Wesco Aircraft
Annual Report 2017

Plain-text annual report

Annual ReportFISCAL YEAR 2017Wesco Aircraft Holdings, Inc. 24911 Avenue Stanford Valencia, CA 91355WESCO AIRCRAFT ANNUAL REPORT 2017wescoair.com © 2017 Wesco Aircraft Holdings, Inc. ANNUAL MEETINGThe 2018 Annual Meeting of Stockholders will be held on Thursday, January 25, 2018, at 1 p.m. Pacific Standard Time at the Hyatt Regency Valencia 24500 Town Center Drive Valencia, CA 91355INVESTOR RELATIONSWesco Aircraft Holdings, Inc. Attention: Jeff Misakian 24911 Avenue Stanford Valencia, CA 91355 Telephone: (661) 775-7200STOCK LISTINGWesco Aircraft common shares are listed on the New York Stock Exchange under the ticker symbol “WAIR.”TRANSFER AGENT AND REGISTRARAmerican Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 Telephone: (800) 937-5449INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPricewaterhouseCoopers LLP 601 South Figueroa Street Los Angeles, CA 90017 Telephone: (213) 356-6000DIRECTORSRandy J. Snyder Chairman of the Board Wesco Aircraft Holdings, Inc.Dayne A. Baird (2, 4) Principal The Carlyle GroupThomas M. Bancroft III (3, 4) Managing Member, Portfolio Manager and Chief Investment Officer Makaira Partners LLCPaul E. Fulchino (2) Operating Partner AE Industrial Partners Former Chairman, President and Chief Executive Officer Aviall, Inc.Jay L. Haberland (1, 4) Former Vice President of Business Controls United Technologies CorporationScott E. Kuechle (1, 4) Former Executive Vice President and Chief Financial Officer Goodrich CorporationAdam J. Palmer (3) Managing Director The Carlyle GroupRobert D. Paulson (1) Chief Executive Officer Aerostar Capital LLCJennifer M. Pollino (2) Executive Coach and Consultant JMPollino, LLCFormer Executive Vice President – Human Resources and Communications Goodrich CorporationTodd Renehan Chief Executive Officer Wesco Aircraft Holdings, Inc.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 MemberEXECUTIVE OFFICERSTodd Renehan Chief Executive Officer Alex Murray President and Chief Operating OfficerKerry Shiba Executive Vice President and Chief Financial OfficerDeclan Grant Executive Vice President Global Strategic Sales Corporate InformationCommercialDefenseBusiness JetAftermarketIndustrialSpacePharmaceutical/HealthcareTransportationEnergy Markets ServedWHO WE AREBROAD PRODUCT OFFERING AND SERVICE CAPABILITIESWesco Aircraft’s full-service approach aligns to the evolving needs of our customers. We offer a comprehensive range of cost-saving innovations by combining our vast breadth of products with our value-add supply chain services, allowing our customers to focus on their core competencies.VALUE PROPOSITIONOur 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.ChemicalsMachined Parts and ToolingChemical Management Services (CMS)KittingWesco Aircraft is one of the world’s leading distributors and providers of comprehensive supply chain management services to the global aerospace industry. The company’s services range from traditional distribution to the management of supplier relationships, quality assurance, kitting, just-in-time delivery, chemical management services, third-party logistics or fourth-party logistics and point-of-use inventory management.SuppliersCustomersSupplier BenefitsCustomer BenefitsReduced finished goods inventoryPrice disciplineImproved working capital and cash flowAccess to more than 7,000 customersLower administrative and selling costsImproved on-time performanceImproved machine utilizationLower SG&AReduced working capitalLower excess and obsolescence expenseImproved productivitySupply base consolidation Substantial improvement in part quality Better on-time deliveryFewer stock shortagesLower average lead-timeElectronic ComponentsHardwareBearingsQuality Assurance3PL/4PL ServicesJust-in-Time (JIT) Management November 28, 2017Dear Shareholders, I don’t think anyone would disagree that fiscal 2017 was a challenging year for Wesco. When I was asked to step into this role last May, our business was not performing to expectations. Wesco had become too inwardly focused, making short-term decisions that hurt our relationships with customers and our financial performance. As one shareholder observed, our goals were in the wrong order; we had placed financial results ahead of supporting the customer – and achieved neither in the process. To right the ship, we quickly engaged in activities that would help us better understand our execution issues and formulate a plan to address them. We renewed our “customer-first” culture to ensure that Wesco would return to the world-class service for which we were known. We also invested in inventory and people to improve service levels.I personally met with our top customers and suppliers, rebuilding partnerships and restoring relationships, as well as our employees to encourage engagement, alignment and accountability. We also reorganized to speed decision-making and bring us closer to the customer.We then developed a long-term improvement plan with initiatives to drive better performance. Our plan is grounded in four principal focus areas: profitable growth and improved margins; procurement and inventory management; customer service and on-time delivery; and greater efficiency and reduced costs.In the first area, our initiatives led to a significant increase in ad-hoc bookings in the second half of fiscal 2017 compared to the first half of the year. The same customers I met with earlier in the year are telling me now that it’s nice to see Wesco back – and giving us more business as a result. In addition, our focus on winning new business, streamlining implementations and improving service has helped us mitigate volume declines in existing agreements and deliver better performance in long-term contracts. At the same time, we’re actively managing inventory, aggregating demand, accelerating remaining long-term purchase agreements and instilling greater discipline in our buying processes to lower cost and improve margins. We invested in inventory during the year to capitalize on price breaks, while providing more parts where they are needed, and to support new business. In customer service and on-time delivery, we implemented new operational processes and metrics in our largest warehouse, while reducing overtime and total labor cost per transaction. As a result, we have seen on-time delivery rates return to levels customers previously enjoyed with Wesco. These new processes are being rolled out now to all major warehouse sites, and because of their success, we are expanding their scope to include procurement and sales operations.Through the execution of these initiatives, we believe we have stabilized our business from an operational perspective. We are seeing positive trends emerge and a recovery in key leading indicators. More importantly, we’re changing the way we think about the business, where our people, culture, customers and suppliers rank just as high as achieving financial performance. I’m a firm believer that a fully engaged workforce will deliver superior customer service, which will lead to better financial performance.It all starts with a Vision of generating value for our people, customers, suppliers and shareholders and delivering the best customer experience in everything we do, every day we come to work. We advance this Vision through Values that define who we are as an organization – Values that include people, teamwork, ethics, engagement, accountability, open communications, customer focus, quality, safety, a bias for action and achieving results. Our long-term Goals are to work as a highly engaged team; to advance a culture based on our Values; to be the customer’s first choice and the supplier’s preferred partner; to lead with innovation and execution; and to deliver profitable growth that’s above the market. We’ve rebuilt Wesco’s foundation on people and customers; we now need to turn our attention to driving greater efficiency and reducing our cost structure. I’m not satisfied with our progress in these areas.To accelerate the process and deliver more tangible financial improvement, we initiated a comprehensive business review. Although work has just begun, we expect the review to further clarify our potential to improve the business and result in even better service for our customers, a lower cost structure and greater shareholder value. While I acknowledge the lack of progress made in our share price, our focus is on improving the long-term fundamentals of our business. I also know that we’ve talked about turning around the business for years and patience might be wearing thin. While we still have a lot more work to do, I’m encouraged by our operational progress. We’re seeing improvements in certain metrics for the first time in several quarters, and this builds confidence in our future. We expect this trend to continue in fiscal 2018 as we work across multiple fronts to achieve better financial performance. I’d like to thank our dedicated employees, strong and diverse customers, valuable supplier partners and shareholders. I believe we have a great future ahead of us and a value proposition that is unmatched in the industry. Through a relentless focus on generating value in everything we do, I’m confident we will succeed in the years ahead. Sincerely,Todd Renehan Chief Executive Officer FINANCIAL SUMMARYFINANCIAL HIGHLIGHTSFiscal Years Ended September 30,($ in thousands, except per share data)201720162015Net sales $1,429,429 $1,477,366 $1,497,615 (Loss) income from operations (208,795) 158,750 (206,365)Interest expense, net 39,821 36,90137,092Net (loss) income (237,346) 91,378 (154,744)Diluted net (loss) income per share(2.40) 0.93 (1.60)Cash and cash equivalents$ 61,625 $ 77,061 $ 82,866 Accounts receivable 256,301 249,195 253,348 Net inventory 827,870 713,470 701,535 Total assets 1,754,107 1,948,578 2,020,973 Accounts payable 184,273 181,700 149,615 Long-term debt and capital lease obligations (1) (2) 790,851 835,989954,730Total stockholders’ equity 649,731 882,915 817,573 Notes:(1) Total long-term debt and capital lease obligations excludes current portion. (2) Total long-term debt was reduced by deferred debt issuance costs of $11.7 million and $7.6 million as of September 30, 2017 and 2016, respectively, as required by ASU 2015-03 which we adopted on October 1, 2016. Total long-term debt was not retroactively recast to include deferred debt issuance costs as of September 30, 2015. NORTH AMERICASOUTH AMERICAAFRICAEUROPEMIDDLE EASTASIAAUSTRALIA GLOBAL PRESENCEExpanding to support customers worldwide 58 Locations | 17 Countries | 2,900+ Employees | 565,000+ SKUsAMERICASSales/AdministrationValencia, CAOrlando, FLMelville, NYWest Chester, PAAustin, TXSanta Fe, Argentina Saltillo, MexicoCentral Stocking Locations Valencia, CARancho Cordova, CATempe, AZMcDonough, GAMiami, FLWichita, KSAmesbury, MABerkeley, MOGreenville, NCMississauga, ONMechanicsburg, PAAustin, TXNorthlake, TXChihuahua, MXForward Stocking Locations Decatur, ALFoley, ALSavannah, GAAustin, TXFort Worth, TXAuburn, WALachine, QCQueretaro, MXEMEA / APACSales/AdministrationHuddersfield, UKCleckheaton, UKBremen, GermanyYokneam Elite, IsraelMarcon, ItalyShanghai, ChinaSingaporeCentral Stocking LocationsHuddersfield, UK Crawley, UKGlasgow, UKLinlithgow, UKHamburg, GermanyShannon, IrelandMielec, PolandForward Stocking LocationsAberdeen, UKCheltenham, UKHuddersfield, UKToulouse, FranceAkko, IsraelRome, ItalyMelbourne, AustraliaChengdu, ChinaPudong, China Shanghai, ChinaBangalore, India Pune, IndiaBaguio City, PhilippinesSingaporeIstanbul, TurkeyUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K For the fiscal year ended September 30, 2017 or □ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Common Stock, par value $0.001 per share Name of Each Exchange on Which Registered 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 ☒ No □ 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 □ No ☒ 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 ☒ No □ 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 ☒ No □ 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. □ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☒ □ (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Emerging growth company □ □ □ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No ☒ As of March 31, 2017, the aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing price as of that day was approximately $768,292,000. The number of shares of common stock (par value $0.001 per share) of the registrant outstanding as of November 21, 2017, was 99,433,767. 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 2018 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, 2017. 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. TABLE OF CONTENTS Part I Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . Item 9. Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Item 12. Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Part IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4 13 26 26 27 27 28 30 31 53 56 94 94 94 95 95 95 95 95 96 96 97 98 CERTAIN DEFINITIONS 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 EMEA, Ltd. (Wesco Aircraft EMEA), which succeeded Wesco Aircraft Europe, Ltd. (Wesco Aircraft Europe) as our primary foreign operating company. References to ‘‘fiscal year’’ mean the year ending or ended September 30. For example, ‘‘fiscal year 2017’’ or ‘‘fiscal 2017’’ means the period from October 1, 2016 to September 30, 2017. 1 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, excess and obsolete inventory and valuation allowance of our deferred tax assets) and legal proceedings; changes in U.S. tax law; our dependence on third-party package delivery companies; fuel price risks; fluctuations in our financial results from period-to-period; 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. 2 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. 3 ITEM 1. BUSINESS Company Overview We are one of the world’s leading distributors and providers of comprehensive supply chain management services to the global aerospace industry, based on annual sales. Our services range from traditional distribution to the management of supplier relationships, quality assurance, kitting, just-in-time (JIT) delivery, chemical management services (CMS), third-party logistics (3PL) or fourth-party logistics (4PL) programs 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 2017, sales of hardware including bearings and other products represented 50.9% of our net sales, sales of chemicals represented 42.1% of our net sales and sales of electronic components represented 7.0% 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 (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 7,000 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 customers in the automotive, energy, health care, industrial, pharmaceutical and space sectors. We have 2,978 employees and operate across 58 locations in 17 countries. The following charts illustrate the composition of our fiscal year 2017 net sales based on our sales data. Sales Mix Customer Type End Use Contract 76% US Government 16% Airline/ MRO 6% Distributors 5% Commercial 56% Ad hoc 24% OEM and Contractors 73% Military 44% 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. 4 Our Products and Services During the three months ended September 30, 2017, we reorganized our businesses under three geographic-based segments: the Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific (APAC). Following this reorganization, our CEO and our President began reviewing the Company’s results on this basis for purposes of allocating resources and assessing performance. Each segment’s results reflect the results of our subsidiaries within that geographic region. Revenues reported by a segment reflect the customer contracts held by that segment, regardless of the geographic location of that customer. Some segments incur expenses for the benefit of the group or other segments, however these expenses are not allocated. We now present corporate expenses related to public company reporting costs and other costs that would not be required by the segments if they were operating on a standalone basis as unallocated corporate costs. We have retroactively recast our segment results under this new segment structure for the years ended September 30, 2017, 2016 and 2015. Following is our revenue by segment for the years ended September 30, 2017, 2016 and 2015 (dollars in thousands). 2017 Years Ended September 30, 2016 2015 Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue Americas . . . . . . . . . . . . . . . . EMEA . . . . . . . . . . . . . . . . . . APAC . . . . . . . . . . . . . . . . . . $1,142,366 258,072 28,991 79.9% $1,177,496 274,952 18.1% 24,918 2.0% 79.7% $1,191,928 288,276 18.6% 17,411 1.7% Total . . . . . . . . . . . . . . . . . . . $1,429,429 100% $1,477,366 100% $1,497,615 79.6% 19.2% 1.2% 100% Our Products We offer more than 565,000 active SKUs, which fall into the following product categories during the year ended September 30, 2017 (dollars in thousands): Hardware $665,224 Chemicals $602,039 Electronic Components $100,160 Bearings $34,566 Machined Parts and Tooling $27,440 Net product sales . . . % of net product sales . . . . . . . . . . . 46.5% 42.1% 7.0% 2.4% 1.9% Types of products offered . . . . . . . . . . • Adhesives Sealants • Blind fasteners • Panel fasteners • Bolts and screws • Clamps • Hi lok pins and • collars • Hydraulic fittings • Coolants and • Inserts • Lockbolts and and tapes • Lubricants • Oil and grease • Paints and coatings • Industrial gases • Cleaners and metalworking fluids cleaning solvents collars • Nuts • Rivets • Springs • Valves • Washers • Airframe control • Brackets • Connectors • Relays bearings • Switches • Rod ends • Circuit breakers • Spherical • Lighted products Bearings • Ball bearing • Wire and cable • Needle roller • Interconnect bearings accessories • Bushings • Precision bearings • Milled parts • Shims • Stampings • Turned parts • Welded assemblies • Installation/ removal tooling Hardware Sales of C-class aerospace hardware represented 47%, 48% and 49% of our fiscal 2017, 2016 and 2015 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 5 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. Chemicals Chemical sales represented 42%, 41% and 40% of our fiscal 2017, 2016 and 2015 product sales, respectively. 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. Machined Parts and Tooling 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 and removal 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, JIT supply chain management, CMS and 3PL/4PL programs for our customers. Quality Assurance Our quality assurance (QA) function is a key component of our service offering, with approximately 6% 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 0.14% during fiscal 2017, to our rejection rate of the products we receive from our suppliers, which was 3.46% during fiscal 2017. 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. 6 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 and CMS JIT supply chain management, which includes CMS, 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 for other SKU’s. As part of our JIT programs, we generally assume custody of 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 perpetual inventory system 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 7,000 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 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 indicators are used to trigger the replenishment of product, with all replenishment activity done via hand-held scanners that transmit orders to our stocking locations. In certain circumstances, we also provide our JIT and CMS customers with additional value-added services, including the implementation of process control and usage reduction programs; safety data-sheet management, support for environmental, health and safety compliance (EHS) and reporting; and assistance with the development of waste management strategies. Customers are also increasingly seeking 3PL or 4PL arrangements to optimize supply chain management by outsourcing either specific logistics and distribution functions or their entire logistics function to a service provider like us. Aftermarket Sales We sell products to airline-affiliated, OEM-affiliated and independent MRO providers on both a Contract and ad hoc basis. We have expanded our efforts to increase our presence in both the commercial and military aerospace MRO markets, particularly as a result of our acquisition of Haas in 2014 and through 7 the introduction of our Wesco e-commerce sales platform, which we believe provides us with a cost-effective way to further penetrate the aftermarket. 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 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, which include CMS 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 as 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 and often provide for us to be reimbursed for the cost of any inventory specifically procured 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 and often provide that we are reimbursed for the cost of any inventory specifically procured for the customer or inventory that is not commonly sold to other customers. LTA customers also frequently purchase products from us on an ad hoc basis, which are not captured under the contractual pricing arrangement. Ad Hoc Sales Ad hoc sales represent products purchased 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 and oftentimes relatively long supplier lead-times, 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 8 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 sales 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 7,000 active customers worldwide. During fiscal 2017, Lockheed Martin represented nearly 11% of our total net sales, consisting of multiple contracts across multiple independent programs such that no individual contract is material. Our top 10 customers collectively accounted for 48% of our total net sales during fiscal 2017. During fiscal 2017, 73% 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 many of their subcontractors. Government sales comprised 16% of our net sales during fiscal 2017 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 2017 net sales. The remaining 5% of our net sales were to other distributors. During fiscal 2017, 56% of our net sales were derived from customers supporting commercial programs and 44% 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 Amphenol, Arconic, Consolidated Aerospace Manufacturing (CAM), Esterline, Henkel, Lisi Aerospace, PPG Industries, Precision Castparts Corp., RBC Bearings, and TriMas. During fiscal 2017, Precision Castparts Corp. and Arconic supplied 13% and 9%, 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 production efficiency; 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 our size 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 and close 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 9 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 organizations 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 quantities, stocking locations and purchases across our customer base by individual inventory item, enabling us to accurately fill an average of 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, in certain cases directly into our customers’ manufacturing process. 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 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 quarterly 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 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 capability. Under these circumstances, we may be unable to sufficiently reduce our costs to provide competitive pricing while also maintaining acceptable operating margins. Employees As of September 30, 2017, we employed 2,978 personnel worldwide, 1,027 of whom were located at customer sites. We have 861 employees located outside of North America. We are not a party to any collective bargaining agreements with our employees. 10 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 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 reset the current TSCA Inventory to identify commercially ‘‘active’’ chemicals, a process expected to result in potentially significant compliance obligations for the Company and our customers and suppliers who manufacture, process and import chemicals. These types 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 11 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. 12 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 aerospace industry or the U.S. or global economy were to experience 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, changes in corporate spending patterns 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, 2017, 44% 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 currently scheduled to resume in the government’s 2018 fiscal year. We are unable to predict the impact that 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. 