74,000
|
|
|
54,000
|
|
|
54,000
|
|
Interest rate swap contract liability (assets), net
|
1,094
|
|
|
1,094
|
|
|
(1,807
|
)
|
|
(1,807
|
)
|
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:
|
|
|
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, 2018
. 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, 2018
and
September 30, 2018
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Instruments designated as accounting hedge:
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other current assets
|
|
$
|
786
|
|
|
$
|
—
|
|
|
$
|
786
|
|
|
$
|
—
|
|
Interest rate swap contracts
|
Accrued expenses and other current liabilities
|
|
580
|
|
|
—
|
|
|
580
|
|
|
—
|
|
Interest rate swap contracts
|
Other liabilities
|
|
1,300
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
Balance Sheet Locations
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Instrument designated as accounting hedge:
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other current assets
|
|
$
|
1,045
|
|
|
$
|
—
|
|
|
$
|
1,045
|
|
|
$
|
—
|
|
Interest rate swap contracts
|
Other assets
|
|
1,051
|
|
|
—
|
|
|
1,051
|
|
|
—
|
|
Interest rate swap contracts
|
Accrued expenses and other current liabilities
|
|
289
|
|
|
—
|
|
|
289
|
|
|
—
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
|
Principal
Amount
|
|
Deferred Debt Issuance Costs
|
|
Carrying
Amount
|
|
Principal
Amount
|
|
Deferred Debt Issuance Costs
|
|
Carrying
Amount
|
Term loan A facility
|
|
$
|
355,000
|
|
|
$
|
(5,168
|
)
|
|
$
|
349,832
|
|
|
$
|
360,000
|
|
|
$
|
(5,842
|
)
|
|
$
|
354,158
|
|
Term loan B facility
|
|
440,562
|
|
|
(2,639
|
)
|
|
437,923
|
|
|
440,562
|
|
|
(2,943
|
)
|
|
437,619
|
|
Revolving facility
|
|
74,000
|
|
|
—
|
|
|
74,000
|
|
|
54,000
|
|
|
—
|
|
|
54,000
|
|
|
|
869,562
|
|
|
(7,807
|
)
|
|
861,755
|
|
|
854,562
|
|
|
(8,785
|
)
|
|
845,777
|
|
Less: current portion
|
|
94,000
|
|
|
—
|
|
|
94,000
|
|
|
74,000
|
|
|
—
|
|
|
74,000
|
|
Non-current portion
|
|
$
|
775,562
|
|
|
$
|
(7,807
|
)
|
|
$
|
767,755
|
|
|
$
|
780,562
|
|
|
$
|
(8,785
|
)
|
|
$
|
771,777
|
|
Senior Secured Credit Facilities
The credit agreement, dated as of December 7, 2012 (as amended, the Credit Agreement), by and among the Company, Wesco Aircraft Hardware Corp. and the lenders and agents party thereto, which governs our senior secured credit facilities, 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 the term loan A facility, the revolving facility and the term loan B facility, together, as the “Credit Facilities.”
As of
December 31, 2018
, our outstanding indebtedness under our Credit Facilities was
$869.6 million
, which consisted of (1)
$355.0 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, 2018
,
$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, 2018
, we borrowed
$30.0 million
under the revolving facility, and made our required quarterly payments of
$5.0 million
on our term loan A facility and voluntary prepayments totaling
$10.0 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 such term is defined in the Credit Agreement) 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 (1) 90 days before the maturity of the term loan B facility, and (2) October 4, 2021. As of
December 31, 2018
, the interest rate for borrowings under the term loan A facility was
5.35%
, 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, 2018
, the interest rate for borrowings under the term loan B facility was
4.85%
, 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 (1)
90
days before the maturity of the term loan B facility, and (2) October 4, 2021. As of
December 31, 2018
, the weighted-average interest rate for borrowings under the revolving facility was
5.83%
.
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. 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
5.75
for the quarter ending
December 31, 2018
. As of
December 31, 2018
, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was
4.31
. The Consolidated Total Leverage Ratio is scheduled to step-down to
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. Based on our current covenants and forecasts, we expect to be in compliance for the one year period after
January 31, 2019
.
