(cid:3)(cid:1115)(cid:1115)(cid:1122)(cid:1102)(cid:1113)
(cid:20)(cid:1106)(cid:1117)(cid:1116)(cid:1119)(cid:1121)
F I S C A L Y E A R 2 0 1 6
(cid:25)(cid:10)(cid:17)(cid:561)(cid:25)(cid:7)(cid:561)(cid:3)(cid:20)(cid:7)
Wesco Aircraft Holdings, Inc. is the world’s leading distributor and provider of comprehensive supply
chain management services to the global aerospace industry, based on annual sales. The company’s
services range from traditional distribution to the management of supplier relationships, quality
assurance, kitting, just-in-time delivery and point-of-use inventory management.
BROAD PRODUCT OFFERING AND SERVICE CAPABILITIES
We believe Wesco Aircraft offers one of the world’s broadest portfolios of aerospace products, including chemical,
electrical and C-class hardware, as well as vendor-managed inventory and tooling, chemical management and
quality assurance services.
Hardware
Chemicals
Electronic Products
Bearings
Customer-Designed
Products and Tooling
Quality Assurance
Chemical Management
Services (CMS)
Kitting Services
Vendor Managed
Inventory (VMI)
Tooling Services
VALUE PROPOSITION
Our value proposition is robust. For customers, we can reduce overhead, improve working capital and aggregate
demand to buy better than they can individually. For suppliers, the value we bring includes improved utilization,
demand forecasts to improve their production system and access to a significantly larger number of customers.
Customer Benefits
Customers
Suppliers
Supplier Benefits
Lower SG&A
Reduced working capital
Lower excess and
obsolescence expense
Improved productivity
Supply base consolidation
Substantial improvement in
part quality
Better on-time delivery
Fewer stock shortages
Lower average lead-time
Reduced finished goods
inventory
Price discipline
Improved working capital
and cash flow
Access to more than 8,200
customers
Lower administrative and
selling costs
Improved on-time
performance
Improved machine
utilization
Dear Shareholders,
Fiscal 2016 was a year of
transformational change for
Wesco Aircraft, as we restructured
the company to better reflect
and support our position as a
full-scale supply chain service
provider to the global aerospace
industry. Our
and defense
progress in fiscal 2016 led to better financial results than
Wesco has reported in its recent history and provides a
stronger foundation for the future.
We came into the year faced with declining sales, elevated
selling, general and administrative (SG&A) expenses,
delivery performance challenges and procurement
practices that were more in line with a smaller, more
traditional distributor. We overcame many challenges
to improve net sales, driven by growth in long-term
contracts. We reduced SG&A expenses by $32 million,
which helped deliver operating income of $159 million
and Wesco’s first operating margin expansion in many
years. Cash flow from operations was strong, and we paid
down long-term debt by $111 million during the year. In
the past two fiscal years, we have significantly improved
our credit profile through debt reductions of nearly
$250 million.
During fiscal 2016, we took the opportunity to leverage
the accelerated integration of our fiscal 2014 acquisition of
Haas and took the actions necessary to right-size the asset
base and SG&A to reflect a slower growth environment;
gained market share by cross-selling hardware and
chemical customers; and improved the balance sheet.
These changes should provide strong leverage for
continued improved performance once underlying
sales growth accelerates from our long-term contractual
position with large aerospace and defense customers and
our strong sales wins and renewal performance.
Wesco’s transformational actions at the close of fiscal 2015
and carried out through fiscal 2016 will serve to align our
corporation to take advantage of the growing aerospace
and defense industry, as we focus sales on servicing our
largest long-term growth markets around large OEM
and Tier 1 customers and expanding our MRO services.
We believe these markets lend themselves to expanding
Wesco’s value-added full-service supply chain model. At
the same time, we remain well positioned to improve
service to ad-hoc distribution markets as customer needs
require. We enter fiscal 2017 with greater sales momentum
and an expanding pipeline of growth opportunities.
a number of sites, while also opening three new larger
sites for multi-commodity customer service in the regions
where Wesco is experiencing significant growth. Our
sales, operations and support personnel were re-aligned
to better support our markets. Supply chain management
initiatives made good progress this year, as we refocused
procurement practices in line with forecasted demand
from our larger customer contracts, improving supplier
delivery performance and increasing the number of
long-term agreements with these critical partners. We
have greater visibility and control of material receipts
and disbursements, which has led to improvements in
inventory and cash management timing and predictability.
Additionally, we continued to pay down debt, refinanced
our long-term debt and enhanced controls, all supporting
our improving balance sheet. Our improved financial
performance allows Wesco to target the end of fiscal
2017 to begin strategic consideration of additional capital
allocation opportunities.
The scope and pace of transformational change is now
largely behind Wesco. We delivered improvement across
the business and better financial performance. We believe
fiscal 2016 results provide the basis for a stronger fiscal
2017. Contract sales momentum is on the right track, our
cost structure is more aligned with sales opportunities, and
the company’s financial structure has been strengthened.
Wesco’s vision is to be the best integrated supply chain
solution provider with the broadest portfolio of products
and services to our markets, supported by our long-term
goals and our strong culture of values, positive people
philosophy and a common operating system. We’re on
track to be the largest service provider in the industry,
while improving profitability and delivering sustained
performance.
I want to thank our shareholders, customers and suppliers
for their ongoing support of Wesco. I also want to thank
our employees, who remain engaged, supportive and
dedicated to driving stronger performance in fiscal 2017. I
am confident that together we will take Wesco Aircraft to
higher levels of performance in the years ahead.
Sincerely,
David J. Castagnola
President and Chief Executive Officer
We executed our restructuring actions as planned,
streamlining and reducing our cost structure by closing
November 28, 2016
(cid:8)(cid:11)(cid:16)(cid:3)(cid:16)(cid:5)(cid:11)(cid:3)(cid:14)(cid:561)(cid:21)(cid:23)(cid:15)(cid:15)(cid:3)(cid:20)(cid:27)
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
Net sales
Income (loss) from operations
Interest expense, net
Net income (loss)
Diluted net income (loss) per share
Cash and cash equivalents
Accounts receivable
Net inventory
Total assets
Accounts payable
Long-term debt and capital lease obligations
Total stockholders’ equity
Fiscal Years Ended September 30,
2016
2015
2014
$1,477,366
$1,497,615
$1,355,877
158,750
36,901
91,378
0.93
$ 77,061
249,195
713,470
1,956,205
181,700
843,616
882,915
(206,365)
37,092
(154,744)
(1.60)
183,934
29,225
102,102
1.05
$ 82,866
$ 104,775
253,348
701,535
2,020,973
149,615
954,730
817,573
301,668
754,400
2,412,274
159,608
1,081,825
992,290
Notes: The company acquired Haas Group International in fiscal 2014. Long-term debt and capital lease obligations exclude current portions.
(cid:9)(cid:14)(cid:17)(cid:4)(cid:3)(cid:14)(cid:561)(cid:18)(cid:20)(cid:7)(cid:21)(cid:7)(cid:16)(cid:5)(cid:7)
Expanding to support customers worldwide
57 Locations | 17 Countries | 2,700+ Employees | 565,000+ SKUs
Forward Stocking
Locations
Decatur, AL
Savannah, GA
Austin, TX
Fort Worth, TX
Auburn, WA
Lachine, QC
Queretaro, MX
EMEA / APAC
EUROPE
Sales/
Administration
Huddersfield, UK
Cleckheaton, UK
Bremen, Germany
MIDDLE
Yokneam Elite,
EAST
Israel
Marcon, Italy
Shanghai, China
Singapore
AFRICA
Central Stocking
Locations
Huddersfield, UK
Crawley, UK
ASIA
Glasgow, UK
Linlithgow, UK
Hamburg, Germany
Shannon, Ireland
Mielec, Poland
AMERICAS
Sales/
Administration
Valencia, CA
Orlando, FL
Melville, NY
West Chester, PA
Austin, TX
Santa Fe, Argentina
Saltillo, Mexico
Central Stocking
Locations
NORTH
AMERICA
Valencia, CA
Rancho Cordova,
CA
Tempe, AZ
McDonough, GA
Miami, FL
Wichita, KS
Amesbury, MA
Berkeley, MO
Greenville, NC
Mississauga, ON
Mechanicsburg, PA
Austin, TX
Northlake, TX
Chihuahua, MX
SOUTH
AMERICA
Forward Stocking
Locations
Aberdeen, UK
Cheltenham, UK
Huddersfield, UK
Toulouse, France
Holon, Israel
Akko, Israel
Rome, Italy
Melbourne,
Australia
Chengdu, China
Pudong, China
Shanghai, China
Bangalore, India
Baguio City,
Philippines
Singapore
Istanbul, Turkey
AUSTRALIA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
(cid:2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(cid:3)
For the transition period from to
Commission File No. 001-35253
WESCO AIRCRAFT HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State of Incorporation)
20-5441563
(I.R.S. Employer Identification Number)
24911 Avenue Stanford
Valencia, California 91355
(Address of Principal Executive Offices and Zip Code)
(661) 775-7200
(Registrant’s Telephone Number, Including Area Code)
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
New York Stock Exchange
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or shorter period
that the registrant was required to submit and post such files). Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934.
Large accelerated filer(cid:4)(cid:2)
Smaller reporting company (cid:3)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a
smaller reporting company)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)(cid:6)(cid:13)(cid:9)(cid:6)(cid:14)(cid:10)(cid:15)(cid:7)(cid:16)(cid:14)(cid:10)(cid:17)(cid:13)(cid:9)(cid:8)(cid:13)(cid:9)(cid:16)(cid:10)(cid:8)(cid:13)(cid:9)(cid:10)(cid:16)(cid:9)(cid:18)(cid:5)(cid:19)(cid:8)(cid:16)(cid:7)(cid:3)(cid:8)(cid:10)(cid:5)(cid:19)(cid:10)(cid:7)(cid:10)(cid:19)(cid:13)(cid:9)(cid:20)(cid:20)(cid:10)(cid:6)(cid:21)(cid:15)(cid:22)(cid:7)(cid:3)(cid:12)(cid:10)(cid:23)(cid:7)(cid:19)(cid:10)(cid:4)(cid:9)(cid:24)(cid:3)(cid:9)(cid:4)(cid:10)(cid:5)(cid:3)(cid:10)(cid:25)(cid:26)(cid:20)(cid:9)(cid:10)(cid:27)(cid:28)(cid:11)(cid:29)(cid:28)(cid:10)(cid:21)(cid:30)(cid:10)(cid:8)(cid:13)(cid:9)(cid:10)(cid:31)(cid:6)(cid:8) !(cid:10)"(cid:9)(cid:19)(cid:3) No (cid:2)
(cid:31)(cid:19)(cid:10)(cid:21)(cid:30)(cid:10)$(cid:7)(cid:16)(cid:6)(cid:13)(cid:10)%(cid:27)&(cid:10)(cid:28)’(cid:27)(&(cid:10)(cid:8)(cid:13)(cid:9)(cid:10)(cid:7)(cid:18)(cid:18)(cid:16)(cid:9)(cid:18)(cid:7)(cid:8)(cid:9)(cid:10)(cid:15)(cid:7)(cid:16)(cid:14)(cid:9)(cid:8)(cid:10))(cid:7)(cid:20)(cid:26)(cid:9)(cid:10)(cid:21)(cid:30)(cid:10)(cid:8)(cid:13)(cid:9)(cid:10))(cid:21)(cid:8)(cid:5)(cid:3)(cid:18)(cid:10)(cid:7)(cid:3)(cid:4)(cid:10)(cid:3)(cid:21)(cid:3)(cid:29))(cid:21)(cid:8)(cid:5)(cid:3)(cid:18)(cid:10)(cid:6)(cid:21)(cid:15)(cid:15)(cid:21)(cid:3)(cid:10)(cid:9)*(cid:26)(cid:5)(cid:8)(cid:12)(cid:10)(cid:13)(cid:9)(cid:20)(cid:4)(cid:10)(cid:11)(cid:12)(cid:10)(cid:3)(cid:21)(cid:3)(cid:29)(cid:7)(cid:30)(cid:24)(cid:20)(cid:5)(cid:7)(cid:8)(cid:9)(cid:19)(cid:10)(cid:11)(cid:7)(cid:19)(cid:9)(cid:4)(cid:10)(cid:21)(cid:3)(cid:10)(cid:8)(cid:13)(cid:9)(cid:10)(cid:6)(cid:20)(cid:21)(cid:19)(cid:5)(cid:3)(cid:18)(cid:10)(cid:22)(cid:16)(cid:5)(cid:6)(cid:9)(cid:10)(cid:7)(cid:19)(cid:10)
(cid:21)(cid:30)(cid:10)(cid:8)(cid:13)(cid:7)(cid:8)(cid:10)(cid:4)(cid:7)(cid:12)(cid:10)(cid:17)(cid:7)(cid:19)(cid:10)(cid:7)(cid:22)(cid:22)(cid:16)(cid:21)+(cid:5)(cid:15)(cid:7)(cid:8)(cid:9)(cid:20)(cid:12)(cid:10),-.(&’.(cid:28)&’’’!
/(cid:13)(cid:9)(cid:10)(cid:3)(cid:26)(cid:15)(cid:11)(cid:9)(cid:16)(cid:10)(cid:21)(cid:30)(cid:10)(cid:19)(cid:13)(cid:7)(cid:16)(cid:9)(cid:19)(cid:10)(cid:21)(cid:30)(cid:10)(cid:6)(cid:21)(cid:15)(cid:15)(cid:21)(cid:3)(cid:10)(cid:19)(cid:8)(cid:21)(cid:6)(cid:14)(cid:10)(cid:23)(cid:22)(cid:7)(cid:16)(cid:10))(cid:7)(cid:20)(cid:26)(cid:9)(cid:10),’!’’(cid:27)(cid:10)(cid:22)(cid:9)(cid:16)(cid:10)(cid:19)(cid:13)(cid:7)(cid:16)(cid:9) (cid:10)(cid:21)(cid:30)(cid:10)(cid:8)(cid:13)(cid:9)(cid:10)(cid:16)(cid:9)(cid:18)(cid:5)(cid:19)(cid:8)(cid:16)(cid:7)(cid:3)(cid:8)(cid:10)(cid:21)(cid:26)(cid:8)(cid:19)(cid:8)(cid:7)(cid:3)(cid:4)(cid:5)(cid:3)(cid:18)(cid:10)(cid:7)(cid:19)(cid:10)(cid:21)(cid:30)(cid:10)0(cid:21))(cid:9)(cid:15)(cid:11)(cid:9)(cid:16)(cid:10)(cid:28)(cid:27)&(cid:10)(cid:28)’(cid:27)(&(cid:10)(cid:17)(cid:7)(cid:19)(cid:10)--&’(cid:27)(cid:28)&-(.!
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrants’ definitive proxy
statement for the 2017 annual meeting of stockholders, which the registrant intends to file pursuant to Regulation 14A with the Securities
and Exchange Commission not later than 120 days after the registrant’s fiscal year end of September 30, 2016. With the exception of the
sections of the definitive proxy statement specifically incorporated herein by reference, the definitive proxy statement is not deemed to be
filed as part of this Annual Report on Form 10-K.
EXPLANATORY NOTE
Wesco Aircraft Holdings, Inc. is filing this Amendment No. 1 to Annual Report on Form 10-K/A
(this “Amendment”) to amend its Annual Report on Form 10-K for the year ended September 30, 2016,
originally filed with the Securities and Exchange Commission on November 28, 2016 (the “Original
Filing”). Due to administrative error, the Report of Independent Registered Public Accounting Firm
under Item 8 of the Original Filing was dated November 17, 2016, rather than November 28, 2016.
This Amendment is being filed solely to provide the Report of Independent Registered Public
Accounting Firm under Item 8 dated as of November 28, 2016 and the related Consent of Independent
Registered Public Accounting Firm as Exhibit 23.1. This Amendment also includes new certifications by
our chief executive officer and chief financial officer pursuant to Sections 302 and 906 of the Sarbanes-
Oxley Act of 2002 as Exhibits 31.1, 31.2 and 32.1.
Except as discussed above, this Amendment does not amend or otherwise update any other
information in the Original Filing. For convenience, the entire Annual Report on Form 10-K, as
amended, is being re-filed.
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN DEFINITIONS
Page
5
15
31
31
31
31
32
34
35
58
61
104
104
106
107
107
107
107
108
109
110
111
Unless otherwise noted in this Annual Report, the term “Wesco Aircraft” means Wesco Aircraft
Holdings, Inc., our top-level holding company, and the terms “Wesco,” “the Company,” “we,” “us,” “our”
and “our Company” mean Wesco Aircraft and its subsidiaries, including (1) Wesco Aircraft Hardware
Corp. (Wesco Aircraft Hardware), which is our primary historical domestic operating company and the
sole member of Haas Group International, LLC, which we acquired, along with Haas Group, Inc. (now
Haas Group, LLC) and its direct and indirect subsidiaries (collectively, Haas), on February 28, 2014,
and (2) Wesco Aircraft Europe, Ltd. (Wesco Aircraft Europe), our primary historical foreign operating
company. References to “fiscal year” mean the year ending or ended September 30. For example, “fiscal
year 2016” or “fiscal 2016” means the period from October 1, 2015 to September 30, 2016.
2
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements (including within the
meaning of the Private Securities Litigation Reform Act of 1995) concerning Wesco and other matters.
These statements may discuss goals, intentions and expectations as to future plans, trends, events, results
of operations or financial condition, or otherwise, based on current beliefs of management, as well as
assumptions made by, and information currently available to, management. Forward-looking statements
may be accompanied by words such as “achieve,” “aim,” “anticipate,” “believe,” “could,” “drive,”
“estimate,” “expect,” “forecast,” “future,” “grow,” “improve,” “increase,” “intend,” “may,” “outlook,”
“plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or similar words,
phrases or expressions. These forward-looking statements are subject to various risks and uncertainties,
many of which are outside our control. Therefore, you should not place undue reliance on such
statements. Factors that could cause actual results to differ materially from those in the forward-looking
statements include, but are not limited to, the following:
• general economic and industry conditions;
•
•
•
•
•
conditions in the credit markets;
changes in military spending;
risks unique to suppliers of equipment and services to the U.S. government;
risks associated with our long-term, fixed-price agreements that have no guarantee of future
sales volumes;
risks associated with the loss of significant customers, a material reduction in purchase orders
by significant customers or the delay, scaling back or elimination of significant programs on
which we rely;
• our ability to effectively compete in our industry;
• our ability to effectively manage our inventory;
• our suppliers’ ability to provide us with the products we sell in a timely manner, in adequate
quantities and/or at a reasonable cost;
• our ability to maintain effective information technology systems;
• our ability to retain key personnel;
•
•
risks associated with our international operations, including exposure to foreign currency movements;
risks associated with assumptions we make in connection with our critical accounting estimates
(including goodwill) and legal proceedings;
• our dependence on third-party package delivery companies;
•
fuel price risks;
• our ability to establish and maintain effective internal control over financial reporting;
•
fluctuations in our financial results from period-to-period;
3
• environmental risks;
•
•
•
risks related to the handling, transportation and storage of chemical products;
risks related to the aerospace industry and the regulation thereof;
risks related to our indebtedness; and
• other risks and uncertainties.
The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and
the other risks and uncertainties that affect our business, including those described under Part I, Item 1A.
“Risk Factors” and the other documents we file from time to time with the Securities and Exchange
Commission (SEC). All forward-looking statements included in this Annual Report on Form 10-K
(including information included or incorporated by reference herein) are based upon information
available to us as of the date hereof, and we undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
4
ITEM 1. BUSINESS
Company Overview
We are the world’s leading distributors and providers of comprehensive supply chain management
services to the global aerospace industry, based on an annual sales. Our services range from traditional
distribution to the management of supplier relationships, quality assurance, kitting, just-in-time (JIT)
delivery and point-of-use inventory management. We supply over 565,000 active stock-keeping units
(SKUs), including C-class hardware, chemicals, electronic components, bearings, tools and machined
parts. In fiscal 2016, sales of hardware including bearings and other products represented 52.3% of
our net sales, sales of chemicals represented 40.6% of our net sales and sales of electronic components
represented 7.1% of our net sales. We serve our customers under both (1) long-term contractual
arrangements (Contracts), which include JIT contracts, that govern the provision of comprehensive
outsourced supply chain management services and long-term agreements, or LTAs, that typically set
prices for specific products, and (2) ad hoc sales. In February 2014, we acquired 100% of the outstanding
stock of Haas, a provider of chemical supply chain management services to the commercial aerospace,
airline, military, automotive, energy, pharmaceutical and electronics sectors. In July 2012, we acquired
substantially all of the assets of Interfast, Inc. (Interfast), a Toronto-based value-added distributor
of specialty fasteners, fastening systems and production installation tooling for the aerospace and
electronics markets.
Founded in 1953 by the father of our current Chairman of the Board of Directors, we have grown to
serve over 8,000 customers, which are primarily in the commercial, military and general aviation sectors,
including the leading original equipment manufacturers (OEMs) and their subcontractors, through which
we support nearly all major Western aircraft programs, and also sell products to airline-affiliated and
independent maintenance, repair and overhaul (MRO) providers. We also service industrial customers,
which include customers in the automotive, energy, pharmaceutical and electronics sectors. We have
2,724 employees and operate across 57 locations in 17 countries. The following charts illustrate the
composition of our fiscal year 2016 net sales based on our sales data.
Sales Mix
Customer Type
End Use
Contract
75%
US
Government
15%
Airline/
MRO
6%
Distributors
4%
Commercial
59%
Ad hoc
25%
OEM and Contractors
75%
Military
41%
For additional information about our segment reporting, see Note 21 of the Notes to Consolidated
Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
5
Our Products and Services
We conduct our operations through two reportable segments: North America and Rest of World.
Year Ended September 30,
2016
2015
2014
Revenue
% of Revenue
Revenue
% of Revenue
Revenue
% of Revenue
North America . . . .
$ 1,185,315
80% $ 1,198,201
80% $ 1,030,511
Rest of World . . . . . .
Total . . . . . . . . . . . . .
292,051
$ 1,477,366
20%
299,414
100% $ 1,497,615
20%
325,366
100% $ 1,355,877
76%
24%
100%
Our Products
We offer more than 565,000 active SKUs, which fall into the following product categories during the
year ended September 30, 2016 (dollars in thousands):
Net product sales . . . .
% of net product
Hardware
$ 711,177
Chemicals
$ 600,124
Electronic
Components
$ 105,207
Bearings
$ 34,662
Other Products
$ 26,196
sales . . . . . . . . . . . . .
48.2%
40.6%
7.1%
2.3%
1.8%
Types of products
offered . . . . . . . . . .
• Blind fasteners
• Panel fasteners
• Bolts and screws
• Clamps
• Hi lok pins and
collars
• Hydraulic
fittings
• Inserts
• Lockbolts and
collars
• Nuts
• Rivets
• Springs
• Valves
• Washers
• Connectors
• Relays
• Switches
• Circuit breakers
• Lighted products
• Wire and cable
• Interconnect
accessories
• Adhesives
• Sealants and tapes
• Lubricants
• Oil and grease
• Paints and coatings
• Industrial gases
• Coolants and
metalworking
fluids
• Cleaners and
cleaning solvents
• Brackets
• Milled parts
• Shims
• Stampings
• Turned parts
• Welded
assemblies
• Installation
tooling
• Airframe
control
bearings
• Rod ends
• Spherical
bearings
• Ball bearing
• Needle roller
bearings
• Bushings
• Precision
bearings
Hardware
Sales of C-class aerospace hardware represented 48%, 49% and 62% of our fiscal 2016, 2015 and
2014 product sales, respectively. Fasteners, our largest category of hardware products, include a wide
range of highly engineered aerospace parts that are designed to hold together two or more components,
such as rivets (both blind and solid), bolts (including blind bolts), screws, nuts and washers. Many of
these fasteners are designed for use in specific aircraft platforms and others can be used across multiple
platforms. Materials used in the manufacture of these fasteners range from standard alloys, such as
aluminum, steel or stainless steel, to more advanced materials, such as titanium, Inconel and Waspalloy.
6
Chemicals
On February 28, 2014, we acquired Haas, a provider of chemical supply chain management services
to the commercial aerospace, airline, military, automotive, energy, pharmaceutical and electronics
sectors. Chemical sales represented 41%, 40%, and 26% of our fiscal 2016, 2015 and 2014 product sales,
respectively. As a result of our acquisition of Haas, our chemical product offerings include adhesives;
sealants and tapes; lubricants; oil and grease; paints and coatings; industrial gases; coolants and
metalworking fluids; and cleaners and cleaning solvents.
Electronic Components
We offer highly reliable interconnect and electro-mechanical products, including connectors, relays,
switches, circuit breakers, lighted products, wire and cable and interconnect accessories. We also offer
value-added assembled products including mil-circular and rack and panel connectors and illuminated
push button switches. We maintain large quantities of connector components in inventory, which allows
us to respond quickly to customer orders. In addition, our lighted switch assembly operation affords
customers same day service, including engraving capabilities in multiple languages.
Bearings
Our product offering includes a variety of standard anti-friction products designed to both
commercial and military aircraft specifications, such as airframe control bearings, rod ends, spherical
bearings, ball bearings, needle roller bearings, bushings and precision bearings.
Other Products
Machined parts are designed for a specific customer and are assigned unique OEM-specific SKUs.
The machined parts we distribute include laser cut or stamped brackets, milled parts, shims, stampings,
turned parts and welded assemblies made of materials ranging from high-grade steel or titanium to nickel
based alloys.
We stock a full range of tools needed for the installation of many of our products, including air
and hydraulic tools as well as drill motors, and we also offer factory authorized maintenance and
repair services for these tools. In addition to selling these tools, we also rent or lease these tools to
our customers.
Our Services
In addition to our traditional distribution services, we have developed innovative value-added
services, such as quality assurance, kitting and JIT supply chain management for our customers.
Quality Assurance
Our quality assurance (QA) function is a key component of our service offering, with approximately
5% of our employees dedicated to this area. We believe we offer an industry-leading QA function as a
result of our rigorous processes, sophisticated testing equipment and dedicated QA staff. Our superior
QA performance is demonstrated by a comparison of our customers’ aggregate rejection rate of the
products we deliver, which was 0.12% during fiscal 2016, to our rejection rate of the products we receive
from our suppliers, which was 3.82% during fiscal 2016.
7
Our QA department inspects the inventory we purchase to ensure the accuracy and completeness of
documentation. For many of our customers, these inspections are conducted at our in-house laboratory,
where we operate sophisticated testing equipment. We also maintain an electronic copy of the relevant
certifications for the inventory, which can include a manufacturer certificate of conformance, test reports,
process certifications, material distributor certifications and raw material mill certifications. Our industry-
leading QA capabilities also allow our JIT customers to reduce the number of personnel dedicated to the
QA function and reduce the delays caused by the rejection of improperly inspected products.
Kitting
Kitting involves the packaging of an entire bill of materials or a complete “ship-set” of products,
which reduces the amount of time workers spend retrieving products from storage locations. Kits can be
customized in varying configurations and sizes and can contain up to several hundred different products.
All of our kits and components contain fully certified and traceable products and are assembled by our
full-service kitting department at our Central Stocking Locations (CSLs), or at our customer sites.
JIT Supply Chain Management
JIT supply chain management involves the delivery of products on an as-needed basis to the point-
of-use at a customer’s manufacturing line. JIT programs are designed to prevent excess inventory build-
up and shortages and improve manufacturing efficiency. Each JIT contract requires us to maintain an
efficient inventory tracking, analysis and replenishment program and is designed to provide high levels of
stock availability and on-time delivery. We believe customers that utilize our comprehensive JIT supply
chain management services are frequently able to realize significant benefits including:
•
•
•
•
reduced inventory levels and lower inventory excess and obsolescence (E&O) expense, in part
because such customers only purchase what they need, and make more efficient use of their
floor space;
increased accuracy in forecasting and planning, resulting in substantially improved on-time
delivery, reduced expediting costs and fewer disruptions of production schedules;
improved quality assurance resulting in a substantial reduction in customer product rejection
rates; and
reduced administrative and overhead costs relating to procurement, QA, supplier management
and stocking functions.
Before signing a JIT contract, our customers typically experience outages of many SKUs and, in some
cases, have up to a year’s worth of inventory on hand. As part of our JIT programs, we generally assume
the customer’s existing inventory at the onset of the contract, immediately reducing their inventory on-
hand and the associated management costs. Customer inventory is generally assumed on a consignment
basis and is entered in our database in a distinct customer-specific “virtual warehouse.” Software protocol
in our IT systems requires the system to first “look” to a customer’s consigned inventory when parts
replenishment is required. In certain cases, we can sell this consigned inventory to our base of over
8,000 other active customers around the world, gradually drawing down the customer’s inventory. As the
consigned inventory for each SKU is exhausted, our stock of Wesco-sourced product reserve is then used
for replenishment.
Another key strength of our JIT programs is our ability to utilize highly scalable and customizable
point-of-use systems to develop an efficient supply chain management system and automated
replenishment solution for any number of SKUs. In order to minimize inventory on hand, certain
8
indicators are used to trigger the replenishment of product from a supplying location to the location of
consumption. Our “Twin-Bin” system is an example of such an indicator. A JIT program designed around
a Twin-Bin system utilizes a specially-manufactured unit composed of two bins stacked on top of one
another. In this system, a clear plastic bag, typically containing a 30-day supply of parts, is loaded in each
bin. Production workers use all of the parts within the bottom bin before drawing a pullout slide between
the two bins that drops the full plastic bag of parts from the top bin into the bottom bin. An empty top bin
indicates the need to initiate replenishment of the parts and provides a clear visual management process
on the manufacturing floor. All replenishment activity is done via hand-held scanners that transmit orders
to our stocking locations.
In certain circumstances, we also provide our JIT customers with additional value-added
services, including the implementation of process control and usage reduction programs; support for
environmental, health and safety compliance (EHS) and reporting; and assistance with the development
of waste management strategies.
MRO Sales
We sell products to airline-affiliated, OEM-affiliated and independent MRO providers on both a
Contract and ad hoc basis. We have recently expanded our efforts to increase our presence in both the
commercial and military aerospace MRO markets, particularly as a result of our acquisition of Interfast
in 2012, our acquisition of Haas in 2014 and through the introduction of our Wesco e-commerce sales
platform, which we believe provides us with a cost-effective way to further penetrate the MRO market. In
addition, we have targeted domestic and international airlines and maintenance centers that we believe
are assuming an expanded role within the MRO market.
Going forward, we expect commercial MRO providers to benefit from the many of the same trends
as those impacting the commercial OEM market, including industry passenger volumes and capacity
utilization, as well as requirements to maintain aging aircraft and the cost of fuel, which can lead to
greater utilization of existing planes. The commercial MRO market may also benefit from directives
or notifications announced by international industry regulators and trade associations. Such directives
or notifications can serve to bolster required maintenance, and thus the demand for new and existing
aerospace products. Furthermore, we expect demand in the military MRO market to be driven by
changes in overall fleet size and the level of U.S. military operational activity domestically and overseas.
We believe that our presence in this market helps us mitigate the volatility of new military aircraft sales
with sales to the aftermarket.
Customer Contracts
We sell products to our customers under two types of arrangements: (1) Contracts, which include JIT
supply chain management contracts and LTAs, and (2) ad hoc sales.
Contracts
JIT Contracts. JIT contracts are typically three to five years in length and are structured to supply the
product requirement for specific SKUs, production lines or facilities. Given our direct involvement with
JIT customers, volume requirements and purchasing frequency under these contracts is highly predictable.
Under JIT contracts, customers commit to purchase specified products from us at a fixed price or a
pass-through price, on an if-and-when needed basis, and we are often responsible for maintaining high
levels of stock availability of those products. JIT contracts typically contain termination for convenience
provisions, which generally allow our customers to terminate their contracts on short notice without
meaningful penalties, provided that we are reimbursed for the cost of any inventory specifically procured
9
for the customer or inventory that is not commonly sold to our other customers. JIT customers often
purchase products from us that are not covered under their contracts on an ad hoc basis. For additional
information about our JIT supply chain management services, see “-Our Products and Services-Our
Services-JIT Supply Chain Management.”
LTAs. Like JIT contracts, LTAs also typically run for three to five years. LTAs are essentially
negotiated price lists for customers or individual customer sites that cover a range of pre-determined
products, purchased on an as-needed basis. LTAs allow the customer to buy contracted SKUs from us and
may obligate us to maintain stock availability for those products. Once an LTA is in place, the customer
is then able to place individual purchase orders with us for any of the contractually specified products.
LTAs typically contain termination for convenience provisions, which generally allow for our customers to
terminate their contracts on short notice without meaningful penalties, provided that we are reimbursed
for the cost of any inventory specifically procured for the customer. LTA customers also frequently
purchase products from us on an ad hoc basis, which are not captured under the pricing arrangement.