13 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, revoke required security clearance, 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, and often provide 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 if 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 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. 14 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, 2017 accounted for 48% 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 have incorporated a higher proportion of composite materials in some of 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. To the extent 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. Our future growth will be dependent, in part, upon our sales to various OEMs and subcontractors as related to such programs. 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. 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 our ability to compete depends on superior customer service and support, on-time delivery, sufficient inventory availability, competitive pricing and effective quality assurance programs. 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 switches 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 level. For 15 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 had no alternative use, and we recorded a provision to write-down such inventory by of $33.0 million. If suppliers are unable to supply us with the products we sell in a timely manner, inadequate 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 suppliers for the year ended September 30, 2017 were Precision Castparts Corp. and Arconic. During fiscal 2017, 13% of the products we purchased were from Precision Castparts Corp. and 9% were purchased from Arconic. In addition, our ten largest suppliers during fiscal 2017 accounted for 42% 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 manufacturing capacity, labor shortages and changes in raw material flows. Any significant interruption in 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. In addition, system improvements and other IT-related upgrades could require us to accelerate the depreciation of certain assets, which could have a material adverse effect on our operating results. Our competitors may have or may develop IT systems that permit them to be more cost effective and otherwise better able to meet customer demands than we are able to with 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. 16 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, 2017 and 2016, 35% and 35%, 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; 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 due to 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, 2017, we reported a cumulative foreign currency translation adjustment of $82.5 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 2017 and 2016, fluctuations in foreign currency translation had a negative impact on net sales of $22.9 million and $30.2 million, respectively. 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 17 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, and trade sanctions, regulations and embargoes administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control. 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. 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. 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. 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, 2017, goodwill and intangible assets, net represented 25.4% 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 June 30, 2017, we recorded a non-cash goodwill impairment of $240.6 million for our North America Hardware reporting unit and $70.5 million for our North America Chemical reporting unit, for a total impairment charge of $311.1 million. Any future 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. For additional information, see ‘‘Part II, Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Goodwill and Indefinite-Lived Intangible Assets.’’ Changes in U.S. tax law may have a material adverse effect on our business, financial condition and results of operation. The current administration and members of the U.S. Congress are currently pursuing reform of the U.S. tax system, which would include reduced U.S. corporate tax rates, changes to the taxation of international earnings for U.S. multinational corporations and the elimination, in whole or in part, of the deduction for net interest expense. While we are unable to predict which, if any, of these proposed tax reforms will be enacted 18 into law, and what effects any enacted legislation will have on our liability for U.S. corporate tax, we believe these potential changes could have a material adverse effect on our business, financial condition and results of operation. However, we do believe that a reduction in the U.S. corporate tax rate would result in a write down of a portion of our net U.S. deferred tax assets, the impact of which could be material. In addition, given our current level of interest expense payments, we believe that a limitation on the deductibility of net interest expense could result in a material increase in our U.S. corporate tax liabilities and effective tax rate. 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. We or our suppliers or 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. 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 19 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, 2017, 24% 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, customers may not continue to purchase the same amount of products from us on an ad hoc basic as they have in the past, so it cannot be assured that in any given year we will be able to generate similar levels of ad hoc net sales 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 our ad hoc net sales. In addition, our acquisition of Haas has contributed to lower our ad hoc sales as a percentage of total 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 significant costs as a result of operating as a publicly traded company, and our management is required to devote substantial time to public company 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 compared to a private company 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 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 20 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 reset the current TSCA Inventory to identify commercially ‘‘active’’ chemicals, a process expected to result in potentially significant compliance obligations for the Company and our customers and suppliers who manufacture, process and import chemicals. These types 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, 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 21 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 due to 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 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 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. Economics related to acquisitions including valuation, purchase price, synergies and competitive advantage may rely on our ability to efficiently integrate an acquired business with our existing enterprise, which we may not be able to execute successfully. 22 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 terms of the withdrawal are subject to a negotiation period that could last until or beyond March 2019, two years after the government of the United Kingdom formally initiated the withdrawal process in March 2017. This 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 a 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 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, 2017, our total 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 $875.6 million, which was 57.4% of our total capitalization. In addition, we may incur substantial additional indebtedness in the future. Our Credit Facilities contain certain 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. 23 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, 2017, we had a current interest rate hedge liability and a long-term interest rate hedge liability of $2.5 million and $0.9 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 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; • make investments; • sell assets; • • • • • • • • • enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us; incur or allow 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 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 24 Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities—Sixth 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. 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 significantly impacted 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. 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 25 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 record 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 stockholders; provide that our Board of Directors is expressly authorized to amend, 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 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, which could result in us taking 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 our Company 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, 2017, we had 950,000,000 shares of common stock authorized and 99,450,902 shares of common stock outstanding. In addition, we have 2,001,044 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2017 and 3,457,947 available shares of common stock reserved for issuance under the Wesco Aircraft Holdings, Inc. 2014 Incentive Award Plan (the 2014 Plan). 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, 2017, we have a total of 58 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 26 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. 27 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. 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 2017 4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2016 4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $11.25 $12.45 $15.30 $15.55 $14.43 $15.00 $14.41 $13.38 $ 7.05 $ 8.25 $11.15 $12.40 $12.68 $12.64 $10.19 $11.44 Stockholders As of November 21, 2017, we had approximately 77 holders of record of our common stock and the closing price reported on the New York Stock Exchange of our common stock was $8.00 per share. 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. Issuer Purchases of Equity Securities During the quarter ended September 30, 2017, we repurchased 74,758 shares of common stock in connection with shares surrendered to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted stock awards under the 2014 Plan. We expended approximately $703,000 to repurchase these shares. Period July 1, 2017 - July 31, 2017 . . . . . . . . . . . . . . . . . . . . . August 1, 2017 - August 31, 2017 . . . . . . . . . . . . . . . September 1, 2017 - September 30, 2017 . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs — — — — Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) — $ — — — $ Total Number of Shares Purchased — — 74,758 74,758 Average Price Paid per Share $ — — 9.40 $9.40 28 Performance The graph set forth below compares the cumulative total shareholder return on our common stock between September 30, 2012 and September 30, 2017 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 (Esterline Technologies Corporation (ESL), Fastenal 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, 2012, 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. ASSUMES $100 INVESTED ON SEP. 30, 2012 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING SEP. 30, 2017 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 2012 2013 2014 2015 2016 2017 Wesco Aircraft Holdings, Inc. NYSE Stock Market (US Companies) Peer Group Company/Market/Peer Group 9/30/2012 9/30/2013 9/30/2014 9/30/2015 9/30/2016 9/30/2017 Wesco Aircraft Holdings, Inc. . . . . . . . . . . . . . . . New York Stock Exchange (U.S. Companies) . . Peer Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 100.00 100.00 $153.22 121.53 127.85 $127.38 141.26 135.22 $ 89.31 135.88 121.44 $ 98.32 155.46 145.54 $ 68.81 181.09 156.94 29 ITEM 6. SELECTED FINANCIAL DATA The selected income statement and other data for each of the years ended September 30, 2017, 2016 and 2015 and the selected balance sheet data as of September 30, 2017 and 2016 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, 2014, and 2013 and the selected balance sheet data as of September 30, 2015, 2014 and 2013 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. 2017 Years Ended September 30, 2014 2015 2016 (in thousands except per share data) 2013 Consolidated statements of income data: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,429,429 $1,477,366 $1,497,615 $1,355,877 $ 901,608 (Loss) income from operations. . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . Other income (expense), net. . . . . . . . . . . . $ (208,795) $ 158,750 (36,901) 3,741 (39,821) 369 $ (206,365) $ 183,934 (29,225) 2,199 (37,092) 1,841 $ 180,802 (25,178) 2,003 (Loss) income before income taxes . . . . . . Income tax benefit (provision) . . . . . . . . . . (248,247) 10,901 125,590 (34,212) (241,616) 86,872 156,908 (54,806) 157,627 (52,815) Net (loss) income . . . . . . . . . . . . . . . . . . . . . $ (237,346) $ 91,378 $ (154,744) $ 102,102 $ 104,812 Per share data: Net (loss) income per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (2.40) $ (2.40) $ 0.94 0.93 $ $ (1.60) $ (1.60) $ 1.06 1.05 $ $ 1.12 1.09 Weighted average shares outstanding Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,701 98,701 97,634 98,166 96,955 96,955 95,951 97,606 93,285 95,844 Consolidated Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . Total assets (1) (4) . . . . . . . . . . . . . . . . . . . . Long-term debt and capital lease obligations (2) (3). . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . $ 61,625 1,754,107 $ 77,061 1,948,578 $ 82,866 2,020,973 $ 104,775 2,412,274 $ 78,716 1,631,153 790,851 649,731 835,989 882,915 954,730 817,573 1,081,825 992,290 569,414 865,436 (1) We acquired Haas in February 2014. (2) Total long-term debt and capital lease obligations excludes current portion. (3) Total long-term debt related to term loan A and term loan B as of September 30, 2017 and 2016 was reduced by deferred debt issuance costs of $11.7 million and $7.6 million, respectively, as required by ASC 2015-03 which we adopted on October 1, 2016. Total long-term debt was not retroactively recast to include deferred debt issuance costs as of September 30, 2015, 2014 and 2013. (4) Total assets as of September 30, 2016 was retroactively recast to reflect the reclassification of $7.6 million of deferred debt issuance costs related to term loan A and term loan B from long-term assets to long-term debt as required by ASC 2015-03. Total assets was not retroactively recast to exclude deferred debt issuance costs as of September 30, 2015, 2014 and 2013. 30 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. Nevertheless, 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, changes in corporate spending patterns 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. 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. 31 Other Factors Affecting Our Financial Results Fluctuations in Revenue There are many factors, such as changes in customer aircraft build rates, customer plant shut downs, variation in customer working days, changes in selling prices, the amount of new customers’ consigned inventory and increases or decreases in customer inventory levels, 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. Ad hoc business tends to vary based on the amount of disruption in the market due to changes in aircraft build rates, new aircraft introduction, customer or site consolidations, and other factors. Fluctuations in our ad hoc business tend to be partially offset by our Contract business as most of our ad hoc revenue comes from our Contract customers. We will continue our strategy of seeking to expand our relationships with existing ad hoc 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. New Contract customers and expansion of existing Contract customers to additional sites and SKUs sometimes leads to a corresponding decrease in ad hoc sales as a portion of the SKUs sold under Contracts were previously sold to the same customer as ad hoc sales. We believe this strategy serves to mitigate some of the fluctuations in our net sales. 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 greater than we expected. 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. Fluctuations in Margins Our gross margins are impacted by changes in product mix. Generally, our hardware products have higher gross profit margins than chemicals and electronic components. 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. Some of our Contracts are denominated in foreign currencies and fixed prices in these Contracts can expose us to fluctuations in foreign currency exchange rates with the U.S. dollar. Fluctuations in Cash Flow Our cash flows are affected by fluctuations in our inventory. When we are awarded new programs, we generally increase our inventory to prepare for expected sales related to the new programs, which often take time to materialize, and to achieve minimum stock requirements, if any. 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 32 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 within the quarter and variation in the time required to collect the payments. 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 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. Prior to the three months ended September 30, 2017, we were organized on a global functional basis and we had two reportable segments, which were the North America segment and the Rest of World segment. Revenues were allocated based on the sales region responsible for the customer relationship. All corporate and other expenses benefiting both segments were reported in the segment that incurred the expenses, primarily North Americas. During the three months ended September 30, 2017, we reorganized our businesses under three geographic-based segments: the Americas, EMEA and APAC. Our CODM began reviewing segment results on this basis for purposes of allocating resources and assessing performance. Each segment’s results reflect the results of our subsidiaries within that geographic region. Revenues reported by a segment reflect the customer contracts held by that segment, regardless of the geographic location of that customer. Some segments incur expenses for the benefit of the group or other segments, however these expenses are not allocated. We now present corporate expenses related to public company reporting costs and other costs that would not be required by the segments if they were operating on a standalone basis as unallocated corporate costs. We have retroactively recast our segment results and unallocated corporate expenses for the years ended September 30, 2017, 2016 and 2015. 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 an effort to better align our workforce to the growth areas of our business and to streamline our operations to increase efficiency and effectiveness. For the year ended September 30, 2016, total cost savings in 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 Americas segment and $4.5 million impacted the EMEA segment. For more information on our Global Restructuring Plan, see Note 4 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. 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. 33 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, CMS, 3PL or 4PL programs 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 Contracts, which include JIT contracts and LTAs, and with ad hoc sales. Under JIT contracts, customers typically commit to purchase specified products from us at a fixed price, on an as needed basis, and we are responsible for maintaining 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 purchases are made by customers on an as-needed basis and are generally supplied out of our existing inventory. Contract customers often purchase products that are not captured under their Contract on an ad hoc basis. (Loss) Income from Operations (Loss) or 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 94.4% of our total cost of sales for the year ended September 30, 2017. The remaining components are freight and expediting fees, import duties, tooling repair charges, packaging supplies and physical inventory adjustment charges, which collectively were 5.6% of our total cost of sales for the year ended September 30, 2017. 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 provision, if any, for excess and obsolete inventory (‘‘E&O’’). The inventory provision is calculated to write-down the value of excess and obsolete inventory to its net realizable value. We review inventory for excess quantities and obsolescence quarterly. For a description of our E&O provision policy, see ‘‘—Critical Accounting Policies and Estimates—Inventories.’’ Charges to cost of sales for the E&O provision and related items of $12.9 million, $14.6 million and $95.1 million were recorded during the years ended September 30, 2017, 2016 and 2015, respectively. We believe that these amounts appropriately reflect the risk of E&O inventory inherent in our business and the proper net valuation of inventories. The larger charges of $95.1 million recorded in the year ended September 30, 2015 as compared to the year ended September 30, 2017 and 2016 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 provision for our hardware inventory from an aging based methodology to a consumption based methodology (totaling $43.8 million), see ‘‘—Change in Estimate—Inventory E&O provision.’’ For a more detailed description of the E&O provision, 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. 34 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—Sixth Amendment to Senior Secured Credit Facilities’’) and our line-of-credit and deferred debt issuance 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. 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 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. We evaluate our estimates and judgments on an on-going basis and may revise our estimates and judgments as circumstances change. Actual results may materially differ from what we anticipate, and different assumptions or estimates about the future could materially 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 charge cost of sales for inventory provisions to write down our inventory to the lower of cost or estimated market value or to write-down E&O inventory to its estimated net realizable value. Most of our inventory provisions relate to the write-down of excess quantities of products, based on our inventory levels compared to assumptions about future demand and market conditions. Once inventory has been 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 our having excess quantities than risk of becoming obsolete due to spoilage. 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 write-down 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. Charges to cost of sales for E&O provisions and related items were $12.9 million, $14.6 million and $95.1 million in the years ended September 30, 2017, 2016 and 2015, respectively. We believe that these amounts appropriately reflect the valuation risk of E&O inventory inherent in our business. 35 The following table provides a summary of the Company’s E&O inventory provision for the years ended September 30, 2017, 2016 and 2015 (in thousands). E&O provision from normal course of business . . . . . . . . . . . . . . . . . . . . . . Strategy change (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory for specific program (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net E&O expense recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 12,900 — — 12,900 2016 14,615 — — 14,615 2015 18,208 43,844 33,000 95,052 (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. 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 emphasis 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 provision estimate, reflecting the new strategy shift to hold inventory at lower quantity levels. This estimate is performed at the individual SKU level, and a shorter sales forecast period than was previously applied before the strategy change resulted in an increase in provision of $43.8 million. (2) During the quarter ended September 30, 2015, we wrote off $33.0 million of inventory related to the termination of a contract specific to 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. Due to this notification, our management assessed the need for an E&O provision 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. 