The Credit Agreement also includes an Excess Cash Flow Percentage (as such term is defined in the Credit Agreement), which is currently set at
75%
, provided that the Excess Cash Flow Percentage shall be reduced to (1)
50%
, if the Consolidated Total Leverage Ratio is less than
4.00
but greater than or equal to
3.00
, (2)
25%
, if the Consolidated Total Leverage Ratio is less than
3.00
but greater than or equal to
2.50
, and (3)
0%
, if the Consolidated Total Leverage Ratio is less than
2.50
. The calculation is determined annually, and for fiscal year 2018, no excess cash flow payment was required.
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 as of
December 31, 2018
and
September 30, 2018
(dollars in thousands). The remaining deferred debt issuance costs as of
December 31, 2018
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, 2018
|
|
$
|
5,842
|
|
|
$
|
2,943
|
|
|
$
|
2,827
|
|
|
$
|
11,612
|
|
Amortization of deferred debt issuance costs
|
|
(674
|
)
|
|
(304
|
)
|
|
(326
|
)
|
|
(1,304
|
)
|
Deferred debt issuance costs as of December 31, 2018
|
|
$
|
5,168
|
|
|
$
|
2,639
|
|
|
$
|
2,501
|
|
|
$
|
10,308
|
|
UK Line of Credit
Our subsidiary, Wesco Aircraft EMEA, Ltd., has a
£5.0 million
(
$6.4 million
based on the
December 31, 2018
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, 2018
, 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,
|
|
|
2018
|
|
2017
|
Net income (loss)
|
|
$
|
6,293
|
|
|
$
|
(374
|
)
|
Foreign currency translation loss
|
|
(857
|
)
|
|
(105
|
)
|
Unrealized (loss) gain on cash flow hedging instruments
|
|
(2,112
|
)
|
|
1,370
|
|
Total comprehensive income
|
|
$
|
3,324
|
|
|
$
|
891
|
|
Note 8. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 income (loss) per share for the
three
months ended
December 31, 2018
and
2017
(dollars in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
2018
|
|
2017
|
Net income (loss)
|
|
$
|
6,293
|
|
|
$
|
(374
|
)
|
Basic weighted average shares outstanding
|
|
99,485,989
|
|
|
99,096,914
|
|
Dilutive effect of stock options and restricted stock
|
|
418,122
|
|
|
—
|
|
Dilutive weighted average shares outstanding
|
|
99,904,111
|
|
|
99,096,914
|
|
Basic net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
—
|
|
Diluted net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
—
|
|
For the
three
months ended
December 31, 2018
and
2017
, respectively,
3,172,721
and
4,160,656
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 (Europe, Middle East and Africa) and APAC (Asia Pacific).
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, 2018
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Unallocated Corporate Costs
|
|
Consolidated
|
Net sales
|
$
|
321,125
|
|
|
$
|
61,738
|
|
|
$
|
12,448
|
|
|
$
|
—
|
|
|
$
|
395,311
|
|
Income (loss) from operations
|
28,991
|
|
|
2,496
|
|
|
1,074
|
|
|
(10,482
|
)
|
|
22,079
|
|
Interest expense, net
|
(11,257
|
)
|
|
(1,631
|
)
|
|
(26
|
)
|
|
—
|
|
|
(12,914
|
)
|
Capital expenditures
|
1,460
|
|
|
491
|
|
|
289
|
|
|
—
|
|
|
2,240
|
|
Depreciation and amortization
|
6,166
|
|
|
849
|
|
|
83
|
|
|
—
|
|
|
7,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Consolidated
|
Total assets
|
$
|
1,503,068
|
|
|
$
|
251,281
|
|
|
$
|
58,727
|
|
|
$
|
1,813,076
|
|
Goodwill
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Consolidated
|
Total assets
|
$
|
1,485,453
|
|
|
$
|
248,937
|
|
|
$
|
55,086
|
|
|
$
|
1,789,476
|
|
Goodwill
|
204,183
|
|
|
51,190
|
|
|
11,271
|
|
|
266,644
|
|
Product and Service Information
Net sales by product categories for the
three
months ended
December 31, 2018
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2018
|
|
Americas
|
|
EMEA
|