Ad Hoc Sales
Ad hoc customers purchase products from us on an as-needed basis and are generally supplied out of
our existing inventory. Typically, ad hoc orders are for smaller quantities of products than those ordered
under Contracts, and are often urgent in nature. Given our breadth and volume of inventory, it is not
uncommon for even our competitors to purchase products from us on an ad hoc basis when their own
stocks prove to be inadequate. In an environment of increasing aircraft production, product shortages
can become increasingly common for OEMs, subcontractors, MRO providers and distributors with less
sophisticated forecasting abilities and procurement organizations.
Under each of the sales arrangements described above we typically warrant that the products we
sell conform to the drawings and specifications that are in effect at the time of delivery in the applicable
contract, and that we will replace defective or non-conforming products for a period of time that varies
from contract to contract. We, in turn, look to the product manufacturer to indemnify us for liabilities
resulting from defective or non-conforming products. We do not accrue for warranty expenses as our
claims related to defective and non-conforming products have been nominal.
We believe that backlog is not a relevant measure of our business, given the long-term nature of our
Contracts with our customers.
Customers
We sell to over 8,000 active customers worldwide. During fiscal 2016, no single customer represented
more than 10% of our net sales, and only two customers accounted for over 5% of our net sales, with
each consisting of multiple independent programs. Our top 10 customers collectively accounted for 46%
of our net sales during fiscal 2016.
During fiscal 2016, 75% of our net sales were derived from major OEMs, such as Airbus, Boeing,
BAE Systems, Bell Helicopter, Bombardier, Cessna, Embraer, Gulfstream, Lockheed Martin, Northrop
Grumman and Raytheon, and certain of their subcontractors. Government sales comprised 15% of our
net sales during fiscal 2016 and were derived from various military parts procurement agencies such as
the U.S. Defense Logistics Agency, or from defense contractors buying on their behalf. Aftermarket
sales to airline-affiliated or independent MRO providers made up 6% of our fiscal 2016 net sales. The
remaining 4% of our net sales were to other distributors.
10
During fiscal 2016, 59% of our net sales were derived from customers supporting commercial
programs and 41% of our net sales were derived from customers supporting military programs.
We also service international customers in markets that include Australia, Canada, China, France,
Germany, India, Ireland, Israel, Italy, Malaysia, Mexico, Philippines, Poland, Saudi Arabia, Singapore,
South Korea, Turkey and the United Kingdom. For additional information about our net sales and
long-lived assets by geographic area, see Note 21 of the Notes to Consolidated Financial Statements in
Part II, Item 8 of this Annual Report on Form 10-K.
Procurement
We source our inventory from over 5,000 suppliers globally, including Precision Castparts Corp., Arconic
(formerly Alcoa), PPG Industries, Lisi Aerospace, Consolidated Aerospace Manufacturing (CAM), TriMas,
Esterline, RBC Bearings, Henkel and 3M. During fiscal 2016, Precision Castparts Corp. and Arconic
supplied 12% and 8%, respectively, of the products we purchased. Suppliers typically prefer to deal with a
relatively small number of large and sophisticated distributors in order to improve machine utilization; reduce
finished goods inventory and related obsolescence costs; maintain pricing discipline; improve performance in
meeting on-time-delivery targets to the end customers; and consolidate customer accounts, which can reduce
administrative and overhead costs relating to sales and marketing, customer service and other functions. As
a result of the scale of our operations and our long-standing relationships with many of our suppliers, we are
often able to take advantage of significant volume-based discounts when purchasing inventory. Given our
industry position, financial strength and philosophy of cooperation with suppliers, we believe we are in an
excellent position to become a distributor for new product lines as they become available.
Our management analyzes supply, demand, cost and pricing factors to make inventory investment
decisions, which are facilitated by our highly customized IT systems, and we maintain close relationships
with the leading suppliers in the industry. Our strong understanding of the global aerospace industry is
derived from our long-term relationships with major OEMs, subcontractors and suppliers. In addition, our
direct insight into our customers’ production rates often allows us to detect industry trends. Furthermore,
our ability to forecast demand, share inventory and usage information, and place purchase orders with
our suppliers well in advance of our customer requirements can provide us with a distinct advantage in an
industry where inventory availability is critical for customers that need specific products within a stipulated
timeframe to meet their own production and delivery commitments. However, despite our expertise in this
area, effective inventory management is an ongoing challenge, and we continue to take steps to enhance
the sophistication of our procurement practices and mitigate the negative impact of inventory builds on our
cash flow. For additional information about the impact of inventory on our business, including our cash
flows, see Part I, Item 1A. “Risk Factors-Risks Related to Our Business and Industry-We may be unable
to effectively manage our inventory, which could have a material adverse effect on our business, financial
condition and results of operations,” Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Other Factors Affecting Our Financial Results-Fluctuations in Cash
Flow,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates-Inventories.”
Information Technology Systems
We have invested to build integrated, highly customized IT systems that enable our purchasing
and sales organization to make more informed decisions, our inventory management system to operate
in an efficient manner and certain of our customers to make online purchases directly from us. Our
primary scalable IT infrastructure is based on IBM and Oracle servers, the Oracle Enterprise database
and the Oracle JD Edwards EnterpriseOne (JDE), enterprise resource planning (ERP) system. Our
chemical supply chain management system, tcmIS, is a proprietary system, developed using the Oracle
Enterprise database. These customized IT systems provide us visibility into inventory quantities, stocking
11
locations and purchases across our customer base by individual SKU, enabling us to accurately fill 16,000
orders per day and provide an exceptional level of customer service. These systems are fully capable
of interfacing with external business systems, including Oracle, SAP, Microsoft and others, and we
have developed additional functionality for JIT delivery and direct line feed of certain of the products
we sell. This functionality includes recognition of signals and actions to fill customer bins from hand-
held scanners, min/max data or proprietary signals from a customer’s ERP system. JDE and tcmIS
also support our EDI functionality, which allows our system to interface with customers and suppliers,
regardless of technology, data format or connectivity. TcmIS also supports additional chemical-specific
functionality, such as product labeling and Global Harmonized System compliance.
For our shipping logistics and export compliance support, we employ Precision Software’s TRA/X.
TRA/X enables us to ship globally while maintaining tracking numbers and rating information for each
customer shipment. In addition, at several of our distribution facilities, we use Minerva’s AIMS inventory
management system in order to provide the best possible warehouse flow and cycle times. AIMS is
tailored to fit our global warehouse operational needs and allows us to provide an expandable warehouse
management system that can also incorporate transaction processing, work-in-progress and other
manufacturing operations. AIMS interfaces with a broad range of material handling equipment, including
horizontal and vertical carousels, conveyors, sorting equipment, pick systems and cranes.
Seasonality
Our net sales may fluctuate on a quarterly basis based on the number of production days at our
customers’ facilities, which is driven by holidays and planned production shutdowns, particularly the
winter holidays during our first fiscal quarter and the in summer months during our fourth fiscal quarter.
Competition
The industry in which we operate is highly competitive and fragmented. We believe the principal
competitive factors in our industry include the ability to provide superior customer service and support,
on-time delivery, sufficient inventory availability, competitive pricing and an effective QA program.
Our competitors include both U.S. and foreign companies, including divisions of larger companies
and certain of our suppliers, some of which have significantly greater financial resources than we do,
and therefore may be able to adapt more quickly to changes in customer requirements than we can.
In addition to facing competition for Contract customers from our primary competitors, Contract
customers or potential Contract customers may also determine that it is more cost effective to establish
or re-establish an in-house supply chain management system. Under these circumstances, we may be
unable to sufficiently reduce our costs in order to provide competitive pricing while also maintaining
acceptable operating margins.
Employees
As of September 30, 2016, we employed 2,724 personnel worldwide, 955 of which were located at
customer sites. We have 745 employees located outside of North America. We are not a party to any
collective bargaining agreements with our employees.
Regulatory Matters
Governmental agencies throughout the world, including the U.S. Federal Aviation Administration
(FAA), prescribe standards for aircraft components, including virtually all commercial airline and general
aviation products, as well as regulations regarding the repair and overhaul of airframes and engines.
Specific regulations vary from country to country, although compliance with FAA requirements generally
12
satisfies regulatory requirements in other countries. In addition, the products we distribute must also be
certified by aircraft and engine OEMs. If any of the material authorizations or approvals that allow us
to supply products is revoked or suspended, then the sale of the related products would be prohibited by
law, which would have an adverse effect on our business, financial condition and results of operations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new
regulations or changes to existing regulations, which are usually more stringent than existing regulations.
If these proposed regulations are adopted and enacted, we could incur significant additional costs to
achieve compliance, which could have a material adverse effect on our business, financial condition and
results of operations.
We are also subject to government rules and regulations that include the U.S. Foreign Corrupt
Practices Act (FCPA), the Bribery Act 2010 (Bribery Act), the International Traffic in Arms Regulations
(ITAR), the Export Administration Regulations (EAR), economic sanctions and the False Claims Act.
See “Risk Factors-Risks Related to Our Business and Industry-We are subject to unique business risks
as a result of supplying equipment and services to the U.S. government directly and as a subcontractor,
which could lead to a reduction in our net sales from, or the profitability of our supply arrangements
with, the U.S. government” and “-Our international operations require us to comply with numerous
applicable anti-corruption and trade control laws and regulations, including those of the U.S. government
and various other jurisdictions, and our failure to comply with these laws and regulations could adversely
affect our reputation, business, financial condition and results of operations.”
Environmental Matters
We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances
relating to pollution, protection of the environment and human health and safety, and the handling,
transportation, storage, treatment, disposal and remediation of hazardous substances, including
potentially with respect to historical chemical blending and other activities that pre-dated our purchase
of Haas. Actual or alleged violations of EHS laws, or permit requirements could result in restrictions or
prohibitions on operations and substantial civil or criminal sanctions, as well as, under some EHS laws,
the assessment of strict liability and/or joint and several liability.
Furthermore, we may be liable for the costs of investigating and cleaning up environmental
contamination on or from our operations or at off-site locations, including potentially with respect to
historical chemical blending and other activities that pre-dated our purchase of our businesses. We may
therefore incur additional costs and expenditures beyond those currently anticipated to address all such
known and unknown situations under existing and future EHS laws.
In addition, governmental, regulatory and societal demands for increasing levels of product safety
and environmental protection are resulting in increased pressure for more stringent regulatory control
with respect to the chemical industry. The European Union’s Registration, Evaluation, Authorization
and Restriction of Chemicals (REACH) regulations enacted in 2009 have been a continuing source of
compliance obligations and restrictions on certain chemicals, and REACH-like regimes have now been
adopted in several other countries. In the United States, the core provisions of the Toxic Substances
Control Act (TSCA) were amended in June 2016 for the first time in nearly 40 years. Among the
more significant changes are that these amendments mandate safety reviews of existing chemicals
with regulatory action to restrict any “high risk” chemicals identified as result of such reviews. The
amendments to the TSCA also mandate that the EPA establish a new inventory of existing chemicals,
a process expected to result in identification of certain chemicals that may not have been properly
characterized on the original inventory and in restrictions on the use of such chemicals pending
completion of a safety review. These types of changes in the Company’s regulatory environment,
13
particularly, but not limited to, in the United States, the European Union, Canada and China, could
lead to heightened regulatory scrutiny and could adversely impact our ability to supply certain products
and provide supply chain management services to our customers. Such changes also could result in
compliance obligations for us directly or as part of our supply chain management services to customers,
fines, ongoing monitoring and other future business activity restrictions, which could have a material
adverse effect on the Company’s liquidity, financial position and results of operations.
Available Information
We file annual, quarterly and current reports and other information with the SEC. You may read and
copy any documents that we file at the SEC’s public reference room at 100 F Street, N.E., Washington,
D.C. 20549. You may call the SEC at 1-800-SEC-0330 to obtain further information about the public
reference room. In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants that file electronically with
the SEC, including us. You may also access, free of charge, our reports filed with the SEC (for example,
our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on
Form 8-K and any amendments to those forms) through the “Investor Relations” portion of our website
(www.wescoair.com). We also make available on our website our (1) Corporate Governance Guidelines,
(2) Code of Business Conduct and Ethics, which applies to our directors, officers and employees,
(3) Whistleblower Policy and (4) the charters of the Audit, Compensation and Nominating and Corporate
Governance Committees. Reports filed with or furnished to the SEC will be available as soon as
reasonably practicable after they are filed with or furnished to the SEC. Our website is included in this
Annual Report as an inactive textual reference only. The information found on our website is not part of
this or any other report filed with or furnished to the SEC.
14
ITEM 1A. RISK FACTORS
You should consider and read carefully all of the risks and uncertainties described below, as well as other
information included in this Annual Report, including our consolidated financial statements and related
notes. The risks described below are not the only ones facing us. The occurrence of any of the following risks or
additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could
materially and adversely affect our business, financial condition or results of operations. This Annual Report
also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward-looking statements as a result of specific factors,
including the risks and uncertainties described below.
Risks Related to Our Business and Industry
We are directly dependent upon the condition of the aerospace industry, which is closely tied to global economic
conditions, and if the volatility in the global financial markets were to result in a slowdown in the current
economic recovery or a return to a recession, our business, financial condition and results of operations could be
negatively impacted.
Demand for the products and services we offer are directly tied to the delivery of new aircraft,
aircraft utilization, and repair of existing aircraft, which, in turn, are impacted by global economic
conditions. For example, 2009 revenue passenger miles (RPMs) on commercial aircraft declined due
to the global recession. During the same period, the industry experienced declines in large commercial,
regional and business jet deliveries. While demand for commercial and regional jets recovered, business
jet orders and deliveries remain well below their pre-recession peak, reflecting a deeper downturn in
the last recession and an uncertain economic outlook. A slowdown in the global economy, or a return to
a recession, would negatively impact the aerospace industry, and could negatively impact our business,
financial condition and results of operations.
Military spending, including spending on the products we sell, is dependent upon national defense budgets, and
a reduction in military spending could have a material adverse effect on our business, financial condition and
results of operations.
During the year ended September 30, 2016, 41% of our net sales were related to military aircraft.
The military market is significantly dependent upon government budget trends, particularly the U.S.
Department of Defense (DoD) budget. Future DoD budgets could be negatively impacted by several
factors, including, but not limited to, a change in defense spending policy by the current and future
presidential administrations and Congress, the U.S. government’s budget deficits, spending priorities,
the cost of sustaining the U.S. military presence in overseas operations and possible political pressure
to reduce U.S. Government military spending, each of which could cause the DoD budget to decline.
A decline in U.S. military expenditures could result in a reduction in military aircraft production, which
could have a material adverse effect on our business, financial condition and results of operations.
In particular, military spending may be negatively impacted by the Budget Control Act of 2011 (the
Budget Control Act), which was passed in August 2011. The Budget Control Act established limits on
U.S. government discretionary spending, including a reduction of defense spending by approximately
$490 billion between the 2012 and 2021 U.S. government fiscal years, and also provided that the defense
budget would face “sequestration” cuts of up to an additional $500 billion during that same period to the
extent that discretionary spending limits were exceeded. The impact of sequestration was reduced with
respect to the government’s 2014 and 2015 fiscal years, in exchange for extending sequestration into fiscal
years 2022 and 2023, following the enactment of the Bipartisan Budget Act of 2013 in December 2013.
The impact of sequestration was further reduced with respect to the government’s 2016 and 2017 fiscal
years, following the enactment of the Bipartisan Budget Act of 2015 in November 2015. Sequestration is
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currently scheduled to resume in the government’s 2018 fiscal year. We are unable to predict the impact
the cuts associated with Sequestration will ultimately have on funding for the military programs which we
support. However, such cuts could result in reductions, delays or cancellations of these programs, which
could have a material adverse effect on our business, financial condition and results of operations.
We are subject to unique business risks as a result of supplying equipment and services to the U.S. government
directly and as a subcontractor, which could lead to a reduction in our net sales from, or the profitability of our
supply arrangements with, the U.S. government.
Companies engaged in supplying defense-related equipment and services to U.S. government
agencies are subject to business risks specific to the defense industry. We contract directly with the
U.S. government and are also a subcontractor to customers contracting with the U.S. government.
Accordingly, the U.S. government may unilaterally suspend or prohibit us from receiving new contracts
pending resolution of alleged violations of procurement laws or regulations, reduce the value of existing
contracts or audit our contract-related costs and fees. In addition, most of our U.S. government contracts
and subcontracts can be terminated by the U.S. government or the contracting party, as applicable, at its
convenience. Termination for convenience provisions provide only for our recovery of costs incurred or
committed, settlement expenses and profit on the work completed prior to termination.
In addition, we are subject to U.S. government inquiries and investigations, including periodic audits
of costs that we determine are reimbursable under government contracts. U.S. government agencies
routinely audit government contractors to review performance under contracts, cost structure and
compliance with applicable laws, regulations, and standards, as well as the adequacy of and compliance
with internal control systems and policies. Any costs found to be misclassified or inaccurately allocated
to a specific contract are not reimbursable, and to the extent already reimbursed, must be refunded.
Also, any inadequacies in our systems and policies could result in payments being withheld, penalties
and reduced future business. If a government inquiry or investigation uncovers improper or illegal
activities, we could be subject to civil or criminal penalties or administrative sanctions, including contract
termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing
business with U.S. government agencies, any of which could materially adversely affect our reputation,
business, financial condition and results of operations.
We are also subject to the federal False Claims Act, which provides for substantial civil penalties and
treble damages where a contractor presents a false or fraudulent claim to the government for payment.
Actions under the False Claims Act may be brought by the government or by other persons on behalf of
the government (who may then share in any recovery).
We do not have guaranteed future sales of the products we sell and when we enter into Contracts with our
customers we generally take the risk of cost overruns, and our business, financial condition, results of operations
and operating margins may be negatively affected if we purchase more products than our customers require,
product costs increase unexpectedly, we experience high start-up costs on new Contracts or our Contracts are
terminated.
A majority of our Contracts are long-term, fixed-price agreements with no guarantee of future sales
volumes, and they may be terminated for convenience on short notice by our customers, often without
meaningful penalties, provided that we are reimbursed for the cost of any inventory specifically procured
for the customer or inventory that is not commonly sold to our other customers. In addition, we purchase
inventory based on our forecasts of anticipated future customer demand. As a result, we may take the
risk of having excess inventory in the event that our customers do not place orders consistent with our
forecasts, particularly with respect to inventory that has a more limited shelf-life. We also run the risk of
not being able to pass along or otherwise recover unexpected increases in our product costs, including
as a result of commodity price increases, which may increase above our established prices at the time we
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entered into the Contract and established prices for products we provide. When we are awarded new
Contracts, particularly JIT contracts, we may incur high costs, including salary and overtime costs to hire
and train on-site personnel, in the start-up phase of our performance. In the event that we purchase more
products than our customers require, product costs increase unexpectedly, we experience high start-up
costs on new Contracts or our Contracts are terminated, our business, financial condition, results of
operations and operating margins could be negatively affected.
If we lose significant customers, significant customers materially reduce their purchase orders or significant
programs on which we rely are delayed, scaled back or eliminated, our business, financial condition and results
of operations may be adversely affected.
Our top ten customers for the year ended September 30, 2016 accounted for 46% of our net sales.
A reduction in purchasing by or loss of one of our larger customers for any reason, including changes in
manufacturing or procurement practices, loss of a customer as a result of the acquisition of such customer
by a purchaser who does not fully utilize a distribution model or uses a competitor, in-sourcing by
customers, a transfer of business to a competitor, an economic downturn, failure to adequately service our
clients or to manage the implementation of new customer sites, decreased production or a strike, could have
a material adverse effect on our business, financial condition and results of operations.
As an example of changes in manufacturing practices that could impact us, OEMs such as Boeing
and Airbus are currently incorporating an increasing amount of composite materials in the aircraft
they manufacture. Aircraft utilizing composite materials generally require the use of significantly fewer
C-class aerospace parts than new aircraft made of more traditional non-composite materials, although
the parts used are generally higher priced than C-class aerospace parts used in non-composite aircraft
structures. As Boeing, Airbus and other customers increase their reliance on composite materials, they
may materially reduce their purchase orders from us.
As an example of the potential loss of business due to customer in-sourcing, a major OEM is
undertaking an initiative to cause its first and second tier suppliers to source certain OEM-specific
materials, including fasteners, directly from the OEM itself, rather than through distributors such as
us. If such initiative is broadly implemented by the OEM, or if other OEMs pursue similar initiatives, a
portion of our sales to their suppliers, and consequently our business, financial condition and results of
operations, could be adversely affected.
We expect to derive a significant portion of our net sales from certain aerospace programs in their
early production stages. In particular, our future growth will be dependent, in part, upon our sales
to various OEMs and subcontractors. If production of any of the programs we support is terminated
or delayed, or if our sales to customers affiliated with these programs are reduced or eliminated, our
business, financial condition and results of operations could be adversely affected.
In addition, during fiscal 2014, we modified and extended a contract with an existing customer that
resulted in a $66.3 million reduction in net sales to the customer during fiscal 2015 compared to fiscal 2014,
and a further reduction of $26.4 million in net sales to the customer during fiscal 2016 compared to fiscal 2015.
We operate in a highly competitive market and our failure to compete effectively may negatively impact our
results of operations.
We operate in a highly competitive global industry and compete against a number of companies,
including divisions of larger companies and certain of our suppliers, some of which may have significantly
greater financial resources than we do, and therefore may be able to adapt more quickly to changes in
customer requirements than we can. Our competitors consist of both U.S. and foreign companies and
range in size from divisions of large public corporations to small privately held entities. We believe that
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our ability to compete depends on superior customer service and support, on-time delivery, sufficient
inventory availability, competitive pricing and effective quality assurance programs. In order to remain
competitive, we may have to adjust the prices of some of the products and services we sell and continue
investing in our procurement, supply-chain management and sales and marketing functions, the costs of
which could negatively impact our results of operations.
In addition, we face competition for our Contract customers from both competitors in our industry
and the in-sourcing of supply-chain management by our customers themselves. If any of our Contract
customers decides to in-source the services we provide or switch to one of our competitors, we would be
adversely affected.
We may be unable to effectively manage our inventory, which could have a material adverse effect on our
business, financial condition and results of operations.
Due to the lead times required by many of our suppliers, we typically order products, particularly
hardware products, in advance of expected sales, and the volume of such orders may be significant.
Lead times generally range from several weeks up to two years, depending on industry conditions,
which makes it difficult to successfully manage our inventory as we plan for future demand. In addition,
demand for our products can fluctuate significantly, which can also negatively impact our cash flows
and inventory management. For example, we believe that the strategic inventory purchases we made
during fiscal 2013, 2014 and 2015, combined with lower than expected demand and a lack of discipline
around our inventory planning process, negatively impacted our cash flows. In addition, we may choose
to dispose of slow-moving inventory in the future if we determine that the market and economics make
it prudent to do so. For example, in the three months ended September 30, 2015, we determined that
inventory previously purchased in connection with a specific program which was subsequently terminated,
to have no alternative use, and we recorded a reserve of $33.0 million for such inventory. In addition,
in the three months ended September 30, 2015, management implemented a new strategy of providing
integrated supply chain services more tailored to customer demand through long-term contracts and
focused forecasted consumption, including changes to our inventory purchasing strategy, holding
inventory for shorter periods and the planned scrapping of long dated inventory. The new strategy and
updates for fiscal 2015 sales activities led to changes in the sell through rates, holding period of aged
inventory and others estimates used in the E&O reserve for our hardware inventory, which increased our
E&O inventory reserves by $43.8 million. If we are unable to effectively manage our inventory, our cash
flows may be negatively affected, which could have a material adverse effect on our business, financial
condition and results of operations.
If suppliers are unable to supply us with the products we sell in a timely manner, in adequate quantities and/or at
a reasonable cost, we may be unable to meet the demands of our customers, which could have a material adverse
effect on our business, financial condition and results of operations.
Our inventory is primarily sourced directly from producers and manufacturing firms, and we depend
on the availability of large supplies of the products we sell. Our largest supplier for the year ended
September 30, 2016 was Precision Castparts Corp. During fiscal 2016, 12% of the products we purchased
were from Precision Castparts Corp. and 8% were purchased from Arconic (formerly Alcoa). In addition,
our ten largest suppliers during fiscal 2016 accounted for 32% of our purchases. These manufacturers
and producers may experience capacity constraints that result in their being unable to supply us with
products in a timely manner, in adequate quantities and/or at a reasonable cost. Contributing factors to
manufacturer capacity constraints include, among other things, industry or customer demands in excess
of machine capacity, labor shortages and changes in raw material flows. Any significant interruption in
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the supply of these products or termination of our relationship with any of our suppliers could result in us
being unable to meet the demands of our customers, which would have a material adverse effect on our
business, financial condition and results of operations.
Our business is highly dependent on complex information technology.
The provision and application of IT is an increasingly critical aspect of our business. Among other
things, our IT systems must frequently interact with those of our customers, suppliers and logistics
providers. Our future success will depend on our continued ability to employ IT systems that meet
our customers’ demands. The failure or disruption of the hardware or software that supports our IT
systems, including redundancy systems, could significantly harm our ability to service our customers and
cause economic losses for which we could be held liable and which could damage our reputation. In
addition, we are subject to cybersecurity risk, which includes, but is not limited to, malicious software and
unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related
to us, our customers or suppliers. A cyber-related attack could cause a loss of data and interruptions
or delays in our business (particularly with respect to our tcmIS operating system), cause us to incur
remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption
of our IT systems, communications or utilities could cause us to interrupt or suspend our operations
or otherwise adversely affect our business. Our property and business interruption insurance may be
inadequate to compensate us for all losses that may occur as a result of any system or operational failure
or disruption which could have a material adverse effect on our business, results of operations and
financial condition.
Our competitors may have or may develop IT systems that permit them to be more cost effective and
otherwise better situated to meet customer demands than IT systems we are able to acquire or develop.
Larger competitors may be able to develop or license IT systems more cost effectively than we can by
spreading the cost across a larger revenue base, and competitors with greater financial resources may
be able to acquire or develop IT systems that we cannot afford. If we fail to meet the demands of our
customers or protect against disruptions of our IT systems, we may lose customers, which could seriously
harm our business and adversely affect our operating results and operating cash flow.
We may be unable to retain personnel who are key to our operations.
Our success, among other things, is dependent on our ability to attract, develop and retain highly
qualified senior management and other key personnel. Competition for key personnel is intense, and
our ability to attract and retain key personnel is dependent on a number of factors, including prevailing
market conditions and compensation packages offered by companies competing for the same talent. The
inability to hire, develop and retain these key employees may adversely affect our operations.
There are risks inherent in international operations that could have a material adverse effect on our business,
financial condition and results of operations.
While the majority of our operations are based in the United States, we have significant international
operations, with facilities in Australia, Canada, China, France, Germany, India, Israel, Italy, Mexico,
Singapore and the United Kingdom, and customers throughout North America, Latin America, Europe,
Asia and the Middle East. For the years ended September 30, 2016 and 2015, 35% and 34%, respectively,
of our net sales were derived from customers located outside the United States.
Our international operations are subject to, without limitation, the following risks:
•
the burden of complying with multiple and possibly conflicting laws and any unexpected changes
in regulatory requirements;
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• political risks, including risks of loss due to civil disturbances, acts of terrorism, acts of war,
guerilla activities and insurrection;
• unstable economic, financial and market conditions and increased expenses as a result of
inflation, or higher interest rates;
• difficulties in enforcement of third-party contractual obligations and collecting receivables
through foreign legal systems;
• difficulties in staffing and managing international operations and the application of foreign
labor regulations;
• differing local product preferences and product requirements; and
• potentially adverse tax consequences from changes in tax laws, requirements relating to
withholding taxes on remittances and other payments by subsidiaries and restrictions on our
ability to repatriate dividends from our subsidiaries.
In addition, fluctuations in the value of foreign currencies affect the dollar value of our net
investment in foreign subsidiaries, with these fluctuations being included in a separate component of
stockholders’ equity. At September 30, 2016, we reported a cumulative foreign currency translation
adjustment of $75.4 million in stockholders’ equity as a result of foreign currency translation adjustments,
and we may incur additional adjustments in future periods. In addition, operating results of foreign
subsidiaries are translated into U.S. dollars for purposes of our statements of comprehensive income at
average monthly exchange rates. Moreover, to the extent that our net sales are not denominated in the
same currency as our expenses, our net earnings could be materially adversely affected. For example,
a portion of labor, material and overhead costs for our facilities in the United Kingdom, Germany,
France and Italy are incurred in British Pounds or Euros, but in certain cases the related net sales are
denominated in U.S. dollars. Changes in the value of the U.S. dollar or other currencies could result in
material fluctuations in foreign currency translation amounts or the U.S. dollar value of transactions
and, as a result, our net earnings could be materially adversely affected. At times we engage in hedging
transactions to manage or reduce our foreign currency exchange risk, but these transactions may not be
successful and, as a result, our business, financial condition and results of operations could be materially
adversely affected. During fiscal 2016 and 2015, fluctuations in foreign currency exchange rates had a
negative impact on net sales of $30.2 million and $25.4 million, respectively.
Our international operations also cause our business to be subject to the U.S. Export Control regime
and similar regulations in other countries, in particular in the United Kingdom. In the United States,
items of a commercial nature are generally subject to regulatory control by the U.S. Department of
Commerce’s Bureau of Industry and Security under EAR, and the U.S. Department of State’s ITAR
and other international trade regulations may apply as well. Consequently, regulatory authorities may
require us to obtain export licenses or other export authorizations to export the products we sell abroad,
depending upon the nature of items being exported, as well as the country to which the export is to be
made. We cannot be certain that our applications for export licenses or other authorizations will be
granted or approved. Furthermore, the export license and export authorization process is often time-
consuming. Violation of export control regulations could subject us to fines and other penalties, such as
losing the ability to export for a period of years, which would limit our sales and significantly hinder our
attempts to expand our business internationally.
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Our total assets include substantial intangible assets, and the write-off of a significant portion of our intangible
assets would negatively affect our financial results.
Our total assets reflect substantial intangible assets. At September 30, 2016, goodwill and intangible
assets, net represented 39.6% of our total assets. Goodwill represents the excess of the purchase price
of acquired businesses over the fair value of the assets acquired and liabilities assumed resulting from
acquisitions, including the acquisition of our Company by affiliates of The Carlyle Group (Carlyle) and
the acquisition of Haas. Intangible assets represent trademarks, backlogs, non-compete agreements,
technology and customer relationships. On at least an annual basis, we assess whether there has been
impairment in the value of goodwill and indefinite-lived intangible assets. If our testing identifies
impairment under generally accepted accounting principles in the United States (GAAP), the impairment
charge we calculate would result in a charge to income from operations. For example, during the three
months ended September 30, 2015, we recorded a non-cash goodwill impairment of $263.8 million in our
North America segment. Any determination requiring the write-off of a significant portion of goodwill
and unamortized identified intangible assets would negatively affect our results of operations and total
capitalization, which could be material.
Our international operations require us to comply with numerous applicable anti-corruption and trade control
laws and regulations, including those of the U.S. government and various other jurisdictions, and our failure to
comply with these laws and regulations could adversely affect our reputation, business, financial condition and
results of operations.
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and
regulations of the U.S. government and various other jurisdictions, and our failure to successfully
comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to
companies, individual directors, officers, employees and agents, and may restrict our operations, trade
practices, investment decisions and partnering activities.
In particular, our international operations are subject to U.S. and foreign anti-corruption laws and
regulations, such as the FCPA, the Bribery Act and other applicable anti-corruption regimes. These laws
generally prohibit us from corruptly providing anything of value, directly or indirectly, to government
officials for the purposes of improperly influencing official decisions, improperly obtaining or retaining
business, or otherwise obtaining favorable treatment. As part of our business, we may deal with governments
and state-owned business enterprises, the employees and representatives of which may be considered
government officials for purposes of the FCPA, the Bribery Act or other applicable anti-corruption laws.
Some anti-corruption laws, such as the Bribery Act, also prohibit commercial bribery and the acceptance
of bribes, and the FCPA further requires publicly traded companies to maintain adequate record-keeping
and internal accounting practices to accurately reflect the transactions of the company. In addition, some
of the international locations in which we operate lack a developed legal system and have elevated levels of
corruption, and our industry is highly regulated, which increases our risk of violating anti-corruption laws.