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. As a result of our operating segment realignment discussed in Note 21 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, the 36 composition of our reporting units for the evaluation of goodwill impairment has changed. Historically, our reporting units used to be one level below our operating segments, which consisted of North America Hardware, North America Chemical, Rest-Of-World Hardware and Rest-Of-World Chemical. Effective July 1, 2017, we identified one reporting unit for each of our three new segments, which are Americas, EMEA and APAC. Goodwill was reassigned to the new reporting units using a relative fair value allocation approach. Due to the change in reporting units, we are required to test goodwill impairment for the reporting units before this change, which is satisfied by our event-driven goodwill impairment test performed on June 30, 2017. 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. 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. 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. 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. For the North America Hardware and North America Chemical reporting units, the fair value was in excess of carrying value by 29% and 15%, respectively. Since 2016, North America Hardware and North America Chemical reporting units have underperformed relative to the forecasts included in the Step 1 analysis; however, our qualitative impairment assessments performed on December 31, 2016 and March 31, 2017 did not indicate it was more likely than not that the carrying value exceeded the fair value of the two reporting units. During the third quarter of fiscal 2017, our stock price experienced a sustained decline in value. Additionally, during June 2017, we reassessed our five-year outlook following the appointment of our new CEO in May 2017. The cash flows in this updated five-year forecast indicated that it was more likely than not that the goodwill in the North America Hardware and North America Chemical reporting units was impaired. These events triggered our decision to perform a quantitative goodwill impairment test as of June 30, 2017. We performed our Step 1 goodwill impairment test on June 30, 2017 on all four reporting units. The results of these tests indicated that the North America Hardware and North America Chemical reporting units were impaired. Lower projected revenue growth and operating results reflected changes in assumptions related to organic growth rates, market trends, business mix, cost structure and other expectations about the anticipated short-term and long-term operating results of these two reporting units, resulting in lower estimated fair values. As a result, we proceeded to Step 2 of the goodwill impairment analysis using the most appropriate valuation methods and compared the implied value of goodwill with the carrying value of the goodwill for each of the impaired reporting units. 37 In applying the Step 2 analysis to the North America Hardware and North America Chemical reporting units, we determined that the fair value of certain identifiable intangibles including trademarks, customer relationships, and technology exceeded their carrying values by a significant amount which further reduced the implied fair value of goodwill. We recorded a non-cash impairment charge of $240.6 million for North America Hardware and $70.5 million for North America Chemical, for a total impairment charge of $311.1 million in the three months ended June 30, 2017 to reduce each reporting unit’s carrying value goodwill to its implied fair value. The remaining goodwill for the North America Hardware and North America Chemical reporting units was $51.4 million and $153.4 million, respectively, as of June 30, 2017, and after recording the impairment charges, the fair values of these reporting units exceeded their carrying values by 8% and 9%, respectively. The Rest of World Hardware and Rest of World Chemical reporting units were not impaired with estimated fair values of these reporting units exceeding their carrying values by 105% and 22%, respectively. On July 1, 2017, we performed our Step 1 goodwill impairment tests on our three new reporting units, Americas, EMEA and APAC. The results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values. For the Americas, EMEA and APAC reporting units, the fair value was in excess of carrying value by 12%, 61% and 28%, respectively. The Americas reporting unit, which had the least headroom at 12%, had goodwill of $204.2 million as of September 30, 2017. The fair value of the Americas reporting unit was determined based on a discounted cash flow analysis and market earnings multiples. The key assumptions used in determining fair value were revenue growth rates, projected operating margins, and projected cash flows. We determined the key assumptions by considering our recent financial performance and trends, industry growth projections, existing customer contracts, current sales pipeline and the timing and amount of future contract renewals. The preparation of our fair value estimate requires significant judgments. In the event that market earnings multiples deteriorate or our future financial performance falls short of our projections due to internal operating factors, economic recession, changes in government regulations, deterioration of industry trends, increased competition, or other factors causing our revenue growth to be slower than anticipated or our margins or cash flow to deteriorate, we may be required to perform an interim impairment analysis with respect to the carrying value of goodwill for this reporting unit prior to our annual test. If the analysis indicates the fair value of the Americas reporting unit has fallen by more than the 12% headroom, we may be required to take a non-cash impairment charge to reduce the carrying value of goodwill or other assets. 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. 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. 38 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 $18.6 million and $5.5 million as of September 30, 2017 and 2016, respectively, against certain deferred tax assets, which consist primarily of 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. Management estimates a forfeiture rate for each grant of awards based on its judgment and expectations of employee turnover behavior and other factors. Quarterly actual forfeiture could have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the amortization of stock-based compensation expense is recognized in the period when the forfeiture occurs. 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 . . . . . . . . . . . . . 2017 $7,335 2016 $8,490 2015 $7,891 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 39 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 2017 Years Ended September 30, 2016 (dollars in thousands) 2015 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,429,429 $1,477,366 $1,497,615 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (provision) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361,907 259,588 311,114 (208,795) (39,821) 369 (248,247) 10,901 $ (237,346) $ 393,692 234,942 — 158,750 (36,901) 3,741 125,590 (34,212) 91,378 $ $ 324,495 267,089 263,771 (206,365) (37,092) 1,841 (241,616) 86,872 $ (154,744) (as a percentage of net sales, numbers rounded) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (provision) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.3% 18.2% 21.7% (14.6)% (2.8)% —% (17.4)% 0.8% (16.6)% 26.6% 15.9% — 10.7% (2.5)% 0.3% 8.5% (2.3)% 6.2% 21.7% 17.8% 17.7% (13.8)% (2.4)% 0.1% (16.1)% 5.8% (10.3)% Year ended September 30, 2017 compared with the year ended September 30, 2016 Net Sales Consolidated net sales decreased $48.0 million, or 3.2%, to $1,429.4 million for the year ended September 30, 2017 compared with $1,477.4 million for the year ended September 30, 2016. Foreign currency translation impacts reduced sales by $22.9 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2017 decreased $25.1 million compared to the same period in the prior year. The $25.1 million decrease was due to a decrease in ad hoc sales of $27.7 million, partially offset by an increase in Contract sales of $2.6 million. The decline in ad hoc sales was primarily due to production schedule changes and customer service issues. Contract sales for the year ended September 30, 2016 included $9.8 million related to a large commercial hardware contract that ended on March 31, 2015. Excluding this $9.8 million, which did not repeat in the corresponding 2017 period, Contract sales increased $12.4 million due to significant new Contracts partially offset by lost Contracts and declines on existing and renewed Contracts. The reduction in customer production days and customer service issues also affected Contract sales; however, other increases in Contract sales more than offset this impact. Ad hoc and Contract sales as a percentage of net sales represented 24% and 76%, respectively, for the year ended September 30, 2017 as compared to 25% and 75%, respectively, for the same period in the prior year. 40 (Loss) Income from Operations Consolidated loss from operations was $208.8 million for the year ended September 30, 2017 due to the non-cash goodwill impairment charge of $311.1 million partially offset by $102.3 million in income from operations. Income from operations excluding the goodwill impairment charge decreased $56.5 million, or 35.5%, compared with $158.8 million income from operations for the year ended September 30, 2016. Loss from operations was 14.6% of net sales for the year ended September 30, 2017. Excluding the goodwill impairment, income from operations as a percentage of net sales was 7.2% compared to an income from operations of 10.7% of net sales for the year ended September 30, 2016, a decrease of 3.5 percentage points. Average gross margins decreased 1.3 percentage points and SG&A as a percent of net sales increased by 2.3 percentage points. The $56.5 million decrease in income from operations excluding the goodwill impairment charge was comprised of a decrease in gross profit of $31.8 million and an increase in SG&A expenses of $24.7 million. Foreign currency translation had a $7.2 million negative impact on gross profit. The remaining $24.6 million decrease in gross profit was primarily driven by the decrease in sales on a constant currency basis and decline in gross margins. The 1.3 percentage point decline in gross margins was due primarily to changes in product mix, a decrease in ad hoc margins and an increase in provisions for customer claims compared to the same period of the prior year. The $29.0 million increase in SG&A expenses, excluding a benefit of $4.3 million related to the impact of foreign currency translation, largely reflected increases in payroll and other personnel related costs of $25.3 million, IT related costs of $2.5 million, travel expenses of $1.9 million, rent expense of $1.7 million, depreciation expense of $1.3 million, repair and maintenance costs of $1.0 million and bad debt expenses of $1.0 million. The increase in payroll and other personnel related costs was due in part to increased staffing required to begin implementing new contracts, and, to a lesser extent, to other headcount increases, wage increases, and higher incentive compensation than in fiscal 2016. These increases were partially offset by decreases in professional fees of $2.9 million, commissions of $1.2 million, non-cash stock-based compensation of $1.1 million and property and liability insurance of $1.0 million. Changes in unallocated corporate costs are included above, which were $0.2 million lower than the prior year, primarily driven by decreases in non-cash stock-based compensation of $1.8 million and professional fees of $1.7 million, partially offset by an increase in payroll and other personnel related costs of $3.4 million including $1.7 million of severance costs. Interest Expense, Net Interest expense, net was $39.8 million for the year ended September 30, 2017, which increased $2.9 million, or 7.9%, compared to the year ended September 30, 2016. The increase was primarily due to $2.3 million of deferred debt issuance costs written off in the year ended September 30, 2017 as debt extinguishment loss related to the Credit Agreement (as defined and described in Note 11 of Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K), as well as additional interest expense from our borrowing against the revolving facility, partially offset by a lower interest expense due to a reduction of the term loans compared to the same period of the prior year. Other Income, Net Other income, net was $0.4 million for the year ended September 30, 2017, which decreased by $3.4 million compared to the year ended September 30, 2016. The decline was primarily related to a decrease in foreign currency exchange gain 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 $10.9 million for the year ended September 30, 2017, compared to the income tax provision of $34.2 million for the year ended September 30, 2016. Our effective tax rate was 4.4% and 27.2% for the years ended September 30, 2017 and 2016, respectively. The decrease in our effective tax rate resulted primarily from (1) the $311.1 million goodwill impairment charge, a portion of which is permanently not deductible for tax purposes, (2) the recording of $37.5 million of U.S. taxes on certain 41 previously undistributed foreign earnings, and (3) the establishment of a $15.1 million valuation allowance with respect to a deferred tax asset for foreign tax credits. 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, 2017. Management’s decision to record a $37.5 million U.S. tax charge on certain undistributed foreign earnings will allow for the future repatriation of up to $126.5 million of foreign earnings to the U.S. without an expected incremental U.S. tax provision impact. Net (Loss) Income We reported a net loss of $237.3 million for the year ended September 30, 2017, compared to a net income of $91.4 million for the year ended September 30, 2016. Net loss was 16.6% of net sales for the year ended September 30, 2017, as compared to net income of 6.2% of net sales for the year ended September 30, 2016. This decrease in net income was primarily driven by a non-cash goodwill impairment charge of $311.1 million, a decrease in gross profit of $31.8 million and an increase in SG&A expenses of $24.7 million, partially offset by a benefit for income taxes, as discussed above. Year ended September 30, 2016 compared with the year ended September 30, 2015 Net Sales Consolidated net sales decreased $20.2 million, or 1.4%, to $1,477.4 million for the year ended September 30, 2016, compared with $1,497.6 million for the year ended September 30, 2015. Foreign currency translation impacts reduced sales by $30.2 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2016 increased $10.0 million compared to the same period in the prior year. The $10.0 million increase was primarily due to Contract sales growth of $45.8 million, which was attributable to increased customer production rates 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 of $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 was $158.8 million for the year ended September 30, 2016, as compared to a 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 provision of $80.5 million. For the year ended September 30, 2016, we did not have goodwill impairment as compared to a $263.8 million goodwill impairment charge recorded under our Americas segment in the prior year (see further discussion above under ‘‘—Critical Accounting Policies and Estimates—Goodwill and Indefinite-Lived Intangible Assets’’). The E&O inventory provision 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 provision was primarily driven by the strategy change in fiscal 2015 that increased expense by $43.8 million and by a specific program inventory provision in fiscal 2015 of $33.0 million (see further discussion above under ‘‘—Critical Accounting Policies and Estimates—Inventories’’). Excluding goodwill impairment and E&O inventory provision, income from operations as a percentage of net sales was 11.7% for the year ended September 30, 2016, compared to 10.2% for the year ended September 30, 2015, an increase of 1.5 percentage points. Average gross margins decreased 0.4 percentage points and SG&A as a percent of net sales decreased by 1.9 percentage points. Excluding goodwill impairment and E&O inventory provision, income from operations increased by $20.9 million for the year ended September 30, 2016 as compared to the prior year, which was primarily due to a decrease in SG&A expenses of $32.1 million, partially offset by a decrease of $11.3 million in gross profit (excluding the impact from E&O provision). The decrease in SG&A expenses of $26.5 million, after adjusting for the $5.6 million impact of foreign currency translation, was largely driven by decreases in payroll and other personnel related 42 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. After adjusting for the $9.9 million impact of foreign currency translation and the impact from the E&O charges, the decrease in gross profit was $1.4 million which was largely driven by the conclusion of a large commercial contract, lower chemical margins due to commodity-based cost and pricing changes on certain pass through Contracts, offset by an increase in Contract net sales on a constant currency basis. Changes in unallocated corporate costs are included above, which were $2.7 million lower than the prior year, primarily driven by decreases in professional fees of $2.8 million and payroll and other personnel related costs of $0.3 million, partially offset by an increase in non-cash stock-based compensation of $0.4 million. Interest Expense, Net Interest expense, net of $36.9 million for the year ended September 30, 2016 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 debt issuance costs as a result of the repayment of our long-term debt during the year ended September 30, 2016. Other Income (Expense), Net Other income, net of $3.7 million for the year ended September 30, 2016 increased by $1.9 million compared to the year ended September 30, 2015. The increase was primarily related to higher net foreign currency exchange gains 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 an 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 net loss of $154.7 million for the year ended September 30, 2015. This increase in net income was primarily driven by a non-cash goodwill impairment charge of $263.8 million in the year ended September 30, 2015, an increase in gross profit of $69.2 million and a decrease in SG&A expenses of $32.1 million, partially offset by an increase in income taxes, as discussed above. 43 Americas Segment Americas Results of Operations 2017 Years Ended September 30, 2016 (dollars in thousands) $1,177,496 2015 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,142,366 $1,191,928 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,285 189,383 308,403 $ (213,501) $ 301,706 167,547 — $ 134,159 $ 251,197 187,650 260,798 $ (197,251) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.9% 16.6% 27.0% (18.7)% 100% 25.6% 14.2% — 11.4% 100% 21.1% 15.7% 21.9% (16.5)% (as a percentage of net sales, numbers rounded) Year ended September 30, 2017 compared with the year ended September 30, 2016 Net Sales Net sales for our Americas segment decreased $35.1 million, or 3.0%, to $1,142.4 million for the year ended September 30, 2017, compared with $1,177.5 million for the year ended September 30, 2016. Foreign currency translation impacts reduced sales by $3.3 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2017 decreased $31.8 million compared to the same period in the prior year. The $31.8 million decline was due to a decrease in ad hoc sales of $34.9 million, slightly offset by an increase in Contract sales of $3.1 million. The $34.9 million decline in ad hoc sales was primarily due to production schedule changes and customer service issues. Contract sales for the year ended September 30, 2016 included $9.8 million related to a large commercial hardware contract that ended on March 31, 2015. Excluding this $9.8 million, which did not repeat in the corresponding 2017 period, Contract sales increased $12.9 million due to increases in contract volume and new contracts, net of contracts losses. (Loss) Income from Operations Loss from operations for our Americas segment for the year ended September 30, 2017 was $213.5 million due to the non-cash goodwill impairment charge of $308.4 million partially offset by $94.9 million in income from operations. Income from operations excluding goodwill impairment decreased $39.3 million, or 29.3%, compared with $134.2 million of income from operations for the same period in the prior year. Excluding the goodwill impairment charge, income from operations as a percentage of net sales was 8.3% for the year ended September 30, 2017, compared to 11.4% for the year ended September 30, 2016, a decline of 3.1 percentage points. Average gross margins decreased 0.7 percentage points and SG&A as a percent of net sales increased by 2.4 percentage points. The $39.3 million decrease in income from operations excluding goodwill impairment charge was comprised of a decrease in gross profit of $17.4 million and an increase in SG&A expenses of $21.9 million. The foreign currency translation impact on gross profit was a negative $1.3 million. The remaining $16.1 million decline in gross profit was primarily driven by lower net sales, and a decrease in gross margins caused by changes in sales mix, partially offset by lower write downs of E&O inventory. The 0.7 percentage point decline in gross margins was due primarily to changes in product mix, a decrease in ad hoc margins and an increase in provisions for customer claims compared to the same period of the prior year. The increase in SG&A expenses was $22.8 million after adjusting for the $0.9 million favorable foreign currency translation impact, which was largely driven by increases in payroll and other personnel related costs of $17.5 million, IT related costs of $2.5 million, rent expense of $1.5 million, bad debt expense of $1.3 million, travel expenses of $1.1 million, depreciation expense of $1.1 million, non-cash stock-based compensation of $0.7 million and repair and maintenance cost of $0.7 million. These increases were partially offset by decreases in professional fees of $1.3 million, commission of $1.1 million and property liability insurance of $1.0 million. 44 Year ended September 30, 2016 compared with the year ended September 30, 2015 Net Sales Net sales for our Americas segment declined $14.4 million, or 1.2%, to $1,177.5 million for the year ended September 30, 2016, compared with $1,191.9 million for the year ended September 30, 2015. Foreign currency translation impacts reduced 2016 sales by $8.7 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2016 decreased $5.7 million compared to the same period in the prior year. The $5.7 million decrease was primarily due to an $18.4 million decline in sales due to the end of a large commercial contract on March 31, 2015 and a $23.7 million decline in ad hoc sales. These declines were partially offset by Contract sales growth of $36.4 million, primarily due to increased customer production rates and expanded content, as well as new business and scope expansion on commercial and military Contracts. Income (Loss) from Operations Income from operations for our Americas segment for the year ended September 30, 2016 was $134.2 million compared to a loss from operations of $197.3 million for the year ended September 30, 2015. Income from operations was 11.4% of net sales for the year ended September 30, 2016, compared to a loss from operations of 16.5% of net sales for the year ended September 30, 2015. The $331.5 million increase in income from operations primarily reflects a goodwill impairment charge of $260.8 million and a decrease in E&O provision of $67.2 million, driven primarily by the strategy change in fiscal 2015 and by the specific program inventory provision in fiscal 2015 as discussed above in our analysis of consolidated income from operations. Excluding goodwill impairment charge and E&O inventory provision, income from operations as a percentage of net sales was 12.8% for the year ended September 30, 2016, compared to 12.3% for the year ended September 30, 2015, an increase of 0.5 percentage points. Excluding the impact of the goodwill impairment charge and E&O inventory provision, income from operations increased by $3.4 million for the year ended September 30, 2016 as compared to the prior year, which was due primarily to a decrease in SG&A expenses of $20.1 million, partially offset by a decline of $16.7 million in gross profit (that excludes E&O provision). Average gross margins decreased 1.1 percentage points and SG&A as a percent of net sales decreased by 1.5 percentage points. Excluding goodwill impairment charge and E&O inventory provision, income from operations increased by $3.4 million for the year ended September 30, 2016 as compared to the prior year which was due primarily to a decrease in SG&A expenses of $20.1 million, partially offset by a decrease of $16.7 million in gross profit (that excludes E&O provision). The decrease in SG&A expenses was $18.0 million after adjusting for the $2.1 million impact of foreign currency translation, which was largely driven by decreases in payroll and other personnel related costs, bad debt and professional fees of $16.5 million, $2.2 million and $1.1 million, respectively. These decreases were partially offset by an increase in software and hardware maintenance costs of $1.7 million. The decrease in gross profit was $13.9 million, after adjusting for the $2.8 million impact of foreign currency translation and the impact from the E&O charges, which 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. 