|
APAC
|
|
Consolidated
|
|
Sales
|
|
% of
Total
|
|
Sales
|
|
% of
Total
|
|
Sales
|
|
% of
Total
|
|
Sales
|
|
% of
Total
|
Hardware
|
$
|
150,997
|
|
|
47.0
|
%
|
|
$
|
27,139
|
|
|
44.0
|
%
|
|
$
|
3,963
|
|
|
31.8
|
%
|
|
$
|
182,099
|
|
|
46.1
|
%
|
Chemicals (1)
|
131,612
|
|
|
41.0
|
%
|
|
30,339
|
|
|
49.1
|
%
|
|
6,558
|
|
|
52.7
|
%
|
|
168,509
|
|
|
42.6
|
%
|
Electronic components
|
26,465
|
|
|
8.3
|
%
|
|
1,959
|
|
|
3.2
|
%
|
|
351
|
|
|
2.8
|
%
|
|
28,775
|
|
|
7.3
|
%
|
Bearings
|
5,619
|
|
|
1.7
|
%
|
|
1,636
|
|
|
2.6
|
%
|
|
1,195
|
|
|
9.6
|
%
|
|
8,450
|
|
|
2.1
|
%
|
Machined parts and other
|
6,432
|
|
|
2.0
|
%
|
|
665
|
|
|
1.1
|
%
|
|
381
|
|
|
3.1
|
%
|
|
7,478
|
|
|
1.9
|
%
|
Total
|
$
|
321,125
|
|
|
100.0
|
%
|
|
$
|
61,738
|
|
|
100.0
|
%
|
|
$
|
12,448
|
|
|
100.0
|
%
|
|
$
|
395,311
|
|
|
100.0
|
%
|
(1) Includes CMS contracts
Note 10. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Provision for income taxes
|
|
$
|
2,655
|
|
|
$
|
13,368
|
|
Effective tax rate
|
|
29.7
|
%
|
|
102.9
|
%
|
For the
three months ended December 31, 2018
, our effective tax rate decreased
73.2
percentage points compared to the same period in the prior year. The difference in effective tax rates is primarily related to discrete adjustments recognized during the three months ended December 31, 2017. Without consideration of discrete adjustments, our effective tax rate for the three months ended December 31, 2018 and December 31, 2017 would have both been
28.6%
. For the three months ended December 31, 2018, our effective tax rate without discrete adjustments was favorably impacted by a decrease in the U.S. federal statutory tax rate to 21% and unfavorably impacted by a global intangible low-taxed income (“GILTI”) inclusion, as further described below.
For the three months ended December 31, 2017, the
74.3
percentage point unfavorable impact of discrete adjustments was primarily related to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. For the three months ended December 31, 2018, the
1.1
percentage point unfavorable impact of discrete adjustments was primarily related to the accrual of interest expense with respect to an uncertain tax position. In accordance with SAB 118, the Company has finalized its calculation of the one-time transition tax on unremitted foreign earnings and recorded a final $
35 thousand
tax benefit.
In January 2018, the FASB released guidance on the accounting for tax on GILTI inclusions under the provision of the Tax Act. GILTI gives rise to U.S. tax on income earned by foreign corporations which is in excess of a deemed return on tangible assets of the foreign corporations. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to account for GILTI as a period cost and therefore has included tax expense related to GILTI in its effective tax rate calculation for the three months ended December 31, 2018.
On November 28, 2018, the U.S. Treasury Department released proposed regulations covering the one-time transition tax on unrepatriated foreign earnings which was enacted as part of the Tax Act. Certain guidance included in these proposed regulations that led to the recognition of a $
1.9 million
benefit for the fiscal year ended September 30, 2018 (the “2018 Benefit”) is inconsistent with our interpretation of the Tax Act. The guidance included in the proposed regulations is not authoritative and is subject to change in the regulatory review process. However, if the same guidance is included in the final regulations as drafted, we may be required to reverse the 2018 Benefit in the quarter when the regulations become final.
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.