As an exporter, we must comply with various laws and regulations relating to the export of products,
services and technology from the United States and other countries having jurisdiction over our
operations. In the U.S., these laws include, among others, EAR administered by the U.S. Department
of Commerce’s Bureau of Industry and Security, ITAR administered by the U.S. Department of State’s
Directorate of Defense Trade Controls (DDTC), and trade sanctions, regulations and embargoes
administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). These
laws and regulations may require us to obtain individual validated licenses from the relevant agency
to export, re-export, or transfer commodities, software, technology, or services to certain jurisdictions,
individuals, or entities
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Violations of these legal requirements are punishable by criminal fines and imprisonment, civil
penalties, disgorgement of profits, injunctions, debarment from government contracts, seizure and
forfeiture of unlawful attempted exports, and/or denial of export privileges, as well as other remedial
measures. We have established policies and procedures designed to assist us, our personnel and our
agents to comply with applicable U.S. and international laws and regulations. However, there can be
no assurance that our policies and procedures will effectively prevent us, our employees and our agents
from violating these regulations in every transaction in which we may engage, and violations, allegations
or investigations of such violations could materially adversely affect our reputation, business, financial
condition and results of operations.
If any of our customers were to become insolvent or experience substantial financial difficulties, our business,
financial condition and results of operations may be adversely affected.
If any of the customers with whom we do business becomes insolvent or experiences substantial
financial difficulties we may be unable to timely collect amounts owed to us by such customers and may
not be able to sell the inventory we have purchased for such customers, which could have a material
adverse effect on our business, financial condition and results of operations.
Our suppliers or our customers may experience damage to or disruptions at our or their facilities caused
by natural disasters and other factors, which may result in our business, financial condition and results of
operations being adversely affected.
Several of our facilities or those of our suppliers and customers could be subject to a catastrophic
loss caused by earthquakes, tornadoes, floods, hurricanes, fire, power loss, telecommunication and
information systems failure or other similar events. Should insurance be insufficient to recover all such
losses or should we be unable to reestablish our operations, or if our customers or suppliers were to
experience material disruptions in their operations as a result of such events, our business, financial
condition and results of operations could be adversely affected.
We are dependent on access to and the performance of third-party package delivery companies.
Our ability to provide efficient distribution of the products we sell to our customers is an integral
component of our overall business strategy. We do not maintain our own delivery networks, and instead
rely on third-party package delivery companies. We cannot assure you that we will always be able to
ensure access to preferred delivery companies or that these companies will continue to meet our needs
or provide reasonable pricing terms. In addition, if the package delivery companies on which we rely
experience delays resulting from inclement weather or other disruptions, we may be unable to maintain
products in inventory and deliver products to our customers on a timely basis, which may adversely affect
our business, financial condition and results of operations.
A significant labor dispute involving us or one or more of our customers or suppliers, or a labor dispute that
otherwise affects our operations, could reduce our net sales and harm our profitability.
Labor disputes involving us or one or more of our customers or suppliers could affect our operations.
If our customers or suppliers are unable to negotiate new labor agreements and our customers’ or
suppliers’ plants experience slowdowns or closures as a result, our net sales and profitability could be
negatively impacted.
While our employees are not currently unionized, they may attempt to form unions in the future,
and the employees of our customers, suppliers and other service providers may be, or may in the future
be, unionized. We cannot assure you that there will not be any strike, lock out or material labor dispute
with respect to our business or those of our customers or suppliers in the future that materially affects our
business, financial condition and results of operations.
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We may be materially adversely affected by high fuel prices.
Fluctuations in the global supply of crude oil and the possibility of changes in government policies
on the production, transportation and marketing of jet fuel make it impossible to predict the future
availability and price of jet fuel. In the event there is an outbreak or escalation of hostilities or other
conflicts or significant disruptions in oil production or delivery in oil-producing areas or elsewhere, there
could be reductions in the production or importation of crude oil and significant increases in the cost
of jet fuel. If there were major reductions in the availability of jet fuel or significant increases in its cost,
commercial airlines would face increased operating costs. Due to the competitive nature of the airline
industry, airlines are often unable to pass on increases in fuel prices to customers by increasing fares. As
a result, an increase in jet fuel could result in a decrease in net income from either lower margins or, if
airlines increase ticket fares, lower net sales from reduced airline travel. Decreases in airline profitability
could decrease the demand for new commercial aircraft, resulting in delays of or reductions in deliveries
of commercial aircraft that utilize the products we sell, and, as a result, our business, financial condition
and results of operations could be materially adversely affected.
Our financial results may fluctuate from period-to-period, making quarter-to-quarter comparisons of our
business, financial condition and results of operations less reliable indicators of our future performance.
There are many factors, such as the cyclical nature of the aerospace industry, fluctuations in our
ad hoc sales, delays in major aircraft programs, planned production shutdowns, downward pressure on
sales prices and changes in the volume of our customers’ orders that could cause our financial results to
fluctuate from period-to-period. For example, during the year ended September 30, 2016, 25% of our
net sales were derived from ad hoc sales. The prices we charge for ad hoc sales are typically higher than
the prices under our Contract sales. However, ad hoc customers may not continue to purchase the same
amount of products from us as they have in the past, so it cannot be assured that in any given year we will
be able to generate similar net sales from our ad hoc customers as we did in the past. We are also actively
working to transition customers from ad hoc purchases to Contracts, which may also result in a reduction
in ad hoc purchases. In addition, our acquisition of Haas has contributed to lower our ad hoc sales as a
percentage of net sales. A significant diminution in our ad hoc sales in any given period could result in
fluctuations in our financial results and operating margins. As a result of these factors, we believe that
quarter-to-quarter comparisons of our financial results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance.
We will continue to incur a significant increase in costs as a result of operating as a publicly traded company, and
our management will be required to devote substantial time to new compliance requirements and investor needs.
As a publicly traded company, we will continue to incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and the rules of the
SEC and the New York Stock Exchange have imposed various requirements on public companies.
Our management and other personnel will continue to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations will continue to result in increased legal
and financial compliance costs and make some activities more time-consuming and costly. For example,
we believe these rules and regulations make it more difficult and more expensive for us to maintain
appropriate levels of director and officer liability insurance.
We are subject to health, safety and environmental laws and regulations, any violation of which could subject us
to significant liabilities and penalties.
We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances
relating to pollution, protection of the environment and human health and safety, and the handling,
transportation, storage, treatment, disposal and remediation of hazardous substances, including
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potentially with respect to historical chemical blending and other activities that pre-dated the purchase
of the Haas business by us. Actual or alleged violations of EHS laws, or permit requirements could result
in restrictions or prohibitions on operations and substantial civil or criminal sanctions, as well as, under
some EHS laws, the assessment of strict liability and/or joint and several liability.
Furthermore, we may be liable for the costs of investigating and cleaning up environmental
contamination on or from our operations or at off-site locations, including potentially with respect to
historical chemical blending and other activities that pre-dated the purchase of the Haas business by us.
We may therefore incur additional costs and expenditures beyond those currently anticipated to address
all such known and unknown situations under existing and future EHS laws.
Governmental, regulatory and societal demands for increasing levels of product safety and
environmental protection are resulting in increased pressure for more stringent regulatory control with
respect to the chemical industry. The European Union’s REACH regulations enacted in 2009 have been
a continuing source of compliance obligations and restrictions on certain chemicals, and REACH-like
regimes have now been adopted in several other countries. In the United States, the core provisions
of the Toxic Substances Control Act (TSCA) were amended in June 2016 for the first time in nearly
40 years. Among the more significant changes are that these amendments mandate safety reviews of
existing chemicals with regulatory action to restrict any “high risk” chemicals identified as result of
such reviews. The amendments to the TSCA also mandate that the EPA establish a new inventory of
existing chemicals, a process expected to result in identification of certain chemicals that may not have
been properly characterized on the original inventory and in restrictions on the use of such chemicals
pending completion of a safety review. These type of changes in the Company’s regulatory environment,
particularly, but not limited to, in the United States, the European Union, Canada and China, could
lead to heightened regulatory scrutiny and could adversely impact our ability to supply certain products
and provide supply chain management services to our customers. Such changes also could result in
compliance obligations for us directly or as part of our supply chain management services to customers,
fines, ongoing monitoring and other future business activity restrictions, which could have a material
adverse effect on our business, financial condition and results of operations.
In addition, these concerns could influence public perceptions regarding our operations and our
ability to attract and retain customers and employees. Moreover, changes in EHS regulations could
inhibit or interrupt our operations, or require us to modify our facilities or operations. Accordingly,
environmental or regulatory matters may cause us to incur significant unanticipated losses, costs, capital
expenditures or liabilities, which could reduce our profitability. Such losses, costs, capital expenditures
or liabilities will be subject to evolving regulatory requirements and will depend on the timing of the
promulgation and enforcement of specific standards which impose requirements on our operations. As a
result, these losses, costs, capital expenditures or liabilities may be more than currently anticipated.
Our operations involve risks associated with the handling, transportation, storage and disposal of chemical
products that may increase our operating costs and reduce our profitability.
Our business is subject to hazards inherent in the handling, transportation, storage and disposal
of chemical products. These hazards include: chemical spills, storage tank leaks, discharges or releases
of toxic or hazardous substances or gases and other hazards incident to the handling, transportation,
storage and disposal of dangerous chemicals. We are also potentially subject to other hazards,
including natural disasters and severe weather; explosions and fires; transportation problems, including
interruptions, spills and leaks; mechanical failures; unscheduled downtimes; labor difficulties; and other
risks. Many potential hazards can cause bodily injury and loss of life, severe damage to or destruction
of property and equipment and environmental damage, and may result in suspension of our own or
our customers’ operations and the imposition of civil or criminal penalties and liabilities. Furthermore,
24
we are subject to present and future claims with respect to our employees when working within our
own operations or when supplying chemicals to and/or providing chemical management services at our
customer’s operations, other persons, including potentially our customers and their employees, workers’
compensation and other matters.
We maintain property, business interruption, products liability and casualty insurance policies which
we believe are in accordance with customary industry practices, as well as insurance policies covering
other types of risks, including pollution legal liability insurance, but we are not fully insured against all
potential hazards and risks incident to our business. Each of these insurance policies is subject to customary
exclusions, deductibles and coverage limits, in accordance with industry standards and practices. As a result
of market conditions, premiums and deductibles for certain insurance policies can increase substantially
and, in some instances, certain insurance may become unavailable or available only for reduced amounts
of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a
material adverse effect on our business, results of operations, financial condition and liquidity.
If the temperature control systems on which we rely fail, certain of the chemical products we sell may become
“non-conforming” while in storage or in transit, and as a result, we may be responsible for providing
replacement products to our customers, which could have a material adverse effect on our business, financial
condition and results of operations.
Many of the chemical products we sell are sensitive to temperature. Our storage facilities and
the vehicles maintained by the third-party delivery companies on whom we rely utilize sophisticated
temperature control systems to ensure safe storage and handling of these products. If these temperature
control systems fail, products that are sensitive to temperature may become non-conforming to the
customer’s specifications, and we may be responsible for providing replacement products, which could
have a material adverse effect on our business, financial condition and results of operations.
Our reputation and/or our business, financial condition and results of operations could be adversely affected if
one of the products we sell causes an aircraft to crash.
We may be exposed to liabilities for personal injury, death or property damage as a result of the
failure of a product we have sold. We typically agree to indemnify our customers against certain liabilities
resulting from the products we sell, and any third party indemnification we seek from our suppliers and
our liability insurance may not fully cover our indemnification obligations to customers. We also may
not be able to maintain insurance coverage in the future at an acceptable cost. Any liability for which
third-party indemnification is not available that is not covered by insurance could have a material adverse
effect on our business, financial condition and results of operations.
In addition, a crash caused by one of the products we have sold could damage our reputation
for selling quality products. We believe our customers consider safety and reliability as key criteria in
selecting a provider of aircraft products and believe our reputation for quality assurance is a significant
competitive strength. If a crash were to be caused by one of the products we sold, or if we were to
otherwise fail to maintain a satisfactory record of safety and reliability, our ability to retain and attract
customers may be materially adversely affected.
We sell products to a highly regulated industry and our business may be adversely affected if our suppliers
or customers lose government approvals, if more stringent government regulations are enacted or if industry
oversight is increased.
The aerospace industry is highly regulated in the United States and in other countries. The FAA
prescribes standards and other requirements for aircraft components in the U.S. and comparable
agencies, such as the European Aviation Safety Agency, the Civil Aviation Administration of China
25
and the Japanese Civil Aviation Bureau, regulate these matters in other countries. Our suppliers and
customers must generally be certified by the FAA, the DoD and similar agencies in foreign countries. If
any of our suppliers’ government certifications are revoked, we would be less likely to buy such supplier’s
products, and, as a result, would need to locate a suitable alternate supply of such products, which we may
be unable to accomplish on commercially reasonable terms or at all. If any of our customers’ government
certifications are revoked, their demand for the products we sell would decline. In each case, our
business, financial condition and results of operations may be adversely affected.
In addition, if new and more stringent government regulations are adopted or if industry oversight
increases, our suppliers and customers may incur significant expenses to comply with such new
regulations or heightened industry oversight. In the case of our suppliers, these expenses may be passed
on to us in the form of price increases, which we may be unable to pass along to our customers. In the
case of our customers, these expenses may limit their ability to purchase products from us. In each case,
our business, financial condition and results of operations may be adversely affected.
We may be unable to successfully consummate or integrate future acquisitions, which could negatively impact
our business, financial condition and results of operations.
We may consider future acquisitions, some of which could be material to us. Depending upon the
acquisition opportunities available, we may need to raise additional funds through the capital markets
or arrange for additional debt financing in order to consummate such acquisitions. We may be unable
to raise the capital required for future acquisitions on satisfactory terms or at all, which could adversely
affect our business, financial condition and results of operations.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative
effect on global economic conditions, financial markets and our business, which could reduce the price of our
common stock.
We have material business operations in both the United Kingdom and the broader European Union.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union
in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a
negotiation period that could last at least two years after the government of the United Kingdom formally
initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the
future relationship between the United Kingdom and the European Union, and has given rise to calls for
the governments of other European Union member states to consider withdrawal.
These developments, or the perception that any of them could occur, have had and may continue to
have a material adverse effect on global economic conditions and the stability of global financial markets,
and could significantly reduce global market liquidity and restrict the ability of key market participants
to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may
be especially subject to increased market volatility. Lack of clarity about future United Kingdom laws
and regulations as the United Kingdom determines which European Union laws to replace or replicate
in the event of a withdrawal, including financial laws and regulations, tax and free trade agreements,
intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations,
immigration laws and employment laws, could decrease foreign direct investment in the United Kingdom,
increase costs, depress economic activity and restrict our access to capital. If the United Kingdom and
the European Union are unable to negotiate acceptable withdrawal terms or if other European Union
member states pursue withdrawal, barrier-free access between the United Kingdom and other European
Union member states or among the European economic area overall could be diminished or eliminated.
Any of these factors could have direct or indirect impact on our business in the United Kingdom and
the broader European Union, on our suppliers and customers in the United Kingdom and the broader
26
European Union and on our business outside the United Kingdom and the broader European Union,
which could have a material adverse effect on our business, financial condition and results of operations
and reduce the price of our common stock.
Our substantial indebtedness could adversely affect our financial health and could harm our ability to react to
changes to our business.
As of September 30, 2016, our total long-term indebtedness outstanding under our Existing Credit
Facilities (as defined in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources—Credit Facilities—Existing Senior Secured
Credit Facilities”) was $841.9 million, which was 48.7% of our total capitalization. Subsequently, on October
4, 2016, we amended our Existing Credit Agreement, which resulted in total long-term indebtedness
outstanding under our Credit Facilities (as defined in Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit
Facilities—Fourth Amendment to Senior Secured Credit Facilities”) of $865.6 million.
In addition, we may incur substantial additional indebtedness in the future. Our Credit Facilities
contain a number of significant qualifications and exceptions that allow us to incur additional indebtedness,
and the indebtedness incurred in compliance with these qualifications and exceptions could be substantial.
If we incur additional debt, the risks associated with our substantial leverage would increase.
Our substantial indebtedness could have important consequences to investors. For example, it could:
•
•
•
increase our vulnerability to general economic downturns and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate;
• place us at a competitive disadvantage compared to competitors that have less debt; and
•
limit, along with the financial and other restrictive covenants contained in the documents
governing our indebtedness, among other things, our ability to borrow additional funds, make
investments and incur liens.
In addition, all of our debt under the Credit Facilities bears, and under the Existing Credit Facilities
bore, interest at floating rates, causing us to enter into interest rate swap derivative instruments
to partially offset our exposure to interest rate fluctuations, which result in additional risks. As of
September 30, 2016, we had a current interest rate hedge liability and a long-term interest rate hedge
liability of $1.1 million and $5.6 million, respectively. If our interest rate hedge was determined ineffective
partially or entirely as defined by GAAP, the ineffective portion or the entire amount of our interest rate
hedge liabilities would adversely affect our earnings. Our derivatives also expose us to credit risk to the
extent that the counterparties may be unable to meet the terms of the agreement, which could negate
the intended protection from our hedge instruments. See further discussion on our derivative financial
instruments in Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K.
Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to
pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. We cannot
assure you that our business will generate sufficient cash flow from operations or that future borrowings will
27
be available to us under the Credit Facilities or otherwise in amounts sufficient to enable us to service our
indebtedness. If we cannot service our debt, we will have to take actions such as reducing or delaying capital
investments, selling assets, restructuring or refinancing our debt or seeking additional equity capital and
cannot assure you that we will be successful in implementing any such actions or that any actions we take
will allow us to stay in compliance with the terms of our indebtedness.
The terms of the Credit Facilities and other debt instruments may restrict our current and future operations,
particularly our ability to respond to changes or to take certain actions.
The Credit Facilities contain a number of restrictive covenants that impose significant operating and
financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best
interests. The Credit Facilities include covenants restricting, among other things, our ability to:
•
incur or guarantee additional indebtedness or issue preferred stock;
• pay distributions on, redeem or repurchase our capital stock or redeem or repurchase our
subordinated debt;
• make investments;
•
sell assets;
• enter into agreements that restrict distributions or other payments from our restricted
subsidiaries to us;
incur or allow existing liens;
consolidate, merge or transfer all or substantially all of our assets;
•
•
• engage in transactions with affiliates;
• enter into sale leaseback transactions;
•
change fiscal periods;
• enter into agreements that restrict the granting of liens or the making of subsidiary distributions;
•
create unrestricted subsidiaries; and
• engage in certain business activities.
In addition, the Credit Facilities contain a maximum leverage ratio covenant. A breach of this financial
covenant could result in a default under the Credit Facilities. If any such default occurs, the lenders under
the Credit Facilities may elect to declare all outstanding borrowings, together with accrued interest and
other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit
Facilities also have the right in these circumstances to terminate any commitments they have to provide
further borrowings. In addition, following an event of default under the Credit Facilities, the lenders under
those facilities will have the right to proceed against the collateral granted to them to secure the debt,
which includes our available cash. If the debt under the Credit Facilities was to be accelerated, we cannot
assure you that our assets would be sufficient to repay in full our debt. See Part II, Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Credit Facilities—Fourth Amendment to Senior Secured Credit Facilities” for additional
information about the Company’s compliance with the Consolidated Total Leverage Ratio (as defined in
the Credit Agreement) maintenance covenant contained in the Credit Agreement.
28
Risks Related to our Common Stock
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your
common stock at or above the price you paid for your common stock. The market price of our common
stock could fluctuate significantly for various reasons, including:
• our operating and financial performance and prospects;
• our quarterly or annual earnings or those of other companies in our industry;
•
•
•
•
•
the public’s reaction to our press releases, our other public announcements and our filings with
the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who
track our common stock or the stock of other companies in our industry;
the failure of securities analysts to cover our common stock or changes in analyst
recommendations;
credit ratings downgrades or other negative actions by ratings agencies for us or our subsidiaries;
strategic actions by us or our competitors, such as acquisitions or restructurings;
• new laws or regulations or new interpretations of existing laws or regulations applicable to
our business;
•
•
changes in accounting standards, policies, guidance, interpretations or principles;
the impact on our profitability temporarily caused by the time lag between when we experience
cost increases until these increases flow through cost of sales because of our method of
accounting for inventory, or the impact from our inability to pass on such price increases to
our customers;
• material litigation or government investigations;
•
•
•
•
•
changes in general conditions in the United States and global economies or financial markets,
including those resulting from war, incidents of terrorism or responses to such events;
changes in key personnel;
sales of common stock by us or members of our management team;
the volume of trading in our common stock; and
the realization of any risks described under “Risk Factors.”
In addition, in recent years, the U.S. stock market has experienced significant price and volume
fluctuations. This volatility has had a significant impact on the market price of securities issued by
many companies, including companies in our industry. The changes have often been unrelated or
disproportionate to the operating performance of the affected companies. Hence, the price of our common
stock could fluctuate based upon factors that have little or nothing to do with our Company, and these
fluctuations could materially reduce our share price and cause you to lose all or part of your investment.
29
We have no plans to pay regular dividends on our common stock, so you may not receive funds without selling
your common stock.
We have no plans to pay regular dividends on our common stock. We generally intend to invest our
future earnings, if any, to fund our growth. Any payment of future dividends will be at the discretion of
our Board of Directors and will depend on, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of
dividends and other considerations that our Board of Directors deems relevant. The Credit Facilities
also effectively limit our ability to pay dividends. Accordingly, you may have to sell some or all of your
common stock in order to generate cash flow from your investment. You may not receive a gain on your
investment when you sell your common stock and you may lose the entire amount of the investment.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and
Delaware law might discourage, delay or prevent a change of control of our company or changes in our
management and, as a result, depress the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain
provisions that could discourage, delay or prevent a change in control of our Company or changes in our
management that the stockholders of our Company may deem advantageous. These provisions:
• establish a classified Board of Directors, with three classes of directors;
• authorize the issuance of blank check preferred stock that our Board of Directors could issue to
increase the number of outstanding shares and to discourage a takeover attempt;
•
limit the ability of stockholders to remove directors;
• prohibit our stockholders from calling a special meeting of stockholders;
• prohibit stockholder action by written consent, which requires all stockholder actions to be taken
at a meeting of our stockholders;
• provide that our Board of Directors is expressly authorized to adopt, or to alter or repeal our
bylaws; and
• establish advance notice requirements for nominations for election to our Board of Directors or
for proposing matters that can be acted upon by stockholders at stockholder meetings.
These anti-takeover defenses, while adopted for the purpose of protecting shareholder value,
could discourage, delay or prevent a transaction involving a change in control of our Company. These
provisions could also discourage proxy contests and make it more difficult for you and other stockholders
to elect directors of your choosing and cause us to take corporate actions other than those you desire.
Future sales of our common stock in the public market could lower our share price, and any additional capital
raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may
adversely affect the market price of our common stock.
We and our existing stockholders may sell additional shares of common stock in subsequent public
offerings. We may also issue additional shares of common stock or convertible debt securities to finance
future acquisitions. As of September 30, 2016, we had 950,000,000 shares of common stock authorized
and 98,614,908 shares of common stock outstanding. In addition, we have 2,700,157 shares of common
stock issuable upon the exercise of options outstanding as of September 30, 2016 and 4,399,512 available
shares of common stock reserved for issuance under the Wesco Aircraft Holdings, Inc. 2014 Incentive
Award Plan (the 2014 Plan).
30
We cannot predict the size of future issuances of our common stock or the effect, if any, that future
issuances and sales of our common stock will have on the market price of our common stock. Sales of
substantial amounts of our common stock (including sales pursuant to Carlyle’s registration rights and
shares issued in connection with an acquisition), or the perception that such sales could occur, may
adversely affect prevailing market prices for our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our global headquarters is located at 24911 Avenue Stanford, Valencia, California 91355. As of
September 30, 2016, we have a total of 57 administrative, sales and/or stocking facilities, all of which
are either leased or located at a customer site, except for our global headquarters, which is owned by
us. These facilities, including facilities in Northlake, Texas; McDonough, Georgia; Wichita, Kansas;
Austin, Texas; Mississauga, Ontario; Cleckheaton, United Kingdom and Clayton West, United Kingdom,
are located in 17 countries, including the U.S., Australia, Canada, China, France, Germany, India,
Israel, Italy, Mexico, Singapore and the United Kingdom.
Our warehouse operations are divided between CSLs and Forward Stocking Locations (FSLs).
Our CSLs serve as the primary supply warehouses for most of our net sales and also house our
procurement, customer service, document control, IT, material support and quality assurance functions.
Our CSLs are supported by sales offices throughout the U.S., Australia, Canada, China, France,
Germany, India, Israel, Italy, Mexico, Singapore and the United Kingdom.
Complementing our CSLs and sales offices are FSLs. An FSL is a specialized stocking point for one
or more Contracts located within a geographic region. FSLs are typically located either near or within
a customer facility and are established to support large Contracts. In certain instances, FSLs initially
established to service a single customer are expanded to service other regional customers.
We believe that our existing facilities, including both owned and leased, are in good condition
and suitable for the conduct of our business. For additional information regarding obligations under
operating leases, see Note 17 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal matters that arise in the ordinary course of our business. We believe
that the ultimate outcome of such matters will not have a material adverse effect on our business,
financial condition or results of operations. However, there can be no assurance that such actions will
not be material or adversely affect our business, financial condition or results of operations. For more
information see Note 17 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
31
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information About Our Common Stock
Our common stock began trading on the New York Stock Exchange under the symbol “WAIR” on
July 28, 2011. Before then, there was no public market for our common stock. The following table sets
forth, for the periods indicated, the high and low sales prices of our common stock as reported by the
New York Stock Exchange:
Fiscal 2016
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2015
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$ 14.43
$ 15.00
$ 14.41
$ 13.38
$ 15.54
$ 16.39
$ 15.73
$ 18.12
$ 12.68
$ 12.64
$ 10.19
$ 11.44
$ 12.20
$ 14.64
$ 12.98
$ 13.48
Stockholders
On September 30, 2016, the closing price reported on the New York Stock Exchange of our common
stock was $13.43 per share. As of November 21, 2016, we had approximately 104 holders of record of our
common stock.
Dividends
We have not paid dividends in the past and we do not intend to pay any cash dividends for the
foreseeable future. We intend to retain earnings, if any, for the future operation and expansion of our
business and the repayment of debt. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will depend upon our results of operations, cash requirements,
financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that
our Board of Directors may deem relevant. Our existing indebtedness effectively limits our ability to pay
dividends and make distributions to our stockholders.
Recent Sales of Unregistered Securities
None.
Performance
The graph set forth below compares the cumulative total shareholder return on our common stock
between September 30, 2011 and September 30, 2016 to (1) the cumulative total return of U.S. companies
listed on the New York Stock Exchange and (2) the cumulative total return of a peer group selected
by the Company (BE Aerospace, Inc. (BEAV), Esterline Technologies Corporation (ESL), Fastenal
32
Company (FAST), HEICO Corporation (HEI), KLX Inc. (KLXI), MSC Industrial Direct Co., Inc.
(MSM), Transdigm Group Incorporated (TDG) and W.W. Grainger, Inc. (GWW)) over the same period.
The peer group reflects a mix of companies that we believe is reflective of our broader industry and line-
of-business. This graph assumes an initial investment of $100 on September 30, 2011, in our common
stock, the market index and the peer group and assumes the reinvestment of dividends, if any. The
historical information set forth below is not necessarily indicative of future price performance.
Company/Market/Peer Group
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
Wesco Aircraft Holdings, Inc. . . . . . . . . .
New York Stock Exchange
(U.S. Companies) . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . .
$ 100.00
$ 124.98
$ 191.49
$ 159.19
$ 111.62
$122.87
100.00
100.00
129.14
134.82
156.94
178.06
182.42
190.16
175.47
165.75
200.74
198.57
33
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement and other data for each of the years ended September 30, 2016, 2015
and 2014 and the selected balance sheet data as of September 30, 2016 and 2015 have been derived from
our audited consolidated financial statements that are included in this Annual Report. The selected
income statement and other data for the years ended September 30, 2013, and 2012 and the selected
balance sheet data as of September 30, 2014, 2013 and 2012 have been derived from audited consolidated
financial statements that are not included in this Annual Report on Form 10-K.
The financial data set forth below are not necessarily indicative of future results of operations. This
data should be read in conjunction with, and is qualified in its entirety by reference to, Part II, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
financial statements and notes thereto included elsewhere in this Annual Report.
Consolidated statements of
income data:
Net sales . . . . . . . . . . . . . . . . . . .
Income (loss) from operations .
Interest expense, net . . . . . . . . .
Other income (expense), net . .
Income (loss) before income
taxes . . . . . . . . . . . . . . . . . . . .
Income tax benefit (provision) .
Net income (loss) . . . . . . . . . . .
Per share data:
Net income (loss) per share
Basic . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . .
Weighted average shares
outstanding
Basic . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet
Data:
Cash and cash equivalents . . . .
Total assets (1), (2) . . . . . . . . . .
Long-term debt and capital
lease obligations (3) . . . . . . .
Total stockholders’ equity (4) . .
Years Ended September 30,
2016
2015
2014
2013
2012
(in thousands except per share data)
$1,477,366
158,750
(36,901)
3,741
$ 1,497,615
$ (206,365)
(37,092)
1,841
$ 1,355,877
183,934
$
(29,225)
2,199
125,590
(34,212)
91,378
(241,616)
86,872
$ (154,744)
0.94
0.93
$
$
(1.60)
(1.60)
$
$
$
156,908
(54,806)
102,102
1.06
1.05
$
$
$
$
$
$
$
$
901,608
180,802
(25,178)
2,003
157,627
(52,815)
104,812
1.12
1.09
$
$
$
$
$
776,206
158,832
(24,646)
(524)
133,662
(41,487)
92,175
1.00
0.96
97,634
98,166
96,955
96,955
95,951
97,606
93,285
95,844
92,058
95,712
$
77,061
1,956,205
$
82,866
2,020,973
$
104,775
2,412,274
$
78,716
1,631,153
$
60,856
1,537,416
843,616
882,915
954,730
817,573
1,081,825
992,290
569,414
865,436
626,205
744,915
(1) We acquired Haas in February 2014.
(2) We acquired Interfast in July 2012.
(3) Total long-term debt and capital lease obligations excludes current portion.
(4) We revised the total stockholders’ equity as of September 30, 2012 (see revision disclosure in Note 2 of the Notes to Consolidated
Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended September 30, 2015 filed on
November 30, 2015).
34
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial
condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction
with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on
Form 10-K.
The statements in this discussion regarding industry trends, our expectations regarding our future
performance, liquidity and capital resources and other non-historical statements are forward-looking
statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but
not limited to, the risks and uncertainties described in Part I, Item 1A. “Risk Factors” and “Cautionary Note
Regarding Forward- Looking Statements.” Our actual results may differ materially from those contained in or
implied by any forward-looking statements.
Industry Trends Affecting Our Business
We rely on demand for new commercial and military aircraft for a significant portion of our sales.
Commercial aircraft demand is driven by many factors, including the global economy, industry passenger
volumes and capacity utilization, airline profitability, introduction of new models and the lifecycle
of current fleets. Demand for business jets is closely correlated to regional economic conditions and
corporate profits, but also influenced by new models and changes in ownership dynamics. Military aircraft
demand is primarily driven by government spending, the timing of orders and evolving U.S. Department
of Defense strategies and policies.
Aftermarket demand is affected by many of the same trends as those in OEM channels, as well
as requirements to maintain aging aircraft and the cost of fuel, which can lead to greater utilization of
existing planes. Demand in the military aftermarket is further driven by changes in overall fleet size and
the level of U.S. military operational activity domestically and overseas.
Supply chain service providers and distributors have been aided by these trends along with
an increase in outsourcing activities, as OEMs and their suppliers focus on reducing their capital
commitments and operating costs.
Commercial Aerospace Market
Over the past three years, major airlines have ordered new aircraft at a robust pace, aided by strong
profits and increasing passenger volumes. At the same time, volatile fuel prices have led to greater
demand for fuel-efficient models and new engine options for existing aircraft designs. The rise of
emerging markets has added to the growth in overall demand at a stronger pace than seen historically.
More recently, several airlines have slowed the pace of orders with large commercial OEMs in response
to rapidly changing macroeconomic conditions. In spite of this development, large commercial
OEMs have indicated that they continue to expect a high level of deliveries, primarily due to their
unprecedented level of backlogs. Business aviation has lagged the larger commercial market, reflecting
a deeper downturn in the last recession and an uncertain economic outlook. Overall business aviation
production levels remain well below their pre-recession peak, though newer models have seen a greater
acceptance in the marketplace than older and previously owned aircraft.
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Military Aerospace Market
Military build-rates have declined for the past few years (and they may continue to decline going
forward), which has negatively affected this portion of our business. We believe the diversity of the
military aircraft programs we support can help mitigate the impact of new program delays, changes or
cancellations. In particular, we believe the services we provide the Joint Strike Fighter program will
benefit our future business as production for that program increases. Increased sales for other established
aircraft programs that directly benefit from such changes also help moderate build-rate declines.
Other Factors Affecting Our Financial Results
Fluctuations in Revenue
There are many factors, such as fluctuations in ad hoc sales, timing of aircraft deliveries, changes in
selling prices, the amount of new customers’ consigned inventory and the volume or timing of customer
orders that can cause fluctuations in our financial results from quarter-to-quarter. To normalize for
short-term fluctuations, we tend to look at our performance over several quarters or years of activity
rather than discrete short-term periods. As such, it can be difficult to determine longer-term trends in our
business based on quarterly comparisons.