45 EMEA Segment EMEA Results of Operations 2017 Years Ended September 30, 2016 (dollars in thousands) 2015 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $258,072 $274,952 $288,276 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,209 45,071 $ 25,138 $ 86,096 42,215 $ 43,881 $ 69,956 53,284 $ 16,672 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% (as a percentage of net sales, numbers rounded) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.2% 17.5% 9.7% 31.3% 15.3% 16.0% 24.3% 18.5% 5.8% Year ended September 30, 2017 compared with the year ended September 30, 2016 Net Sales Net sales for our EMEA segment decreased $16.9 million, or 6.1%, to $258.1 million for the year ended September 30, 2017, compared with $275.0 million to the year ended September 30, 2016. Foreign currency translation impacts reduced sales by $19.5 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2017 increased $2.6 million compared to the same period in the prior year. The $2.6 million increase was due to ad hoc sales growth of $7.2 million, partially offset by a decline in Contract sales of $4.6 million. The increase in ad hoc sales was primarily due to increased customer production rates and expanded content. The decrease in Contract sales was driven by a decline in existing contract volumes partially offset by new contracts in excess of lost business. Income from Operations Income from operations for our EMEA segment decreased $18.7 million, or 42.7%, to $25.1 million for the year ended September 30, 2017, compared to $43.9 million for the year ended September 30, 2016. Income from operations as a percentage of net sales was 9.7% for the year ended September 30, 2017, compared to 16.0% for the year ended September 30, 2016, a decrease of 6.3 percentage points. The decrease in income from operations was comprised of a $15.9 million decrease in gross profit and a $2.8 million increase in SG&A expenses. Average gross margins decreased 4.1 percentage points and SG&A as a percent of net sales increased by 2.2 percentage points. The $15.9 million decrease in gross profit was partially due to a $5.9 million decrease due to negative foreign currency translation impact. The remaining $10.0 million decrease in gross profit was primarily driven by lower product margin, higher write downs of E&O inventory, higher freight and expedite costs, partially offset by the increase in sales on a constant currency basis. The 4.1 percentage point decline in gross margins was due primarily to a decrease in chemical margins, a decrease in ad hoc margins due to higher than usual margins in the prior year, an increase in write downs of E&O inventory and changes in product mix compared to the same period of the prior year. Excluding a favorable $3.4 million impact of foreign currency translation, SG&A expenses increased by $6.2 million, largely driven by increases in payroll and other people costs of $3.9 million, travel expenses of $0.6 million, repair and maintenance costs of $0.3 million, rent expense of $0.2 million, warehouse expense of $0.2 million, depreciation expense of $0.2 million and professional fees of $0.2 million. Year ended September 30, 2016 compared with the year ended September 30, 2015 Net Sales Net sales for our EMEA segment decreased $13.3 million, or 4.6%, to $275.0 million for the year ended September 30, 2016, compared with $288.3 million for the year ended September 30, 2015. Foreign currency translation impacts reduced 2016 sales by $21.2 million. Excluding foreign currency translation impacts, net 46 sales for the year ended September 30, 2016 increased $7.9 million compared to the same period in the prior year, due primarily to ad hoc sales growth of $12.7 million and Contract sales growth of $3.2 million that was primarily due to increased customer production rates 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 for our EMEA segment increased $27.2 million, or 163.2%, to $43.9 million for the year ended September 30, 2016, compared to $16.7 million for the year ended September 30, 2015. Income from operations as a percentage of net sales was 16.0% for the year ended September 30, 2016, compared to 5.8% for the year ended September 30, 2015, an increase of 10.2 percentage points. The $27.2 million increase in income from operations was partially caused by a lower charge to the E&O inventory provision of $13.8 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 provision, income from operations as a percentage of net sales was 15.0% for the year ended September 30, 2016, compared to 9.7% for the year ended September 30, 2015, an increase of 5.3 percentage points. Excluding the favorable impact associated with the E&O inventory provision, income from operations increased by $13.4 million for the year ended September 30, 2016 as compared to the prior year, which was the result of an increase in gross profit of $2.3 million and a decrease in SG&A expenses of $11.1 million. Average gross margins increased 2.2 percentage points and SG&A as a percent of net sales decreased by 3.1 percentage points. The increase in gross profit, excluding the $7.0 million negative impact of foreign currency translation adjustments and the E&O provision, 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 was $7.7 million after adjusting for the $3.4 million impact of foreign currency translation, which was largely driven by decreases in payroll costs, utilities and warehouse expenses of $6.4 million, $0.4 million and $0.4 million, respectively. These decreases were partially offset by a $0.6 million increase in bad debt expense. APAC Segment APAC Results of Operations 2017 Years Ended September 30, 2016 (dollars in thousands) 2015 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,991 $24,918 $17,411 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,413 4,874 2,711 (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (172) $ 5,890 4,694 — $ 1,196 $ 3,342 2,947 2,973 $ (2,578) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% (as a percentage of net sales, numbers rounded) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general & administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.6% 16.8% 9.4% (0.6)% 23.6% 18.8% — 4.8% 19.2% 16.9% 17.1% (14.8)% Year ended September 30, 2017 compared with the year ended September 30, 2016 Net Sales Net sales for our APAC segment increased $4.1 million, or 16.3%, to $29.0 million for the year ended September 30, 2017, compared with $24.9 million to the year ended September 30, 2016. Foreign currency translation impacts reduced sales by $0.2 million. Excluding foreign currency translation impacts, net sales for 47 the year ended September 30, 2017 increased $4.3 million compared to the same period in the prior year. The $4.3 million increase was due to Contract sales growth of $4.1 million and ad hoc sales growth of $0.2 million. The increase in Contract sales was primarily due to increased customer production rates and new contracts. (Loss) income from Operations Loss from operations of our APAC segment for the year ended September 30, 2017 was $0.2 million due to the non-cash goodwill impairment charge of $2.7 million partially offset by $2.5 million in income from operations. Income from operations excluding the goodwill impairment increased $1.3 million, or 112.2%, compared with $1.2 million of income from operations for the same period in the prior year. Excluding the goodwill impairment, income from operations as a percentage of net sales was 8.8% for the year ended September 30, 2017, compared to 4.8% for the year ended September 30, 2016, an increase of 4.0 percentage points. The $1.3 million increase in income from operations was comprised of an increase in gross profit of $1.5 million, partially offset by an increase in SG&A expenses of $0.2 million. Average gross margins increased 2.0 percentage points and SG&A as a percent of net sales decreased by 2.0 percentage points. The increase in gross profit was primarily driven by higher net sales and lower write downs of E&O inventory. The 2.0 percentage point increase in gross margins was primarily driven by lower write downs of E&O inventory. The higher SG&A expenses was driven by an increase in payroll and other personnel related costs of $0.5 million, partially offset by a decrease in bad debt expense of $0.2 million. Year ended September 30, 2016 compared with the year ended September 30, 2015 Net Sales Net sales for our APAC segment increased $7.5 million, or 43.1%, to $24.9 million for the year ended September 30, 2016 compared with $17.4 million for the year ended September 30, 2015. Foreign currency translation impacts reduced sales by $0.2 million. Excluding foreign currency translation impacts, net sales for the year ended September 30, 2016 increased $7.7 million compared to the same period in the prior year. The $7.7 million increase was due to an increase in ad hoc sales of $1.5 million and an increase in Contract sales of $6.2 million. The increase in Contract sales was primarily driven by a new contract with a commercial customer as well as increased customer production rates on existing commercial contracts. Income (Loss) from Operations Income from operations of our APAC segment for the year ended September 30, 2016 was $1.2 million compared to a loss from operations of $2.6 million for the year ended September 30, 2015. Income from operations was 4.8% of net sales for the year ended September 30, 2016, compared to a loss from operations of 14.8% of net sales for the year ended September 30, 2015. The $3.8 million increase in income from operations primarily reflects a goodwill impairment charge of $3.0 million in fiscal 2015, partially offset by an increase in the E&O inventory provision of $0.6 million for the year ended September 30, 2016 as compared to the year ended September 30, 2015. Excluding goodwill impairment and E&O inventory provision from the comparison, income from operations as a percentage of net sales was 8.8% for the year ended September 30, 2016, compared to 4.6% for the year ended September 30, 2015, an increase of 4.2 percentage points. Also, excluding goodwill impairment charge and E&O inventory provision from the comparison, income from operations increased by $1.4 million for the year ended September 30, 2016 as compared to the prior year and primarily due to an increase in gross profit $3.1 million, partially offset by an increase of $1.7 million in SG&A expenses. Average gross margins increased 6.1 percentage points and SG&A as a percent of net sales increased by 1.9 percentage points. The increase in gross profit was driven by increased sales. The increase in SG&A expenses was $1.8 million after adjusting for a favorable $0.1 million impact of foreign currency translation, and largely was driven by increases in payroll and other personnel related costs and bad debt of $1.3 million and $0.2 million, respectively. Liquidity and Capital Resources Overview Our primary sources of liquidity are cash flow from operations and available borrowings under our revolving facility. 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 48 of $61.6 million and $77.1 million as of September 30, 2017 and 2016, respectively, of which $48.7 million, or 79.0%, and $53.3 million, or 69.2%, was held by our foreign subsidiaries as of September 30, 2017 and 2016, respectively. None of our cash and cash equivalents consisted of restricted cash and cash equivalents as of September 30, 2017 or 2016. All of our foreign cash and cash equivalents are readily convertible into U.S. dollars or other foreign currencies. During the quarter ended September 30, 2017, we reassessed the potential need to repatriate foreign earnings based on our current long-range outlook, the current imbalance between cash generated and used in the U.S., and the increase in the percentage of excess cash that must be used to repay debt under the Sixth Amendment to the Credit Agreement. We determined it was likely that we would, in the future, repatriate approximately $126.5 million of previously earned and undistributed earnings. Accordingly, we provided for a $38.7 million deferred tax liability for U.S. taxes that will become due upon such repatriation net of foreign tax credits estimated to be available in the years when we expect to repatriate the previously undistributed earnings. The determination of the deferred tax liability requires our best estimate about the amount of foreign tax credits that would be available in the years that we repatriate foreign earnings which will depend on the amount of foreign earnings, including repatriated foreign earnings, and U.S. earnings for each year. The deferred tax liability may increase or decrease materially in future years, impacting our tax provision or benefit and our effective tax rate, if our estimate for the timing of future earnings repatriation and foreign tax credit availability changes. Our primary uses of cash currently 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; and debt service requirements for borrowings under the Credit Facilities (as defined below under ‘‘—Credit Facilities—Sixth Amendment to Senior Secured Credit Facilities’’). 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 is necessary from time to time to borrow under our revolving facility to meet cash demands. Provided we are in compliance with applicable covenants, we can borrow up to $180.0 million on our revolving credit facility of which $55.0 million was outstanding as of September 30, 2017. 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, 2017, we did not have any material capital expenditure commitments. Cash Flows Our cash and cash equivalents decreased by $15.5 million during the year ended September 30, 2017. The decrease was primarily due to cash used in operating activities. A summary of our operating, investing and financing activities are shown in the following table (in thousands): Consolidated statements of cash flows data: Years Ended September 30, 2016 2015 2017 Net (loss) income adjusted for non-cash items . . . . . . . . . . . . . . . . Changes in working capital assets and liabilities . . . . . . . . . . . . . . . $ 109,087 (136,015) $ 155,390 (37,935) Net cash (used in) provided by operating activities. . . . . . . . . . . . . $ (26,928) $ 117,455 $ 119,821 21,351 $ 141,172 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,923) $ (11,992) $ (9,864) Net cash provided by (used in) financing activities . . . . . . . . . . . . . 20,645 (108,121) (150,696) 49 Operating Activities Our cash flows from operations fluctuates based on the level of profitability during the period as well as the timing of investments in inventory, collections of cash from our customers, payments of cash to our suppliers, and other changes in working capital accounts such as changes in our prepaid expenses and accrued liabilities or the timing of our tax payments. Our operating activities used $26.9 million of cash in the year ended September 30, 2017, a decrease of $144.4 million as compared to the year ended September 30, 2016. The decrease in operating cash flow of $144.4 million was primarily due to cash used for inventory purchases of $129.8 million during fiscal 2017 as compared to cash used for inventory purchases of $41.8 million during fiscal 2016, and to a lesser extent, a $46.3 million decrease in net (loss) income adjusted for non-cash items. The remaining decrease of $10.1 million represents cash used for other working capital changes. The $88.0 million increase of cash used for inventory purchases was to support new contracts, multi-year inventory purchases to support long-term contracts, and increased stocking to support our MRO and ad hoc business objectives. During the year ended September 30, 2017, net loss adjusted for non-cash items provided cash of $109.1 million, while net income adjusted for non-cash items provided cash of $155.4 million in the prior year. The decrease of $46.3 million of cash provided from results of operations was due to lower sales volumes, a decline in gross margins and higher spending for SG&A expenses. 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 loss adjusted for non-cash items provided cash of $155.4 million. During the year ended September 30, 2015, net income 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 a 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 by tax payments of $46.3 million and 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. Investing Activities Our investing activities used $8.9 million, $12.0 million and $9.9 million of cash in the years ended September 30, 2017, 2016 and 2015, respectively. Investing activities consist primarily of software development and implementation projects and the purchase of property and equipment. Financing Activities Our financing activities generated $20.6 million of cash in the year ended September 30, 2017, which consisted primarily of $55.0 million of short-term borrowings and $3.0 million of proceeds received in connection with the exercise of stock options, partially offset by $21.3 million for repayments of our long-term debt, $2.1 million for repayments of our capital lease obligations and a $12.8 million payment for debt issuance costs. 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 capital lease obligations, and a $2.1 million payment for debt issuance costs, 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. 50 Credit Facilities Sixth Amendment to Senior Secured Credit Facilities On November 2, 2017, we entered into the Sixth Amendment (the Sixth 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 Sixth Amendment modified the Existing Credit Agreement to increase the Excess Cash Flow Percentage (as such term is defined in the Credit Agreement) to 75%, provided that the Excess Cash Flow Percentage shall be reduced to (i) 50%, if the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) is less than 4.00 but greater than or equal to 3.00, (ii) 25%, if the Consolidated Total Leverage Ratio is less than 3.00 but greater than or equal to 2.50 and (iii) 0%, if the Consolidated Total Leverage Ratio is less than 2.50. The Sixth Amendment further modified the Credit Agreement to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility (as such term is defined in the Credit Agreement) to zero, unless the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement), after giving effect to the incurrence of any incremental loans or commitments and the use of proceeds thereof, on a pro forma basis, would be (i) less than 4.00 but greater than or equal to 3.50, in which case the Capped Incremental Facility would be increased to $75.0 million, or (ii) less than 3.50, in which case the Capped Incremental Facility would be increased to $150.0 million. The Sixth Amendment also modified the Credit Agreement to increase the Consolidated Total Leverage Ratio levels in the financial covenant set forth in the Credit Agreement to a maximum of 6.25 for the quarters ending September 30, 2017, December 31, 2017 and March 31, 2018, with step-downs to 6.00 for the quarters ending June 30, 2018 and September 30, 2018; 5.75 for the quarter ending December 31, 2018; 5.50 for the quarter ending March 31, 2019; 5.25 for the quarter ending June 30, 2019; 4.75 for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020; 4.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and 3.00 for the quarter ending June 30, 2021 and thereafter. As a result of the Amendment, we incurred $1.9 million in fees that were capitalized and will be amortized over the remaining life of the related debt. Existing Senior Secured Credit Facilities The Credit Agreement provides for (1) a $400.0 million senior secured term loan A facility (the term loan A facility), (2) a $180.0 million revolving facility (the revolving facility), and (3) a $525.0 million senior secured term loan B facility (the term loan B facility). We refer to the term loan A facility, the revolving facility and the term loan B facility, together, as the ‘‘Credit Facilities.’’ See Note 11 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a summary of the Credit Facilities and the Credit Agreement. On March 28, 2017, we entered into the Fifth Amendment to the Credit Agreement (the Fifth Amendment). The Fifth Amendment modified the Existing Credit Agreement to increase the highest possible interest rate margin applicable to loans under the term loan A facility and loans and commitments under the revolving facility from 2.75% to 3.00% for Eurocurrency loans and from 1.75% to 2.00% for Alternate Base Rate (ABR) loans. The Fifth Amendment also modified the Existing Credit Agreement to (a) to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility and (b) increase the Consolidated Total Leverage Ratio levels in the financial covenant; however, these modifications were subsequently superseded by the Sixth Amendment. As of September 30, 2017, our outstanding indebtedness under our Credit Facilities was $875.6 million, which consisted of (1) $380.0 million of indebtedness under the term loan A facility, (2) $55.0 million of indebtedness under the revolving facility, and (3) $440.6 million of indebtedness under the term loan B facility. As of September 30, 2017, $125.0 million was available for borrowing under the revolving facility to fund our operating and investing activities without breaching any covenants contained in the Credit Agreement. 51 As referred to above, our borrowings under the Credit Facilities are subject to a financial covenant based upon our Consolidated Total Leverage Ratio with the maximum ratio prior to the Sixth Amendment set at 4.50 for the quarter ending September 30, 2017, and after the Sixth Amendment set at 6.25 for the quarter ending September 30, 2017. The Credit Agreement also contains customary negative covenants, including restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions with affiliates. As of September 30, 2017, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was 4.59. A breach of the Consolidated Total Leverage Ratio covenant or any of other covenants contained in the Credit Agreement could result in an event of default in which case the lenders may elect to declare all outstanding amounts to be immediately due and payable. If the debt under the Credit Facilities were to be accelerated, our available cash would not be sufficient to repay in full our debt. Contractual Obligations The following table is a summary of contractual cash obligations at September 30, 2017 (in thousands): Long-term debt obligations (1) . . . . . . . . . . . . Borrowings under the revolving facility (2) . . Capital lease obligations. . . . . . . . . . . . . . . . . . Operating lease obligations . . . . . . . . . . . . . . . Total $ 926,962 59,455 5,253 51,362 < 1 Year $ 53,166 57,871 3,041 11,043 Payments Due by Period 1 - 3 Years 3 - 5 Years $103,838 1,462 1,871 16,823 $769,958 122 185 10,938 Total by period . . . . . . . . . . . . . . . . . . . . . . . . . 1,043,032 $125,121 $123,994 $781,203 > 5 Years $ — — 156 12,558 $12,714 Other long-term liabilities (uncertainty in the timing of future payments) (3) . . . . . . . 10,620 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,053,652 (1) (2) 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, 2017, which was 4.24% for the existing term loan A facility and 3.84% 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. Includes both principal, estimated variable interest expense payments and estimated undrawn fees. The interest rate used to calculate the estimated future variable interest expense is based on the weighted-average actual interest rate of 4.24% applicable to the Company’s borrowings under the revolving facility as of September 30, 2017. 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. (3) 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 $0.9 million, uncertain tax positions of approximately $6.5 million and non-current deferred tax liabilities of approximately $3.2 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. 52 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk consists of foreign currency exchange rate fluctuations, changes in interest rates and fluctuations in fuel prices. Foreign Currency Exposure We operate on an international basis with a portion of our revenue and expenses transacted in currencies other than the U.S. dollar. During the years ended September 30, 2017 and 2016, 29% and 27%, respectively, of our net sales were made by our foreign subsidiaries, and our total net sales to customers outside the U.S. represented 35% and 35%, respectively, of our total net sales. Some of our foreign sales are denominated in U.S. dollars and some of our foreign subsidiaries have U.S. dollar functional currencies. We are exposed to three types of foreign currency exposure: economic exposure (which could impact our operating margins where the proportions of revenue and expenses denominated in a foreign currency are different), transactional exposure (which could result in foreign currency transaction gains or losses) and translation impacts (which could impact the amount of revenues, expenses, assets and liabilities reported in U.S. dollars). We do not consider the risk associated with foreign currency exchange rate fluctuations to be material to our financial condition or results of operations. As previously disclosed we reorganized the operations of several different legal entities on April 1, 2017 to consolidate our U.K. operations under a new subsidiary, Wesco Aircraft EMEA with a U.S. dollar functional currency. Our operations in the U.K. have revenue and costs primarily denominated in U.S. dollars and, to a lesser extent, in British pounds and euros. The change to a U.S. dollar functional currency for our operations in the U.K. affected the nature of the foreign currency related impacts on our financial results. This reorganization is expected to eliminate the foreign currency translation risk associated with our U.K. operations and to make the management of transactional gains and losses easier and less expensive. Wesco Aircraft EMEA’s revenues and product costs are predominately denominated in U.S. dollars while its operating expenses are predominately denominated in British pounds. When our subsidiaries have revenues or expenses denominated in currencies other than their functional currencies, exchange rate movements can impact the operating margins reported by the subsidiaries. We cannot predict the effect of exchange rate fluctuations upon future operating results. However, because we have partially offsetting revenue and expense exposure in each of these foreign currencies, the effect on our operating margins from currency fluctuations is reduced. Our primary economic exposure arises from Wesco Aircraft EMEA, our U.K. subsidiary which has a U.S. dollar functional currency and a portion of its revenues and expenses in euro and British pounds. For the six months that Wesco Aircraft EMEA has been operating, it has had less than 5% of its net sales in euro, but 17% of its cost of sales and 20% of its selling, general and administrative expenses in euro. From March 31, 2017 to September 30, 2017, the U.S. dollar weakened against the euro by $0.11 (from $1.07 to $1.18) or 10%. Had the exchange rate remained the same as it was on March 31, 2017, operating profit for Wesco Aircraft EMEA would have been approximately $1.0 million higher for the six months ended September 30, 2017. Certain assets, including certain bank accounts and accounts receivables of some of our business units, and certain liabilities, including accounts payable, exist in currencies other than the functional currency of the related business units. As a result, these assets and liabilities are affected by foreign currency exchange rate fluctuations. These balances are principally denominated in U.S. dollars, British pounds, euros, Canadian dollars, and Mexican pesos. When these transactions are settled in a currency other than the functional currency, we may recognize a foreign currency transaction gain or loss. We attempt to limit this exposure by seeking to maintain a low net asset or net liability exposure to each currency. 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, but changes in exchange rates may cause the reported amounts of revenue or expenses to be higher or lower. This impact is sometimes partially offset by the economic impact when the underlying sale or expense is denominated in U.S. dollars making the net exposure difficult to quantify, predict, or mitigate. Any adjustments resulting from the translation are recorded in accumulated other comprehensive loss on our statements of changes in stockholders’ equity. 53 During the year ended September 30, 2017, our subsidiaries had the following sales and expenses in currencies other than the functional currency: • • Prior to the internal reorganization on April 1, 2017 mentioned above, our subsidiaries in the United Kingdom with a British pound function currency had sales in U.S. dollars and Euros of $70.9 million and €5.0 million (equivalent of $5.4 million), respectively, and had purchases in U.S. dollars and Euros of $40.1 million and €12.9 million (equivalent of $13.9 million), respectively. Following the internal reorganization, our new UK subsidiary with a U.S. dollar functional currency had sales in British pound and Euros during the year ended September 30, 2017 of £24.1 million (equivalent of $31.0 million) and €3.6 million (equivalent of $4.1 million), respectively, and had purchases in British pound and Euros of £8.1 million (equivalent of $10.4 million) and €13.1 million (equivalent of $14.4 million), respectively. • Our subsidiary in Canada, which has a U.S. dollar functional currency, had sales in Canadian dollars of $0.4 million (equivalent of $0.3 million) and had purchases in Canadian dollars of $0.5 million (equivalent of $0.4 million). • Our subsidiary in Mexico, which has a Mexican peso functional currency, had sales and purchases in U.S. dollars of $17.4 million and $18.2 million, respectively. • Our subsidiary in Israel, which has a U.S. dollar functional currency, had purchases in Israeli shekels of 37.5 million (equivalent of $10.3 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. 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, 2017, 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. If variable interest rates were to change by 1.0%, our interest expense would fluctuate $8.9 million per year, without taking into account the effect of any hedging instruments. On November 2, 2017, we entered into the Sixth Amendment, as described above. Neither the Sixth 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. On September 30, 2017, we had an interest rate swap agreement which effectively fixed our interest rate on variable rate debt of $375.0 million to 2.2625% 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. 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, 2017 and 54 2016 was $26.9 million and $24.2 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. 55 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 (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 57 58 59 60 61 62 56 To the Board of Directors and Stockholders of Wesco Aircraft Holdings, Inc. Report of Independent Registered Public Accounting Firm In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive (loss) income, 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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017 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, 2017, 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 debt issuance costs in 2017. 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, 2017 57 Wesco Aircraft Holdings, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share and per share data) As of September 30, 2017 2016 Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $3,109 and $3,846 at September 30, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred debt issuance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,625 $ 77,061 256,301 827,870 13,733 3,617 1,163,146 50,355 3,676 266,644 178,292 76,038 15,956 249,195 713,470 10,203 1,460 1,051,389 50,525 1,120 579,865 194,114 58,171 13,394 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,754,107 $1,948,578 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligations, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings and current portion of long-term debt . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligations, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,273 35,329 3,290 2,952 75,000 300,844 2,013 788,838 3,197 9,484 181,700 26,424 6,782 1,471 — 216,377 1,710 834,279 4,092 9,205 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,104,376 1,065,663 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, 99,450,902 and 98,614,908 shares issued and outstanding at September 30, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 436,522 (84,626) 297,736 649,731 99 427,295 (79,561) 535,082 882,915 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,754,107 $1,948,578 See the accompanying notes to the consolidated financial statements. 58 Wesco Aircraft Holdings, Inc. and Subsidiaries Consolidated Statements of Comprehensive (Loss) Income (in thousands, except per share data) Years Ended September 30, 2016 2015 2017 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,429,429 1,067,522 $ 1,477,366 1,083,674 $ 1,497,615 1,173,120 Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income before income taxes . . . . . . . . . . . . . . . . . . . . . Benefit (Provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of income taxes: Change in net foreign currency translation adjustment . . . . . . . Change in net unrealized holding losses on derivatives . . . . . . . Other comprehensive loss, net of income taxes . . . . . . . . . . . . . 361,907 259,588 311,114 (208,795) (39,821) 369 (248,247) 10,901 (237,346) (7,138) 2,073 (5,065) 393,692 234,942 — 158,750 (36,901) 3,741 125,590 (34,212) 91,378 (39,211) (1,629) (40,840) 324,495 267,089 263,771 (206,365) (37,092) 1,841 (241,616) 86,872 (154,744) (25,322) (2,577) (27,899) Comprehensive (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . $ (242,411) Net (loss) income per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (2.40) (2.40) Weighted average shares outstanding: $ $ $ 50,538 $ (182,643) 0.94 0.93 $ $ (1.60) (1.60) Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,700,879 98,700,879 97,634,155 98,165,856 96,955,043 96,955,043 See the accompanying notes to the consolidated financial statements. 59 Wesco Aircraft Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (dollars in thousands) Common Stock Shares Amount Balance at September 30, 2014 . . . . . . . 97,010,286 527,838 Issuance of common stock . . . . . . . . . Settlement on restricted stock tax $97 1 Additional Paid-in Capital $404,567 822 Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity $(10,822) — $ 598,448 — $ 992,290 823 withholding. . . . . . . . . . . . . . . . . . . . — — (701) — — (701) Excess tax benefit related to restricted stock units and stock options exercised . . . . . . . . . . . . . . . Stock-based compensation expense. . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss. . . . . . . . . . — — — — — — — — (87) 7,891 — — Balance at September 30, 2015 . . . . . . . 97,538,124 1,076,784 Issuance of common stock . . . . . . . . . Settlement on restricted stock tax 98 1 412,492 6,072 — — — (27,899) (38,721) — — — (154,744) — 443,704 — (87) 7,891 (154,744) (27,899) 817,573 6,073 withholding. . . . . . . . . . . . . . . . . . . . — — (857) — — (857) 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, 2016 . . . . . . . 98,614,908 Issuance of common stock . . . . . . . . . Settlement on restricted stock tax withholding. . . . . . . . . . . . . . . . . . . . Stock-based compensation expense. . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss. . . . . . . . . . 99 835,994 — — — — — — — — — 1,098 8,490 — — 427,295 2,964 (1,072) 7,335 — — — — — (40,840) (79,561) — — — — (5,065) — — 91,378 — 535,082 — 1,098 8,490 91,378 (40,840) 882,915 2,964 — — (237,346) — (1,072) 7,335 (237,346) (5,065) Balance at September 30, 2017 . . . . . . . 99,450,902 $99 $436,522 $(84,626) $ 297,736 $ 649,731 See the accompanying notes to the consolidated financial statements. 60 Wesco Aircraft Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows (dollars in thousands) Operating activities Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred debt issuance costs . . . . . . . . . . . . . Bad debt and sales return reserve . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . Inventory provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefit related to stock-based incentive plans . . . Income from equity investment . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by operating activities . . . . 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 short-term borrowings . . . . . . . . . . . . . . . . . . . . . Repayments of short-term borrowings . . . . . . . . . . . . . . . . . . . . Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of capital lease obligations . . . . . . . . . . . . . . . . . . . Excess tax benefit related to stock-based incentive plans . . . . . Net proceeds from exercise of stock options. . . . . . . . . . . . . . . . Settlement on restricted stock tax withholding . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . Effect of foreign currency exchange rate on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease 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) Years Ended September 30, 2016 2015 2017 $(237,346) $ 91,378 $(154,744) 28,352 6,143 225 7,335 12,900 311,114 — — (21,070) 1,434 (8,531) (2,159) (129,772) (5,989) 2,201 11,761 (3,526) (26,928) (8,923) — — — (8,923) 77,000 (22,000) (21,344) (12,796) (2,107) — 2,964 (1,072) 20,645 27,980 4,627 (810) 8,490 14,615 — (1,098) (582) 13,212 (2,422) (4,077) (1,269) (41,798) (1,204) 34,657 (11,008) (13,236) 117,455 (13,992) 2,000 — — (11,992) — — (111,000) (2,126) (1,309) 1,098 6,073 (857) (108,121) 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 15,768 141,172 (9,631) — 17 (250) (9,864) — — (149,750) — (1,511) 443 823 (701) (150,696) (230) (15,436) 77,061 $ 61,625 (3,147) (5,805) 82,866 $ 77,061 (2,521) (21,909) 104,775 $ 82,866 See the accompanying notes to the consolidated financial statements. 61 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, chemical management services, third-party logistics or fourth-party logistics programs and point-of-use inventory management. In addition to the central stocking facilities, we use a network of forward-stocking locations to service customers in a JIT and or ad hoc manner. There are 58 administrative, sales and/or stocking facilities 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 and Basis of Presentation The accompanying consolidated financial statements include the accounts of Wesco Aircraft Hardware Corp. (Wesco Aircraft Hardware), Wesco Aircraft EMEA, Ltd. (Wesco Aircraft EMEA), Wesco Aircraft Europe, Ltd., 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. Our financial statements have been prepared under the assumption that our company will continue as a going concern. On September 30, 2017, we adopted Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements - Going Concern. As a result of adopting ASU 2014-15, we are required to evaluate if there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. We accessed and concluded that our company will not have substantial doubts about our company’s ability as a going concern during the period of one year after November 28, 2017. 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. 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. 62 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, 2017 . . . . . . . . . . . . . . . . Year ended as of September 30, 2016 . . . . . . . . . . . . . . . . Year ended as of September 30, 2015 . . . . . . . . . . . . . . . . Balance at Beginning of Period $3,846 5,892 5,332 Charges to Cost and Expenses $ (133) (846) 1,121 Write-offs $ (604) (1,200) (561) Balance at End of Period $3,109 3,846 5,892 Inventories Inventories are stated at the lower of cost or market. The method by which amounts are removed from inventory are weighted average cost for all inventory, except for chemical products for which the first-in, first-out method is used. In-bound freight-related costs of $1.5 million, $1.9 million and $1.7 million as of September 30, 2017, 2016, and 2015, 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, including quantities and prices at which such inventories will be able to be sold in the normal course of business. During the years ended September 30, 2017 and 2016, we recorded a provision to write down E&O inventory to net realizable value of $12.9 million and $14.6 million respectively. During the year ended September 30, 2015, we charged $95.1 million for impairment of inventory to net realizable value 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. Also 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. The new strategy also included 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 calculating the E&O provision for our hardware inventory, which led to an additional E&O provision of $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 63 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued) 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 comprises assets and liabilities of each of our reporting units, which consists of Americas, Europe, Middle-East and Africa (EMEA) and Asia Pacific (APAC) reporting units (see change in our reporting units discussed under ‘‘Goodwill and Indefinite-Lived Intangible Assets’’ below). We have identified customer relationships as the primary asset because it is the principal asset from which the reporting units derive their cash flow generating capacity and has the longest remaining useful life. Recoverability is assessed by comparing the carrying value of the asset group to the undiscounted cash flows expected to be generated by these assets. Impairment losses are measured as the amount by which the carrying values of the primary assets exceed their fair values. To date, we have not recognized an impairment charge related to the write-down of long-lived assets. Deferred Debt Issuance Costs Deferred debt issuance costs are amortized using the straight-line method, which approximates 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 debt issuance costs was $6.1 million, $4.6 million and $4.4 million for the years ended September 30, 2017, 2016 and 2015, respectively. As of September 30, 2017 and 2016, the remaining unamortized deferred debt issuance costs are $15.4 million and $8.7 million, respectively, of which $11.7 million and $7.6 million was offset against the long-term debt, 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. As a result of our operating segment realignment discussed in Note 21, the composition of our reporting units for the evaluation of goodwill impairment has changed. Historically, our reporting units were identified at one level below our operating segments, which consisted of North America Hardware, North America Chemical, Rest-Of-World Hardware and Rest-Of-World Chemical. Effective July 1, 2017, we identified one reporting unit for each of our three new segments, which are Americas, EMEA and APAC. Goodwill was 64 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued) reassigned to the new reporting units using a relative fair value allocation approach. As a result of the change in reporting units, we are required to test goodwill impairment for the reporting units before this change, which is satisfied by our event-driven goodwill impairment test performed on June 30, 2017. We also performed our annual goodwill impairment test as of July 1, 2017 for the new reporting units as required, which indicated no impairment for any of the three new reporting units at July 1, 2017. For the Americas, EMEA and APAC reporting units, the fair value was in excess of carrying value by 12%, 61% and 28%, respectively. 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 during the years ended September 30, 2017 and 2016, which resulted in an interim goodwill impairment charge of $311.1 million during the year of 2017 and no goodwill impairment for the year of 2016. Refer to Note 8 for additional information. Indefinite-lived intangibles consist of a trademark, for which we estimate fair value and compare such fair value to the carrying amount. If the carrying amount of the trademark exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, we primarily utilize reported market transactions and discounted cash flow analysis. We use a three-tier fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability. The definition of fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled. For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly. 65 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 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 loss, net of taxes, and are recognized in net earnings at the time earnings are affected by the hedged transaction. Adjustments to record changes in fair values of the derivative contracts that are attributable to the ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in our consolidated statements of cash flows’ operating, investing, or financing activities consistent with the cash flows of the hedged item. Comprehensive Loss or Income Comprehensive loss or income generally represents all changes in stockholders’ equity, except those resulting from investments by or distributions to stockholders. Our comprehensive loss or income consists of foreign currency translation adjustments and fair value adjustments for cash flow hedges. Revenue Recognition We recognize product and service revenue when (1) persuasive evidence of an arrangement exists, (2) title transfers to the customer, (3) the sales price charged is fixed or determinable, and (4) collection is reasonably assured. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on the terms of the sales contract. In connection with the sales of our products, we often provide certain supply chain management services to our JIT customers. These services include the timely replenishment of products at the customer site, while also minimizing the customer’s on-hand inventory. We provide these services contemporaneously with the delivery of the product, and as such, once the product is delivered, we do not have a post-delivery obligation to provide services to the customer. Accordingly, the price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the product, at which point we have satisfied our obligations to the customer. We do not account for these services as a separate element, as the services do not have stand-alone value and cannot be separated from the product element of the arrangement. Additionally, we do not present service revenues apart from product revenues, as the service revenues represent less than 10% of our consolidated net sales. We report revenue on a gross or net basis, based on management’s assessment of whether we act as a principal or agent in the transaction, in our presentation of net sales and costs of sales. If we are the principal in the transaction and have the risks and rewards of ownership, the transactions are recorded as gross in the consolidated statements of comprehensive income. If we do not act as a principal in the transaction, the transactions are recorded on a net basis in the consolidated statements of comprehensive income. The majority of our revenue is recorded on a gross basis with the exception of certain gas, energy and chemical manager service contracts that are recorded as net revenue. 66 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued) We also enter into sales rebates and profit sharing arrangements. Such customer incentives are accounted for as a reduction to gross sales and recorded based upon estimates at the time products are sold. These estimates are based upon historical experience for similar programs and products. We review such rebates and profit sharing arrangements on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available. We provide allowances for credits and returns based on historic experience and adjust such allowances as considered necessary. To date, such provisions have been within the range of our expectations and the allowance established. Sales tax collected from customers is excluded from net sales in the consolidated statements of comprehensive income. In connection with our JIT supply chain management programs, at times, we assume customer inventory on a consignment basis. This consigned inventory remains the property of the customer but is managed and distributed by us. We earn a fixed fee per unit on each shipment of the consigned inventory; such amounts represent less than 1% of consolidated net sales. Shipping and Handling Costs We record revenue for shipping and handling billed to our customers. Shipping and handling revenues were $4.6 million, $5.1 million and $7.8 million for the years ended September 30, 2017, 2016 and 2015, respectively. Shipping and handling costs are primarily included in cost of sales. Total shipping and handling costs were $31.4 million, $28.0 million and $33.2 million for the years ended September 30, 2017, 2016 and 2015, 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, 2017, 2016 and 2015, we made 13%, 12%, and 13%, respectively, of our purchases from Precision Castparts Corp. and the amounts payable to this supplier were 6% and 3% of total accounts payable at September 30, 2017 and 2016, respectively. Additionally, for the years ended September 30, 2017, 2016 and 2015, we made 9%, 8%, and 9%, respectively, of our purchases from Arconic and the amounts payable to this supplier were 6% and 3% of total accounts payable at September 30, 2017 and 2016, respectively. The majority of the products we sell are available through multiple channels and, therefore, this reduces the risk related to any vendor relationship. 