We will continue our strategy of seeking to expand our relationships with existing customers by
transitioning them to Contracts, as well as expanding relationships with our existing Contract customers
to include additional customer sites, additional SKUs and additional levels of service. We believe this
strategy serves to mitigate fluctuations in our net sales. However, our sales to Contract customers may
fail to meet our expectations for a variety of reasons, in particular if industry build rates are lower than
expected or, for certain newer JIT customers, if their consigned inventory, which must be exhausted
before corresponding products are purchased directly from us, is larger than we expected.
During the year ended September 30, 2014, we modified and extended a contract with an existing
customer that resulted in a $66.3 million reduction in net sales to the customer during the year ended
September 30, 2015, and a further reduction of $26.4 million in net sales to the customer during the year
ended September 30, 2016 compared to the year ended September 30, 2015.
If any of our customers are acquired or controlled by a company that elects not to utilize our services,
or attempt to implement in-sourcing initiatives, it could have a negative effect on our strategy to mitigate
fluctuations in our net sales. Additionally, although we derive a significant portion of our net sales
from the building of new commercial and military aircraft, we have not typically experienced extreme
fluctuations in our net sales when sales for an individual aircraft program decrease, which we believe is
attributable to our diverse base of customers and programs. In addition, we believe our substantial sales
under Contracts helps to mitigate fluctuations in our financial results, as Contract customers tend to have
steadier purchasing patterns than ad hoc customers. However, as mentioned above, our sales to Contract
customers may fail to meet our expectations for a variety of reasons, in particular if industry build rates
are lower than expected or, for certain newer JIT customers, if their consigned inventory, which must be
exhausted before corresponding products are purchased directly from us, is larger than we expected or if
estimated usage rates are actually lower. In addition, we believe that during industry growth cycles, our
customer’s demand may begin to exceed supplier lead times, which could result in an increase in our ad
hoc sales.
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Fluctuations in Margins
We added chemicals to our product offerings in connection with our Haas acquisition on February 28,
2014. Gross profit margins on chemicals are lower than the gross profit margins on many of the products
we sold prior to the Haas acquisition, which resulted in a reduction in our overall gross profit margins. In
addition, we believe our gross profit margins may also be negatively impacted to the extent other lower-
margin product lines, such as electronic components, exceed the growth rates of higher margin product
lines. In addition, there continues to be pricing pressure throughout the supply chain.
We also believe that our strategy of growing our Contract sales and converting ad hoc customers into
Contract customers could negatively affect our gross profit margins, as gross profit margins tend to be
higher on ad hoc sales than they are on Contract-related sales. However, we believe any potential adverse
impact on our gross profit margins is outweighed by the benefits of a more stable long-term revenue
stream attributable to Contract customers.
Our Contracts generally provide for fixed prices, which can expose us to risks if prices we pay to
our suppliers rise due to increased raw material or other costs. However, we believe our expansive
product offerings and inventories, our ad hoc sales and, where possible, our longer-term agreements with
suppliers have enabled us to mitigate this risk.
Fluctuations in Cash Flow
We believe our cash flows may be affected by fluctuations in our inventory that can occur over time.
When we are awarded new programs, we have generally increased our inventory to account for expected
sales related to the new program, which often take time to materialize. As a result, if certain programs for
which we have procured inventory are delayed or if certain newer JIT customers’ consigned inventory is
larger than we expected, we may experience a more sustained inventory increase.
Inventory fluctuations may also be attributable to general industry trends. Factors that may
contribute to fluctuations in inventory levels in the future could include (1) strategic purchases (a) to
take advantage of favorable pricing, (b) made in anticipation of the expected industry growth cycle, (c) to
support new customer Contracts or (d) to acquire high-volume products that are typically difficult to
obtain in sufficient quantities, (2) changes in supplier lead times and the timing of inventory deliveries,
(3) purchases made in anticipation of future growth (particularly growth in our MRO business) and
(4) purchases made in connection with the expansion of existing Contracts. While effective inventory
management is an ongoing challenge, we continue to take steps to enhance the sophistication of our
procurement practices to mitigate the negative impact of inventory buildups on our cash flow.
Our accounts receivable balance as a percentage of net sales may fluctuate from quarter-to-quarter.
These fluctuations are primarily driven by changes, from quarter-to-quarter, in the timing of sales and the
current average days’ sales outstanding. The completion of customer Contracts with accelerated payment
terms can also contribute to these quarter-to-quarter fluctuations. Similarly, our accounts payable may
fluctuate from quarter-to-quarter, which is primarily driven by the timing of purchases or payments made
to our suppliers.
Segment Presentation
We conduct our business through two reportable segments: North America and Rest of World. We
evaluate segment performance based on segment income or loss 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.
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Restructuring Activities
In September 2015, we committed to a Global Restructuring Plan, which involved the immediate
elimination of redundant positions and the closure and consolidation of various facilities in order to
better align our workforce to the growth areas of our business and to streamline our operations in order
to increase efficiency and effectiveness. For the year ended September 30, 2016, total cost savings to our
selling, general and administrative expenses were $26.5 million, excluding impact from foreign exchange
rate movements, most of which is recurring and driven by actions under our Global Restructuring Plan.
Out of the $26.5 million, $22.0 million impacted the North America segment and $4.5 million impacted
Rest of World segment. For more information on our Global Restructuring Plan, see Note 22 of the
Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Revision of Supplemental Cash Flow Information
We determined that our 2015 cash paid for interest of $15.7 million as reported in our 2015 Annual
Report on Form 10-K is understated. The correct amount is $32.6 million. We have revised our 2015 cash
paid for interest amount to present the correct amount in Note 19 of the Notes to Consolidated Financial
Statement in Part II, Item 8 of this Annual Report on Form 10-K. The misstatement had no effect on
previously reported income from operations, net income or cash flows for the year ended September 30,
2015 and the interim periods within that year. We have evaluated the misstatement and do not believe it
is material to the financial statements for the year ended September 30, 2015.
Key Components of Our Results of Operations
The following is a discussion of the key line items included in our financial statements for the periods
presented below under the heading “Results of Operations.” These are the measures that management
utilizes to assess our results of operations, anticipate future trends and evaluate risks in our business.
Net Sales
Our net sales include sales of hardware, chemicals, electronic components, bearings, tools and
machined parts, and eliminate all intercompany sales. We also provide certain services to our customers,
including quality assurance, kitting, JIT delivery and point-of-use inventory management. However,
these services are provided by us contemporaneously with the delivery of the product, and as such, once
the product is delivered, we do not have a post-delivery obligation to provide services to the customer.
Accordingly, the price of such services is generally included in the price of the products delivered to the
customer, and revenue is recognized upon delivery of the product, at which point, we have satisfied our
obligations to the customer. We do not account for these services as a separate element, as the services
generally do not have stand-alone value and cannot be separated from the product element of the
arrangement.
We serve our customers under both Contracts, which include JIT contracts and LTAs, and ad
hoc sales. Under JIT contracts, customers typically commit to purchase specified products from us at
a fixed price, on an if-and-when needed basis, and we are responsible for maintaining high levels of
stock availability of those products. LTAs are typically negotiated price lists for customers or individual
customer sites that cover a range of pre-determined products, purchased on an as-needed basis. Ad hoc
customers purchase products from us on an as-needed basis and are generally supplied out of our existing
inventory. In addition, Contract customers often purchase products that are not captured under their
Contract on an ad hoc basis.
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Income from Operations
Income from operations is the result of subtracting the cost of sales and selling, general, and
administrative expenses from net sales, and is used primarily to evaluate our performance and
profitability.
The principal component of our cost of sales is product cost, which was 93.0% of our total cost of
sales for the year ended September 30, 2016. The remaining components are freight and expediting fees,
import duties, tooling repair charges, packaging supplies and physical inventory adjustment charges,
which collectively were 7.0% of our total cost of sales for the year ended September 30, 2016.
Product cost is determined by the current weighted average cost of each inventory item, except
for chemical parts for which the first-in, first-out method is used, and the adjustment to the reserve, if
any, for excess and obsolete inventory. The inventory reserve is calculated to estimate the amount of
excess and obsolete inventory we currently have on-hand. We review inventory for excess quantities and
obsolescence quarterly and adjust the reserve and future forecasted sell-through rates as necessary. For a
description of our E&O reserve policy, see “—Critical Accounting Policies and Estimates—Inventories.”
Charges to cost of sales for the increase of our E&O reserve and related items of $14.6 million,
$95.1 million and $17.7 million were recorded during the years ended September 30, 2016, 2015 and 2014,
respectively. We believe that these amounts appropriately reflect the risk of E&O inventory inherent
in our business. The larger charges of $95.1 million recorded in the year ended September 30, 2015 as
compared to the year ended September 30, 2016 and 2014 are primarily due to $76.8 million charges
relating to inventory previously purchased in connection with a specific program which was subsequently
terminated and deemed to have no alternative use (totaling $33.0 million), and our change in the
estimation methodology by which we determine the E&O reserve for our hardware inventory from an
aging methodology to a consumption methodology (totaling $43.8 million), see “—Change in Estimate—
Inventory E&O Reserve.” For a more detailed description of the E&O reserves, see Note 5 of the Notes
to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
The principal components of our selling, general and administrative expenses are salaries, wages,
benefits and bonuses paid to our employees; stock-based compensation; commissions paid to outside
sales representatives; travel and other business expenses; training and recruitment costs; marketing,
advertising and promotional event costs; rent; bad debt expense; professional services fees (including
legal, audit and tax); and ordinary day-to-day business expenses. Depreciation and amortization expense
is also included in selling, general and administrative expenses, and consists primarily of scheduled
depreciation for leasehold improvements, machinery and equipment, vehicles, computers, software and
furniture and fixtures. Depreciation and amortization also includes intangible asset amortization expense.
Other Expenses
Interest Expense, Net. Interest expense, net consists of the interest we pay on our long-term debt, fees
on our revolving facility (as defined below under “—Liquidity and Capital Resources—Credit Facilities—
Fourth Amendment to Senior Secured Credit Facilities”) and our line-of-credit and deferred financing
costs, net of interest income.
Other Income (Expense), Net. Other income (expense), net is primarily comprised of foreign
exchange gain or loss associated with transactions denominated in currencies other than the respective
functional currency of the reporting subsidiary.
39
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our most critical accounting policies have
a significant impact on the results we report in our financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience and on assumptions that
we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for
our judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate, and different assumptions or estimates about
the future could change our reported results. We believe the following accounting policies are the most
critical in that they significantly affect our financial statements, and they require our most significant
estimates and complex judgments.
Inventories
Our inventory is comprised solely of finished goods. Inventories are stated at the lower of cost or
market (LCM). The method by which amounts are removed from inventory are weighted average cost for
all inventory, except for chemical parts for which the first-in, first-out method is used.
We record provisions, as appropriate, to write-down E&O inventory to estimated net realizable
value. We charge cost of sales for inventory provisions to write down our inventory to the lower of cost
or estimated market value or to completely write-off obsolete or excess inventory. Most of our inventory
provisions relate to the write-off of excess quantities of products, based on our inventory levels compared
to assumptions about future demand and market conditions. Once inventory has been written-off or
written-down, it creates a new cost basis for the inventory that is not subsequently written-up. The process
for evaluating E&O inventory often requires us to make subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventories will be able to be sold in the normal
course of business.
The components of our inventory are subject to different risks of excess quantities or obsolescence. Our
hardware inventory, which does not expire or have a pre-determined shelf life, bears a higher risk of excess
quantities than of becoming obsolete. However, our chemical inventory becomes obsolete when it has aged
past its shelf-life, cannot be recertified and is no longer usable or able to be sold, or the inventory has been
damaged on-site or in-transit. In such instances, a full reserve is taken against such inventory.
Demand for our products can fluctuate significantly. Our estimates of future product demand and selling
prices may prove to be inaccurate, in which case we may have understated or overstated the write-down
required for E&O inventories. In the future, if our inventories are determined to be valued higher than
LCM, we will be required to reduce the value of such inventories to LCM and recognize the differences in
our cost of goods sold at the time of such determination. Conversely, if our inventories are determined to
be valued below LCM, we may have over-reported our costs of goods sold in previous periods and will be
required to defer the recognition of such additional operating income until those inventories are sold. As of
September 30, 2016 and 2015, our E&O reserve was $250.7 million and $264.1 million, respectively. Charges
to cost of sales for the increase in our E&O reserves and related items were $14.6 million, $ 95.1 million
and $17.7 million in the years ended September 30, 2016, 2015 and 2014, respectively. We believe that these
amounts appropriately reflect the risk of E&O inventory inherent in our business.
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The following table provides a rollforward of the Company’s E&O inventory reserve for the years
ended September 30, 2016, 2015 and 2014 (in thousands).
Beginning E&O reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 264,114
2015
$ 197,188
E&O provision from normal course of business . . . . . . . . . . . . . .
14,615
Strategy change(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory for specific program(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net E&O expense recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
14,615
(4,516)
18,208
43,844
33,000
95,052
292
Reserve depletion for inventory scrapped(1) . . . . . . . . . . . . . . . . .
(23,475)
(28,418)
2014
$ 176,413
17,700
—
—
17,700
3,594
(519)
Ending E&O reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 250,738
$ 264,114
$ 197,188
(1) Historically, management’s strategy was to purchase inventory in large quantities to capture purchase discounts and rebates,
hold inventory for long periods of time and meet customer ad hoc and unplanned inventory needs. As a result, we maintained
parts on hand with low annual sales but large cumulative sales over many years and historically scrapped very little inventory.
The inventory would typically be sold well in excess of cost. Each fiscal year-end, we performed a reserve adequacy test by
performing a hypothetical liquidation of the ending inventory balance using the historical actual sell-through rates based on
the year of inventory purchase and adjust the reserve as needed. We were adequately reserved as of September 30, 2014 and
each of the quarterly periods ended December 31, 2014, March 31, 2015 and June 30, 2015.
In May 2015, we hired a new Chief Executive Officer and Chief Financial Officer, who implemented a different strategy with
respect to the management of our inventory. This change in strategy was driven by a change in the nature of our business
towards a higher percentage of revenue coming from recurring customer contracts, which allows for more predictable buying
patterns and holding inventory for a shorter period of time and at levels closer to current demand. As a result of this change,
during the quarter ended September 30, 2015, we updated our E&O reserve model, reflecting the new strategy shift to hold
inventory at lower quantity levels. This model is performed at the individual SKU level with a shorter forecast period than was
historically applied in the liquidation model, which resulted in an increase in the reserve of $43.8 million. Our commitment
to this new strategy was demonstrated by the scrapping of older inventory, resulting in a write-off of $23.5 million and $28.4
million of E&O reserve for the years ended September 30, 2016 and 2015, respectively.
(2) During the quarter ended September 30, 2015, we wrote off $33.0 million of inventory related to the termination of a contract
in support of a specific program. The program is a large commercial customer’s new aircraft model. We had entered into two
arrangements in 2009 and 2010 to support this program, and had purchased inventory for the program over a period of years
beginning in 2009.
During the fiscal year ended September 30, 2014, we were notified that this program would be modified and disclosed the
estimated impact of the modifications in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 under
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Factors
Affecting Our Financial Results—Fluctuations in Revenue.”
As a result of this notification, our management assessed the need for an E&O reserve on the related inventory at each
subsequent reporting period. For each reporting period up to the quarter ended June 30, 2015, we determined that a charge
was not necessary due to the following alternatives that were available: (i) negotiations with the customer regarding the extent
of the modification were continuing, (ii) the platform being supported continued to have a strong order backlog and the parts
held in our inventory were used in current production, (iii) we were in negotiations with the customer and had experienced a
history of favorable negotiations with the customer after a contract termination to recover the cost of the inventory purchased
and (iv) we were exploring opportunities to sell the inventory to other suppliers of this customer.
During the quarter ended September 30, 2015, we were informed by the customer that they had a substantial supply of
the inventory in question. Based on the analysis performed by us and despite on-going negotiations with the customer, we
determined that other options were no longer probable, including the potential sale of the inventory to other suppliers of the
customer. As a result, the quantity on hand was deemed not saleable and therefore was written down by $33.0 million to its net
realizable value.
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The Years Ended September 30, 2016 and 2015
In conducting our E&O reserve for our hardware inventory, we consider a variety of factors,
including historical sales over a five year period which we utilize to forecast future demand. E&O
inventory is identified by comparing current inventory levels to future demand, and is reserved
appropriately. We also stratify the inventory population in order to identify inventory which is sold to a
single customer, and we therefore have increased risk of holding excess or obsolete inventory should the
underlying contracts with that customer be terminated or otherwise not renewed.
We also consider a variety of factors, including shelf-life expiration, damage to products,
rights we have with certain manufacturers to exchange unsold products for new products and open
customer orders.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the consideration paid over the fair value of the net assets
acquired in a business combination. Goodwill and indefinite-lived intangible assets acquired in a business
combination are not amortized, but instead tested for impairment at least annually or more frequently
should an event occur or circumstances indicate that the carrying amount may be impaired. Such events
or circumstances may be a significant change in business climate, economic and industry trends, legal
factors, negative operating performance indicators, significant competition, changes in strategy, or
disposition of a reporting unit or a portion thereof. Goodwill and indefinite lived intangibles impairment
testing is performed at the reporting unit level on July 1 of each year and when circumstances change that
might indicate impairment.
We test goodwill for impairment by performing a qualitative assessment process, or using a two-
step quantitative assessment process. If we choose to perform a qualitative assessment process and
determine it is more likely than not (that is, a likelihood of more than 50 percent) that the carrying value
of the net assets is more than the fair value of the reporting unit, the two-step quantitative assessment
process is then performed; otherwise, no further testing is required. Factors utilized in the qualitative
assessment include the following: macroeconomic conditions; industry and market considerations; cost
factors; overall financial performance; Wesco entity specific operating results and other relevant Wesco
entity specific events. We may elect not to perform the qualitative assessment process and, instead,
proceed directly to the two step quantitative assessment process. For reporting units where the two-step
quantitative assessment process is performed, the first step involves comparing the carrying value of net
assets, including goodwill, to the fair value of the reporting unit. If the fair value exceeds its carrying
amount, goodwill is not considered impaired and the second step of the process is unnecessary. If the
carrying amount of a reporting unit’s goodwill exceeds its fair value, the second step measures the
impairment loss, if any.
The first step identifies potential impairment by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. We have four reporting units, which are North America Hardware,
Rest of World Hardware, North America Chemical and Rest of World Chemical. The estimates of fair
value of a reporting unit are determined based on a discounted cash flow analysis and market earnings
multiples. A discounted cash flow analysis requires us to make various judgmental assumptions, including
assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash
flows and growth rates are based on the forecast and long-term business plans of each reporting unit.
Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the
respective reporting units. If the fair value exceeds the carrying value of a reporting unit, goodwill is not
considered impaired and the second step of the test is unnecessary. If the carrying amount of a reporting
unit’s goodwill exceeds the fair value of a reporting unit, the second step measures the impairment loss,
if any.
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The second step compares the implied fair value of goodwill with the carrying amount of that
goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. The implied fair value of the reporting unit’s goodwill is calculated
by creating a hypothetical balance sheet as if the reporting unit had just been acquired. This balance sheet
contains all assets and liabilities recorded at fair value (including any intangible assets that may not have
any corresponding carrying value in our balance sheet). The implied value of the reporting unit’s goodwill
is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If
the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
We performed our Step 1 goodwill impairment tests on July 1, 2016. The results of these tests
indicated that the estimated fair values of our reporting units exceeded their carrying values.
We performed our Step 1 goodwill impairment tests on July 1, 2015. The results of these tests
indicated that the estimated fair values of our reporting units exceeded their carrying values, with the
exception of the North America Hardware reporting unit within our North America segment reflecting
management’s reduced sales and earnings outlook. The impact of market pressures such as decreasing
revenue and under-performance relative to forecast adversely impacted the fair value of this reporting
unit. As a result, we proceeded to Step 2 of the goodwill impairment analysis, and compared the implied
value of North America Hardware’s goodwill with the carrying value of its goodwill, and since the
carrying value exceeded the implied fair value, we recorded a non-cash impairment charge of $263.8
million in the three months ended September 30, 2015.
The preparation of our internal forecasts requires significant judgments, including the estimation
of the long-term rate of growth for our business, estimation of the useful life over which cash flows
will occur, cost containment activities, changes in working capital, growth rates, discount rates, and
other factors. Changes in these factors could significantly change our internal forecasts, which could
significantly change the amount of impairment recorded, if any.
Revenue Recognition
We recognize product and service revenue when (1) persuasive evidence of an arrangement exists,
(2) title transfers to the customer, (3) the sales price charged is fixed or determinable and (4) collection is
reasonably assured. In instances where title does not pass to the customer upon shipment, we recognize
revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
We report revenue on a gross or net basis based on management’s assessment of whether we act as
a principal or agent in the transaction. We assess whether we act as a principal in the transaction or as
an agent acting on behalf of others by considering such factors as to whether or not we obtain control of
the product, the form of consideration we receive, our ability to influence pricing, and our performance
obligations. Based upon these criteria, if we are the principal in the transaction and have the risks
and rewards of ownership, the transactions are recorded as gross in the consolidated statements of
comprehensive income. If we do not act as a principal in the transaction, the transactions are recorded
on a net basis in the consolidated statements of comprehensive income. The majority of our revenue
is recorded on a gross basis with the exception of certain gas, energy and chemical manager service
contracts that are recorded as net revenue.
We also enter into sales rebate and profit sharing arrangements with our customers. Such customer
incentives are accounted for as a reduction to gross sales and recorded based upon estimates at the
time products are sold. These estimates are based upon historical experience for similar programs and
products. We review such rebates and profit sharing arrangements on an ongoing basis and accruals are
adjusted, if necessary, as additional information becomes available.
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Management provides allowances for credits and returns, based on historic experience, and adjusts
such allowances as considered necessary. To date, such provisions have been within the range of
management’s expectations and the allowance established.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which these temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date. A valuation allowance is established, when necessary, to reduce net deferred
tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets depends
upon the generation of future taxable income during the periods in which temporary differences become
deductible or includible in taxable income. We consider projected future taxable income and tax planning
strategies in our assessment. Our foreign subsidiaries are taxed in local jurisdictions at local statutory
rates. The Company includes interest and penalties related to income taxes, including unrecognized tax
benefits, within income tax expense.
We determine whether it is more likely than not that some or all of the deferred tax assets will not
be realized. We have recorded valuation allowances of $5.5 million and $6.0 million as of September 30,
2016 and 2015, respectively, against certain deferred tax assets, which consist primarily of temporary
differences related to certain Haas foreign tax credits and Haas foreign net operating losses. The
valuation allowances are based on our estimates of taxable income by jurisdictions in which we operate
and the period over which our deferred tax assets will be recoverable. If actual results differ from these
estimates or if we revise these estimates in future periods, we may need to adjust the valuation allowances
which could materially impact our financial position and results of operations.
Stock-Based Compensation
We account for all stock-based compensation awards to employees and members of our Board of
Directors based upon their fair values as of the date of grant using a fair value method and recognize the
fair value of each award as an expense over the requisite service period using the graded vesting method for
awards with performance conditions and the straight line method for awards with service conditions only.
For purposes of calculating stock-based compensation, we estimate the fair value of stock options
using a Black-Scholes option pricing model, which requires the use of certain subjective assumptions
including expected term, volatility, expected dividend, risk-free interest rate, and the fair value of our
common stock. These assumptions generally require significant judgment.
We estimate the expected term of employee options using the average of the time-to-vesting and the
contractual term. We derive our expected volatility from the historical volatilities of several unrelated
public companies within our industry because we have little information on the volatility of the price of
our common stock since we have limited trading history. When making the selections of our industry
peer companies to be used in the volatility calculation, we also consider the size and financial leverage of
potential comparable companies. These historical volatilities are weighted based on certain qualitative
factors and combined to produce a single volatility factor. Our expected dividend rate is zero, as we have
never paid any dividends on our common stock and do not anticipate any dividends in the foreseeable
future. We base the risk-free interest rate on the U.S. Treasury yield in effect at the time of grant for zero
coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected life. For awards
with performance conditions, we estimate the probability that the performance condition will be met.
44
We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue
to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis
of employee turnover behavior and other factors. Quarterly changes in the estimated forfeiture rate
can have a significant effect on reported stock-based compensation expense, as the cumulative effect
of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate
is changed.
The following table summarizes the amount of stock-based compensation expense recognized in our
consolidated statements of comprehensive income (in thousands):
Stock-based compensation expense . . . . . . . . . .
2016
$ 8,490
2015
2014
$ 7,891 $ 5,507
For the years ending September 30, 2017 and 2018, we expect to incur stock-based compensation
expense of approximately $10.3 million and $10.9 million, respectively.
If any of the factors change and/or we employ different assumptions, stock-based compensation
expense may differ significantly from what we have recorded in the past. If there is a difference
between the assumptions used in determining stock-based compensation expense and the actual factors
that become known over time, we may change the input factors used in determining stock-based
compensation costs for future grants. Additionally, we may change the estimates that the performance
obligations may be met. These changes, if any, may materially impact our results of operations in the
period such changes are made. We expect to continue to grant stock options in the future, and to the
extent that we do, our actual stock-based compensation expense recognized in future periods will
likely increase.
Results of Operations
Consolidated
Consolidated Result of Operations
2016
2015
2014
Years Ended September 30,
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . .
Income tax (provision) benefit . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . .
Income tax (provision) benefit . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,477,366
158,750
(36,901)
3,741
125,590
(34,212)
91,378
$
(dollars in thousands)
$1,497,615
$ (206,365)
(37,092)
1,841
(241,616)
86,872
$ (154,744)
$1,355,877
$ 183,934
(29,225)
2,199
156,908
(54,806)
$ 102,102
(as a percentage of net sales, numbers rounded)
100 %
10.7 %
(2.5)%
0.3 %
8.5 %
(2.3)%
6.2 %
100 %
(13.8)%
(2.4)%
0.1 %
(16.1)%
5.8 %
(10.3)%
100 %
13.6 %
(2.2)%
0.2 %
11.6 %
(4.1)%
7.5 %
45
Year ended September 30, 2016 compared with the year ended September 30, 2015
Net Sales
Consolidated net sales for the year ended September 30, 2016 decreased $20.2 million, or 1.4%, to
$1,477.4 million compared to the year ended September 30, 2015. Foreign currency impacts reduced
sales by $30.2 million. Excluding foreign currency impacts, fiscal 2016 net sales increased $10.0 million
compared to fiscal 2015. The $10.0 million increase was primarily due to Contract sales growth of $45.8
million, which was attributable to increased production and expanded content, as well as new business
and scope expansion on commercial and military Contracts. The Contract sales growth was partially offset
by a $26.4 million decline in sales due to the end of a large commercial contract on March 31, 2015 and a
decrease of ad hoc sales by $9.6 million during the year ended September 30, 2016. Ad hoc and Contract
sales as a percentage of net sales represented 25% and 75%, respectively, for the year ended September
30, 2016 as compared to 26% and 74%, respectively, for the year ended September 30, 2015.
Income (loss) from Operations
Consolidated income from operations for the year ended September 30, 2016 was $158.8 million,
compared to loss from operations of $206.4 million for the year ended September 30, 2015. Income
from operations was 10.7% of net sales for the year ended September 30, 2016, compared to loss from
operations of 13.8% of net sales for the year ended September 30, 2015. The $365.2 million increase in
income from operations was primarily due to a decrease in goodwill impairment charge of $263.8 million
and a decrease in E&O inventory reserve of $80.5 million, both of which are non-cash adjustments. For
the year ended September 30, 2016, we did not have goodwill impairment as compared to $263.8 million
of goodwill impairment charge recorded under our North America segment in the prior year (see further
discussion above under “—Critical Account Policies and Estimates—Goodwill and Indefinite-Lived
Intangible Assets”). The E&O inventory reserve charge was $14.6 million for the year ended September
30, 2016 as compared to $95.1 million for the prior year. The $80.5 million decrease in E&O inventory
reserve charge was primarily driven by the strategy change in fiscal 2015 that increased expense by $43.8
million and by a specific program inventory reserve in fiscal 2015 of $33.0 million (see further discussion
above under “—Critical Account Policies and Estimates—Inventories”). Excluding goodwill impairment
and E&O inventory reserve, income from operations increased by $20.9 million for the year ended
September 30, 2016 as compared to the prior year.
The remaining $20.9 million increase in income from operations was primarily due to a decrease
in SG&A expenses of $32.1 million, of which $5.6 million was due to foreign currency exchange rate
movements, partially offset by a decrease of $11.3 million in gross profit (that excludes impact from
E&O reserve charges), of which $9.9 million was due to foreign currency exchange rate movements.
The decrease in SG&A expenses, excluding the impact of foreign currency exchange rate movements,
was largely driven by decreases in payroll and other people related costs, professional fees and bad debt
of $21.8 million, $4.0 million and $1.4 million, respectively. These decreases were partially offset by an
increase in software and hardware maintenance costs of $1.8 million. The $11.3 million decrease in gross
profit, excluding the impact of foreign currency exchange rate movements and the impact from the E&O
charges, was largely driven by the conclusion of a large commercial contract and lower chemical margins
due to commodity-based cost and pricing changes on certain pass through Contracts.
46
Other Expenses
Interest Expense, Net
Interest expense, net was $36.9 million for the year ended September 30, 2016, which decreased $0.2
million, or 0.5%, compared to the year ended September 30, 2015. The decrease was primarily due to the
repayment of our long-term debt during the year ended September 30, 2016, partially offset by periodical
interest swap costs that commenced after June 30, 2015 and an acceleration in the amortization of
deferred financing costs as a result of the repayment of our long-term debt during the year ended
September 30, 2016.
Other Income, Net
Other income, net was $3.7 million for the year ended September 30, 2016, which increased by $1.9
million compared to the year ended September 30, 2015. The increase was primarily related to foreign
currency exchange gain associated with transactions denominated in currencies other than the respective
functional currency of the reporting subsidiary.
(Provision) Benefit for Income Taxes
The income tax provision was $34.2 million for the year ended September 30, 2016, compared to
the income tax benefit of $86.9 million for the year ended September 30, 2015. Our effective tax rate
was 27.2% and 36.0% for the years ended September 30, 2016 and 2015, respectively. The decrease in
our effective tax rate resulted primarily from (1) a decrease in U.S. pretax income, which is subject to a
higher tax rate and an increase in foreign pretax income which is subject to a lower tax rate; and (2) the
settlement of a tax audit; and (3) the foreign currency loss related to a distribution of previously taxed
foreign earnings. Refer to Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8 of
this Annual Report on Form 10-K for additional information about our benefit for income taxes for the
year ended September 30, 2016.
Net Income (Loss)
We reported a net income of $91.4 million for the year ended September 30, 2016, compared to a
net loss of $154.7 million for the year ended September 30, 2015. Net income was 6.2% of net sales for
the year ended September 30, 2016, as compared to net loss of 10.3% of net sales for the year ended
September 30, 2015.
Year ended September 30, 2015 compared with the year ended September 30, 2014
Net Sales
Net sales for the year ended September 30, 2015 increased $141.7 million, or 10.5%, to $1,497.6
million compared to the year ended September 30, 2014, driven by the Haas acquisition completed on
February 28, 2014, offset by the impact of a customer contract renegotiation, as described below, and
foreign currency movements. Sales attributable to the acquired Haas business increased $235.7 million
for the year ended September 30, 2015 as compared to the year ended September 30, 2014, which was a
result of having a full year and seven months of Haas results included in the years ended September 30,
2015 and 2014, respectively. During the year ended September 30, 2014, we modified and extended a
contract with an existing customer that resulted in a $66.3 million reduction in net sales to the customer
during the year ended September 30, 2015 as compared to the year ended September 30, 2014. The year
ended September 30, 2014 also included a $6.4 million settlement related to the termination of a separate
contract. During the year ended September 30, 2015, foreign currency movements negatively impacted
47
sales by $25.4 million. Ad hoc and Contract sales as a percentage of consolidated net sales represented
26% and 74%, respectively, for the year ended September 30, 2015, as compared to 28% and 72%,
respectively, for the year ended September 30, 2014. The decrease in ad hoc sales as a percentage of net
revenue was a result of adding a full year of Haas sales, which has a higher percentage of Contract sales.