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) For the year ended September 30, 2017, we derived nearly 11% of our total net sales from one individual customer. For the years ended September 30, 2016 and 2015, 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 16%, 15% and 14% of our net sales during fiscal 2017, 2016 and 2015, respectively. Foreign Currency Translation and Transactions The financial statements of foreign subsidiaries and affiliates where the local currency is the functional currency are translated into U.S. dollars using exchange rates in effect at each period-end for assets and liabilities and average exchange rates during the period for results of operations. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are reported as other income (expense), net in the consolidated statements of comprehensive income. For the years ended September 30, 2017, 2016 and 2015, realized foreign currency transaction gains were $0.1 million, $3.2 million and $0.6 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 incorporates stock price correlation and other variables over the time horizons matching the performance periods. Net Loss or Net Income 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. Note 3. Recent Accounting Pronouncements Changes to generally accepted accounting principles in the United States (GAAP) are established by the FASB, in the form of 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. 68 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 3. Recent Accounting Pronouncements (Continued) New Accounting Standards Updates In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which specifies the modification accounting applicable to any entity that changes the terms or conditions of a share-based payment award. ASU 2017-09 is effective for the Company in fiscal year 2019. Early adoption is permitted. We do not anticipate the adoption of ASU 2017-09 will have a significant impact on our consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other:Simplifying the Test for Goodwill Impairment, which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company in fiscal year 2021, including interim reporting periods within that reporting period, and all annual and interim reporting periods thereafter. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement that when an investment subsequently qualifies for use of the equity method as a result of an increase in level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and to adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. In addition, ASU 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for the Company in fiscal year 2018, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. We have an investment in two joint ventures accounted for under the equity method, which had a carrying value of $10.9 million as of September 30, 2017. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. ASU 2016-02 also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. A modified retrospective transition approach shall be used when adopting ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for the Company in fiscal year 2020 and interim periods therein, with early application permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. As of September 30, 2017, total future minimum payments under our operating leases amounted to $51.4 million. In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for the Company in fiscal year 2019, with early adoption permitted for certain provisions. We are currently evaluating the impact of ASU 2016-01 related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. 69 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 3. Recent Accounting Pronouncements (Continued) In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value, and eliminates current GAAP options for measuring market value. ASU 2015-11 defines realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for the Company in fiscal year 2018, and interim periods therein. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-11 can only be applied prospectively. We do not anticipate the adoption of ASU 2015-11 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, ASU 2016-12, ASU 2016-20, ASU 2017-10 and ASU 2017-13, which FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017 and September 2017, respectively (collectively the ‘‘amended ASU 2014-09’’). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for the amended ASU 2014-09 for the Company is fiscal year 2019, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal year 2018, including interim reporting periods within that reporting period. The amended ASU 2014-09 may have an impact on the timing and amount of revenues and cost of sales in our industry due primarily to changes in whether certain performance obligations are accounted for on a gross or net basis, separating service revenue from the related product revenue, reporting costs currently included in operating expense as costs of services, and capitalizing certain up-front costs related to contracts and amortizing them over the service period. We have completed reviewing our major contracts and are in the process of reviewing the remaining contracts on a sampling basis to determine the extent to which these and other issues may impact on our results after adoption. We plan to adopt the amended ASU 2014-09 in fiscal 2019 using the modified retrospective method. Adopted Accounting Standards Updates Effective September 30, 2017, we adopted 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. The adoption of ASU 2014-15 did not have any impact on our consolidated financial statements. Effective October 1, 2016, we elected to early adopt ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The primary impacts of adoption are (1) the recognition of excess tax benefits in our benefit (provision) for income taxes instead of paid-in capital and (2) the presentation of excess tax benefits in the statement of cash flows as cash provided by operating 70 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 3. Recent Accounting Pronouncements (Continued) activities instead of cash provided by financing activities. The first requirement is required to be applied prospectively. For the year ended September 30, 2017, we recorded $0.9 million of excess tax benefits as a reduction to our provision for income tax. For the second requirement, we elected to adopt this update prospectively. For the year ended September 30, 2017, we included the $0.9 million excess tax benefits in cash provided by operating activities on our consolidated statements of cash flows. ASU 2016-09 also addresses cash flow statement presentation. Since we have historically presented cash flows related to employee taxes paid for withheld shares as a financing activity, ASU 2016-09 had no impact on our consolidated statements of cash flows. As permitted by ASU 2019-09, we have elected to continue to estimate forfeitures to determine the amount of compensation cost to be recognized in each period. Effective October 1, 2016, we adopted, on a prospective basis, ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. As of June 30, 2017, we did not have any provisional amounts outstanding from prior acquisitions. Therefore, the adoption of ASU 2015-16 did not have any impact on our consolidated financial statements. Effective October 1, 2016, we adopted ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 requires entities should present debt issuance costs for line-of-credit as an asset, and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. As of September 30, 2017 and September 30, 2016, we had $3.7 million and $1.1 million, respectively, of deferred debt issuance costs related to our revolving line-of-credit facility. Effective October 1, 2016, we adopted ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost. ASU 2015-03 requires that we change the presentation of debt issuance costs on our consolidated balance sheets. Effective October 1, 2016, our unamortized debt issuance costs are presented as a reduction of long-term debt instead of being presented as an asset on our consolidated balance sheet. As required by ASU 2015-03, we reclassified $7.6 million of deferred debt issuance costs from non-current assets to reduce our $841.9 million long-term debt as of September 30, 2016. As of September 30, 2017, deferred debt issuance costs of $11.7 million are presented as a reduction of our long-term debt. See Note 11 for further information. Effective October 1, 2016, we adopted, on a prospective basis, ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The adoption of ASU 2014-12 did not have any impact on our consolidated financial statements. Note 4. 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 an expense reduction of $355,000 related to the termination of leases 71 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 4. Restructuring Activities (Continued) and other expenses, partially offset by $170,000 of additional employee severance and related costs. 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 Additions/ Adjustments Cash Payments Foreign Currency Translation September 30, 2016 Employee severance . . . . . . . . . . . . . . . . Lease termination costs and other. . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,106 2,384 $4,490 $ 170 (355) $(185) $(2,193) (856) $(3,049) $(15) (77) $(92) $ 68 1,096 $1,164 As of September 30, 2017, our restructuring liabilities were $0.4 million, which was included in the accrued expenses and other current liabilities line of our consolidated balance sheets. Note 5. Inventory Our inventory is comprised solely of finished goods. Charges to cost of sales for E&O provisions and related items were $12.9 million, $14.6 million and $95.1 million in the years ended September 30, 2017, 2016 and 2015, respectively. We believe that these amounts appropriately write-down E&O inventory to its net realizable value. In the fourth quarter of 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 provision of $33.0 million to reduce its carrying value to zero. 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. The new strategy also included 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 to determine the E&O provision for our hardware inventory, which led to an additional E&O inventory provision of $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 (paid quarterly) plus fees and expenses associated with company-related meetings. The management fee was waived by an entity affiliated with The Carlyle Group for the third and fourth quarters of fiscal 2017. We incurred expense of $0.6 million, $1.3 million and $1.1 million for the years ended September 30, 2017, 2016 and 2015, respectively, related to this management agreement. These amounts were paid to The Carlyle Group during the years ended September 30, 2017, 2016 and 2015. 72 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 6. Related Party Transactions (Continued) 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 $1.6 million, $1.8 million and $1.7 million for the years ended September 30, 2017, 2016 and 2015, respectively (see Note 17). Note 7. Property and Equipment, net Property and equipment, net, consists of the following at September 30 (in thousands): 2017 2016 Land, buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,202 21,265 8,011 942 50,395 4,300 $ 29,392 18,288 6,319 1,288 36,274 11,333 Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,115 (65,760) 102,894 (52,369) Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,355 $ 50,525 At September 30, 2017 and 2016, property and equipment included assets of $15.6 million, and $8.9 million respectively, acquired under capital lease arrangements. Accumulated amortization of assets acquired under capital leases was $7.9 million and $5.8 million as of September 30, 2017 and 2016, respectively. Depreciation and amortization expense for property and equipment was $13.4 million, $12.1 million and $11.8 million during the years ended September 30, 2017, 2016 and 2015, respectively (including amortization expense of $2.5 million, $1.5 million and $1.5 million on assets acquired under capital leases for the years ended September 30, 2017, 2016 and 2015, respectively). Note 8. Goodwill and Intangible Assets, net Goodwill A reconciliation of our goodwill balance is as follows (in thousands): Americas September 30, 2017 2016 EMEA September 30, 2016 2017 APAC September 30, Consolidated September 30, 2017 2016 2017 2016 Beginning balance, gross . . . . . . . . . . . . . . $ 773,384 $ 773,384 $53,297 $ 64,019 $16,955 $16,955 $ 843,636 $ 854,358 Accumulated impairment . . . . . . . . (260,798) (260,798) — — (2,973) (2,973) (263,771) (263,771) Beginning balance, net . $ 512,586 $ 512,586 $53,297 $ 64,019 $13,982 $13,982 $ 579,865 $ 590,587 Foreign currency translation . . . . . . . . . Goodwill impairment . . — (308,403) — (2,107) — — (10,722) — — (2,711) (2,107) — — (311,114) (10,722) — Ending balance, gross . . $ 773,384 $ 773,384 $51,190 $ 53,297 $16,955 $16,955 $ 841,529 $ 843,636 Accumulated impairment . . . . . . . . (569,201) (260,798) — — (5,684) (2,973) (574,885) (263,771) Ending balance, net . . . $ 204,183 $ 512,586 $51,190 $ 53,297 $11,271 $13,982 $ 266,644 $ 579,865 73 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. For the North America Hardware and North America Chemical reporting units, the fair value was in excess of carrying value by 29% and 15%, respectively. Since 2016, North America Hardware and North America Chemical reporting units have underperformed relative to the forecasts included in the Step 1 analysis; however, our qualitative impairment assessments performed on December 31, 2016 and March 31, 2017 did not indicate it was more likely than not that the carrying value exceeded the fair value of the two reporting units. During the third quarter of fiscal 2017, our stock price experienced a sustained decline in value. Additionally, during June 2017, we reassessed our five-year outlook following the appointment of our new CEO in May 2017. The cash flows in this updated five-year forecast indicated that it was more likely than not that the goodwill in the North America Hardware and North America Chemical reporting units was impaired. These events triggered our decision to perform a quantitative goodwill impairment test as of June 30, 2017. We performed our Step 1 goodwill impairment test on June 30, 2017 on all four reporting units. The results of these tests indicated that the goodwill of North America Hardware and North America Chemical reporting units was impaired. Lower projected revenue growth and operating results reflected changes in assumptions related to organic growth rates, market trends, business mix, cost structure and other expectations about the anticipated short-term and long-term operating results of these two reporting units, resulting in lower estimated fair values. As a result, we proceeded to Step 2 of the goodwill impairment analysis using the most appropriate valuation methods and compared the implied value of goodwill with the carrying value of the goodwill for each of the impaired reporting units. In applying the Step 2 analysis to the North America Hardware and North America Chemical reporting units, we determined that the fair value of certain identifiable intangibles including trademarks, customer relationships, and technology exceeded their carrying values by a significant amount which further reduced the implied fair value of goodwill. We recorded a non-cash impairment charge of $240.6 million for North America Hardware and $70.5 million for North America Chemical, for a total impairment charge of $311.1 million in the three months ended June 30, 2017 to reduce each reporting unit’s carrying value goodwill to its implied fair value. The remaining goodwill for the North America Hardware and North America Chemical reporting units was $51.4 million and $153.4 million, respectively, as of June 30, 2017, and after recording the impairment charges, the fair values of these reporting units exceeded their carrying values by 8% and 9%, respectively. The Rest of World Hardware and Rest of World Chemical reporting units were not impaired with estimated fair values of these reporting units exceeding their carrying values by 105% and 22%, respectively. As a result of our operating segment realignment discussed in Note 21, the composition of our reporting units for the evaluation of goodwill impairment has changed. Historically, our reporting units used to be one level below our operating segments, which consisted of North America Hardware, North America Chemical, Rest-Of-World Hardware and Rest-Of-World Chemical. Effective July 1, 2017, we identified one reporting unit for each of our three new segments, which are Americas, EMEA and APAC. Goodwill was reassigned to the new reporting units using a relative fair value allocation approach. As a result of the change in reporting units, we are required to test goodwill impairment for the reporting units before this change, which is satisfied by our event-driven goodwill impairment test performed on June 30, 2017. We also performed our annual goodwill impairment test as of July 1, 2017 for the new reporting units as required, which indicated no impairment for any of the three new reporting units at July 1, 2017. For the Americas, EMEA and APAC reporting units, the fair value was in excess of carrying value by 12%, 61% and 28%, respectively. 74 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 8. Goodwill and Intangible Assets, net (Continued) Intangible Assets As of September 30, 2017 and 2016, the gross amounts and accumulated amortization of intangible assets is as follows (in thousands): 2017 2016 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization 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). . . . . . . . . . . . . . . . . . . . . . . . . . . $172,603 52,930 4,327 1,457 32,260 $(64,319) (3,610) (4,327) (1,457) (11,572) $173,437 53,034 4,327 1,457 32,481 $(53,829) (2,618) (4,327) (1,457) (8,391) Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $263,577 $(85,285) $264,736 $(70,622) Estimated future intangible amortization expense as of September 30, 2017 is as follows (in thousands): 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,933 14,933 14,799 14,396 14,396 67,003 $140,460 Amortization expense included in the statements of comprehensive income for the years ended September 30, 2017, 2016 and 2015 was $14.9 million, $15.8 million and $15.9 million, respectively. In addition to amortizing intangibles, we assigned an indefinite life to the Wesco Aircraft trademark. As of September 30, 2017 and 2016, the trademark had a carrying value of $37.8 million. Note 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands): Accrued compensation and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued customer rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes (property, sales and use). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2017 2016 $16,271 4,240 2,083 2,462 10,273 $35,329 $10,067 3,931 150 1,059 11,217 $26,424 Note 10. Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, accounts receivable and payable, accrued and other current liabilities and a revolving facility. The carrying amounts of these instruments approximate fair value because of their short-term maturities. The fair value of interest rate swap agreements is determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement. The fair value of the long-term debt instruments is determined using current applicable rates for similar instruments as of the balance sheet date, a Level 2 measurement. 75 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 10. Fair Value of Financial Instruments (Continued) The carrying amounts and fair values of the debt instruments and interest rate swap hedge instrument were as follows (in thousands): September 30, 2017 Fair Value Carrying Amount September 30, 2016 Fair Value Carrying Amount Term loan A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap hedge liabilities . . . . . . . . . . . . . . . . . . . $380,000 440,562 55,000 3,365 $376,960 428,667 55,000 3,365 $401,344 440,562 — 6,672 $401,344 435,716 — 6,672 Note 11. Long-Term Debt Long-term debt consists of the following (in thousands): Term loan A facility . . . . . . . Term loan B facility . . . . . . . Revolving facility . . . . . . . . . Less: current portion . . . . Principal Amount $380,000 440,562 55,000 875,562 75,000 September 30, 2017 Deferred Debt Issuance Costs $ (7,562) (4,162) — (11,724) — Carrying Amount $372,438 436,400 55,000 863,838 75,000 Principal Amount $401,344 440,562 — 841,906 — September 30, 2016 Deferred Debt Issuance Costs $(2,247) (5,380) — (7,627) — Carrying Amount $399,097 435,182 — 834,279 — Non-current portion. . . . . . . $800,562 $(11,724) $788,838 $841,906 $(7,627) $834,279 Aggregate maturities of long-term debt as of September 30, 2017 are as follows (in thousands): Years Ended September 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000 20,000 20,000 760,562 $875,562 Sixth Amendment to Senior Secured Credit Facilities On November 2, 2017, we entered into the Sixth Amendment to Credit Agreement (the Sixth Amendment) to our credit agreement, dated as of December 7, 2012, by and among the Company, Wesco Aircraft Hardware (the Borrower) and the lenders and agents party thereto (as amended prior to the Sixth Amendment, the Existing Credit Agreement; the Existing Credit Agreement, as amended by the Sixth Amendment, the Credit Agreement). The Sixth Amendment modified the Existing Credit Agreement to increase the Excess Cash Flow Percentage (as such term is defined in the Credit Agreement) to 75%, provided that the Excess Cash Flow Percentage shall be reduced to (i) 50%, if the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) is less than 4.00 but greater than or equal to 3.00, (ii) 25%, if the Consolidated Total Leverage Ratio is less than 3.00 but greater than or equal to 2.50 and (iii) 0%, if the Consolidated Total Leverage Ratio is less than 2.50. The Sixth Amendment further modified the Credit Agreement to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility (as such term is defined in the Credit Agreement) to zero, unless the Consolidated Total Leverage Ratio (as such term is defined in the Credit 76 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 11. Long-Term Debt (Continued) Agreement), after giving effect to the incurrence of any incremental loans or commitments and the use of proceeds thereof, on a pro forma basis, would be (i) less than 4.00 but greater than or equal to 3.50, in which case the Capped Incremental Facility would be increased to $75.0 million or (ii) less than 3.50, in which case the Capped Incremental Facility would be increased to $150.0 million. The Sixth Amendment also modified the Credit Agreement to increase the Consolidated Total Leverage Ratio levels in the financial covenant set forth in the Credit Agreement to a maximum of 6.25 for the quarters ending September 30, 2017, December 31, 2017 and March 31, 2018, with step-downs to 6.00 for the quarters ending June 30, 2018 and September 30, 2018; 5.75 for the quarter ending December 31, 2018; 5.50 for the quarter ending March 31, 2019; 5.25 for the quarter ending June 30, 2019; 4.75 for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020; 4.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and 3.00 for the quarter ending June 30, 2021 and thereafter. As a result of the Amendment, we incurred $1.9 million in fees that were capitalized and will be amortized over the remaining life of the related debt. Existing Senior Secured Credit Facilities The Credit Agreement provides for (1) a $400.0 million senior secured term loan A facility (the term loan A facility), (2) a $180.0 million revolving facility (the revolving facility), and (3) a $525.0 million senior secured term loan B facility (the term loan B facility). We refer to term loan A facility, the revolving facility and the term loan B facility, together, as the ‘‘Credit Facilities.’’ On March 28, 2017, we entered into the Fifth Amendment to the Credit Agreement (the ‘‘Fifth Amendment’’). The Fifth Amendment modified the Existing Credit Agreement to increase the highest possible interest rate margin applicable to loans under the term loan A facility and loans and commitments under the revolving facility from 2.75% to 3.00% for Eurocurrency loans and from 1.75% to 2.00% for Alternate Base Rate (ABR) loans. The Fifth Amendment also modified the Existing Credit Agreement to (a) to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility and (b) increase the Consolidated Total Leverage Ratio levels in the financial covenant; however, these modifications were subsequently superseded by the Sixth Amendment. During the year ended September 30, 2017, we made four required quarterly payments totaling $20.0 million and a voluntary prepayment of $1.3 million on our term loan A facility and three voluntary prepayments totaling $22.0 million on our borrowings under the revolving facility. As of September 30, 2017, $55.0 million of indebtedness was outstanding and $125.0 million was available for borrowing under the revolving facility to fund our operating and investing activities without breaching any covenants contained in the Credit Agreement. The interest rate for the term loan A facility is based on our Consolidated Total Leverage Ratio as determined in the most recently delivered financial statements, with the respective margins ranging from 2.00% to 3.00% for Eurocurrency loans and 1.00% to 2.00% for ABR loans. The term loan A facility amortizes in equal quarterly installments of 1.25%of the original principal amount of $400.0 million with the balance due on the earlier of (i) 90 days before the maturity of the term loan B facility, and (ii) October 4, 2021. As of September 30, 2017, the interest rate for borrowings under the term loan A facility was 4.24%, which approximated the effective interest rate. The interest rate for the term loan B facility has a margin of 2.50% per annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or 1.50% per annum for ABR loans (subject to a minimum ABR floor of 1.75% per annum). The term loan B facility amortizes in equal quarterly installments of 0.25% of the original principal amount of $525.0 million, with the balance due at maturity on 77 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 11. Long-Term Debt (Continued) February 28, 2021. As of September 30, 2017, the interest rate for borrowings under the term loan B facility was 3.84%, which approximated the effective interest rate. In July 2015, we entered into interest rate swap agreements relating to this indebtedness, which are described in greater detail in Note 12 below. The interest rate for the revolving facility is based on our Consolidated Total Leverage Ratio as determined in the most recently delivered financial statements, with the respective margins ranging from 2.00% to 3.00% for Eurocurrency loans and 1.00% to 2.00% for ABR loans. The revolving facility expires on the earlier of (i) 90 days before the maturity of the term loan B facility, and (ii) October 4, 2021. As of September 30, 2017, the weighted-average interest rate for borrowings under the revolving facility was 4.24%. As a result of the Fourth Amendment to our Credit Agreement on October 4, 2016, we incurred $10.5 million in fees that were capitalized, $7.2 million of which was related to the term loan A facility and $3.3 million of which was related to the revolving facility. Of the $3.4 million of the unamortized deferred debt issuance costs related to the Credit Agreement prior to the Fourth Amendment, $2.3 million was written off as debt extinguishment loss in the year ended September 30, 2017, which was included in interest expense for the period. As a result of the Fifth Amendment to our Credit Agreement on March 28, 2017, we incurred $2.3 million in fees that were capitalized, $1.6 million of which was related to the term loan A facility and $0.7 million of which was related to the revolving facility. The deferred debt issuance costs of term loan B were not impacted by the Fourth Amendment or Fifth Amendment. The following table summarizes the total deferred debt issuance costs for the term loan A facility, the term loan B facility and the revolving facility, which will be amortized over their remaining terms. Term Loan A Facility Term Loan B Facility Revolving Facility Deferred debt issuance costs as of September 30, 2016 . . . . Write off for the Fourth Amendment. . . . . . . . . . . . . . . . . . . Deferred debt issuance costs for the Fourth Amendment . . Deferred debt issuance costs for the Fifth Amendment . . . . Amortization of deferred debt issuance costs . . . . . . . . . . . . $ 2,247 (1,769) 7,215 1,617 (1,748) Deferred debt issuance costs as of September 30, 2017 . . . . $ 7,562 $ 5,378 — — — (1,216) $ 4,162 $1,120 (553) 3,247 719 (857) Total $ 8,745 (2,322) 10,462 2,336 (3,821) $3,676 $15,400 Our borrowings under the Credit Facilities are guaranteed by us and all of our direct and indirect, wholly-owned, domestic restricted subsidiaries (subject to certain exceptions) and secured by a first lien on substantially all of our assets and the assets of our guarantor subsidiaries, including capital stock of the subsidiaries (in each case, subject to certain exceptions). The Credit Agreement contains customary negative covenants, including restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions with affiliates. As referred to above, our borrowings under the Credit Facilities are subject to a financial covenant based upon our Consolidated Total Leverage Ratio with the maximum ratio prior to the Sixth Amendment set at 4.50 for the quarter ending September 30, 2017, and after the Sixth Amendment set at 6.25 for the quarter ending September 30, 2017. Had the Consolidated Total Leverage Ratio not been increased by the Sixth Amendment, we would not have been in compliance as of September 30, 2017 or subsequent measurement dates based on our current operating forecasts and debt levels. After the Sixth Amendment, as of September 30, 2017 we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was 4.59. After the Sixth Amendment, based on our current covenants and current forecasts, we expect to be compliance for the one year period following the issuance of our 2017 financial statements. 78 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 EMEA, has a £7.0 million ($9.4 million based on the September 30, 2017 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, 2017, 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 $387.5 million through September 29, 2017, and matured on September 29, 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, which is effective on September 29, 2017 and matures on September 30, 2019, has an amortizing notional amount, $375.0 million as of September 30, 2017, giving us the contractual right to pay a fixed interest rate of 2.2625% plus the applicable margin under the term loan B facility. 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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended September 30, 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized immediately in earnings. During the year ended September 30, 2017, we did not record any hedge ineffectiveness in earnings. No portion of our interest rate swap agreements is excluded from the assessment of hedge effectiveness. Amounts reported in accumulated other comprehensive loss related to derivatives are reclassified to interest expense as interest payments are made on our variable-rate debt. As of September 30, 2017, we expected to reclassify approximately $1.6 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. 79 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 12. Derivative Financial Instruments (Continued) On October 3 and October 5, 2016, we entered into two foreign currency forward contracts to partially reduce our exposure to foreign currency fluctuations for a subsidiary’s net monetary assets, which are denominated in a foreign currency. Both foreign currency forward contracts expired on December 28, 2016. On January 6, 2017, 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 foreign currency forward contract expired on March 30, 2017. The derivatives were not designated as a hedging instrument. The change in their fair value is recognized as periodic gain or loss in the other income (loss), net line of our consolidated statement of earnings and comprehensive income. We did not have foreign currency forward contracts as of September 30, 2017 and 2016. The following table summarizes the notional principal amounts at September 30, 2017 and 2016 of our interest rate swap agreements discussed above (in thousands). We did not have foreign exchange forward contracts as of September 30, 2017 and 2016. Derivative Notional September 30, 2017 September 30, 2016 Instruments designated as accounting hedges: Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375,000 $425,000 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, 2017 and 2016 (in thousands). We did not have foreign exchange forward contracts as of September 30, 2017 and 2016. Liability Derivatives Instruments designated as accounting hedges: Interest rate swap contracts . . . Balance Sheet Locations Fair Value as of September 30, 2017 2016 Accrued expenses and other current liabilities Other liabilities $2,462 903 $1,057 5,615 The following table provides the losses of our cash flow hedging instruments (net of income tax benefit), which were transferred from accumulated other comprehensive loss to our consolidated statement of comprehensive (loss) income for the years ended September 30, 2017, 2016 and 2015 (in thousands). Cash Flow Derivatives Location in Consolidated Statement Of Comprehensive (Loss) Income Years Ended September 30, 2016 2015 2017 Interest rate swap contracts . . Interest expense, net $(385) $(1,344) $(4) The following table provides the effective portion of the losses of our cash flow hedge instruments which are recognized (net of income taxes) in other comprehensive gain (loss) for the years ended September 30, 2017, 2016 and 2015 (in thousands). Cash Flow Derivatives Years Ended September 30, 2016 2015 2017 Interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,688 $(2,973) $(2,581) 80 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 12. Derivative Financial Instruments (Continued) The following table provides a summary of changes to our accumulated other comprehensive loss related to our cash flow hedging instruments (net of income taxes) during the years ended September 30, 2017 and 2016. AOCI - Unrealized Gain (Loss) on Hedging Instruments Years Ended September 30, 2017 2016 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified to earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,206) 1,688 385 Net current period other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,073 Balance at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,133) $(2,577) (2,973) 1,344 (1,629) $(4,206) 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, 2017, 2016 and 2015 (in thousands). We did not have such derivative instruments in the year ended September 30, 2015. Instruments Not Designated As Hedging Instruments Location in Consolidated Statement of Comprehensive Income Foreign exchange contract . . . . . . . . . . . . . . . . Other income, net Years Ended September 30, 2017 2016 2015 $(1,843) $(5,606) — Note 13. Other Comprehensive Loss The components of other comprehensive loss and related tax effects for each period were as follows (dollars in thousands): 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 . . . . . . . . . . . . . . Year Ended September 30, 2017 Tax Before Tax After Tax Before Tax Year Ended September 30, 2016 Tax After Tax Before Tax Year Ended September 30, 2015 After Tax Tax 2,692 (1,004) 1,688 (4,716) 1,743 (2,973) (4,094) 1,513 (2,581) 615 (230) 385 2,132 (788) 1,344 6 (2) 4 (5,959) (1,179) (7,138) (39,211) — (39,211) (25,322) — (25,322) $(2,652) $(2,413) $(5,065) $(41,795) $ 955 $(40,840) $(29,410) $1,511 $(27,899) 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. 81 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 13. Other Comprehensive Loss (Continued) The changes in accumulated other comprehensive loss by component and related tax effects for each period were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized Losses on Derivative Instruments 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Comprehensive loss before reclassifications . . . . . . . . . . . . . . . Amounts reclassified out of accumulated other loss . . . . . . . . . . . . . . Tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,822) (25,322) — — (25,322) $(36,144) (39,211) — — (39,211) (75,355) (5,959) — (1,179) (7,138) $ — (4,094) 6 1,511 (2,577) $(2,577) (4,716) 2,132 955 (1,629) (4,206) 2,692 615 (1,234) 2,073 Total $(10,822) (29,416) 6 1,511 (27,899) $(38,721) (43,927) 2,132 955 (40,840) (79,561) (3,267) 615 (2,413) (5,065) Balance at September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(82,493) $(2,133) $(84,626) Note 14. Net (Loss) Income Per Share The following table presents net (loss) income per share and related information (dollars in thousands): Years Ended September 30, 2016 2015 2017 Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic weighted average shares outstanding. . . . . . . . . . . . . . . . . Dilutive effect of stock options and restricted shares. . . . . . . . . $ (237,346) 98,700,879 — 91,378 $ 97,634,155 531,701 $ (154,744) 96,955,043 — Dilutive weighted average shares outstanding . . . . . . . . . . . . . . 98,700,879 98,165,856 96,955,043 Basic net (loss) income per share. . . . . . . . . . . . . . . . . . . . . . . . . Diluted net (loss) income per share. . . . . . . . . . . . . . . . . . . . . . . $ $ (2.40) (2.40) $ $ 0.94 0.93 $ $ (1.60) (1.60) Shares of common stock equivalents of 3.7 million, 2.0 million, and 2.3 million for the years ended September 30, 2017, 2016 and 2015, 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, 2017, 2016 and 2015 was as follows (in thousands): 2017 2016 2015 U.S. (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(261,594) $ 63,614 $(242,864) 1,248 Foreign income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,976 13,347 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(248,247) $125,590 $(241,616) 82 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 15. Income Taxes (Continued) The components of our income tax provision (benefit) for the years ended September 30, 2017, 2016 and 2015 were as follows (in thousands): 2017 2016 2015 Current provision Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,536) $ 7,315 1,134 12,482 (591) 12,999 $ 24,797 1,726 13,247 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,872 20,931 39,770 Deferred (benefit) provision Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,730) (2,738) (3,305) 10,979 1,108 1,194 (105,748) (12,543) (8,351) Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,773) 13,281 (126,642) (Benefit) provision for income taxes . . . . . . . . . . . . . . . $(10,901) $34,212 $ (86,872) The tax impact associated with the exercise of employee stock options and vesting of restricted stock units for the year ended September 30, 2017 will be recognized in the current tax return. For the year ended September 30, 2017, $0.9 million of tax benefit was recorded as a decrease to our provision for income tax due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as discussed in Note 3. For the years ended September 30, 2016 and 2015, a reduction to paid in capital of $1.1 million of tax benefit was recorded as an increase to additional paid in capital, and $0.1 million of tax benefit was recorded as a decrease to additional paid in capital, respectively. A reconciliation of our (benefit) provision for income taxes to the U.S. federal statutory rate is as follows for the years ended September 30, 2017, 2016 and 2015 (in thousands): 2017 2016 2015 Provision (benefit) for income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . $(84,404) (4,559) 6,099 283 (3,526) (6,197) 15,057 23,644 37,537 4,123 1,042 State taxes, net of tax benefit . . . . . . . . . . . . . . Deemed foreign dividends . . . . . . . . . . . . . . . . Nondeductible items. . . . . . . . . . . . . . . . . . . . . Impact of foreign operations . . . . . . . . . . . . . . Foreign tax credit . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . Non-deductible goodwill impairment . . . . . . . Unremitted earnings of foreign subsidiaries . Tax contingencies . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.00% $43,956 1.84% 1,458 (2.46)% 3,963 (0.11)% (1,912) 1.42% (8,015) 2.50% (4,313) — (6.07)% — (9.52)% (15.12)% — (1.66)% (674) (0.43)% (251) 35.00% $(84,566) 1.16% (7,002) 4,289 3.16% (1.52)% (642) (6.38)% 2,125 (3.43)% (4,205) —% — —% — —% — 772 (0.54)% (0.21)% 2,357 35.00% 2.90% (1.78)% 0.27% (0.88)% 1.74% —% —% —% (0.32)% (0.98)% Actual (benefit) provision for income taxes . . $(10,901) 4.39% $34,212 27.24% $(86,872) 35.95% 83 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 15. Income Taxes (Continued) As of September 30, 2017 and 2016, the components of deferred income tax assets (liabilities) were as follows (in thousands): Deferred tax assets - Non-current Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves and other accruals. . . . . . . . . . . . . . . . . . . . . . . . . Compensation accruals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating losses and tax credits . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax (liabilities) - Non-current Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . Unremitted earnings of foreign subsidiaries . . . . . . . . . . . Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities - non-current . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2016 $ 92,711 1,692 2,308 20,101 3,197 19,345 2,611 141,965 (3,505) — (40,009) — (7,008) (50,522) (18,602) $ 88,000 412 1,060 — 3,674 16,827 2,119 112,092 (355) (38) — (52,072) — (52,465) (5,548) Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . $ 72,841 $ 54,079 We had deferred tax assets of $20.1 million and deferred tax liabilities of $52.1 million with respect to goodwill and other intangible assets as of September 30, 2017 and September 30, 2016, respectively. The change is primarily due to the $311.1 million goodwill impairment charge during the year ended September 30, 2017, as discussed in Note 2, a portion of which will be deductible for tax purposes. As of September 30, 2017, we had state net operating loss carryforwards of $3.0 million, which will begin to expire in 2026, and foreign net operating loss carryforwards of $9.7 million which will begin to expire in 2021. As of September 30, 2017, we had U.S. foreign tax credit carryforwards of $17.4 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, 2013. During the year ended September 30, 2017, we reassessed the potential need to repatriate foreign earnings based on our current long-range outlook, the current imbalance between cash generated and used in the U.S., and the increase in the percentage of excess cash that must be used to repay debt. We determined it was likely that we would, in the future, repatriate certain previously undistributed foreign earnings. Accordingly, we recorded a deferred tax liability for U.S. federal and state taxes of $40.0 million, which equals a $38.7 million deferred tax liability after taking into account the federal tax benefit of state taxes. Of this amount, $37.5 million was provided for through the deferred tax provision and the remaining $1.2 million is a cumulative translation adjustment to reflect currency fluctuation related to the previously undistributed earnings. The remaining undistributed earnings of foreign subsidiaries, which amount to $26.1 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 these undistributed earnings would be between $7.0 million and $8.0 million. 84 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 15. Income Taxes (Continued) We determine whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We classify gross interest and penalties and unrecognized tax benefits as non-current liabilities in the consolidated balance sheets. As of September 30, 2017, the total amount of gross unrecognized tax benefits was $6.5 million, including $1.0 million of interest and $0.3 million of penalties, all of which would impact the effective tax rate if recognized. It is reasonably possible that within the next twelve months, $0.1 million of benefit 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, 2017, 2016 and September 30, 2015 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2016 2015 $2,166 3,250 — — — (51) (133) $5,232 $2,725 — — — (579) (113) 133 $2,166 $1,901 1,716 — — — (892) — $2,725 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). Valuation Allowance Recorded During The Period Ending Balance Beginning Balance Valuation allowance for deferred tax assets: Year ended September 30, 2017 . . . . . . . . . . . . . . . . . . Year ended September 30, 2016 . . . . . . . . . . . . . . . . . . Year ended September 30, 2015 . . . . . . . . . . . . . . . . . . $5,548 5,961 4,930 $13,054 (413) 1,031 $18,602 5,548 5,961 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, 2017, there were 3,457,947 shares remaining available for issuance under the 2014 Plan. 85 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, 2017, we have outstanding 461,766 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): Weighted Average Exercise Price Number of Shares Options outstanding at September 30, 2016 . . . . . . . . . . . 2,700,157 683,230 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (614,588) Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (305,989) Forfeited options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.59 13.52 4.39 12.40 Options outstanding at September 30, 2017 . . . . . . . . . . . 2,462,810 $14.92 Options exercisable at September 30, 2017. . . . . . . . . . . . 2,001,044 $15.34 Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (1) 6.07 $6,833 6.99 6.59 $ $ 79 79 (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, 2017, 2016 and 2015 was $6.0 million, $4.5 million and $1.5 million, respectively. For the years ended September 30, 2017, 2016 and 2015, we recorded $2.6 million, $3.2 million and $3.6 million, respectively, of stock-based compensation expense related to these options that is included within selling, general and administrative expenses. At September 30, 2017, the unrecognized stock-based compensation related to these options was $1.6 million and is expected to be recognized over a weighted-average period of 1.7 years. Cash received from the exercise of stock options by us during the years ended September 30, 2017, 2016 and 2015 was $2.7 million, $6.3 million and $0.8 million, respectively. Restricted Stock Units and Restricted Stock In the year ended September 30, 2017, we granted 813,803 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, 2017, 2016 and 2015, we granted 68,493, 57,759 and 73,662, respectively, of restricted common shares to our directors. During fiscal year 2017, we also granted performance-related restricted stock units (PSUs) to certain executives. The PSUs vest after three years based on the achievement of certain predetermined goals, and are payable in shares of our common stock. One of the goals is based on our achieving a certain level of return on invested capital (ROIC) and the other goal is based on our total shareholder return (TSR) relative to certain peer companies over the three-year performance period. The actual number of shares to be issued for these PSUs is subject to 86 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 16. Stock-Based and Other Compensation Arrangements (Continued) final achievement of these goals and can range from 0% to 200% of the target shares set at the time of grant. Stock-based compensation expense for the PSUs is recognized on a straight-line basis over the performance period based upon the value determined using the intrinsic value method for the ROIC portion of the PSUs and using the Monte Carlo valuation method for the TSR portion of the PSUs. Stock-based compensation expense for the ROIC portion of the PSUs is cumulatively adjusted based upon the expected achievement of ROIC, which is assessed by management quarterly until vesting. Stock-based compensation expense for the TSR portion of the PSUs is recognized over the performance period regardless of the TSR performance. For the years ended September 30, 2017, 2016 and 2015, we recorded $3.8 million, $5.3 million and $4.3 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, 2017, 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 2.0 years. Restricted share activity during the year ended September 30, 2017 was as follows: Outstanding at September 30, 2016 . . . . . . . . . . . . . . . . . . . . Granted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 606,444 882,296 (401,433) (289,745) Outstanding at September 30, 2017 . . . . . . . . . . . . . . . . . . . . 