(Loss) Income from Operations
Loss from operations was $206.4 million for the year ended September 30, 2015, as compared to
income from operations of $183.9 million for the year ended September 30, 2014. Loss from operations
was 13.8% of net sales for the year ended September 30, 2015, compared to income from operations
of 13.6% of net sales for the year ended September 30, 2014. The dollar decrease in income from
operations was comprised of a decrease in gross profit of $78.5 million, an increase in selling, general
and administrative expenses of $48.0 million and a goodwill impairment charge of $263.8 million. The
decrease in gross profit was primarily driven by a $95.1 million increase in E&O inventory reserve, which
was largely the result of our change of E&O reserve estimation methodologies (see further discussion
under “—Critical Accounting Policies and Estimates—Inventories”), and lower-margin Contract sales
partially offset by additional gross profit as a result of the Haas acquisition. The increase in selling,
general and administrative expenses was primarily driven by $32.6 million of additional expenses as a
result of the Haas acquisition and increases in professional fees, payroll costs, stock-based compensation,
restructuring costs and depreciation expense of $8.2 million, $4.7 million, $2.4 million, $4.5 million
and $1.3 million, respectively. These increases were partially offset by lower integration related costs
of $5.8 million.
Other Expenses
Interest Expense, Net
Interest expense, net of $37.1 million for the year ended September 30, 2015 increased $7.9 million,
or 26.9%, compared to the year ended September 30, 2014. $7.1 million of this increase resulted from
having a full year of interest during fiscal 2015 compared to seven months of interest during fiscal 2014
on the term loan B facility under the Existing Credit Facilities (as defined below under “—Liquidity and
Capital Resources—Credit Facilities—Existing Senior Secured Credit Facilities”), which was used to fund
the Haas acquisition in February 2014.
Other Income (Expense), Net
Other income, net of $1.8 million for the year ended September 30, 2015 decreased by $0.4 million
compared to the year ended September 30, 2014. This change was primarily due to unrealized foreign
exchange losses associated with transactions denominated in currencies other than the respective
functional currency of the reporting subsidiary.
Benefit (Provision) for Income Taxes
The income tax benefit was $86.9 million for the year ended September 30, 2015 compared to an
income tax provision of $54.8 million for the year ended September 30, 2014. Our effective tax rate was
36.0% and 34.9% for the years ended September 30, 2015 and 2014, respectively. The change in our
effective tax rate resulted primarily from an impairment of certain goodwill and adjustments to our E&O
inventory reserve. Refer to Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8
of this Annual Report on Form 10-K for additional information about our benefit for income taxes for
the year ended September 30, 2015.
48
Net (Loss) Income
We reported a net loss of $154.7 million for the year ended September 30, 2015, compared to net
income of $102.1 million for the year ended September 30, 2014. Net loss as a percent of net sales was
10.3% for the year ended September 30, 2015, as compared to net income as a percent of nets sales of
7.5% for the year ended September 30, 2014. This decrease is primarily due to loss from operations as a
percentage of net sales for fiscal 2015, as discussed above, which was partially offset by income tax benefit
for operating losses.
North America Segment
North America Results of Operations
2016
2015
2014
Years Ended September 30,
(dollars in thousands)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . .
$1,185,315
$ 113,426
$1,198,201
$ (222,719)
(as a percentage of net sales, numbers rounded)
$1,030,511
$ 145,357
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . .
100%
9.6%
100
(18.6)%
100%
14.1%
Year ended September 30, 2016 compared with the year ended September 30, 2015
Net Sales
Net sales of $1,185.3 million from our North America segment for the year ended September 30,
2016 decreased $12.9 million, or 1.1%, compared to the year ended September 30, 2015, primarily due to
an $18.4 million decline in sales as a result of the end of a large commercial contract on March 31, 2015
and a $22.2 million decline in ad hoc sales. These declines were partially offset by Contract sales growth
of $27.7 million, primarily due to increased production and expanded content, as well as new business and
scope expansion on commercial and military Contracts.
Income from Operations
Income from operations of our North America segment for the year ended September 30, 2016 was
$113.5 million compared to a loss from operations of $222.7 million for the year ended September 30,
2015. Income from operations was 9.6% of net sales for the year ended September 30, 2016, compared to
a loss from operations of 18.6% of net sales for the year ended September 30, 2015. The $336.2 million
increase in income from operations was primarily caused by a decrease in goodwill impairment charge of
$263.8 million and a decrease in E&O inventory reserve of $67.0 million, driven primarily by the strategy
change in fiscal 2015 and by the specific program inventory reserve in fiscal 2015 as discussed above in
our analysis of consolidated income from operations. Excluding goodwill impairment and E&O inventory
reserve, income from operations increased by $5.4 million for the year ended September 30, 2016 as
compared to the prior year.
The remaining $5.4 million increase in income from operations was due primarily to a decrease
in SG&A expenses of $22.0 million, partially offset by a decrease of $16.7 million in gross profit that
excludes impact from E&O reserve charges. The decrease in SG&A expenses was largely driven by
decreases in payroll and other people related costs, professional fees and bad debt of $17.7 million, $4.0
million and $2.2 million, respectively. These decreases were partially offset by an increase in software
49
and hardware maintenance costs of $1.7 million. The decrease in gross profit was largely driven by the
conclusion of a large commercial contract and lower chemical margins due to commodity-based cost and
pricing changes on certain pass through Contracts.
Year ended September 30, 2015 compared with the year ended September 30, 2014
Net Sales
Net sales of $1,198.2 million from our North America segment for the year ended September 30,
2015 increased $167.7 million, or 16.3%, compared to the year ended September 30, 2014. The year
ended September 30, 2015 reflects an increase of $189.7 million driven by the Haas acquisition, partially
offset by a customer contract modification and the settlement related to the termination of a contract that
took place during the year ended September 30, 2014.
Ad hoc sales decreased by $4.0 million, or 1.1%, and Contract sales increased by $171.8 million, or
25.3%, primarily due to the addition of Haas, which has a higher percentage of Contract sales than ad
hoc sales.
(Loss) from Operations
Loss from operations in our North America segment for the year ended September 30, 2015
was $222.7 million, compared to an income from operations of $145.4 million for the year ended
September 30, 2014. Loss from operations was 18.6% of net sales for the year ended September 30,
2015, compared to an income from operations of 14.1% of net sales for the year ended September 30,
2014. The dollar decrease in income from operations was comprised of a decrease in gross profit of
$67.7 million, an increase in selling, general and administrative expenses of $36.6 million and a goodwill
impairment charge of $263.8 million. The decrease in gross profit was primarily driven by an $83.7 million
inventory adjustment and increased lower-margin Contract sales, partially offset by additional gross
profit as a result of the Haas acquisition. The increase in selling, general and administrative expenses was
primarily driven by $22.8 million of additional expenses as a result of the Haas acquisition and increases
in professional fees, payroll costs, stock-based compensation, restructuring costs and depreciation
expense of $8.3 million, $3.9 million, $2.4 million, $2.6 million and $1.5 million, respectively. These
increases were partially offset by lower integration related costs of $6.0 million.
Rest of World Segment
Rest of World Results of Operations
2016
2015
2014
Years Ended September 30,
(dollars in thousands)
$ 325,366
$ 38,577
$ 292,051
$ 45,324
$ 299,414
$ 16,354
(as a percentage of net sales,
numbers rounded)
100%
5.5%
100%
15.5%
100%
11.9%
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . .
50
Year ended September 30, 2016 compared with the year ended September 30, 2015
Net Sales
Net sales of $292.1 million from our Rest of World segment for the year ended September 30, 2016
decreased $7.3 million or 2.5%, compared to the year ended September 30, 2015. Foreign currency
impacts reduced sales by $30.2 million. Excluding foreign currency impacts, fiscal 2016 net sales increased
$22.8 million compared to fiscal 2015, due primarily to ad hoc sales growth of $12.7 million and Contract
sales growth of $18.1 million that was primarily due to increased production and expanded content, as
well as new business and scope expansion on commercial Contracts. These sales increases were partially
offset by an $8.0 million decline in sales due to the end of a large commercial contract on March 31, 2015.
Income from Operations
Income from operations of our Rest of World segment for the year ended September 30, 2016 was
$45.3 million, which increased $29.0 million, or 177.1%, compared to the year ended September 30, 2015.
Income from operations as a percentage of net sales in our Rest of World segment was 15.5% for the
year ended September 30, 2016, compared to 5.5% for the year ended September 30, 2015. The $29.0
million increase in income from operations was partially caused by a decrease in E&O inventory reserve
of $13.4 million, driven primarily by the strategy change in fiscal 2015 as discussed above in our analysis
of consolidated income from operations. Excluding E&O inventory reserve, income from operations
increased by $15.6 million for the year ended September 30, 2016 as compared to the prior year.
The remaining $15.6 million increase in income from operations was the result of an increase in
gross profit of $5.5 million, net of a $9.9 million negative impact from foreign currency exchange rate
movements, and a decrease in SG&A expenses of $10.1 million, of which $5.6 million was due to foreign
currency exchange rate movements. The increase in gross profit, excluding the impact of foreign currency
exchange rate movements and the E&O reserve charges, was primarily driven by an increase in Contract
margins and changes in the mix of ad hoc and Contract business. The decrease in SG&A expenses,
excluding the impact of foreign currency exchange rate movements, was largely driven by decreases in
payroll costs, utilities and warehouse expenses of $4.1 million, $0.4 million and $0.2 million, respectively.
These decreases were partially offset by a $0.7 million increase in bad debt.
Year ended September 30, 2015 compared with the year ended September 30, 2014
Net Sales
Net sales of $299.4 million from our Rest of World segment for the year ended September 30, 2015
decreased $26.0 million, or 8.0%, compared to the year ended September 30, 2014, reflecting negative
foreign currency impacts of $25.4 million and a customer contract modification, partially offset by
additional Haas sales of $46.1 million. Ad hoc sales decreased by $0.4 million, or 0.9%, and Contract sales
decreased by $25.6 million, or 9.1%, primarily due to the customer contract modification and foreign
currency impacts.
Income from Operations
Income from operations of our Rest of World segment for the year ended September 30, 2015 was
$16.4 million, which decreased $22.2 million, or 57.6%, compared to the year ended September 30, 2014.
Income from operations as a percentage of net sales in our Rest of World segment was 5.5% for the
year ended September 30, 2015, compared to 11.9% for the year ended September 30, 2014. The dollar
decrease in income from operations was comprised of a decrease in gross profit of $10.8 million and an
51
increase in selling, general and administrative expenses of $11.4 million. The decrease in gross profit
was primarily driven by an $11.3 million inventory adjustment and increased lower-margin Contract
sales, partially offset by $12.4 million of additional gross profit as a result of the Haas acquisition. The
increase in selling, general and administrative expenses was primarily driven by $10.8 million of additional
expenses as a result of the Haas acquisition and increases in payroll costs and commissions of $0.8 million
and $0.6 million, respectively.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash flow from operations and available borrowings under our
revolving facility (as defined below under “—Credit Facilities—Fourth Amendment to Senior Secured
Credit Facilities”). We have historically funded our operations, debt payments, capital expenditures
and discretionary funding needs from our cash from operations. We had total available cash and cash
equivalents of $77.1 million and $82.9 million as of September 30, 2016 and 2015, respectively, of
which $53.3 million, or 69.2%, and $30.8 million, or 37.2%, was held by our foreign subsidiaries as of
September 30, 2016 and 2015, respectively. None of our cash and cash equivalents consisted of restricted
cash and cash equivalents as of September 30, 2016 or 2015. All of our foreign cash and cash equivalents
are readily convertible into U.S. dollars or other foreign currencies. Our strategic plan does not require
the repatriation of foreign cash in order to fund our operations in the U.S. and it is our current intention
to permanently reinvest our foreign cash and cash equivalents outside of the U.S. If we were to repatriate
foreign cash to the U.S., we may be required to accrue and pay U.S. taxes in accordance with applicable
U.S. tax rules and regulations as a result of the repatriation. Our primary uses of cash are for:
• operating expenses;
• working capital requirements to fund the growth of our business;
•
capital expenditures that primarily relate to IT equipment and our warehouse operations;
• debt service requirements for borrowings under the Credit Facilities (as defined below under “—
Credit Facilities—Fourth Amendment to Senior Secured Credit Facilities”); and
•
strategic acquisitions.
Generally, cash provided by operating activities has been adequate to fund our operations. Due to
fluctuations in our cash flows and the growth in our operations, it may be necessary from time to time in
the future to borrow under our revolving facility to meet cash demands. We anticipate that cash provided
by operating activities, cash and cash equivalents and borrowing capacity under our revolving facility will
be sufficient to meet our cash requirements for the next twelve months. As of September 30, 2016, we did
not have any material capital expenditure commitments.
Credit Facilities
Fourth Amendment to Senior Secured Credit Facilities
On October 4, 2016, we entered into the Fourth Amendment (the Amendment) to our credit
agreement, dated as of December 7, 2012, by and among the Company, Wesco Aircraft Hardware
(the Borrower) and the lenders and agents party thereto (as amended prior to the Amendment, the
Existing Credit Agreement; the Existing Credit Agreement, as amended by the Amendment, the Credit
Agreement). The Amendment modified the Existing Credit Agreement to replace the Borrower’s
existing revolving credit facility with a new revolving credit facility in an aggregate principal amount
52
of $180.0 million (the revolving credit facility) and the Borrower’s existing senior secured term loan A
facility with a new senior secured term loan A facility in an aggregate principal amount of $400.0 million
(the term loan A facility).
The Amendment also modified the Existing Credit Agreement to (1) remove the Consolidated Net
Interest Coverage Ratio (as defined in the Existing Credit Agreement) financial covenant set forth in
the Existing Credit Agreement and (2) modify the Consolidated Total Leverage Ratio (as defined in
the Credit Agreement) levels in the financial covenant set forth in the Existing Credit Agreement to a
maximum of 4.50 for the quarters ending September 30, 2016 and December 31, 2016, with step-downs to
4.25 for the quarters ending March 31, 2017 and June 30, 2017, 4.00 for the quarters ending September
30, 2017 and December 31, 2017, 3.75 for the quarters ending March 31, 2018 and June 30, 2018 and 3.50
for the quarter ending September 30, 2018 and thereafter.
The Amendment also provided for additional amendments to the Existing Credit Agreement,
including (1) permitting the corporate consolidation of 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 $100.0 million to $150.0 million and providing and (4) providing increased flexibility for
future restructurings.
The Credit Agreement provides for (1) a $400.0 million term loan A facility, (2) a $180.0 million
revolving credit facility and (3) a $525.0 million senior secured term loan B facility (the “term loan B
facility”). We refer to the term loan B facility, together with the term loan A facility and the revolving
facility, as the “Credit Facilities.”
As a result of the Amendment, we incurred $10.4 million in fees that were capitalized and will be
amortized over the remaining life of the related debt. $1.9 million of the unamortized financing fees
related to the Existing Credit Agreement will be written off as debt extinguishment loss in the three
months ending December 31, 2016.
On October 4, 2016, we repaid $1.3 million on our existing term loan A facility prior to the
effectiveness of the Amendment, resulting in a $400.0 million balance. After the effectiveness of the
Amendment, we borrowed $25.0 million on October 4, 2016 under our new $180.0 million revolving
facility to pay the fees of our Amendment and fund our normal operations. As of October 4, 2016, the
interest rate for borrowings under the revolving facility was 3.29%.
The interest rate for the term loan A facility under the Credit Agreement is based on our
Consolidated Total Leverage Ratio (as defined in the Credit Agreement) as determined in the most
recently delivered financial statements, with the respective margins ranging from 2.00% to 2.75% for
Eurocurrency loans and 1.00% to 1.75% for alternate base rate (ABR) loans. The term loan A facility
amortizes in equal quarterly installments of 1.25% of the original principal amount of $400.0 million, with
the balance due at maturity on October 4, 2021, subject to certain exceptions.
The interest rate for the term loan B facility under the Credit Agreement has a margin of 2.50% per
annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or
1.50% per annum for ABR loans (subject to a minimum ABR floor of 1.75% per annum). The term
loan B facility continues to amortize in equal quarterly installments of 0.25% of the original principal
amount of $525.0 million, with the balance due at maturity on February 28, 2021. In July 2015, we entered
into interest rate swap agreements relating to this indebtedness, which are described in greater detail in
Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on
Form 10-K.
53
The interest rate for the revolving facility under the Credit Agreement is based on our Consolidated
Total Leverage Ratio as determined in the most recently delivered financial statements, with the
respective margins ranging from 2.00% to 2.75% for Eurocurrency loans and 1.00% to 1.75% for ABR
loans. The revolving facility expires on October 4, 2021, subject to certain exceptions.
Our borrowings under the Credit Facilities are guaranteed by us and all of our direct and indirect,
wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a first lien
on substantially all of our assets and the assets of our guarantor subsidiaries, including capital stock of the
subsidiaries (in each case, subject to certain exceptions).
The Credit Facilities contain customary negative covenants, including restrictions on our and our
restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant
liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell
or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into
transactions with affiliates.
Existing Senior Secured Credit Facilities
The Existing Credit Agreement (prior to the Amendment) provided for (1) a $625.0 million term
loan A facility (the existing revolving facility), (2) a $200.0 million revolving credit facility (the existing
revolving facility) and (3) a $525.0 million senior secured term loan B facility, discussed above. We refer
to the term loan B facility, together with the existing term loan A facility and the existing revolving
facility, as the Existing Credit Facilities.
As of September 30, 2016, our outstanding indebtedness under the Existing Credit Facilities was
$841.9 million, which consisted of (1) $401.3 million of indebtedness under the existing term loan A
facility and (2) $440.6 million of indebtedness under the term loan B facility. As of September 30,
2016, $200.0 million was available for borrowing under the existing revolving facility, of which we could
borrow up to $146.4 million without breaching any covenants contained in the agreements governing
our indebtedness.
The interest rate for the existing term loan A facility was based on the Consolidated Total Leverage
Ratio (as defined in the Existing Credit Agreement) as was determined in the most recently delivered
financial statements, with the respective margins ranging from 1.75% to 2.50% for Eurocurrency loans
and 0.75% to 1.50% for alternate base rate (ABR) loans. The existing term loan A facility amortized in
equal quarterly installments of 1.25% of the original principal amount of $625.0 million for the first year,
escalating to quarterly installments of 2.50% of the original principal amount of $625.0 million by the
fifth year, with the balance due at maturity on December 7, 2017. As of September 30, 2016, the interest
rate for borrowings under the existing term loan A facility was 5.00%.
The interest rate for the term loan B facility had a margin of 2.50% per annum for Eurocurrency
loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or 1.50% per annum for ABR
loans (subject to a minimum ABR floor of 1.75% per annum). The term loan B facility amortized in
equal quarterly installments of 0.25% of the original principal amount of $525.0 million, with the balance
due at maturity on February 28, 2021. As of September 30, 2016, the interest rate for borrowings under
the term loan B facility was 3.34%. In July 2015, we entered into interest rate swap agreements relating to
this indebtedness, which are described in greater detail in Note 12.
The interest rate for the existing revolving facility was based on our Consolidated Total Leverage
Ratio as determined in the most recently delivered financial statements, with the respective margins
ranging from 1.75% to 2.50% for Eurocurrency loans and 0.75% to 1.50% for ABR loans. The existing
revolving facility was due to expire on December 7, 2017.
54
Our borrowings under the Existing Credit Facilities were guaranteed by us and all of our direct and
indirect, wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a
first lien on substantially all of our assets and the assets of our guarantor subsidiaries, including capital
stock of the subsidiaries (in each case, subject to certain exceptions).
During the year ended September 30, 2016, we made voluntary prepayments totaling $76.0 million
on our existing term loan A facility and $35.0 million on our term loan B facility, which, with respect to
the term loan B facility, have been applied to future required quarterly payments and to the amount due
upon maturity.
Under the terms and definitions applicable to the Existing Credit Facilities as of September 30, 2016,
our Consolidated Total Leverage Ratio (as defined in the Existing Credit Facilities) could not exceed 4.50
(with step-downs on such ratio during future periods) and our Consolidated Net Interest Coverage Ratio
(as defined in the Existing Credit Facilities) could not be less than 2.25. The Existing Credit Facilities also
contained customary negative covenants, including restrictions on our and our restricted subsidiaries’
ability to merge and consolidate with other companies, incur indebtedness, grant liens or security
interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise
transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions
with affiliates. As of September 30, 2016, we were in compliance with all the foregoing covenants.
UK Line of Credit
Our subsidiary, Wesco Aircraft Europe, Ltd, has a £7.0 million ($9.1 million based on the
September 30, 2016 exchange rate) line of credit that automatically renews annually on October 1.
The line of credit bears interest based on the base rate plus an applicable margin of 1.65%. As of
September 30, 2016, the full £7.0 million was available for borrowing under the UK line of credit without
breaching any covenants contained in the agreements governing our indebtedness.
Cash Flows
A summary of our operating, investing and financing activities are shown in the following table
(in thousands):
Consolidated statements of cash flows data:
Net cash provided by operating activities . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . .
2016
$ 117,455
(11,992)
(108,121)
2015
$ 141,172
(9,864)
(150,696)
2014
$ 53,689
(571,503)
543,035
Years Ended September 30,
Operating Activities
Our operating activities generated $117.5 million of cash in the year ended September 30, 2016, a
decrease of $23.7 million as compared to the year ended September 30, 2015. During the year ended
September 30, 2016, net income adjusted for non-cash items provided cash of $155.4 million. During
the year ended September 30, 2015, net loss adjusted for non-cash items provided cash of $119.8 million.
This increase of $35.6 million of cash generated from results of operations was primarily due to lower
spending for SG&A expenses. The $35.6 million increase in cash generated from results of operations
was more than offset by higher cash used for tax payments of $46.3 million and for accrued expenses and
other liabilities of $14.5 million, resulting in a net cash outflow of $25.2 million, which was partially offset
by cash provided by other working capital changes of $1.5 million.
55
Our operating activities generated $141.2 million of cash in the year ended September 30, 2015, an
increase of $87.5 million as compared to the year ended September 30, 2014. During the year ended
September 30, 2015, net loss adjusted for non-cash items provided cash of $119.8 million. During the
year ended September 30, 2014, net income adjusted for non-cash items provided cash of $143.4 million.
This decrease of $23.6 million of cash generated from results of operations was primarily due to a lower
gross profit and higher SG&A expenses. The $23.6 million decrease in cash generated from results of
operations was more than offset by higher cash generated by working capital of $93.0 million, taxes of
$10.3 million, and accrued expenses and other liabilities of $12.3 million, partially offset by a use of cash
of $4.5 million from prepaid expenses.
Investing Activities
Our investing activities used $12.0 million, $9.9 million and $571.5 million of cash in the years
ended September 30, 2016, 2015 and 2014, respectively. During the year ended September 30, 2014,
$560.2 million was used for the Haas acquisition. Excluding the cash used for the Haas acquisition,
cash used was primarily for investments in various capital expenditures and to purchase property
and equipment.
Financing Activities
Our financing activities used $108.1 million of cash in the year ended September 30, 2016, which
consisted primarily of $111.0 million for repayments of our long-term debt, $1.3 million for repayments of
our capital lease obligations and $2.1 million payment for financing fees, partially offset by $6.1 million of
proceeds received in connection with the exercise of stock options.
Our financing activities used $150.7 million of cash in the year ended September 30, 2015, which
consisted primarily of $149.8 million for repayments of our long-term debt and $1.5 million for
repayments of capital lease obligations.
Our financing activities generated $543.0 million of cash in the year ended September 30, 2014.
This was primarily due to $565.0 million of borrowings to fund the Haas acquisition. Other drivers were
$10.2 million in excess tax benefit related to stock options exercised and $9.6 million of proceeds received
in connection with the exercise of stock options. These amounts were partially offset by $10.2 million of
financing fees paid in connection with the borrowings to fund the Haas acquisition, $30.3 million used to
repay principal against our long-term debt and $1.3 million used to make principal payments under our
capital lease obligations.
56
Contractual Obligations
The following table is a summary of contractual cash obligations at September 30, 2016
(in thousands):
Long-term debt obligations (1) . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . .
Total by period . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities (uncertainty in the
timing of future payments) (2) . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$ 954,385
3,180
57,769
1,015,334
12,182
$1,027,516
Payments Due by Period
< 1 Year
$34,772
1,361
10,952
$47,085
1 - 3 Years
$ 440,787
1,436
19,199
$ 461,422
3 - 5 Years
$ 30,911
163
10,526
$ 41,600
> 5 Years
$ 447,915
220
17,092
$ 465,227
(1) Includes both principal and estimated variable interest expense payments. The interest rate used to calculate the estimated
future variable interest expense is based on the actual interest rate applicable to the Company’s indebtedness as of
September 30, 2016, which was 5.00% for the existing term loan A facility and 3.34% for the term loan B facility. The actual
variable interest expense paid by the Company in the future may vary from what is presented above. Investors should refer
to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Credit Facilities” and “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk” for
additional information.
(2) Other long-term liabilities primarily include long-term hedge liabilities, non-current income taxes payable and non-current
deferred tax liabilities. Due to the uncertainty in the timing of future payments, long-term hedge liabilities of approximately
$5.6 million, uncertain tax positions of approximately $2.5 million and non-current deferred tax liabilities of approximately
$4.1 million were presented as one aggregated amount in the total column on a separate line in this table.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
Recently Issued and Adopted Accounting Pronouncements
See Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K for a summary of recently issued and adopted accounting pronouncements.
57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our exposure to market risk consists of foreign currency exchange rate fluctuations, changes in
interest rates and fluctuations in fuel prices.
Foreign Currency Exposure
Foreign Currency Translation
During the years ended September 30, 2016 and 2015, 27% and 20% respectively of our net sales
were made by our foreign subsidiaries, and our total non-U.S. net sales represented 35% and 34%,
respectively, of our total net sales. As a result of these international operating activities, we are exposed
to risks associated with changes in foreign currency exchange rates, principally foreign currency exchange
rates between the U.S. dollar, British pound, the Euro, Canadian dollar and the Mexican peso.
The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average
foreign currency exchange rate for each relevant period. This translation has no impact on our cash flow.
However, as foreign currency exchange rates change, there are changes to the U.S. dollar equivalent of
sales and expenses denominated in foreign currencies. Any adjustments resulting from the translation
are recorded in accumulated other comprehensive income on our statements of changes in stockholders’
equity. We do not consider the risk associated with foreign currency exchange rate fluctuations to be
material to our financial condition or results of operations.
A hypothetical 10% decrease in the value of the British pound, the Euro, the Canadian dollar
and the Mexican peso relative to the U.S. dollar would have impacted our consolidated net income
with an increase of $3.2 million, an increase of $0.2 million, no change and an increase of $0.2 million,
respectively, during the year ended September 30, 2016. A hypothetical 10% increase in the value of the
British pound, the Euro, the Canadian dollar and the Mexican peso relative to the U.S. dollar would have
impacted our consolidated net loss with a decrease of $3.2 million, a decrease of $0.2 million, no change
and a decrease of $0.2 million, respectively, during the year ended September 30, 2016.
Foreign Currency Transactions
Foreign currency transaction exposure arises where actual sales and purchases are made by a
company in a currency other than its own functional currency. During the year ended September 30,
2016, our subsidiaries in the United Kingdom had sales in U.S. dollars and Euros of $147.8 million
and €7.7 million (equivalent of $8.6 million), respectively, and had purchases in U.S. dollars and Euros
of $72.7 million and €21.0 million (equivalent of $23.4 million), respectively. During the year ended
September 30, 2015, our subsidiaries in the United Kingdom had sales in U.S. dollars and Euros of
$161.3 million and €7.6 million (equivalent of $8.7 million), respectively, and had purchases in U.S.
dollars and Euros of $91.1 million and €26.1 million (equivalent of $30.0 million), respectively. During the
year ended September 30, 2016, our subsidiary in Canada had sales in Canadian dollars of $2.3 million
(equivalent of $1.8 million) and had purchases in Canadian dollars of $0.5 million (equivalent of $0.4
million). During the year ended September 30, 2015, our subsidiary in Canada had sales in Canadian
dollars of $5.4 million (equivalent of $4.4 million) and had purchases in Canadian dollars of $0.5 million
(equivalent of $0.4 million). During the year ended September 30, 2016, our subsidiaries in Mexico
and Israel had purchases in U.S. dollars of $4.5 million and purchases in Israeli shekels of $36.8 million
(equivalent of $9.6 million). During the year ended September 30, 2015, our subsidiaries in Mexico
and Israel had purchases in U.S. dollars of $71.9 million and purchases in Israeli shekels of 27.7 million
58
(equivalent of $7.1 million). To the extent possible, we structure arrangements where the purchase
transactions are denominated in U.S. dollars in order to minimize near-term exposure to foreign currency
exchange rate fluctuations.
From September 30, 2015 to September 30, 2016, the U.S. dollar strengthened against the pound
by $0.21 (from $1.51 to $1.30). From September 30, 2014 to September 30, 2015, the U.S. dollar
strengthened slightly against the pound by $0.15 (from $1.66 to $1.51). A strengthening of the U.S.
dollar means we realize a lesser amount of U.S. dollar revenue on sales that were denominated in British
pounds, whereas a weakening of the U.S. dollar means we realize a greater amount of U.S. dollar revenue
on sales that were denominated in British pounds. As a result of the slight movement of the U.S. dollar
during the years ended September 30, 2016 and 2015, transactions denominated in foreign currencies did
not have a material impact on our financial results during those periods. A hypothetical 10% increase or
decrease in the value of the British pound relative to the U.S. dollar would have resulted in an increase or
decrease in our net income of $3.2 million, during the year ended September 30, 2016, attributable to our
transactions denominated in foreign currencies.
We have historically entered into currency forward and option contracts to limit exposure to foreign
currency exchange rate changes and will continue to monitor our exposure to foreign currency exchange
rate changes. Gains and losses on these contracts are deferred until the transaction being hedged is
finalized. As of September 30, 2016, we had no outstanding currency forward and option contracts. We do
not enter into currency forward and option contracts for trading or speculative purposes.
Interest Rate Risk
Our principal interest rate exposure relates to our Credit Facilities, which bear interest at a variable
rate. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Liquidity and Capital Resources—Credit Facilities.” If interest rates rise, our debt
service obligations on the borrowings under the Credit Facilities would increase even though the amount
borrowed remained the same, which would affect our results of operations, financial condition and
liquidity. At our debt level and borrowing rates for the years ended September 30, 2016 and 2015, our
interest expense, including fees under our existing revolving facility, would be $35.5 million and $29.1
million, respectively. If variable interest rates were to change by 1.0%, our interest expense would
fluctuate $8.5 million per year, without taking into account the effect of any hedging instruments.
On October 4, 2016, we entered into the Amendment to the Existing Credit Agreement and incurred
$23.7 million of additional net borrowings under the Credit Facilities, bringing our total debt to $865.6
million. Neither the Amendment nor the additional borrowings under the Credit Facilities are expected
to materially impact our interest rate risk as disclosed above.
We periodically enter into interest rate swap agreements to manage interest rate risk on our
borrowing activities. In July 2015, we entered into interest rate swap agreements which effectively fix
our interest rate on variable rate debt of $475.0 million to 1.21% plus the applicable margin. See further
discussion on our derivative financial instruments in Note 12 of the Notes to Consolidated Financial
Statements in Part II, Item 8 of this Annual Report on Form 10-K.
We do not hold or issue derivative financial instruments for trading or speculative purposes.
59
Fuel Price Risk
Our principal direct exposure to increases in fuel prices is as a result of potential increased freight
costs caused by fuel surcharges or other fuel cost-driven price increases implemented by the third-
party package delivery companies on which we rely. We estimate that our annual freight costs (which
consists of in-bound and out-bound freight-related costs, net of freight revenue) during the years ended
September 30, 2016 and 2015 was $24.2 million and $23.6 million, respectively, and as a result, we do
not believe the impact of these potential fuel surcharges or fuel cost-driven price increases would have a
material impact on our business, financial condition and results of operations. In addition, increases in
fuel prices may have an indirect material adverse effect on our business, financial condition and results of
operations, as such increases may contribute to decreased airline profitability and, as a result, decreased
demand for new commercial aircraft that utilize the products we sell. See Part I, Item 1A. “Risk Factors—
We may be materially adversely affected by high fuel prices.” We do not use derivatives to manage our
exposure to fuel prices.
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
62
63
64
65
66
67
61
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Wesco Aircraft Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of comprehensive income (loss), stockholders’ equity and cash flows present fairly, in all
material respects, the financial position of Wesco Aircraft Holdings, Inc. and its subsidiaries as of
September 30, 2016 and 2015, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 2016 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of September 30, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
these financial statements, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Management’s
Report on Internal Control Over Financial Reporting, appearing under Item 9A. Our responsibility is
to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in
which it accounts for deferred income taxes in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
November 28, 2016
62
Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
As of September 30,
2016
2015
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $3,846 and
$5,892 at September 30, 2016 and 2015, respectively . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
77,061
82,866
249,195
713,470
10,203
1,460
—
1,051,389
50,525
8,747
579,865
194,114
58,171
13,394
$ 1,956,205
253,348
701,535
10,004
187
89,401
1,137,341
46,976
11,248
590,587
215,389
6,844
12,588
$ 2,020,973
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, current portion . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, less current portion . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,700
26,424
6,782
1,471
216,377
1,710
841,906
4,092
9,205
149,615
38,896
21,442
1,044
210,997
1,824
952,906
30,693
6,980
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,073,290
1,203,400
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value per share: 50,000,000 shares
authorized; no shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . .
Common stock, class A, $0.001 par value, 950,000,000 shares authorized,
98,614,908 and 97,538,124 shares issued and outstanding at
September 30, 2016 and 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
99
427,295
(79,561)
535,082
882,915
98
412,492
(38,721)
443,704
817,573
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,956,205
2,020,973
See the accompanying notes to the consolidated financial statements.
63
Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share data)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . .
Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes. . . . . . . . . . . . . . . .
(Provision) benefit for income taxes . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of income taxes:
Change in net foreign currency translation
2016
$ 1,477,366
1,083,674
393,692
234,942
—
158,750
(36,901)
3,741
125,590
(34,212)
91,378
Years Ended September 30,
2015
$ 1,497,615
1,173,120
324,495
267,089
263,771
(206,365)
(37,092)
1,841
(241,616)
86,872
(154,744)
2014
$ 1,355,877
952,877
403,000
219,066
—
183,934
(29,225)
2,199
156,908
(54,806)
102,102
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,211)
(25,322)
Change in net unrealized holding losses on
derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of income taxes . . . . . . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . .
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding:
(1,629)
(40,840)
50,538
0.94
0.93
(2,577)
(27,899)
(182,643)
(1.60)
(1.60)
$
$
$
$
$
$
$
$
$
(633)
—
(633)
101,469
1.06
1.05
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,634,155
98,165,856
96,955,043
96,955,043
95,950,994
97,605,783
See the accompanying notes to the consolidated financial statements.
64
Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(dollars in thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders’
Equity
94,776,683
$
95
$ 379,184
$
(10,189)
$ 496,346
$ 865,436
Balance at September
30, 2013. . . . . . . . . . . . . . . . .
Issuance of common
stock . . . . . . . . . . . . . . . . .
Excess tax benefit related to
restricted stock units and
stock options exercised . .
Stock-based compensation
expense. . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .
Other comprehensive
loss . . . . . . . . . . . . . . . . . .
Balance at September
30, 2014. . . . . . . . . . . . . . . . .
Issuance of common
stock . . . . . . . . . . . . . . . . .
Settlement on restricted stock
tax withholding . . . . . . . . . . . .
Excess tax benefit related to
restricted stock units and
stock options exercised . .
Stock-based compensation
expense . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . .
Other comprehensive
loss . . . . . . . . . . . . . . . . . .
Balance at September
30, 2015. . . . . . . . . . . . . . . . .
Issuance of common
stock . . . . . . . . . . . . . . . . .
Settlement on restricted stock
tax
withholding . . . . . . . . . . .
Excess tax shortfall related to
restricted units and stock
options exercised . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .
Other comprehensive
loss . . . . . . . . . . . . . . . . . .
2,233,603
—
—
—
—
97,010,286
527,838
—
—
—
—
—
97,538,124
1,076,784
—
—
—
—
—
Balance at September
30, 2016. . . . . . . . . . . . . . . . .
98,614,908
$
2
—
—
—
—
97
1
—
—
—
—
—
98
1
—
—
—
—
—
99
9,641
10,235
5,507
—
—
—
—
—
—
—
—
—
102,102
9,643
10,235
5,507
102,102
(633)
—
(633)
404,567
(10,822)
598,448
992,290
822
(701)
(87)
7,891
—
—
—
—
—
—
—
—
—
—
—
823
(701)
(87)
7,891
(154,744)
(154,744)
(27,899)
—
(27,899)
412,492
(38,721)
443,704
817,573
6,072
(857)
1,098
8,490
—
—
—
—
—
—
—
—
—
—
—
91,378
6,073
(857)
1,098
8,490
91,378
(40,840)
—
(40,840)
$ 427,295
$
(79,561)
$ 535,082
$ 882,915
See the accompanying notes to the consolidated financial statements.
65
Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt and sales return reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based incentive plans . . . . . . . . . . . . . .
Income from equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sales of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended September 30,
2016
2015
2014
$
91,378
$ (154,744)
$ 102,102
27,980
4,627
(810)
8,490
14,615
—
(1,098)
(582)
452
13,212
(2,874)
(4,077)
(1,269)
(41,798)
(1,204)
34,657
(11,008)
(13,236)
27,726
4,354
354
7,891
95,052
263,771
(443)
(596)
—
(127,035)
3,491
43,841
16,036
(48,977)
1,250
(9,992)
3,425
15,768
21,402
3,300
965
5,507
17,700
—
(10,235)
(141)
—
8,273
(5,489)
(38,545)
19,003
(72,702)
5,799
3,099
(8,830)
2,481
53,689
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
117,455
141,172
Investing activities
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of property, plant and equipment . . . . . . . . . . . . . . . . . .
Acquisitions of business, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based incentive plans . . . . . . . . . . . . . . . .
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement on restricted stock tax withholding . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . .
Effect of foreign currency exchange rate on cash and cash equivalents . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Supplemental disclosure of cash flow information (see Note 19)
(13,992)
2,000
—
—
(11,992)
—
(111,000)
(2,126)
(1,309)
1,098
6,073
(857)
(108,121)
(3,147)
(5,805)
82,866
77,061
(9,631)
—
17
(250)
(9,864)
(10,517)
—
—
(560,986)
(571,503)
—
(149,750)
—
(1,511)
443
823
(701)
(150,696)
(2,521)
(21,909)
104,775
82,866
$
565,000
(30,344)
(10,161)
(1,338)
10,235
9,643
—
543,035
838
26,059
78,716
$ 104,775
See the accompanying notes to the consolidated financial statements.
66
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements
Note 1. Organization and Business
Our company, Wesco Aircraft Holdings, Inc., is a distributor and provider of comprehensive
supply chain management services to the global aerospace industry. Our services range from traditional
distribution to the management of supplier relationships, quality assurance, kitting, just-in-time (JIT)
delivery, and point-of-use inventory management.
In addition to the central stocking facilities, we use a network of forward-stocking locations to
service its customers in a JIT and or ad hoc manner. There are 57 stocking locations around the world
with concentrations in North America and Europe. In addition to product fulfillment, we also provide
comprehensive supply chain management services for selected customers. These services include
procurement and JIT inventory management and delivery services.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Wesco Aircraft
Hardware, Wesco Aircraft Europe, Flintbrook Limited, Wesco Aircraft Germany GmbH, Wesco Aircraft
France SAS, Wesco Aircraft Israel Limited, Wesco Aircraft Italy SRL, Wesco Aircraft Hardware India
Pvt., Limited, Wesco Aircraft Trading Shanghai Co., Limited, Interfast Europe Limited, Interfast
USA Inc., Interfast USA Holdings Inc. and Haas. All intercompany accounts and transactions have been
eliminated. When we do not have a controlling interest in an entity, but exert significant influence over
the entity, we apply the equity method of accounting.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements, in conformity with accounting principles generally accepted
in the United States of America, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Estimates are used for, but not limited to, receivable valuations and allowance for sales returns,
inventory valuations of excess and obsolescence (E&O) inventories, the useful lives of long-lived assets
including property, equipment and intangible assets, annual goodwill impairment assessment, stock-based
compensation, income taxes and contingencies. Actual results could differ from such estimates.
Revision of Supplemental Cash Flow Information
We determined that our 2015 cash paid for interest of $15.7 million as reported in our 2015 Annual
Report on Form 10-K is understated. The correct amount is $32.6 million. We have revised our 2015 cash
paid for interest amount to present the correct amount in Note 19. The misstatement had no effect on
previously reported income from operations, net income or cash flows for the year ended September 30,
2015 and the interim periods within that year. We have evaluated the misstatement and do not believe it
is material to the financial statements for the year ended September 30, 2015.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities from date of purchase of three
months or less to be cash equivalents.
67
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable consist of amounts owed to us by customers. We perform periodic credit
evaluations of the financial condition of our customers, monitor collections and payments from
customers, and generally do not require collateral. Accounts receivable are generally due within 30 to
60 days. We provide for the possible inability to collect accounts receivable by recording an allowance
for doubtful accounts. We reserve for an account when it is considered to be uncollectible. We estimate
our allowance for doubtful accounts based on historical experience, aging of accounts receivable and
information regarding the creditworthiness of our customers. To date, losses have been within the range
of management’s expectations. If the estimated allowance for doubtful accounts subsequently proves to
be insufficient, additional allowances may be required.
Our allowance for doubtful accounts activity consists of the following (in thousands):
Allowance for Doubtful Accounts
Year ended as of September 30, 2016 . . . . . . . . . . . . . .
Year ended as of September 30, 2015 . . . . . . . . . . . . . .
Year ended as of September 30, 2014 . . . . . . . . . . . . . .
Inventories
Balance at
Beginning of
Period
$
5,892
5,332
4,464
Charges to
Cost and
Expenses
(846)
$
1,121
1,159
Write-offs
$ (1,200)
(561)
(291)
Balance at
End of Period
$
3,846
5,892
5,332
Inventories are stated at the lower of cost or market. The method by which amounts are removed
from inventory are weighted average cost for all inventory, except for chemical products for which
the first-in, first-out method is used. In-bound freight-related costs of $1.9 million, $1.7 million and
$1.4 million as of September 30, 2016, 2015, and 2014, respectively, are included as part of the cost
of inventory held for resale. We record provisions, as appropriate, to write-down E&O inventory to
estimated net realizable value. The process for evaluating E&O inventory utilizes factors such as
historical demand and current inventory quantities, and subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventories will be able to be sold in the normal
course of business. During the year ended September 2015, we charged $33.0 million and $62.1 million to
cost of sales for impairment of inventory to net realizable value and for increases in our E&O reserve and
related items, respectively, as further described below.
In the fourth quarter of 2015, we determined that inventory previously purchased in connection with
a specific program which was subsequently terminated, to have no alternative use. During the year ended
September 30, 2015, we continued to negotiate a sale of such inventory with our customer for whom
such inventory was purchased, as well as market the inventory through other channels, and believed the
full cost of this inventory was recoverable. However, in the fourth quarter of 2015, we determined such
inventory was not marketable and recorded a reduction in net realizable value of $33.0 million.
68
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
In the fourth quarter of 2015, management implemented a new strategy of providing integrated
supply chain services more tailored to customer demand through long-term contracts and focused
forecasted consumption including changes to our inventory purchasing strategy, holding inventory for
shorter periods and the planned scrapping of long dated inventory. The new strategy and updates for
fiscal 2015 sales activities led to changes in the sell through rates, holding period of aged inventory
and others estimates used in the E&O reserve for our hardware inventory, which increased our E&O
inventory reserves by $43.8 million.
Property and Equipment
Property and equipment are stated at cost, less accumulated amortization and depreciation,
computed using the straight-line method over the estimated useful life of each asset. Leasehold
improvements are amortized over the lesser of the remaining lease term or the estimated useful life of
the assets. Expenditures for repair and maintenance costs are expensed as incurred, and expenditures
for major renewals and improvements are capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation and amortization are removed from the accounts and any gain or
loss is reflected in the consolidated statements of comprehensive income. The useful lives for depreciable
assets are as follows:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . .
1 - 39.5 years
5 - 7 years
7 years
5 years
3 years
Impairment of Long-Lived Assets
We assess potential impairments of our long-lived assets whenever events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable. Factors we consider
include, but are not limited to: significant underperformance relative to expected historical or projected
future operating results; significant changes in the manner of use of the acquired assets or the strategy for
the overall business; and significant negative industry or economic trends. We have determined that our
asset group for impairment testing is comprised of the assets and liabilities of each of our reporting units,
which consists of North America Hardware, Rest of World Hardware, North America Chemical and
Rest of World Chemical, as this is the lowest level of identifiable cash flows. We have identified customer
relationships as the primary asset because it is the principal asset from which the reporting units derive
their cash flow generating capacity and has the longest remaining useful life. Recoverability is assessed by
comparing the carrying value of the asset group to the undiscounted cash flows expected to be generated
by these assets. Impairment losses are measured as the amount by which the carrying values of the
primary assets exceed their fair values. To date, we have not recognized an impairment charge related to
the write-down of long-lived assets.
69
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Deferred Financing Costs
Deferred financing costs are amortized using the effective interest method over the term of the
related credit arrangement; such amortization is included in interest expense in the consolidated
statements of comprehensive income. Amortization of deferred financing costs was $4.6 million, $4.4
million and $3.3 million for the years ended September 30, 2016, 2015 and 2014, respectively. As of
September 30, 2016 and 2015, the remaining unamortized deferred financing costs are $8.7 million and
$11.2 million, respectively.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill, which represents the excess of the consideration paid over the fair value of the net assets
acquired in a business combination, and other acquired intangible assets with indefinite lives are not
amortized, but are tested for impairment at least annually or more frequently when an event occurs or
circumstances change such that it is more likely than not that the carrying amount may be impaired. Such
events or circumstances may be a significant change in business climate, economic and industry trends,
legal factors, negative operating performance indicators, significant competition, changes in strategy,
or disposition of a reporting unit or a portion thereof. Goodwill and indefinite-lived intangibles asset
impairment testing is performed at the reporting unit level on July 1 of each year. Our reporting units are
one level below our operating segments.
We test goodwill for impairment by performing a qualitative process, or a two-step quantitative
assessment process. The first step of the quantitative process involves comparing the carrying value of
net assets, including goodwill, to the fair value of the reporting unit. If the fair value exceeds its carrying
amount, goodwill is not considered impaired and the second step of the process is unnecessary. If the
carrying amount of a reporting unit’s goodwill exceeds its fair value, the second step measures the
impairment loss, if any.
The second step compares the implied fair value of goodwill with the carrying amount of that
goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. The implied fair value of the reporting unit’s goodwill is calculated
by creating a hypothetical balance sheet as if the reporting unit had just been acquired. This balance
sheet contains all assets and liabilities recorded at fair value (including any intangible assets that may not
have any corresponding carrying value in our balance sheet). The implied value of the reporting unit’s
goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting
unit. If the carrying value of goodwill exceeds the implied fair value of that goodwill, an impairment loss
is recognized in an amount equal to that excess. We performed our goodwill impairment tests for the
years ended September 30, 2016 and 2015, which resulted in no goodwill impairment in the year ended
September 30, 2016 and a goodwill impairment charge of $263.8 million in the year ended September 30,
2015 for our North America Hardware reporting unit. Refer to Note 8 for additional information.
Indefinite-lived intangibles consist of a trademark, for which we estimate fair value and compare
such fair value to the carrying amount. If the carrying amount of the trademark exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. To determine fair value, we primarily
utilize reported market transactions and discounted cash flow analysis. We use a three tier fair value
hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of us. Unobservable
inputs are inputs that reflect our own assumptions about the assumptions market participants would use
in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the
highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities.
Inputs other than quoted prices that are observable for the asset or liability, either directly
or indirectly.
Unobservable inputs for the asset or liability.
The definition of fair value includes the consideration of nonperformance risk. Nonperformance risk
refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled. For financial assets
traded in an active market (Level 1), the nonperformance risk is included in the market price. For certain
other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.
Fair value measurements are classified according to the lowest level input or value-driver that is
significant to the valuation. A measurement may therefore be classified within Level 3 even though there
may be significant inputs that are readily observable.
We use observable market-based inputs to calculate fair value of our interest rate swap agreements
and outstanding debt instruments, in which case the measurements are classified within Level 2. If quoted
or observable market prices are not available, fair value is based upon internally developed models that
use, where possible, current market-based parameters such as interest rates, yield curves and currency
rates. These measurements are classified within Level 3.
Where available, we utilize quoted market prices or observable inputs rather than unobservable
inputs to determine fair value.
Derivative Financial Instruments
We periodically enter into cash flow derivative transactions, such as interest rate swap agreements,
to hedge exposure to various risks related to interest rates. We recognize all derivatives at their fair value
as either assets or liabilities. For cash flow designated hedges, the effective portion of the changes in fair
value of the derivative contract are recorded in accumulated other comprehensive income (loss), net of
taxes, and are recognized in net earnings at the time earnings are affected by the hedged transaction.
Adjustments to record changes in fair values of the derivative contracts that are attributable to the
ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in
our consolidated statements of cash flows’ operating, investing, or financing activities consistent with the
cash flows of the hedged item.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Comprehensive Loss or Income
Comprehensive loss or income generally represents all changes in stockholders’ equity, except those
resulting from investments by or distributions to stockholders. Our comprehensive loss or income consists
of foreign currency translation adjustments and fair value adjustments for cash flow hedges.
Revenue Recognition
We recognize product and service revenue when (1) persuasive evidence of an arrangement exists,
(2) title transfers to the customer, (3) the sales price charged is fixed or determinable, and (4) collection
is reasonably assured. In instances where title does not pass to the customer upon shipment, we recognize
revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
In connection with the sales of our products, we often provide certain supply chain management
services to our JIT customers. These services include the timely replenishment of products at the
customer site, while also minimizing the customer’s on-hand inventory. We provide these services
contemporaneously with the delivery of the product, and as such, once the product is delivered, we do not
have a post-delivery obligation to provide services to the customer. Accordingly, the price of such services
is generally included in the price of the products delivered to the customer, and revenue is recognized
upon delivery of the product, at which point we have satisfied our obligations to the customer. We do
not account for these services as a separate element, as the services do not have stand-alone value and
cannot be separated from the product element of the arrangement. Additionally, we do not present
service revenues apart from product revenues, as the service revenues represent less than 10% of our
consolidated net sales.
We report revenue on a gross or net basis, based on management’s assessment of whether we act as
a principal or agent in the transaction, in our presentation of net sales and costs of sales. If we are the
principal in the transaction and have the risks and rewards of ownership, the transactions are recorded
as gross in the consolidated statements of comprehensive income. If we do not act as a principal in the
transaction, the transactions are recorded on a net basis in the consolidated statements of comprehensive
income. The majority of our revenue is recorded on a gross basis with the exception of certain gas, energy
and chemical manager service contracts that are recorded as net revenue.
We also enter into sales rebates and profit sharing arrangements. Such customer incentives are
accounted for as a reduction to gross sales and recorded based upon estimates at the time products are
sold. These estimates are based upon historical experience for similar programs and products. We review
such rebates and profit sharing arrangements on an ongoing basis and accruals are adjusted, if necessary,
as additional information becomes available.
We provide allowances for credits and returns based on historic experience and adjust such
allowances as considered necessary. To date, such provisions have been within the range of our
expectations and the allowance established. Sales tax collected from customers is excluded from net sales
in the consolidated statements of comprehensive income.
In connection with our JIT supply chain management programs, at times, we assume customer
inventory on a consignment basis. This consigned inventory remains the property of the customer but is
managed and distributed by us. We earn a fixed fee per unit on each shipment of the consigned inventory;
such amounts represent less than 1% of consolidated net sales.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Shipping and Handling Costs
We record revenue for shipping and handling billed to our customers. Shipping and handling
revenues were $5.1 million, $7.8 million and $7.0 million for the years ended September 30, 2016, 2015
and 2014, respectively.
Shipping and handling costs are primarily included in cost of sales. Total shipping and handling costs
were $28.0 million, $33.2 million and $24.8 million for the years ended September 30, 2016, 2015 and
2014, respectively.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which these temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date. A valuation allowance is established, when necessary, to reduce net deferred
tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets depends
upon the generation of future taxable income during the periods in which temporary differences become
deductible or includible in taxable income. We consider projected future taxable income and tax planning
strategies in our assessment. Our foreign subsidiaries are taxed in local jurisdictions at local statutory
rates. The Company includes interest and penalties related to income taxes, including unrecognized tax
benefits, within income tax expense.
Concentration of Credit Risk and Significant Vendors and Customers
We maintain our cash and cash equivalents in bank deposit accounts which, at times, may exceed
federally insured limits. We have not experienced any losses in such accounts and do not believe we are
exposed to any significant credit risk from cash and cash equivalents.
We purchase our products on credit terms from vendors located throughout North America and
Europe. For the years ended September 30, 2016, 2015 and 2014, we made 12%, 13%, and 15%,
respectively, of our purchases from Precision Castparts Corp. and the amounts payable to this vendor
were 3% and 7% of total accounts payable at September 30, 2016 and 2015, respectively. Additionally,
for the years ended September 30, 2016, 2015 and 2014, we made 8%, 9%, and 15%, respectively, of
our purchases from Alcoa Fastening Systems and the amounts payable to this vendor were 3% and 6%
of total accounts payable at September 30, 2016 and 2015, respectively. The majority of the products
we sell are available through multiple channels and, therefore, this reduces the risk related to any
vendor relationship.
For the years ended September 30, 2016, 2015 and 2014, we did not derive 10% or more of our total
net sales from any individual customer. Government sales, which were derived from various military parts
procurement agencies such as the U.S. Defense Logistics Agency, or from defense contractors buying on
their behalf, comprised 15%, 14% and 9% of our net sales during fiscal 2016, 2015 and 2014, respectively.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation and Transactions
The financial statements of foreign subsidiaries and affiliates where the local currency is the
functional currency are translated into U.S. Dollars using exchange rates in effect at each period-end
for assets and liabilities and average exchange rates during the period for results of operations. The
adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as
a separate component of stockholders’ equity. Foreign currency transaction gains and losses are reported
as other income (expense), net in the consolidated statements of comprehensive income. For the years
ended September 30, 2016, 2015 and 2014, realized foreign currency transaction gains were $3.2 million,
$0.6 million and $1.6 million, respectively.
Stock-Based Compensation
We recognize all stock-based awards to employees and directors as stock-based compensation
expense based upon their fair values on the date of grant.
We estimate the fair value of stock-based payment awards on the date of grant. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense during the requisite
service periods. We have estimated the fair value for each option award as of the date of grant using
the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among
other factors, the expected life of the award and the expected volatility of our stock price. We recognize
the stock-based compensation expense over the requisite service period (generally a vesting term of
three years) using the graded vesting method for performance condition awards and the straight line
method for service condition only awards, which is generally a vesting term of three years. Stock options
typically have a contractual term of 10 years. The stock options granted have an exercise price equal to
the closing stock price of our common stock on the grant date. Compensation expense for restricted
stock units and awards are based on the market price of the shares underlying the awards on the grant
date. Compensation expense for performance based awards reflects the estimated probability that the
performance condition will be met. Compensation expense for awards with total stockholder return
metrics reflects the fair value calculated using the Monte Carlo simulation model, which incorporats stock
price correlation and other variables over the time horizons matching the performance periods.
Net Income or Net Loss Per Share
Basic net income or net loss per share is computed by dividing net income or net loss available to
common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net income or net loss per share includes the dilutive effect of both outstanding stock options and
restricted shares, calculated using the treasury stock method. Assumed proceeds from the in-the-money
options include the tax benefits, net of shortfalls, calculated under the “as-if” method.
74
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 3. Recent Accounting Pronouncements
Changes to generally accepted accounting principles in the United States (GAAP) are established
by the Financial Accounting Standards Board (FASB), in the form of Accounting Standards Updates
(ASUs), to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and
determined to be either not applicable or are expected to have minimal impact on our consolidated
financial position and results of operations.
New Accounting Standards Updates
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic
718):Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several
aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows.
ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods
therein. Early application is permitted. We are currently evaluating the impact of this guidance on our
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic
323), Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement
that when an investment subsequently qualifies for use of the equity method as a result of an increase in level
of ownership interest or degree of influence, an investor must adjust the investment, results of operations,
and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during
all previous periods that the investment had been held. ASU 2016-07 requires that the equity method
investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s
previously held interest and to adopt the equity method of accounting as of the date the investment
becomes qualified for equity method accounting. In addition, ASU 2016-07 requires that an entity that has
an available-for-sale equity security that becomes qualified for the equity method of accounting recognize
through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the
investment becomes qualified for use of the equity method. ASU 2016-07 is effective for reporting periods
beginning after December 15, 2016, with early adoption permitted. We do not anticipate the adoption of
ASU 2016-07 will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize
on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term,
and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from
current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current
GAAP) and operating leases. The classification criteria for distinguishing between finance leases and
operating leases will be substantially similar to the classification criteria for distinguishing between capital
leases and operating leases under current GAAP. ASU 2016-02 also requires qualitative and quantitative
disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. A
modified retrospective transition approach shall be used when adopting ASU 2016-02, which includes a
number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual
periods beginning after December 15, 2018 and interim periods therein, with early application permitted. We
are currently evaluating the impact of this guidance on our consolidated financial statements.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 3. Recent Accounting Pronouncements (Continued)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, which affects the accounting
for equity investments, financial liabilities under the fair value option and the presentation and disclosure
requirements of financial instruments. ASU 2016-01 is effective for reporting periods beginning after
December 15, 2017, with early adoption permitted for certain provisions. We are currently evaluating the
impact of ASU 2016-01 related to equity investments and the presentation and disclosure requirements of
financial instruments on our consolidated financial statements.
In September 2015, FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying
the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize
adjustments to provisional amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years
beginning after December 15, 2015, including interim periods within those fiscal years. ASU 2015-16
should be applied prospectively to adjustments to provisional amounts that occur after the effective date
of this update with earlier application permitted for financial statements that have not been issued. As of
September 30, 2016, we did not have any provisional amounts outstanding from prior acquisitions.
In August 2015, the FASB issued ASU 2015-15, Interest — Imputation of Interest (Subtopic
835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-
Credit Arrangements. ASU 2015-15 states entities should present debt issuance costs as an asset, and
subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit
arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. We do not anticipate the adoption of ASU 2015-15 will have a significant impact on our
consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value,
and eliminates current GAAP options for measuring market value. ASU 2015-11 defines realizable value
as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning
after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for
financial statements that have not been previously issued. ASU 2015-11 can only be applied prospectively.
We are currently evaluating the impact of the adoption of ASU 2015-11 on our financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Cost. The amendments in ASU 2015-03 are intended to
simplify the presentation of debt issuance costs. These amendments require that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2105-03 is
effective for annual reporting periods beginning after December 15, 2015, and interim periods within those
fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The
adoption of ASU 2015-03 will reduce our non-current assets and non-current debt by the amount of
our net deferred financing costs in our consolidated balance sheets but will not impact our consolidated
statements of comprehensive income and consolidated statements of cash flow. As of September 30, 2016
and 2015, our deferred financing costs, net was $8.7 million and $11.2 million, respectively.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 3. Recent Accounting Pronouncements (Continued)
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,
which amends ASC Subtopic 205-40 to provide guidance about management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide
related disclosures. Specifically, ASU 2014-15 (1) provides a definition of the term “substantial doubt,”
(2) requires an evaluation every reporting period, (3) provides principles for considering the mitigating
effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a
result of consideration of management’s plans, (5) requires an express statement and other disclosures
when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after
the date that financial statements are issued. ASU 2014-15 is effective for fiscal years ending after
December 15, 2016, and for annual periods and interim periods thereafter. We do not anticipate the
adoption of ASU 2014-15 will have a significant impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718):
Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could
Be Achieved After the Requisite Service Period. ASU 2014-12 requires that a performance target that
affects vesting and that could be achieved after the requisite service period be treated as a performance
condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply ASU 2014-12 either
prospectively to all awards granted or modified after the effective date or retrospectively to all awards
with performance targets that are outstanding as of the beginning of the earliest annual period presented
in the financial statements and to all new or modified awards thereafter. If retrospective transition is
adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period
presented in the financial statements should be recognized as an adjustment to the opening retained
earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use
hindsight in measuring and recognizing the compensation cost. We do not anticipate the adoption of ASU
2014-12 will have a significant impact on our consolidated financial statements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12,
which the FASB issued in August 2015, March 2016, April 2016, May 2016 and May 2016, respectively
(collectively the “amended ASU 2014-09”). The amended ASU 2014-09 provides a single comprehensive
model for the recognition of revenue arising from contracts with customers and supersedes most current
revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize
revenue when the entity transfers promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services.
The amended ASU 2014-09 creates a five-step model that requires entities to exercise judgment when
considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2)
identifying the separate performance obligations in the contract, (3) determining the transaction price, (4)
allocating the transaction price to the separate performance obligations, and (5) recognizing revenue when
each performance obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including qualitative and quantitative information about contracts with customers, significant judgments
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 3. Recent Accounting Pronouncements (Continued)
and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The
effective date for the amended ASU 2014-09 is for annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for
annual reporting periods beginning after December 15, 2016, including interim reporting periods within
that reporting period. We are currently evaluating the effect of the adoption of the amended ASU 2014-09
on our consolidated financial statements and the implementation approach to be used.
Adopted Accounting Standards Updates
Effective July 1, 2016, we elected to early adopt ASU 2015-17, Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes on a prospective basis. This guidance requires that all deferred
tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the
balance sheet. The adoption of ASU 2015-17 had no impact on our results of operations or cash flows for
the year ended September 30, 2016.
Effective January 1, 2016, we elected to early adopt ASU 2015-05, Intangibles - Goodwill and Other -
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement. This guidance clarifies that if a cloud computing arrangement includes a software license,
the customer should account for the license consistent with its accounting for other software licenses. If
the arrangement does not include a software license, the customer should account for the arrangement as
a service contract. We elected to adopt the amendments prospectively for all arrangements entered into
or materially modified after January 1, 2016. The adoption of ASU 2015-05 does not have a significant
impact on our consolidated financial statements. We record the qualified cloud-based software license
fees as software intangible assets instead of prepaid expenses, and amortize them over the contract length
as software amortization expense instead of service expense. Both amortization expense and service
expense are included in the selling, general and administrative expense line of our consolidated statement
of comprehensive income, resulting in no significant impact on our income from operations, net income
or cash flows.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 4. Acquisitions
2014 Acquisition
On February 28, 2014, through our wholly owned subsidiary, Flyer Acquisition Corp., we acquired
100% of the outstanding shares of Haas. The results of Haas since the acquisition have been included in
the consolidated financial statements and are included in the North America and Rest of World segments
based on actual results of the reporting units.
Haas consolidated net sales included in the financial statements since the acquisition date was $591.8
million and $356.2 million in the years ended September 2015 and 2014, respectively. Haas consolidated
net loss or income included in the financial statements since the acquisition date was a net loss of $0.6
million and a net income of $2.9 million in the years ended September 2015 and 2014, respectively.
Pro Forma Consolidated Results
The following pro forma information presents the financial results as if the acquisition of Haas had
occurred on October 1, 2013. The pro forma results do not include any anticipated cost synergies, costs
or other effects of the planned integration of the acquisition. Accordingly, such pro forma amounts are
not necessarily indicative of the results that actually would have occurred had the acquisitions been
completed on the dates indicated, nor are they indicative of future operating results. We did not have any
material, nonrecurring pro forma adjustments directly attributable to the business combination in the
reported pro-forma net sales and earnings (in thousands except per share data).
Pro forma net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income per common share amounts:
Basic net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
September
30, 2014
$ 1,591,538
102,652
$
$
$
1.07
1.05
Note 5. Inventory
Our inventory is comprised solely of finished goods.
As of September 30, 2016 and 2015, our E&O reserve was $250.7 million and $264.1 million,
respectively. Charges to cost of sales for increase in our E&O reserves and related items were $14.6
million, $95.1 million and $17.7 million in the years ended September 30, 2016, 2015 and 2014,
respectively. We believe that these amounts appropriately reflect the risk of E&O inventory inherent in
our business.
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Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 5. Inventory (Continued)
In the three months ended September 30, 2015, we determined that inventory previously purchased
in connection with a specific program which was subsequently terminated, had no alternative use. Prior to
such determination during the year ended September 30, 2015, we attempted to negotiate a sale of such
inventory with our customer for whom such inventory was purchased, as well as market the inventory
through other channels, and believed the full cost of this inventory was recoverable. However, in the
fourth quarter of 2015, we determined such inventory was not marketable and recorded a reserve of
$33.0 million.
In the fourth quarter of 2015, management implemented a new strategy of providing integrated
supply chain services more tailored to customer demand through long-term contracts and focused
forecasted consumption including changes to our inventory purchasing strategy, holding inventory for
shorter periods and the planned scrapping of long dated inventory. The new strategy and updates for
fiscal 2015 sales activities led to changes in the sell through rates, holding period of aged inventory
and others estimates used in the E&O reserve for our hardware inventory, which increased our E&O
inventory reserves by $43.8 million.
Note 6. Related Party Transactions
We entered into a management agreement with The Carlyle Group to provide certain financial,
strategic advisory and consultancy services. Under this management agreement, we are obligated to
pay The Carlyle Group, or a designee thereof, an annual management fee of $1.0 million plus fees
and expenses associated with company-related meetings. We incurred expense of $1.3 million, $1.1
million and $1.1 million for the years ended September 30, 2016, 2015 and 2014, respectively, related to
this management agreement. These amounts were paid to The Carlyle Group during the years ended
September 30, 2016, 2015 and 2014.