797,562 Weighted Average Fair Value $13.63 12.63 13.99 13.80 $12.21 (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, 2017, 2016 and 2015 was $5.3 million, $3.5 million and $3.1 million, respectively. The fair value of shares that were granted during the years ended September 30, 2017, 2016 and 2015 was $11.1 million, $6.9 million and $8.8 million, respectively. The weighted average fair value at the grant date for restricted shares issued during the years ended September 30, 2017, 2016 and 2015 was $12.63, $12.29 and $16.05, respectively. Due to tax deductions associated with option exercises and restricted share activities, we realized tax benefits of $0.9 million, tax benefits of $1.1 million and a tax shortfall of $0.1 million for the years ended September 30, 2017, 2016 and 2015, respectively. The realized 2017 tax benefits were recorded as a reduction to our provision for income tax allowed by ASU 2016-09 which we early adopted on October 1, 2016 (see Note 3 for more discussion on ASU 2016-09), and the realized 2016 tax benefits and 2015 tax shortfall were recorded to the additional paid in capital account in our stockholders’ equity. Stock-Based Compensation We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, risk-free interest rate and expected dividends. We estimated expected volatility based on historical data of comparable public companies. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated 87 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 16. Stock-Based and Other Compensation Arrangements (Continued) 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: 2017 2016 2015 Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.93 6.00 6.00 30.94% 35.00% 38.51% 1.87% 1.55% — — 1.33% — The weighted average fair value per option at the grant date for options issued during the years ended September 30, 2017, 2016, and 2015 was $4.37, $4.38 and $6.52, 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-concealable 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, 2017 are as follows (dollars in thousands): Years Ended September 30, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Party Related Party Total $ 9,341 8,180 6,849 5,804 5,096 12,558 $47,828 $1,701 1,642 153 38 — — $3,534 $11,042 9,822 7,002 5,842 5,096 12,558 $51,362 Total rent expense for the years ended September 30, 2017, 2016 and 2015 was $12.6 million, $11.9 million and $11.4 million, respectively. 88 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, 2017 and September 30, 2016 are $5.3 million and $3.5 million, respectively. Future minimum lease payments under capital lease agreements as of September 30, 2017 are as follows (in thousands): 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,041 1,420 451 94 91 156 5,253 (288) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,965 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, $2.4 million and $2.1 million to this plan during the years ended September 30, 2017, 2016 and 2015, respectively. Certain non-US employees of the Company participate in other defined contribution retirement plans with varying vesting and contribution provisions. 89 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 19. Supplemental Cash Flow Information 2017 Years Ended September 30, 2016 (in thousands) 2015 Cash payments for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,386 10,287 $33,349 37,193 $32,551 16,996 Schedule of non-cash investing and financing activities: Property and equipment acquired pursuant to capital leases . . . . . . . . . . . . $ 3,891 $ 1,780 $ 333 Note 20. Quarterly Financial Data (unaudited) Summarized unaudited quarterly financial data for quarters ended December 31, 2015 through September 30, 2017 is as follows (in thousands except per share data): September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Quarters Ended: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (loss) income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net (loss) income per share (2) . . . . . . . . . . . . . . . . . Diluted net (loss) income per share (2) . . . . . . . . . . . . . . . $361,552 87,487 (38,287) (0.39) (0.39) $ $ $ 363,907 90,208 (229,608) $ $ (2.32) $ (2.32) $ $364,599 94,755 17,442 0.18 0.18 $339,371 89,457 13,107 0.13 0.13 $ $ September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 Quarters Ended: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net income per share (2) . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share (2) . . . . . . . . . . . . . . . . . . . . $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 $ $ (1) During the three months ended June 30, 2017, we recorded a non-cash goodwill impairment charge of $311.1 million. See Note 2, Note 5 and Note 8 for additional information. (2) Net income (loss) per share calculations for each quarter are based on the weighted average basic and diluted shares outstanding for that quarter and may not total to the full year amount. Note 21. Segment Reporting We 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. Prior to the three months ended September 30, 2017, we were organized on a global functional basis and we had two reportable segments, which were the North America segment and the Rest of World segment. Revenues were allocated based on the sales region responsible for the customer relationship. All corporate and other expenses benefiting both segments were reported in the segment that incurred the expenses, primarily North Americas. During the three months ended September 30, 2017, we reorganized our businesses under three geographic-based segments: the Americas, EMEA and APAC. Our CODM began reviewing segment results on this basis for purposes of allocating resources and assessing performance. Each segment’s results reflect 90 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 21. Segment Reporting (Continued) the results of our subsidiaries within that geographic region. Revenues reported by a segment reflect the customer contracts held by that segment, regardless of the geographic location of that customer. Some segments incur expenses for the benefit of the group or other segments, however these expenses are not allocated. We now present corporate expenses related to public company reporting costs and other costs that would not be required by the segments if they were operating on a standalone basis as unallocated corporate costs. We have retroactively recast our segment results and unallocated corporate expenses for the years ended September 30, 2017, 2016 and 2015. The following table presents net sales and other financial information by business segment (in thousands): Year Ended September 30, 2017 Americas EMEA APAC Unallocated Corporate Costs Consolidated Net sales (1) . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations (2) (3) . . Interest expense, net. . . . . . . . . . . . . . . . . Capital expenditures. . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . Goodwill (3) . . . . . . . . . . . . . . . . . . . . . . . $1,142,366 (213,501) 35,936 5,659 24,765 1,436,840 204,183 $258,072 25,138 3,786 3,165 3,321 275,445 51,190 $28,991 (172) 99 99 266 41,822 11,271 $ — $1,429,429 (208,795) (20,260) 39,821 — 8,923 — — 28,352 — 1,754,107 266,644 — (1) For fiscal 2017, nearly 11% of our total net sales were derived from one individual customer, which was reported under the Americas, EMEA and APAC segments. (2) Unallocated corporate costs for fiscal 2017 consisted of payroll and personnel costs of $10.1 million, stock-based compensation expenses of $3.4 million and professional fees and other corporate expenses of $6.8 million. (3) Changes in the goodwill balance for fiscal 2017 included a non-cash impairment charge of $311.1 million, of which $308.4 million was related to the Americas segment and $2.7 million was related to the APAC segment. See Note 8 for further information. Year Ended September 30, 2016 Americas EMEA APAC Unallocated Corporate Costs Consolidated Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . Income from operations (1). . . . . . . . . . . Interest expense, net. . . . . . . . . . . . . . . . . Capital expenditures. . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . Goodwill (2) . . . . . . . . . . . . . . . . . . . . . . . $1,177,496 134,159 32,595 12,728 24,412 1,639,583 512,586 $274,952 43,881 4,309 1,143 3,289 265,724 53,297 $24,918 1,196 (3) 121 279 43,271 13,982 $ — $1,477,366 158,750 (20,486) 36,901 — 13,992 — — 27,980 — 1,948,578 579,865 (1) Unallocated corporate costs for fiscal 2016 consisted of payroll and personnel costs of $6.7 million, stock-based compensation expenses of $5.3 million and professional fees and other corporate expenses of $8.5 million. (2) For fiscal 2016, the change in the goodwill balance was due to foreign currency exchange rate changes related to the EMEA segment. See Note 8 for further information. 91 Wesco Aircraft Holdings, Inc. & Subsidiaries Notes to the Consolidated Financial Statements (Continued) Note 21. Segment Reporting (Continued) Year Ended September 30, 2015 Americas EMEA APAC Unallocated Corporate Costs Consolidated Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income from operations (1) (2) . . Interest expense, net. . . . . . . . . . . . . . . . . Capital expenditures. . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . $1,191,928 (197,251) 32,921 (8,237) 23,490 $288,276 16,672 4,179 (1,373) 3,935 $17,411 (2,578) (8) (21) 301 $ (23,208) — — $1,497,615 (206,365) 37,092 (9,631) 27,726 — (1) Unallocated corporate costs for fiscal 2015 consisted of payroll and personnel costs of $6.9 million, stock-based compensation expenses of $4.9 million and professional fees and other corporate expenses of $11.4 million. (2) For fiscal 2015, we recognized a non-cash goodwill impairment charge of $263.8 million, of which $260.8 million was related to the Americas segment and $3.0 million was related to the APAC segment. Geographic Information We operated principally in the United States, United Kingdom and other foreign geographic areas in Americas, Europe and emerging markets, such as Asia, Pacific Rim and the Middle East. Net sales by geographic area, for the years ended September 30, 2017, 2016, and 2015, were as follows (dollars in thousands): 2017 Years Ended September 30, 2016 2015 Sales % of Total Sales Sales % of Total Sales Sales % of Total Sales United States of America . . . . . . . United Kingdom . . . . . . . . . . . . . . Other foreign countries . . . . . . . . . $1,062,523 179,160 187,746 74.3% $1,087,691 195,473 12.5% 194,202 13.2% 73.6% $1,101,385 190,661 13.2% 205,569 13.2% All foreign countries . . . . . . . . . . . 366,906 25.7% 389,675 26.4% 396,230 73.5% 12.7% 13.8% 26.5% Total . . . . . . . . . . . . . . . . . . . . . . . . $1,429,429 100.0% $1,477,366 100.0% $1,497,615 100.0% We determine the geographic area based on the origin of the sale. Our long-lived assets consist of property and equipment, net, intangible assets, net and investment in joint ventures. Long-lived assets by geographic area, for the years ended September 30, 2017 and 2016, were as follows (in thousands): United States of America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . All foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended September 30 2017 2016 $185,438 54,109 $239,547 $198,370 56,947 $255,317 92 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, 2017, 2016 and 2015 were as follows (dollars in thousands): 2017 Years Ended September 30 2016 2015 Sales % of Total Sales Sales % of Total Sales Sales % of Total Sales Hardware . . . . . . . . . . . . . . . . . . . . . . . . . $ 665,224 602,039 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . 100,160 Electronic components . . . . . . . . . . . . . . 34,566 Bearings . . . . . . . . . . . . . . . . . . . . . . . . . . 27,440 Machined parts and other. . . . . . . . . . . . 46.6% $ 711,177 600,124 42.1% 105,207 7.0% 34,662 2.4% 26,196 1.9% 48.2% $ 738,496 591,840 40.6% 107,918 7.1% 33,602 2.3% 25,759 1.8% 49.3% 39.5% 7.2% 2.3% 1.7% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,429,429 100.0% $1,477,366 100.0% $1,497,615 100.0% Note 22. Subsequent Event On November 2, 2017, we entered into the Sixth Amendment to our Credit Agreement. The Sixth Amendment modified the Existing Credit Agreement to increase the Excess Cash Flow Percentage (as such term is defined in the Credit Agreement) to 75%, provided that the Excess Cash Flow Percentage shall be reduced to (i) 50%, if the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) is less than 4.00 but greater than or equal to 3.00, (ii) 25%, if the Consolidated Total Leverage Ratio is less than 3.00 but greater than or equal to 2.50 and (iii) 0%, if the Consolidated Total Leverage Ratio is less than 2.50. The Sixth Amendment further modified the Credit Agreement to reduce the maximum amount permitted to be incurred under the Capped Incremental Facility (as such term is defined in the Credit Agreement) to zero, unless the Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement), after giving effect to the incurrence of any incremental loans or commitments and the use of proceeds thereof, on a pro forma basis, would be (i) less than 4.00 but greater than or equal to 3.50, in which case the Capped Incremental Facility would be increased to $75.0 million or (ii) less than 3.50, in which case the Capped Incremental Facility would be increased to $150.0 million. The Sixth Amendment also modified the Credit Agreement to increase the Consolidated Total Leverage Ratio levels in the financial covenant set forth in the Credit Agreement to a maximum of 6.25 for the quarters ending September 30, 2017, December 31, 2017 and March 31, 2018, with step-downs to 6.00 for the quarters ending June 30, 2018 and September 30, 2018; 5.75 for the quarter ending December 31, 2018; 5.50 for the quarter ending March 31, 2019; 5.25 for the quarter ending June 30, 2019; 4.75 for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020; 4.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and 3.00 for the quarter ending June 30, 2021 and thereafter. As a result of the Amendment, we incurred $1.9 million in fees that were capitalized and will be amortized over the remaining life of the related debt. See Note 11 for further information about the Credit Facilities. 93 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. Based upon their evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2017. Management’s Report on Internal Control Over Financial Reporting Our 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. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; and providing reasonable assurance regarding the prevention or timely detection of the unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision and with the participation of our chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of September 30, 2017. The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of September 30, 2017. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 94 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 2018 annual meeting of stockholders (2018 Proxy Statement) filed within 120 days after September 30, 2017 or will be included in an amendment to this Annual Report on Form 10-K filed within 120 days after September 30, 2017. To the extent such information is included in our 2018 Proxy Statement within 120 days after September 30, 2017, it is expected to be incorporated by reference to the sections of our 2018 Proxy Statement specified below. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information appearing in our 2018 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 2018 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 2018 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 2018 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.’’ ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information appearing in our 2018 Proxy Statement under the following heading is incorporated herein by reference: • ‘‘Proposal 4—Ratification of Appointment of Independent Auditors.’’ 95 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. ITEM 16. FORM 10-K SUMMARY None. 96 SIGNATURES 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. WESCO AIRCRAFT HOLDINGS, INC. Dated: November 28, 2017 By: /s/ Todd S. Renehan Todd S. Renehan 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/ TODD S. RENEHAN Todd S. Renehan Chief Executive Officer and Director (principal executive officer) November 28, 2017 /s/ KERRY A. SHIBA Kerry A. Shiba Executive Vice President and Chief Financial Officer (principal financial officer) November 28, 2017 /s/ CHRIS KING Chris King Vice President, Finance and Global Controller (principal accounting officer) November 28, 2017 /s/ RANDY J. SNYDER Randy J. Snyder Chairman of the Board of Directors November 28, 2017 /s/ DAYNE A. BAIRD Dayne A. Baird Director /s/ THOMAS M. BANCROFT Thomas M. Bancroft Director /s/ PAUL E. FULCHINO Paul E. Fulchino /s/ JAY L. HABERLAND Jay L. Haberland /s/ SCOTT E. KUECHLE Scott E. Kuechle /s/ ADAM J. PALMER Adam J. Palmer /s/ ROBERT D. PAULSON Robert D. Paulson /s/ JENNIFER M. POLLINO Jennifer M. Pollino /s/ NORTON A. SCHWARTZ Norton A. Schwartz Director Director Director Director Director Director Director 97 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 November 28, 2017 Exhibit Number 2.1 3.1 3.2 4.1 10.1 10.2 10.3 10.4 10.5 10.6 Exhibit Index Description 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)) 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)) 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)) 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)) 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)) 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)) 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)) 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)) Fifth 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 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 28, 2017 (File No. 001-35253)) Sixth 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 November 2, 2017 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 2, 2017 (File No. 001-35253)) 98 Exhibit Number 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 Description 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)) 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)) 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)) Executive Severance Agreement between Todd Renehan and Wesco Aircraft Hardware Corp., dated February 6, 2017 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2016 (File No. 001-35253)) Executive Severance Agreement between Kerry A. Shiba and Wesco Aircraft Hardware Corp., dated September 15, 2017 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 18, 2017 (File No. 001-35253)) 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)) Separation and Release Agreement, by and among Wesco Aircraft Holdings, Inc., Wesco Aircraft Hardware Corp. and David J. Castagnola, dated as of April 27, 2017 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 28, 2017 (File No. 001-35253)) Separation Agreement, by and among Wesco Aircraft Holdings, Inc., Wesco Aircraft Hardware Corp. and Richard Weller, dated as of September 15, 2017 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated September 18, 2017 (File No. 001-35253)) Separation Agreement, by and among Wesco Aircraft Holdings, Inc., Wesco Aircraft Hardware Corp. and Dan Snow, dated as of September 15, 2017 (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated September 18, 2017 (File No. 001-35253)) 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)) 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)) 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)) 99 Exhibit Number 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 Description 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)) 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)) 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)) 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)) 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)) 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)) 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)) 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)) 10.27 Form of Performance Stock Unit Agreement (fiscal 2017 grant) (Filed herewith) 10.28 10.29 10.30 10.31 10.32 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)) 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)) 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)) 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)) 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)) 100 Exhibit Number 10.33 10.34 21.1 23.1 31.1 31.2 32.1 Description 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)) 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)) List of Subsidiaries (Filed herewith) Consent of Independent Registered Public Accounting Firm (Filed herewith) 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 herewith) 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 herewith) 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 herewith) 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 101 [THIS PAGE INTENTIONALLY LEFT BLANK]  ANNUAL MEETINGThe 2018 Annual Meeting of Stockholders will be held on Thursday, January 25, 2018, at 1 p.m. Pacific Standard Time at the Hyatt Regency Valencia 24500 Town Center Drive Valencia, CA 91355INVESTOR RELATIONSWesco Aircraft Holdings, Inc. Attention: Jeff Misakian 24911 Avenue Stanford Valencia, CA 91355 Telephone: (661) 775-7200STOCK LISTINGWesco Aircraft common shares are listed on the New York Stock Exchange under the ticker symbol “WAIR.”TRANSFER AGENT AND REGISTRARAmerican Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 Telephone: (800) 937-5449INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPricewaterhouseCoopers LLP 601 South Figueroa Street Los Angeles, CA 90017 Telephone: (213) 356-6000DIRECTORSRandy J. Snyder Chairman of the Board Wesco Aircraft Holdings, Inc.Dayne A. Baird (2, 4) Principal The Carlyle GroupThomas M. Bancroft III (3, 4) Managing Member, Portfolio Manager and Chief Investment Officer Makaira Partners LLCPaul E. Fulchino (2) Operating Partner AE Industrial Partners Former Chairman, President and Chief Executive Officer Aviall, Inc.Jay L. Haberland (1, 4) Former Vice President of Business Controls United Technologies CorporationScott E. Kuechle (1, 4) Former Executive Vice President and Chief Financial Officer Goodrich CorporationAdam J. Palmer (3) Managing Director The Carlyle GroupRobert D. Paulson (1) Chief Executive Officer Aerostar Capital LLCJennifer M. Pollino (2) Executive Coach and Consultant JMPollino, LLCFormer Executive Vice President – Human Resources and Communications Goodrich CorporationTodd Renehan Chief Executive Officer Wesco Aircraft Holdings, Inc.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 MemberEXECUTIVE OFFICERSTodd Renehan Chief Executive Officer Alex Murray President and Chief Operating OfficerKerry Shiba Executive Vice President and Chief Financial OfficerDeclan Grant Executive Vice President Global Strategic Sales Corporate InformationCommercialDefenseBusiness JetAftermarketIndustrialSpacePharmaceutical/HealthcareTransportationEnergy Markets ServedWHO WE AREBROAD PRODUCT OFFERING AND SERVICE CAPABILITIESWesco Aircraft’s full-service approach aligns to the evolving needs of our customers. We offer a comprehensive range of cost-saving innovations by combining our vast breadth of products with our value-add supply chain services, allowing our customers to focus on their core competencies.VALUE PROPOSITIONOur 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.ChemicalsMachined Parts and ToolingChemical Management Services (CMS)KittingWesco Aircraft is one of the world’s leading distributors and providers of comprehensive supply chain management services to the global aerospace industry. The company’s services range from traditional distribution to the management of supplier relationships, quality assurance, kitting, just-in-time delivery, chemical management services, third-party logistics or fourth-party logistics and point-of-use inventory management.SuppliersCustomersSupplier BenefitsCustomer BenefitsReduced finished goods inventoryPrice disciplineImproved working capital and cash flowAccess to more than 7,000 customersLower administrative and selling costsImproved on-time performanceImproved machine utilizationLower SG&AReduced working capitalLower excess and obsolescence expenseImproved productivitySupply base consolidation Substantial improvement in part quality Better on-time deliveryFewer stock shortagesLower average lead-timeElectronic ComponentsHardwareBearingsQuality Assurance3PL/4PL ServicesJust-in-Time (JIT) Management Annual ReportFISCAL YEAR 2017Wesco Aircraft Holdings, Inc. 24911 Avenue Stanford Valencia, CA 91355WESCO AIRCRAFT ANNUAL REPORT 2017wescoair.com © 2017 Wesco Aircraft Holdings, Inc.

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