We lease several office and warehouse facilities under operating lease agreements from entities
controlled by our former chief executive officer, who is also our Chairman of the Board. Rent expense
on these facilities was $1.8 million, $1.7 million and $1.8 million for the years ended September 30, 2016,
2015 and 2014, respectively (see Note 17).
80
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 7. Property and Equipment, net
Property and equipment, net, consist of the following at September 30 (in thousands):
Land, buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 29,392
18,288
6,319
1,288
36,274
11,333
102,894
(52,369)
$ 50,525
2015
$ 27,152
17,874
5,768
1,339
33,226
2,186
87,545
(40,569)
$ 46,976
At September 30, 2016 and 2015, property and equipment included assets of $8.9 million, and
$7.1 million respectively, acquired under capital lease arrangements. Accumulated amortization of
assets acquired under capital leases was $5.8 million and $4.1 million as of September 30, 2016 and
2015, respectively.
Depreciation and amortization expense for property and equipment was $12.1 million, $11.8 million
and $8.8 million during the years ended September 30, 2016, 2015 and 2014, respectively (including
amortization expense of $1.5 million, $1.5 million and $1.4 million on assets acquired under capital leases
for the years ended September 30, 2016, 2015 and 2014, respectively).
Note 8. Goodwill and Intangible Assets, net
A reconciliation of our goodwill balance is as follows (in thousands):
North America,
September 30,
Rest of World
September 30,
Consolidated
September 30,
2016
2015
2016
2015
2016
2015
Beginning balance,
gross . . . . . . . . . . . . . . .
$ 779,647
$ 779,395
$ 74,711
$ 82,180
$ 854,358
$ 861,575
Accumulated
impairment . . . . . . . . .
Beginning balance, net . .
Foreign currency
translation . . . . . . . . . .
Haas acquisition . . . . . . .
Goodwill impairment . . .
Ending balance, gross . .
Accumulated
impairment . . . . . . . . .
Ending balance, net . . . .
$(263,771)
$ 515,876
$
$ 779,395
— $ — $ — $(263,771)
$ 590,587
$ 82,180
$74,711
—
$
$ 861,575
—
—
—
$ 779,647
65
187
(263,771)
$ 779,647
(10,722)
—
—
$ 63,989
(7,532)
63
—
$ 74,711
(10,722)
—
—
$ 843,636
(7,467)
250
(263,771)
$ 854,358
$(263,771)
$ 515,876
$(263,771)
$ 515,876
$ — $ — $ (263,771)
$ 579,865
$ 63,989
$ 74,711
$ (263,771)
$ 590,587
81
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 8. Goodwill and Intangible Assets, net (Continued)
We performed our Step 1 goodwill impairment tests on July 1, 2016. The results of these tests
indicated that the estimated fair values of our reporting units exceeded their carrying values.
We performed our Step 1 goodwill impairment test on July 1, 2015. The results of these tests
indicated that the estimated fair values of our reporting units exceeded their carrying values, with the
exception of the North America Hardware reporting unit within our North America segment. The
impact of market pressures such as decreasing revenue and underperformance relative to forecast
adversely impacted the fair value of this reporting unit. As a result, we proceeded to Step 2 of the
goodwill impairment analysis using the most appropriate valuation methods including the income
approach, and compared the implied value of North America Hardware’s goodwill with the carrying
value of its goodwill, and since the carrying value exceeded the implied fair value, we recorded a non-cash
impairment charge of $263.8 million in the three months ended September 30, 2015.
As of September 30, 2016 and 2015, the gross amounts and accumulated amortization of intangible
assets is as follows (in thousands):
2016
2015
Customer relationships (12 to 20 year life) . . . .
Trademarks (5 years to indefinite life) . . . . . . . .
Backlog (2 year life) . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements (3 to 4 year life) . . . .
Technology (10 year life) . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . .
Gross
Amount
$ 173,437
53,034
4,327
1,457
32,481
$ 264,736
Accumulated
Amortization
$
(53,829)
(2,618)
(4,327)
(1,457)
(8,391)
(70,622)
$
Gross
Amount
$ 178,858
56,153
4,327
1,457
33,607
$274,402
Accumulated
Amortization
$
(45,057)
(3,661)
(4,327)
(1,457)
(4,511)
(59,013)
$
Estimated future intangible amortization expense at September 30, 2016 is as follows (in thousands):
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,582
14,582
14,582
14,448
14,045
84,042
$ 156,281
Amortization expense included in the statements of comprehensive income for the years ended
September 30, 2016, 2015 and 2014 was $15.8 million, $15.9 million and $12.6 million, respectively. In
addition to amortizing intangibles, we assigned an indefinite life to the Wesco Aircraft trademark. As of
September 30, 2016 and 2015, the trademark had a carrying value of $37.8 million.
82
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
Accrued compensation and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual for professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued customer rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued taxes (property, sales and use) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual for undermarket contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued profit sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued freight and duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual for restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10. Fair Value of Financial Instruments
September 30,
2016
$ 10,067
986
1,069
3,931
150
125
1,164
325
781
1,164
1,059
5,603
$ 26,424
2015
$ 16,054
2,127
2,438
640
1,046
1,241
1,671
370
732
4,490
1,903
6,184
$ 38,896
Our financial instruments include cash and cash equivalents, accounts receivable and payable,
accrued and other current liabilities and a revolving facility. The carrying amounts of these instruments
approximate fair value because of their short-term maturities. The fair value of interest rate swap
agreements is determined using pricing models that use observable market inputs as of the balance
sheet date, a Level 2 measurement. The fair value of the long-term debt instruments is determined using
current applicable rates for similar instruments as of the balance sheet date, a Level 2 measurement.
The carrying amounts and fair values of the debt instruments and interest rate swap hedge
instrument were as follows (in thousands):
$625,000 term loan A . . . . . . . . . . . . . . . .
$525,000 term loan B . . . . . . . . . . . . . . . .
$200,000 revolving facility . . . . . . . . . . . .
Interest rate swap hedge liabilities . . . . .
September 30, 2016
September 30, 2015
Carrying Amount
401,344
$
440,562
—
6,672
Fair Value
$ 401,344
435,716
—
6,672
Carrying Amount
477,344
$
475,562
—
4,088
Fair Value
$ 476,150
467,002
—
4,088
83
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 11. Long-Term Debt
Long-term debt consists of the following (in thousands):
$625,000 term loan A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$525,000 term loan B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,000 revolving facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,
2016
401,344
440,562
—
841,906
—
841,906
$
$
2015
$ 477,344
475,562
—
952,906
—
$ 952,906
Aggregate maturities of long-term debt as of September 30, 2016 are as follows (in thousands):
Years Ended September 30,
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
401,344
—
—
440,562
$ 841,906
Existing Senior Secured Credit Facilities
On October 4, 2016, we entered into the Fourth Amendment (the Amendment) to our credit
agreement, dated as of December 7, 2012, by and among the Company, Wesco Aircraft Hardware
(the Borrower) and the lenders and agents party thereto (as amended prior to the Amendment, the
Existing Credit Agreement; the Existing Credit Agreement, as amended by the Amendment, the Credit
Agreement). The Amendment modified the Existing Credit Agreement to replace the Borrower’s existing
revolving credit facility with a new revolving credit facility in an aggregate principal amount of $180.0
million and the Borrower’s existing senior secured term loan A facility with a new senior secured term
loan A facility in an aggregate principal amount of $400.0 million. (See Note 23 for a discussion of the
Credit Facilities as amended by the Amendment).
As of September 30, 2016, our Existing Credit Agreement provided for (1) a $625.0 million term
loan A facility (the existing term loan A facility), (2) a $200.0 million revolving credit facility (the existing
revolving facility) and (3) a $525.0 million senior secured term loan B facility (the term loan B facility).
We refer to the term loan B facility, together with the existing term loan A facility and the existing
revolving facility, as the Existing Credit Facilities.
As of September 30, 2016, our outstanding indebtedness under our Existing Credit Facilities was
$841.9 million, which consisted of (1) $401.3 million of indebtedness under the existing term loan A facility
and (2) $440.6 million of indebtedness under the term loan B facility. As of September 30, 2016, $200.0
million was available for borrowing under the existing revolving facility, of which we could borrow up to
$146.4 million without breaching any covenants contained in the agreements governing our indebtedness.
84
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 11. Long-Term Debt (Continued)
The interest rate for the existing term loan A facility was based on our Consolidated Total Leverage
Ratio (as defined in the Existing Credit Agreement) as was determined in the most recently delivered
financial statements, with the respective margins ranging from 1.75% to 2.50% for Eurocurrency loans
and 0.75% to 1.50% for alternate base rate (ABR) loans. The existing term loan A facility amortized in
equal quarterly installments of 1.25% of the original principal amount of $625.0 million for the first year,
escalating to quarterly installments of 2.50% of the original principal amount of $625.0 million by the
fifth year, with the balance due at maturity on December 7, 2017. As of September 30, 2016, the interest
rate for borrowings under the existing term loan A facility was 5.00%.
The interest rate for the term loan B facility had a margin of 2.50% per annum for Eurocurrency
loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or 1.50% per annum for ABR
loans (subject to a minimum ABR floor of 1.75% per annum). The term loan B facility amortized in
equal quarterly installments of 0.25% of the original principal amount of $525.0 million, with the balance
due at maturity on February 28, 2021. As of September 30, 2016, the interest rate for borrowings under
the term loan B facility was 3.34%. In July 2015, we entered into interest rate swap agreements relating to
this indebtedness, which are described in greater detail in Note 12.
The interest rate for the existing revolving facility was based on our Consolidated Total Leverage
Ratio as determined in the most recently delivered financial statements, with the respective margins
ranging from 1.75% to 2.50% for Eurocurrency loans and 0.75% to 1.50% for ABR loans. The existing
revolving facility was due to expire on December 7, 2017.
Our borrowings under the Existing Credit Facilities were guaranteed by us and all of our direct and
indirect, wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a
first lien on substantially all of our assets and the assets of our guarantor subsidiaries, including capital
stock of the subsidiaries (in each case, subject to certain exceptions).
During the year ended September 30, 2016, we made voluntary prepayments totaling $76.0 million
on our existing term loan A facility and $35.0 million on our term loan B facility, which, with respect to
the term loan B facility, have been applied to future required quarterly payments and to the amount due
upon maturity.
Under the terms and definitions applicable to the Existing Credit Facilities as of September 30, 2016,
our Consolidated Total Leverage Ratio (as defined in the Existing Credit Agreement) could not exceed
4.5 (with step-downs on such ratio during future periods) and our Consolidated Net Interest Coverage
Ratio (as defined in the Existing Credit Agreement) could not be less than 2.25. The Existing Credit
Facilities also contained customary negative covenants, including restrictions on our and our restricted
subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or
security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or
otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into
transactions with affiliates. As of September 30, 2016, we were in compliance with all of the foregoing
covenants, and our Consolidated Total Leverage Ratio was 3.78 and our Consolidated Net Interest
Coverage Ratio was 6.30.
85
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 11. Long-Term Debt (Continued)
UK Line of Credit
Our subsidiary, Wesco Aircraft Europe, Ltd, has a £7.0 million ($9.1 million based on the
September 30, 2016 exchange rate) line of credit that automatically renews annually on October 1.
The line of credit bears interest based on the base rate plus an applicable margin of 1.65%. As of
September 30, 2016, the full £7.0 million was available for borrowing under the UK line of credit without
breaching any covenants contained in the agreements governing our indebtedness.
Note 12. Derivative Financial Instruments
We use derivative instruments primarily to manage exposures to foreign currency exchange rates
and interest rates. Our primary objective in holding derivatives is to reduce the volatility of earnings
and cash flows associated with fluctuations in foreign exchange rates and changes in interest rates. Our
derivatives expose us to credit risk to the extent that the counter-parties may be unable to meet the
terms of the agreement. We, however, seek to mitigate such risks by limiting our counter-parties to major
financial institutions. In addition, the potential risk of loss with any one counter-party resulting from this
type of credit risk is monitored. Management does not expect material losses as a result of defaults by
counter-parties.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage
our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate
swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow
hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate
payments over the life of the agreements without exchange of the underlying notional amount. In July
2015, we entered into two interest rate swap agreements, which we designated as cash flow hedges, in
order to reduce our exposure to variability in cash flows related to interest payments on a portion of our
outstanding debt. The first interest rate swap agreement has an amortizing notional amount, which was
425.0 million as of September 30, 2016, and matures on September 30, 2017, giving us the contractual
right to pay a fixed interest rate of 1.21% plus the applicable margin under the term loan B facility
(as defined in Note 11 above; see Note 11 for the applicable margin). The second interest rate swap
agreement also has an amortizing notional amount, initially $375.0 million, giving us the contractual right
to pay a fixed interest rate of 2.2625% plus the applicable margin under the term loan B facility, which is
effective on September 29, 2017 and matures on September 30, 2019.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash
flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified
into earnings in the period that the hedged forecasted transaction affects earnings. During the year
ended September 30, 2016, such derivatives were used to hedge the variable cash flows associated
with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is
recognized immediately in earnings. During the year ended September 30, 2016, we did not record any
hedge ineffectiveness in earnings. No portion of our interest rate swap agreements is excluded from the
assessment of hedge effectiveness.
86
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 12. Derivative Financial Instruments (Continued)
Amounts reported in accumulated other comprehensive income (loss) (AOCI) related to derivatives
are reclassified to interest expense as interest payments are made on our variable-rate debt. As of
September 30, 2016, we expected to reclassify approximately $0.7 million from accumulated other
comprehensive loss to earnings as an increase to interest expense over the next 12 months when the
underlying hedged item impacts earnings.
Non-Designated Derivatives
On December 16, 2015, we entered into one foreign currency forward contract to partially reduce our
exposure to foreign currency fluctuations for a subsidiary’s net monetary assets, which are denominated
in a foreign currency. The derivative is not designated as a hedging instrument. The change in its fair
value is recognized as periodic gain or loss in the other income (loss), net line of our consolidated
statement of earnings and comprehensive income. This foreign currency forward contract expired on
September 28, 2016.
The following table summarizes the notional principal amounts at September 30, 2016 and 2015 of
our interest rate swap agreements discussed above (in thousands). We did not have foreign exchange
forward contracts as of September 30, 2016 and 2015.
Derivative Notional
September
30, 2016
September
30, 2015
Instruments designated as accounting hedges:
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 425,000
$ 475,000
The following table provides the location and fair value amounts of our hedge instruments, which are
reported in our consolidated balance sheets as of September 30, 2016 and 2015 (in thousands). We did
not have foreign exchange forward contracts as of September 30, 2016 and 2015.
Liability Derivatives
Instruments designated as accounting
hedges:
Interest rate swap contracts
Balance Sheet Locations
Fair Value as of
September 30,
2016
2015
Accrued expenses and other current
liabilities
Other liabilities
$ 1,057
$ 5,615
$ 1,902
$ 2,186
The following table provides the losses of our cash flow hedging instruments (net of income tax
benefit), which were transferred from AOCI to our consolidated statement of comprehensive income
(loss) for the years ended September 30, 2016, 2015 and 2014 (in thousands). We did not have any hedge
instruments in the year ended September 30, 2014.
Cash Flow Derivatives
Interest rate swap contracts . . .
Location in Consolidated Statement
Of Comprehensive (Loss) Income
Interest expense, net
Years Ended September 30,
2016
$ (1,344)
2015
2014
$
(4)
—
87
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 12. Derivative Financial Instruments (Continued)
The following table provides the effective portion of the losses of our cash flow hedge instruments
which are recognized (net of income taxes) in other comprehensive loss for the years ended
September 30, 2016, 2015 and 2014 (in thousands). We did not have any hedge instruments in the year
ended September 30, 2014.
Cash Flow Derivatives
Interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ (2,973)
2015
$ (2,581)
2014
—
The following table provides a summary of changes to our accumulated other comprehensive
income (loss) related to our cash flow hedging instruments (net of income taxes) during the years ended
September 30, 2016 and 2015.
Years Ended September 30,
Years Ended September 30,
AOCI - Unrealized Gain (Loss) on Hedging Instruments
Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified to earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ (2,577)
(2,973)
1,344
(1,629)
$ (4,206)
2015
$
—
(2,581)
4
(2,577)
$ (2,577)
The following table provides the pretax effect of our derivative instruments not designated as hedging
instruments on our consolidated earnings and comprehensive income for the years ended September 30,
2016, 2015 and 2014 (in thousands). We did not have such derivative instruments in the years ended
September 30, 2015 and 2014.
Instruments Not Designated As
Hedging Instruments
Foreign exchange contract
Location in Consolidated Statement
of Comprehensive Income
Other income (loss), net
Years Ended September 30,
2016
$ (5,606)
2015
2014
—
—
88
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 13. Other Comprehensive Loss
The components of other comprehensive loss and related tax effects for each period were as follows
(dollars in thousands):
Year Ended September 30, 2016
Year Ended September 30, 2015
Year Ended September 30, 2014
Before
Tax
Tax
After
Tax
Before
Tax
Tax
After
Tax
Before
Tax
Tax
After
Tax
(4,716)
1,743
(2,973)
(4,094)
1,513
(2,581)
—
—
—
2,132
(788)
1,344
6
(2)
4
—
—
—
(39,211)
—
(39,211)
(25,322)
—
(25,322)
(633)
—
(633)
Change in unrealized
holding losses on
derivatives . . . . . . . . .
Less: adjustment for
losses on derivatives
included in net
income . . . . . . . . . . . .
Change in net foreign
currency translation
adjustment . . . . . . . . .
Other comprehensive
loss . . . . . . . . . . . . . . .
$ (41,795)
$ 955
$ (40,840)
$ (29,410)
$ 1,511
$ (27,899)
$ (633)
$ — $ (633)
See Note 12 for the amounts of losses on derivatives reclassified out of accumulated other
comprehensive loss into the consolidated statements of income, with presentation location, for each
period. We did not have any hedge instruments in the year ended September 30, 2014.
The changes in accumulated other comprehensive loss by component and related tax effects for each
period were as follows (in thousands):
Balance at September 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
Other Comprehensive loss before reclassifications . . . . . . . . .
Tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at September 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
Other Comprehensive loss before reclassifications . . . . . . . . .
Amounts reclassified out of accumulated other loss . . . . . . . .
Tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Other Comprehensive loss before reclassifications . . . . . . . . .
Amounts reclassified out of accumulated other loss . . . . . . . .
Tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
89
Foreign
Currency
Translation
Adjustments
$ (10,189)
(633)
—
(633)
$ (10,822)
(25,322)
—
—
(25,322)
(36,144)
(39,211)
—
—
(39,211)
$ (75,355)
Unrealized
Losses on
Derivative
Instruments
$
Total
— $ (10,189)
(633)
—
—
—
—
(633)
— $ (10,822)
(29,416)
6
1,511
(27,899)
(4,094)
6
1,511
(2,577)
(2,577)
(4,716)
2,132
955
(1,629)
(4,206)
(38,721)
(43,927)
2,132
955
(40,840)
$ (79,561)
$
$
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 14. Net Income (Loss) Per Share
The following table presents net income (loss) per share and related information (dollars
in thousands):
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic weighted average shares outstanding . . . . . . . .
Dilutive effect of stock options and restricted shares
Dilutive weighted average shares outstanding . . . . . .
Basic net income (loss) per share . . . . . . . . . . . . . . . .
Diluted net income (loss) per share . . . . . . . . . . . . . .
Years Ended September 30,
2016
91,378
97,634,155
531,701
98,165,856
0.94
0.93
$
$
$
2015
(154,744)
96,955,043
—
96,955,043
(1.60)
(1.60)
$
$
$
2014
102,102
95,950,994
1,654,789
97,605,783
1.06
1.05
$
$
$
Shares of common stock equivalents of 2.0 million, 2.3 million, and 0.5 million for the years ended
September 30, 2016, 2015 and 2014, respectively, were excluded from the diluted calculation due to their
anti-dilutive effect.
Note 15. Income Taxes
Income (loss) before benefit or provision for income taxes for the years ended September 30, 2016,
2015 and 2014 was as follows (in thousands):
U.S. (loss) income . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 63,614
61,976
$ 125,590
2015
$(242,864)
1,248
$(241,616)
2014
$ 112,841
44,067
$ 156,908
The components of our income tax provision (benefit) for the years ended September 30, 2016, 2015
and 2014 were as follows (in thousands):
Current provision
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred provision (benefit)
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . .
2016
2015
2014
$
7,315
1,134
12,482
20,931
10,979
1,108
1,194
13,281
$ 34,212
$
24,797
1,726
13,247
39,770
(105,748)
(12,543)
(8,351)
(126,642)
$ (86,872)
$
$
32,204
1,920
9,625
43,749
9,756
1,497
(196)
11,057
54,806
90
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 15. Income Taxes (Continued)
The tax impact associated with the exercise of employee stock options and vesting of restricted stock
units for the year ended September 30, 2016 will be recognized in the current tax return. For the year
ended September 30, 2016, $1.1 million of tax benefit has been credited to additional paid in capital. For
the years ended September 30, 2015 and 2014, a reduction to paid in capital of $0.1 million was recorded,
and $10.2 million of tax benefit has been credited to additional paid in capital, respectively.
A reconciliation of our provision (benefit) for income taxes to the U.S. federal statutory rate is as
follows for the years ended September 30, 2016, 2015 and 2014 (in thousands):
2016
2015
2014
Provision(benefit) for income taxes at
statutory rate . . . . . . . . . . . . . . . . . . . .
State taxes, net of tax benefit . . . . . . . . .
Deemed foreign dividends . . . . . . . . . . .
Nondeductible items . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign operations . . . . . . . . .
Foreign tax credit . . . . . . . . . . . . . . . . . .
Tax contingencies . . . . . . . . . . . . . . . . . .
Actual provision (benefit) for income
$ 43,956 35.00% $ (84,566) 35.00% $ 54,917 35.00%
1.42%
2,221
4.52%
7,091
0.71%
1,114
0.75%
1,176
(5,707) (3.64)%
(5,329) (3.40)%
(677) (0.43)%
1.16%
1,458
3,963
3.16%
(1,912) (1.52)%
(251) (0.21)%
(8,015) (6.38)%
(4,313) (3.43)%
(674) (0.54)%
2.90%
(1.78)%
0.27%
(0.98)%
(0.88)%
1.74%
(0.32)%
(7,002)
4,289
(642)
2,357
2,125
(4,205)
772
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 34,212 27.24% $ (86,872) 35.95% $ 54,806 34.93%
In November 2015, The FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred
Taxes. The new accounting guidance amends the presentation of deferred income taxes on our
Consolidated Balance Sheet such that they are presented entirely as non-current assets and liabilities. As
permitted by the standard, we early adopted the new presentation prospectively, beginning July 1, 2016.
Consistent with our prospective adoption, the presentation of deferred income tax assets and liabilities as
of September 30, 2015 was not restated.
91
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 15. Income Taxes (Continued)
As of September 30, 2016 and 2015, the components of deferred income tax assets (liabilities) were
as follows (in thousands):
2016
2015
Deferred tax assets - Current
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves and other accruals . . . . . . . . . . . . . . .
Compensation accruals . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $ 86,812
417
—
2,965
—
1,123
—
Deferred tax assets - Non-current
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves and other accruals . . . . . . . . . . . . . . .
Compensation accruals . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses and tax credits . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . .
Deferred tax (liabilities) - Non-current
Property and equipment . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . .
Total deferred tax liabilities - non-current . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets (liabilities) . . . . . . . . . . .
88,000
412
1,060
3,674
16,827
2,119
112,092
—
—
—
3,256
14,523
419
109,515
(355)
(38)
(52,072)
(52,465)
(5,548)
$ 54,079
(1,937)
4
(36,069)
(38,002)
(5,961)
$ 65,552
As of September 30, 2016, we had state net operating loss carryforwards of $3.0 million which will
begin to expire in 2025, and foreign net operating loss carryforwards of $11.8 million which will begin to
expire in 2021. As of September 30, 2016, we had U.S. foreign tax credit carryforwards of $13.6 million
which will begin to expire in 2021.
We are subject to U.S. federal income tax as well as income taxes in various state and foreign
jurisdictions. The earliest tax year still subject to examination by a significant taxing jurisdiction is
September 30, 2012.
The undistributed earnings of our foreign subsidiaries, which amount to $87.0 million are considered
to be indefinitely reinvested and no provision for federal or state and local taxes or foreign withholding
taxes has been provided on such earnings. The taxes associated with the undistributed earnings would be
between $15.0 million and $20.0 million.
We determine whether it is more likely than not that a tax position will be sustained upon
examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to
determine the amount of benefit to recognize in the financial statements. The tax position is measured as
the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
We classify gross interest and penalties and unrecognized tax benefits as non-current liabilities in the
92
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 15. Income Taxes (Continued)
consolidated balance sheets. As of September 30, 2016, the total amount of gross unrecognized tax
benefits was $2.5 million, including $0.3 million of interest and $42,000 of penalties, all of which would
impact the effective tax rate if recognized. It is reasonably possible that within the next twelve months,
$86,000 may be recognized as a result of the lapsing of the statute of limitations.
The unrecognized tax benefits, which exclude interest and penalties, for the years ended
September 30, 2016, 2015 and September 30, 2014 are as follows (in thousands):
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to tax positions taken during a prior year . . . .
Decreases related to tax positions taken during a prior year . . .
Increases related to tax positions taken during the current year . .
Decreases related to settlements with taxing authorities . . . . . .
Decreases related to expiration of statute of limitations . . . . . .
Changes due to translation of foreign currencies . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 2,725
—
—
—
(579)
(113)
133
$ 2,166
2015
$ 1,901
1,716
—
—
—
(892)
—
$ 2,725
2014
$ —
2,491
(590)
—
—
—
—
$ 1,901
We determine whether it is more likely than not that some or all of our deferred tax assets will not be
realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable
income during the periods in which temporary differences become deductible or includible in taxable
income. We consider projected future taxable income and tax planning strategies in our assessment.
Based upon the level of historical income and projections for future taxable income, we believe it is more
likely than not that we will not realize the benefits of the temporary differences related to certain Haas
foreign tax credits and Haas foreign net operating losses. Therefore, a valuation allowance has been
recorded against these deferred tax assets (in thousands).
Beginning
Balance
Valuation allowance for deferred tax assets:
Year ended September 30, 2016 . . . . . . . . . . . . . $ 5,961
4,930
Year ended September 30, 2015 . . . . . . . . . . . . .
—
Year ended September 30, 2014 . . . . . . . . . . . . .
Valuation
Allowance
Recorded
During
The Period
Ending
Balance
$
(413)
1,031
4,930
$ 5,548
5,961
4,930
Note 16. Stock-Based and Other Compensation Arrangements
On January 27, 2015, our stockholders approved the 2014 Plan, which amended and restated our
2011 Equity Incentive Award Plan and authorized the issuance of a total of 5,717,584 shares. As of
September 30, 2016, there were 4,399,512 shares remaining available for issuance under the 2014 Plan.
93
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 16. Stock-Based and Other Compensation Arrangements (Continued)
Stock Options
Our stock options are eligible to vest over three years in three equal annual installments, subject to
continued employment on each vesting date. Vested options are exercisable at any time until 10 years
from the date of the option grant, subject to earlier expirations under certain terminations of service and
other conditions. The stock options granted have an exercise price equal to the closing stock price of our
common stock on the grant date.
Continuous Employment Conditions
At September 30, 2016, we have outstanding 598,665 unvested time-based stock options under the
2014 Plan or our prior equity incentive plans (collectively, the Plans), which will vest on the basis of
continuous employment. All of the time-based options vest ratably during the period of service.
The following table sets forth the summary of options activity under the Plans (dollars in thousands
except per share data):
Options outstanding at September 30, 2015 . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited options . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at September 30, 2016 . . .
Options exercisable at September 30, 2016 . . . .
Weighted
Average
Exercise
Price
$ 12.09
$ 12.07
$
7.94
$ 17.12
$ 12.59
$ 12.32
Number
of Shares
3,242,018
656,247
(798,740)
(399,368)
2,700,157
2,101,492
Weighted
Average
Remaining
Contractual
Life
(in years)
5.15
Aggregate
Intrinsic
Value(1)
$ 8,954
6.07
5.10
$ 6,833
$ 6,274
(1) Aggregate intrinsic value is calculated based on the difference between our closing stock price at year end and the
exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have
been received by the option holders, had they all exercised all their options on the fiscal year end date.
The total intrinsic value of options exercised during the years ended September 30, 2016, 2015 and
2014 was $4.5 million, $1.5 million and $34.6 million, respectively. For the years ended September 30,
2016, 2015 and 2014, we recorded $3.2 million, $3.6 million and $2.9 million, respectively, of stock-based
compensation expense related to these options that is included within selling, general and administrative
expenses. At September 30, 2016, the unrecognized stock-based compensation related to these options
was $2.8 million and is expected to be recognized over a weighted-average period of 1.5 years. Cash
received from the exercise of stock options by us during the years ended September 30, 2016, 2015 and
2014 was $6.3 million, $0.8 million and $9.6 million, respectively.
Restricted Stock Units and Restricted Stock
In the year ended September 30, 2016, we granted 506,943 shares of restricted common stock to
employees. These shares are eligible to vest over three years in three equal annual installments, subject
to continued employment on each vesting date. During the years ended September 30, 2016, 2015 and
94
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 16. Stock-Based and Other Compensation Arrangements (Continued)
2014, we granted 57,759, 73,662 and 26,874, respectively, of restricted common shares to our directors.
During fiscal year 2016, we granted performance-related restricted stock to certain executives, which vest
after three years based on the achievement of a certain operational goal. The stock-based compensation
expense for the performance awards is determined based on the probability of achieving the performance
goal which is assessed by management on a quarterly basis until vesting. For the years ended
September 30, 2016, 2015 and 2014, we recorded $5.3 million, $4.3 million and $2.6 million, respectively,
of stock-based compensation expense related to restricted stock that is included within selling, general
and administrative expenses. The restricted stock awards do not contain any redemption provisions that
are not within our control. Accordingly, these restricted stock awards have been accounted for as our
stockholders’ equity. At September 30, 2016, the unrecognized stock-based compensation related to
restricted stock awards was $6.6 million and is expected to be recognized over a weighted-average period
of 1.8 years.
Restricted share activity during the year ended September 30, 2016 was as follows:
Outstanding at September 30, 2015 . . . . . . . . . . .
Granted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 30, 2016 . . . . . . . . . . .
Weighted
Average
Fair Value
16.56
$
12.29
14.51
15.15
13.63
$
Shares
371,395
564,702
(263,499)
(66,154)
606,444
(1) Under the terms of their respective restricted stock award agreements, holders of restricted stock have the
same voting rights as common stock shareholders; such rights exist even if the shares of restricted stock
have not vested.
Fair value of our restricted shares is based on our closing stock price on the date of grant. The fair
value of shares that were vested during the years ended September 30, 2016, 2015 and 2014 was $3.5
million, $3.1 million and $2.8 million, respectively. The fair value of shares that were granted during
the years ended September 30, 2016, 2015 and 2014 was $6.9 million, $8.8 million and $4.3 million,
respectively. The weighted average fair value at the grant date for restricted shares issued during the
years ended September 30, 2016, 2015 and 2014 was $12.29, $16.05 and $20.88, respectively. Due to tax
deductions associated with option exercises and restricted share activities, we realized tax benefits of $1.0
million, a tax shortfall of $0.1 million and tax benefits of $10.2 million for the years ended September 30,
2016, 2015 and 2014, respectively. The realized tax benefits were recorded to the additional paid in
capital account in our stockholders’ equity.
Stock-Based Compensation
We use the Black-Scholes option pricing model to determine the fair value of stock options. The
determination of the fair value of stock-based payment awards on the date of grant using an option-
pricing model is affected by our stock price as well as assumptions regarding complex and subjective
variables. These variables include the expected stock price volatility over the term of the awards, risk-free
interest rate and expected dividends.
95
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 16. Stock-Based and Other Compensation Arrangements (Continued)
We estimated expected volatility based on historical data of comparable public companies. The
expected term, which represents the period of time that options granted are expected to be outstanding,
is estimated based on guidelines provided in U.S. Securities and Exchange Commission Staff Accounting
Bulletin No. 110 and represents the average of the vesting tranches and contractual terms. The risk-
free rate assumed in valuing the options is based on the U.S. Treasury rate in effect at the time of grant
for the expected term of the option. We do not anticipate paying any cash dividends in the foreseeable
future and, therefore, used an expected dividend yield of zero in the option pricing model. Compensation
expense is recognized only for those options expected to vest with forfeitures estimated based on our
historical experience and future expectations. Stock-based compensation awards are amortized on a
straight line basis over a three year period.
The weighted average assumptions used to value the option grants are as follows:
Expected life (in years) . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
6.00
2016
2015
6.00
5.93
35.00% 38.51% 45.00%
1.72%
1.87%
—
—
1.55%
—
The weighted average fair value per option at the grant date for options issued during the years
ended September 30, 2016, 2015, and 2014 was $4.38, $6.52 and $9.36, respectively.
Note 17. Commitments and Contingencies
Operating Leases
We lease office and warehouse facilities (certain of which are from related parties) and warehouse
equipment under various non-cancelable operating leases that expire at various dates through October
31, 2026. Certain leases contain escalation clauses based on the Consumer Price Index. We are also
committed under the terms of certain of these operating lease agreements to pay property taxes,
insurance, utilities and maintenance costs.
Future minimum rental payments under operating leases as of September 30, 2016 are as follows
(dollars in thousands):
Years Ended September 30,
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third
Party
Related
Party
Total
$
9,265
8,752
7,091
5,845
4,485
17,092
$ 52,530
$ 1,688
1,701
1,655
156
39
—
$ 5,239
$ 10,953
10,453
8,746
6,001
4,524
17,092
$ 57,769
Total rent expense for the years ended September 30, 2016, 2015 and 2014 was $11.9 million, $11.4
million and $6.6 million, respectively.
96
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 17. Commitments and Contingencies (Continued)
Capital Lease Commitments
We lease certain equipment under capital lease agreements that require minimum monthly payments
that expire at various dates through June 30, 2024. The gross amount of these leases at September 30,
2016 and September 30, 2015 are $3.5 million and $3.3 million, respectively.
Future minimum lease payments as of September 30, 2016 are as follows (in thousands):
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,482
1,043
504
118
89
245
3,481
(301)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,180
Indemnifications
In the normal course of business, we provide indemnifications to our customers with regard
to certain products and enter into contracts and agreements that may contain representations and
warranties and provide for general indemnifications. Our maximum exposure under many of these
agreements is not quantifiable as we have a limited history of prior indemnification claims and
payments. Payments we have made under such agreements have not had a material adverse effect
on our results of operations, cash flows, or financial position. However, we could incur costs in the
future as a result of indemnification obligations.
Litigation
We are involved in various legal matters that arise in the ordinary course of business. Management,
after consulting with outside legal counsel, believes that the ultimate outcome of such matters will not
have a material adverse effect on our financial position, results of operations or cash flows. There can be
no assurance, however, that such actions will not be material or adversely affect our business, financial
position and results of operations or cash flows.
Note 18. Employee Benefit Plan
We maintain a 401(k) defined contribution plan and a retirement saving plan for the benefit of our
eligible employees. All U.S. full-time employees who have completed at least one full month of service
and are at least 20 years of age are eligible to participate in the plans. Eligible employees may elect to
contribute up to 60% of their eligible compensation. We made contributions of $2.4 million, $2.1 million
and $1.6 million during the years ended September 30, 2016, 2015 and 2014, respectively.
97
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 19. Supplemental Cash Flow Information
Cash payments for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of non-cash investing and financing activities:
Property and equipment acquired pursuant to capital leases . . . . . . . .
Property and equipment disposed of pursuant to termination of
Year Ended September 30,
2016
2015
2014
(in thousands)
$ 33,349
$ 37,193
$ 32,551
$ 16,996
$ 24,440
$ 24,457
$ 1,780
$
333
$ 1,528
capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $ (5,414)
Note 20. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for quarters ended December 31, 2014 through
September 30, 2016 is as follows (in thousands except per share data):
Quarter Ended:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share (2) . . . . . . . . . . . . . . . .
Diluted net income per share (2) . . . . . . . . . . . . . .
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015
$
$
$
365,595
95,485
23,261
0.24
0.24
$ 375,186
99,241
24,016
0.25
0.24
$
$
$ 376,742
102,337
23,492
0.24
0.24
$
$
$ 359,843
96,629
20,609
0.21
0.21
$
$
September 30,
2015
June 30,
2015
March 31,
2015
December 31,
2014
Quarter Ended:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income (1) . . . . . . . . . . . . . . . . . . . . . . .
Basic net (loss) income per share (2) . . . . . . . . . .
Diluted net (loss) income per share (2) . . . . . . . .
$
$
$
369,654
6,131
(213,999)
(2.21)
(2.21)
$ 368,706
103,355
16,479
0.17
0.17
$
$
$ 385,559
109,086
23,046
0.24
0.24
$
$
$ 373,696
105,923
19,730
0.20
0.20
$
$
(1)
(2)
During the three months ended September 30, 2015, we recorded charges to cost of sales of $83.4 million for the increase in
our E&O reserve and related items, and a non-cash goodwill impairment charge of $263.8 million. See Note 2, Note 5 and
Note 8 for additional information.
Net income (loss) per share calculations for each quarter are based on the weighted average basic and diluted shares
outstanding for that quarter and may not total to the full year amount.
98
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 21. Segment Reporting
We are organized based on geographic location. Our reportable segments are North America and
Rest of World.
We evaluate segment performance based on segment operating earnings or loss. Each segment
reports its results of operations and makes requests for capital expenditures and acquisition funding to
our chief operating decision-maker (CODM). Our chief executive officer serves as our CODM.
The following table presents net sales and other financial information by business segment
(in thousands):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .
Year Ended September 30, 2016
North America
$ 1,185,315
113,426
(32,584)
(26,134)
1,657,716
515,876
(12,860)
24,497
Rest of World
$ 292,051
45,324
(4,317)
(8,078)
298,489
63,989
(1,132)
3,483
Consolidated
$1,477,366
158,750
(36,901)
(34,212)
1,956,205
579,865
(13,992)
27,980
Changes in the goodwill balance in the year ended September 30, 2016 are due to foreign currency
exchange rate changes related to the Rest of World segment. See Note 8 for further information.
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from operations . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . .
Benefit (provision) for income taxes . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .
Year Ended September 30, 2015
North America
$ 1,198,201
(222,719)
(32,912)
94,450
1,709,904
515,876
(8,300)
23,548
Rest of World
$ 299,414
16,354
(4,180)
(7,578)
311,069
74,711
(1,331)
4,178
Consolidated
$1,497,615
(206,365)
(37,092)
86,872
2,020,973
590,587
(9,631)
27,726
99
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 21. Segment Reporting (Continued)
Changes in the goodwill balance in the year ended September 30, 2015 included a non-cash
impairment charge of $263.8 million relate to the North America. See Note 8 for further information.
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .
Geographic Information
Year Ended September 30, 2014
North America
$ 1,030,511
145,357
(25,836)
(47,459)
(9,763)
18,317
Rest of World
$ 325,366
38,577
(3,389)
(7,347)
(754)
3,085
Consolidated
$1,355,877
183,934
(29,225)
(54,806)
(10,517)
21,402
We operated principally in three geographic areas, North America, Europe and emerging markets,
such as Asia, Pacific Rim and the Middle East.
Net sales by geographic area, for the years ended September 30, 2016, 2015, and 2014, were as
follows (dollars in thousands):
Year Ended September 30,
2016
2015
2014
United States of America . . . . . .
United Kingdom . . . . . . . . . . . . .
Other foreign counties . . . . . . . .
All foreign counties . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
Sales
$1,087,691
195,473
194,202
389,675
$1,477,366
% of Sales
Sales
73.6% $ 1,101,385
190,661
13.2%
205,569
13.2%
396,230
26.4%
100.0% $ 1,497,615
We determine the geographic area based on the origin of the sale.
% of Sales
Sales
% of Sales
70.1%
13.3%
16.6%
29.9%
100.0% $1,355,877 100.0%
73.5% $ 950,058
180,535
12.7%
225,284
13.8%
405,819
26.5%
Long-lived assets by geographic area, for the years ended September 30, 2016 and 2015, were as
follows (in thousands):
United States of America . . . . . . . . . . . . . . . . . . .
All foreign countries . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
September 30,
2016
2015
$ 198,370
56,947
$ 255,317
$ 205,679
67,280
$ 272,959
100
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 21. Segment Reporting (Continued)
Product and Services Information
Net sales by product categories, for the years ended September 30, 2016, 2015 and 2014 were as
follows (dollars in thousands):
Year Ended September 30,
2016
2015
2014
Hardware . . . . . . . . . . . . . . . . . . . .
Chemicals(1) . . . . . . . . . . . . . . . . .
Electronic components . . . . . . . . .
Bearings . . . . . . . . . . . . . . . . . . . . .
Machined parts and other . . . . . .
% of Sales
Sales
% of Sales
Sales
Sales
$ 711,177
600,124
105,207
34,662
26,196
48.2% $ 738,496
591,840
40.6%
107,918
7.1%
33,602
2.3%
25,759
1.8%
$1,477,366 100.0% $1,497,615
49.3% $ 837,615
356,154
39.5%
109,616
7.2%
31,729
2.3%
20,763
1.7%
100.0% $1,355,877
% of Sales
61.8%
26.3%
8.1%
2.3%
1.5%
100.0%
(1) We did not sell inventory classified as “Chemicals” prior to February 28, 2014.
Note 22. Restructuring Activities
We record costs associated with involuntary separation programs when management has approved
the plan for separation, the affected employees are identified, and it is unlikely that actions required to
complete the separation plan will change significantly.
In September 2015, we committed to a Global Restructuring Plan (GRP), which involved the
immediate elimination of redundant positions and the closure and consolidation of various facilities in
order to better align our workforce to the growth areas of our business and to streamline our operations
in order to increase efficiency and effectiveness. As of September 30, 2016, we materially completed the
actions under the GRP.
During the year ended September 30, 2016, we recorded a net expense reduction of $185,000 related
to the restructuring activities, consisting of $170,000 of additional employee severance and related costs,
which was more than offset by an expense reduction of $355,000 related to the termination of leases and
other expenses. Of these amounts, $183,000 of additional expenses was recorded in North America and
$368,000 of expense reduction was recorded in Rest of World. Such net expense reduction was recorded
in selling, general and administrative expenses in our consolidated statements of comprehensive income.
Our restructuring liabilities were included in the accrued expenses and other current liabilities line of
our consolidated balance sheets. The following table summarizes the activities affecting our restructuring
liabilities described above during the year ended September 30, 2016 (in thousands):
September 30,
2015
Employee severance . . . . . . . . . . . . . .
Lease termination costs and other . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,106
2,384
4,490
Additions/
Adjustments
170
$
(355)
(185)
$
Cash
Payments
$ (2,193)
(856)
$ (3,049)
Foreign
Currency
Translation
(15)
$
(77)
(92)
$
September 30,
2016
$
$
68
1,096
1,164
101
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 22. Restructuring Activities (Continued)
The following table summarizes the total incurred restructuring costs by segment as of September 30,
2016 (in thousands):
North America segment . . . . . . . . . . . . . . . . . . . . . . .
2,747 $
(2,095) $
3 $
Restructuring
Costs Accrued
Since Inception
$
Cash
Payments
Year-to-date
Foreign
Currency
Translation
Restructuring
Costs Accrued
September 30,
655
Rest of World segment . . . . . . . . . . . . . . . . . . . . . . . .
1,558
(954)
(95)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,305 $
(3,049) $
(92) $
509
1,164
The remaining costs to be incurred under the GRP are not expected to differ significantly from the
amount accrued as of September 30, 2016.
Note 23. Subsequent Event
On October 4, 2016, we entered into the Amendment to the Existing Credit Agreement. The
Amendment modified the Existing Credit Agreement to replace the Borrower’s existing revolving
credit facility with a new revolving credit facility in an aggregate principal amount of $180.0 million
(the revolving facility) and the Borrower’s existing senior secured term loan A facility with a new senior
secured term loan A facility in an aggregate principal amount of $400.0 million (the term loan A facility).
The Amendment also modified the Existing Credit Agreement to (1) remove the Consolidated Net
Interest Coverage Ratio (as defined in the Existing Credit Agreement) financial covenant set forth in
the Existing Credit Agreement and (2) modify the Consolidated Total Leverage Ratio (as defined in
the Credit Agreement) levels in the financial covenant set forth in the Existing Credit Agreement to a
maximum of 4.50 for the quarters ending September 30, 2016 and December 31, 2016, with step-downs to
4.25 for the quarters ending March 31, 2017 and June 30, 2017, 4.00 for the quarters ending September
30, 2017 and December 31, 2017, 3.75 for the quarters ending March 31, 2018 and June 30, 2018 and 3.50
for the quarter ending September 30, 2018 and thereafter.
The Amendment also provided for additional amendments to the Existing Credit Agreement,
including (1) permitting the corporate consolidation of the Company’s operations in the United
Kingdom, (2) expanding the Company’s ability to enter into receivables financings, (3) increasing the
maximum amount permitted to be incurred under a Cash-Capped Incremental Facility (as defined in
the Credit Agreement) from $100 million to $150 million and (4) providing increased flexibility for
future restructurings.
The Credit Agreement provides for (1) a $400.0 million term loan A facility, (2) a $180.0 million
revolving credit facility and (3) a $525.0 million senior secured term loan B facility (the “term loan B
facility”). We refer to the term loan B facility, together with the term loan A facility and the revolving
facility, as the “Credit Facilities.”
As a result of the Amendment, we incurred $10.4 million in fees that were capitalized and will be
amortized over the remaining life of the related debt. $1.9 million of the unamortized financing fees
related to the Existing Credit Agreement will be written off as debt extinguishment loss in the three
months ending December 31, 2016.
102
Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 23. Subsequent Event (Continued)
On October 4, 2016, we repaid $1.3 million on our existing term loan A facility prior to the
effectiveness of the Amendment, resulting in a $400.0 million balance. After the effectiveness of the
Amendment, we borrowed $25.0 million on October 4, 2016 under our new $180.0 million revolving
facility to pay the fees of our Amendment and fund our normal operations. As of October 4, 2016, the
interest rate for borrowings under the revolving facility was 3.29%.
The interest rate for the term loan A facility under the Credit Agreement is based on our
Consolidated Total Leverage Ratio (as defined in the Credit Agreement) as determined in the most
recently delivered financial statements, with the respective margins ranging from 2.00% to 2.75% for
Eurocurrency loans and 1.00% to 1.75% for alternate base rate (ABR) loans. The term loan A facility
amortizes in equal quarterly installments of 1.25% of the original principal amount of $400.0 million, with
the balance due at maturity on October 4, 2021, subject to certain exceptions.
The interest rate for the term loan B facility under the Credit Agreement has a margin of 2.50% per
annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or
1.50% per annum for ABR loans (subject to a minimum ABR floor of 1.75% per annum). The term
loan B facility continues to amortize in equal quarterly installments of 0.25% of the original principal
amount of $525.0 million, with the balance due at maturity on February 28, 2021. In July 2015, we
entered into interest rate swap agreements relating to this indebtedness, which are described in greater
detail in Note12.
The interest rate for the revolving facility under the Credit Agreement is based on our Consolidated
Total Leverage Ratio as determined in the most recently delivered financial statements, with the
respective margins ranging from 2.00% to 2.75% for Eurocurrency loans and 1.00% to 1.75% for ABR
loans. The revolving facility expires on October 4, 2021, subject to certain exceptions.
Our borrowings under the Credit Facilities are guaranteed by us and all of our direct and indirect,
wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a first lien
on substantially all of our assets and the assets of our guarantor subsidiaries, including capital stock of the
subsidiaries (in each case, subject to certain exceptions).
The Credit Facilities contain customary negative covenants, including restrictions on our and our
restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant
liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell
or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into
transactions with affiliates.
103
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of the Company, with the participation of its chief executive officer and chief financial
officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 13d-15(e) under the Exchange Act). Based on their evaluation, as of the end of the
period covered by this Annual Report on Form 10-K, the Company’s chief executive officer and chief
financial officer have concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Management of the
Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
September 30, 2016. In making its assessment of internal control over financial reporting, management
used the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management
concluded that the Company’s internal control over financial reporting was effective as of September 30,
2016 based on criteria in Internal Control-Integrated Framework issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2016
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Remediation of Material Weaknesses
In previous annual and quarterly reports, we disclosed material weaknesses in our internal control
over financial reporting relating to (1) a lack of a sufficient complement of accounting and financial
reporting personnel with an appropriate level of accounting knowledge and experience commensurate
with our financial reporting requirements, (2) maintaining effective controls over the preparation and
review of account reconciliations and (3) maintaining effective controls over the integration of policies,
practices and controls over the acquired Haas business.
Throughout fiscal 2015 and 2016, we implemented changes to our processes to improve our internal
control over financial reporting. The following steps have been taken to remediate the conditions leading
to the above material weaknesses:
• Our staff attended four training sessions during fiscal 2016, at our corporate headquarters and
through videoconferencing for employees located outside of our corporate headquarters, as part
of our comprehensive training program to upgrade the skills of our internal audit and accounting
personnel.
• We formalized all of our critical accounting and reporting policies, which were approved by our
chief financial officer and made available on our intranet, and we trained our finance personnel
on these policies.
• We implemented a formalized account reconciliation policy and procedures that included
intensive training of our accounting team to ensure that these reconciliations are completed at
each period-end on a timely basis.
104
• We conducted a thorough assessment of the account reconciliation process, which included
performing a walk-through of the process and testing on a sample basis, after which we
concluded that the process is designed and operating effectively.
• We reviewed our control environment and related control activities to identify and implement
enhancements and other integration activities to simplify and, where possible, centralize our
processes and related controls.
• We integrated various key processes, systems and resources, including implementation of a
common financial system across substantially all of the business, which allows for streamlined
efforts, reduced redundancies, and the ability to train employees to specialize in certain tasks.
• We implemented new software to automate and improve our account reconciliation process,
which has simplified and reduced routine activities and provided additional time for our finance
department to focus on non-routine areas that require more analysis and professional judgment.
• We filled openings at senior financial and organizational leadership roles, including:
• Global controller, who started in January 2015,
• Chief executive officer, who started in May 2015, and
• Chief financial officer, who started in May 2015.
• We restructured and reorganized our finance department, as well as other departments,
to capitalize on the collective skills, abilities, and expertise of our resources based on our
assessment and analysis of our combined talent pool from the Haas acquisition. Where gaps were
identified, we actively filled key roles.
• We added qualified and experienced financial reporting staff in the finance department to
ensure that it has sufficient depth, skills, and experience to prepare our financial statements and
disclosures in accordance with GAAP. Additional experienced staff include:
• New controller of operations and supply chain, who started in February 2015,
• New treasury manager, who was promoted in August 2015,
• New director of SEC reporting and technical accounting, who started in September 2015, and
• New internal audit manager, who started in September 2015.
• We enhanced controls around the identification, documentation and application of technical
accounting guidance with particular emphasis on events outside the ordinary course of business.
These controls include the implementation of additional supervision and review activities by
qualified personnel, the preparation of formal accounting memoranda to support our conclusions
on technical accounting matters and the development and use of checklists and research tools to
assist in compliance with GAAP for complex accounting issues.
• We formed a disclosure committee comprised of members of our financial management and
representatives from our accounting, legal, and investor relations departments to address and
coordinate SEC filings and investor communications, the minutes of which are reviewed with the
audit committee.
105
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the
quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
106
PART III
In accordance with General Instruction G.(3) of Form 10-K certain information required by this
Part III will either be incorporated into this Annual Report on Form 10-K by reference to our definitive
proxy statement for our 2017 annual meeting of stockholders (2017 Proxy Statement) filed within
120 days after September 30, 2016 or will be included in an amendment to this Annual Report on
Form 10-K filed within 120 days after September 30, 2016. To the extent such information is included in
our 2017 Proxy Statement within 120 days after September 30, 2016, it is expected to be incorporated by
reference to the sections of our 2017 Proxy Statement specified below.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information appearing in our 2017 Proxy Statement under the following headings is incorporated
herein by reference:
•
•
•
•
“Proposal 1—Election of Directors,”
“Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and
“General Information Concerning the Board of Directors, Its Committees and the Company’s
Corporate Governance.”
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in our 2017 Proxy Statement under the following headings is incorporated
herein by reference:
•
•
“Compensation Discussion and Analysis,”
“General Information Concerning the Board of Directors, Its Committees and the Company’s
Corporate Governance” and
•
“Compensation Committee Report.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information appearing in our 2017 Proxy Statement under the following heading is incorporated
herein by reference:
•
•
“Security Ownership of Certain Beneficial Owners and Management” and
“Compensation Discussion and Analysis.”
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information appearing in our 2017 Proxy Statement under the following headings is incorporated
herein by reference:
•
•
“Certain Relationships and Related Party Transactions” and
“General Information Concerning the Board of Directors, Its Committees and the Company’s
Corporate Governance.”
107
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information appearing in our 2017 Proxy Statement under the following heading is incorporated
herein by reference:
•
“Proposal 3—Ratification of Appointment of Independent Auditors.”
108
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
(1) Financial Statements. The financial statements listed in the “Index to Consolidated
Financial Statements” under Part II, Item 8. “Financial Statements and Supplementary
Data,” which index is incorporated herein by reference.
(2) Financial Statement Schedules. Financial statement schedules have been omitted because
either they are not applicable, not required or the information is included in the financial
statements or the notes thereto.
(3) Exhibits. The attached list of exhibits in the “Exhibit Index” immediately preceding
the exhibits to this Annual Report on Form 10-K, which index is incorporated herein
by reference.
109
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SIGNATURES
WESCO AIRCRAFT HOLDINGS, INC.
Dated: December 14, 2016
By:
/s/ David J. Castagnola
David J. Castagnola
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURE
TITLE
DATE
/s/ DAVID J. CASTAGNOLA
David J. Castagnola
President and Chief Executive Officer
and Director
December 14, 2016
/s/ RICHARD J. WELLER
Richard J. Weller
Executive Vice President and Chief Financial
Officer
December 14, 2016
110
Exhibit
Number
Exhibit Index
Description
2.1 Agreement and Plan of Merger, by and among Wesco Aircraft Holdings, Inc., Flyer
Acquisition Corp. and Haas Group Inc., dated as of January 30, 2014 (Incorporated by
reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated January 31,
2014 (File No. 001-35253))
3.1 Amended and Restated Certificate of Incorporation of Wesco Aircraft Holdings, Inc.
(Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
10-Q, dated August 17, 2011 (File No. 001-35253))
3.2 Amended and Restated Bylaws of Wesco Aircraft Holdings, Inc. (Incorporated by reference
to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q, dated August 17, 2011
(File No. 001-35253))
4.1 Form of Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant’s
Registration Statement on Form S-1/A dated June 6, 2011 (Registration No. 333-173381))
10.1 Credit Agreement, by and among Wesco Aircraft Holdings, Inc., Wesco Aircraft
Hardware Corp., Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities LLC, Morgan Stanley Senior Funding, Inc., RBC Capital Markets,
KeyBank National Association, Sumitomo Mitsui Banking Corporation, Union Bank, N.A.,
BBVA Compass Bank, PNC Bank, National Association, Raymond James Bank, N.A. and
the lenders party thereto, dated as of December 7, 2012 (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated February 8, 2013
(Registration No. 001-35253))
10.2 First Amendment to Credit Agreement, by and among Wesco Aircraft Holdings, Inc.,
Wesco Aircraft Hardware Corp., Barclays Bank PLC and the lenders party thereto, dated
February 28, 2014 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K dated February 28, 2014 (File No. 001-35253))
10.3 Third Amendment to Credit Agreement, by and among Wesco Aircraft Holdings, Inc.,
Wesco Aircraft Hardware Corp., Barclays Bank PLC, as administrative agent and collateral
agent, and the lenders party thereto, dated as of March 24, 2016 (Incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 24, 2016 (File
No. 001-35253))
10.4 Fourth Amendment to Credit Agreement by and among Wesco Aircraft Holdings, Inc.,
Wesco Aircraft Hardware Corp., the other subsidiaries party thereto, Barclays Bank PLC,
as administrative agent and collateral agent, and the lenders party thereto, dated as of
October 4, 2016 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K dated October 4, 2016 (File No. 001-35253))
10.5 Guarantee and Collateral Agreement, by and among Wesco Aircraft Holdings, Inc., Wesco
Aircraft Hardware Corp., Barclays Bank PLC and the subsidiary guarantors party thereto,
dated as of December 7, 2012 (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q dated February 8, 2013 (Registration No. 001-35253))
111
Exhibit
Number
Description
10.6 Employment Agreement between Wesco Aircraft Hardware Corp. and Todd Renehan,
dated as of January 30, 2014 (Incorporated by reference to Exhibit 10.12 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (File
No. 001-35253))
10.7 Executive Severance Agreement between Randy Snyder and Wesco Aircraft Hardware
Corp., dated May 8, 2014 (Incorporated by reference to Exhibit 10.15 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2014 (File
No. 001-35253))
10.8 Executive Severance Agreement between David J. Castagnola and Wesco Aircraft
Hardware Corp., dated April 6, 2015 (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated April 6, 2015 (File No. 001-35253))
10.9 Executive Severance Agreement between Richard J. Weller and Wesco Aircraft Hardware
Corp., dated April 23, 2015 (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K dated April 23, 2015 (File No. 001-35253))
10.10 Form of Executive Severance Agreement (Incorporated by reference to Exhibit 10.16 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014
(File No. 001-35253))
10.11 Amended and Restated Equity Incentive Plan of Wesco Aircraft Holdings, Inc. (formerly
Wesco Holdings, Inc.) (Incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-1 dated April 8, 2011 (Registration No. 333-173381))
10.12 Form of Incentive Stock Option Agreement under Amended and Restated Equity Incentive
Plan of Wesco Aircraft Holdings, Inc. (formerly Wesco Holdings, Inc.) (Incorporated by
reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1/A dated
May 12, 2011 (Registration No. 333-173381))
10.13 Form of Non-qualified Stock Option Agreement for Independent Directors under
Amended and Restated Equity Incentive Plan of Wesco Aircraft Holdings, Inc. (formerly
Wesco Holdings, Inc.) (Incorporated by reference to Exhibit 10.11 to the Registrant’s
Registration Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
10.14 Form of Amended and Restated Restricted Stock Unit Agreement under Amended
and Restated Equity Incentive Plan of Wesco Aircraft Holdings, Inc. (formerly Wesco
Holdings, Inc.) (Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration
Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
10.15 Form of Restricted Stock Agreement for Independent Directors under Amended and
Restated Equity Incentive Plan of Wesco Aircraft Holdings, Inc. (formerly Wesco
Holdings, Inc.) (Incorporated by reference to Exhibit 10.13 to the Registrant’s Registration
Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
112
Exhibit
Number
Description
10.16 Wesco Aircraft Holdings, Inc. 2011 Equity Incentive Award Plan (Incorporated by
reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1/A dated
June 27, 2011 (Registration No. 333- 173381))
10.17 Wesco Aircraft Holdings, Inc. 2014 Incentive Award Plan (Incorporated by reference to
Appendix A to the Registrant’s Definitive Proxy Statement dated December 18, 2014 (File
No. 001-35253))
10.18 Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.24 to the
Registrant’s Registration Statement on Form S-1/A dated June 27, 2011 (Registration
No. 333- 173381))
10.19 Form of Restricted Stock Unit Agreement (Incorporated by reference to Exhibit 10.25 to
the Registrant’s Registration Statement on Form S-1/A dated June 27, 2011 (Registration
No. 333-173381))
10.20 Form of Stock Option Agreement (Incorporated by reference to Exhibit 10.26 to the
Registrant’s Registration Statement on Form S-1/A dated June 27, 2011 (Registration
No. 333-173381))
10.21 Form of Performance Stock Unit Agreement (Incorporated by reference to Exhibit 10.27 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015
(File No. 001-35253))
10.22 Wesco Aircraft Holdings, Inc. Management Incentive Plan (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January 9, 2015 (File
No. 001-35253))
10.23 Amended and Restated Management Agreement between Wesco Aircraft Holdings, Inc.
and Carlyle Investment Management, L.L.C. (Incorporated by reference to Exhibit 10.14
to the Registrant’s Quarterly Report on Form 10-Q, dated August 17, 2011 (File
No. 001-35253))
10.24 Amended and Restated Stockholders Agreement of Wesco Aircraft Holdings, Inc.
(Incorporated by reference to Exhibit 10.20 to the Registrant’s Quarterly Report on
Form 10-Q, dated August 17, 2011 (File No. 001-35253))
10.25 Form of Wesco Aircraft Holdings, Inc. Indemnification Agreement (Incorporated by
reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1/A dated
June 6, 2011 (Registration No. 333- 173381))
10.26 Lease Agreement between Wesco Aircraft Hardware Corp. and Avenue Scott, LLC, dated
as of October 1, 2004 (Incorporated by reference to Exhibit 10.16 to the Registrant’s
Registration Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
10.27 Lease Agreement between Wesco Aircraft Hardware Corp. and WATX Properties, LLC,
dated as of January 1, 2004 (Incorporated by reference to Exhibit 10.17 to the Registrant’s
Registration Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
113
Exhibit
Number
Description
10.28 Lease Agreement between Wesco Aircraft Europe Ltd. and Snyder Family Living Trust,
dated as of January 1, 2006 (Incorporated by reference to Exhibit 10.18 to the Registrant’s
Registration Statement on Form S-1/A dated May 12, 2011 (Registration No. 333-173381))
21.1 List of Subsidiaries (Filed as Exhibit 21.1 to the Registrant’s Amendment No. 1 to Annual
Report on Form 10-K/A dated December 14, 2016 (File No. 001-35253))
23.1 Consent of Independent Registered Public Accounting Firm (Filed as Exhibit 23.1
to the Registrant’s Amendment No. 1 to Annual Report on Form 10-K/A dated
December 14, 2016 (File No. 001-35253))
31.1 Certification of Chief Executive Officer pursuant to Rule 13a- 14(a)/15d-14a and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.1 to the Registrant’s
Amendment No. 1 to Annual Report on Form 10-K/A dated December 14, 2016
(File No. 001-35253))
31.2 Certification of Chief Financial Officer pursuant to Rule 13a- 14(a)/15d-14a and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.2 to the Registrant’s
Amendment No. 1 to Annual Report on Form 10-K/A dated December 14, 2016
(File No. 001-35253))
32.1 Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Filed as Exhibit 32.1 to the Registrant’s Amendment No. 1 to Annual Report
on Form 10-K/A dated December 14, 2016 (File No. 001-35253))
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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Aftermarket
Pharmaceutical/Healthcare
Defense
Industrial
Transportation
Business Jet
Space
Energy
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ANNUAL MEETING
The 2017 Annual Meeting of Stockholders
will be held on Thursday, January 26, 2017,
at 1 p.m. Pacific Standard Time at the
Hyatt Regency Valencia
24500 Town Center Drive
Valencia, CA 91355
INVESTOR RELATIONS
Wesco Aircraft Holdings, Inc.
Attention: Jeff Misakian
24911 Avenue Stanford
Valencia, CA 91355
Telephone: (661) 775-7200
DIRECTORS
Randy J. Snyder
Chairman of the Board
Wesco Aircraft Holdings, Inc.
Dayne A. Baird (2, 4)
Principal
The Carlyle Group
Thomas M. Bancroft III (3, 4)
Managing Member, Portfolio Manager
and Chief Investment Officer
Makaira Partners LLC
David J. Castagnola
President and Chief Executive Officer
Wesco Aircraft Holdings, Inc.
STOCK LISTING
Wesco Aircraft common shares are listed on the
New York Stock Exchange under the ticker symbol
“WAIR.”
Paul E. Fulchino (2)
Former Chairman, President
and Chief Executive Officer
Aviall, Inc.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Telephone: (800) 937-5449
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
601 South Figueroa Street
Los Angeles, CA 90017
Telephone: (213) 356-6000
Jay L. Haberland (1, 4)
Former Vice President of Business Controls
United Technologies Corporation
Scott E. Kuechle (1, 4)
Former Executive Vice President
and Chief Financial Officer
Goodrich Corporation
Adam J. Palmer (3)
Managing Director
The Carlyle Group
Robert D. Paulson (1)
Chief Executive Officer
Aerostar Capital LLC
Jennifer M. Pollino (2)
Executive Coach and Consultant
JMPollino, LLC
Former Executive Vice President –
Human Resources and Communications
Goodrich Corporation
Norton A. Schwartz (3)
President and Chief Executive Officer
Business Executives for National Security
General, USAF (Ret)
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Corporate
Governance Committee Member
(4) Finance Committee Member
EXECUTIVE OFFICERS
Dave Castagnola
President and Chief Executive Officer
Rick Weller
Executive Vice President and
Chief Financial Officer
Alex Murray
Executive Vice President and
Chief Operations Officer
Todd Renehan
Executive Vice President and Chief
Commercial Officer
Dan Snow
Executive Vice President and
Chief Supply Chain Officer
Wesco Aircraft Holdings, Inc.
24911 Avenue Stanford
Valencia, CA 91355
wescoair.com
© 2016 Wesco Aircraft Holdings, Inc.