Company Quick10K Filing
Wesco Aircraft
Price10.98 EPS0
Shares100 P/E34
MCap1,101 P/FCF13
Net Debt749 EBIT35
TEV1,849 TEV/EBIT53
TTM 2019-09-30, in MM, except price, ratios
10-K 2019-09-30 Filed 2019-11-26
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-03
10-Q 2018-12-31 Filed 2019-02-01
10-K 2018-09-30 Filed 2018-11-16
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-31 Filed 2018-05-04
10-Q 2017-12-31 Filed 2018-02-09
10-K 2017-09-30 Filed 2017-11-29
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-Q 2016-12-31 Filed 2017-02-08
10-K 2016-09-30 Filed 2016-11-28
10-Q 2016-06-30 Filed 2016-08-05
10-Q 2016-03-31 Filed 2016-05-06
10-Q 2015-12-31 Filed 2016-02-05
10-K 2015-09-30 Filed 2015-11-30
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-08
10-Q 2014-12-31 Filed 2015-02-06
10-K 2014-09-30 Filed 2014-12-01
10-Q 2014-06-30 Filed 2014-08-06
10-Q 2014-03-31 Filed 2014-05-12
10-Q 2013-12-31 Filed 2014-02-12
10-K 2013-09-30 Filed 2013-12-10
10-Q 2013-06-30 Filed 2013-08-06
10-Q 2013-03-31 Filed 2013-05-09
10-Q 2012-12-31 Filed 2013-02-08
10-K 2012-09-30 Filed 2012-11-30
10-Q 2012-06-30 Filed 2012-08-10
10-Q 2012-03-31 Filed 2012-05-11
10-Q 2011-12-31 Filed 2012-02-06
10-K 2011-09-30 Filed 2011-12-05
10-Q 2011-06-30 Filed 2011-08-17
8-K 2020-01-09
8-K 2020-01-02
8-K 2019-11-25
8-K 2019-10-24
8-K 2019-10-14
8-K 2019-09-13
8-K 2019-08-09
8-K 2019-08-08
8-K 2019-08-08
8-K 2019-05-02
8-K 2019-01-31
8-K 2019-01-24
8-K 2018-11-15
8-K 2018-09-14
8-K 2018-08-02
8-K 2018-06-26
8-K 2018-05-03
8-K 2018-02-09
8-K 2018-02-08
8-K 2018-01-25

WAIR 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation and Significant Accounting Policies
Note 2. Recent Accounting Pronouncements
Note 3. Inventory
Note 4. Goodwill
Note 5. Fair Value of Financial Instruments
Note 6. Long - Term Debt
Note 7. Comprehensive Income
Note 8. Net Income per Share
Note 9. Segment Reporting
Note 10. Income Taxes
Note 11. Shareholders' Equity
Note 12. Commitments and Contingencies
Note 13. Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit101.htm
EX-10.2 exhibit102.htm
EX-31.1 wair-2019630exx311.htm
EX-31.2 wair-2019630exx312.htm
EX-32.1 wair-2019630exx321.htm

Wesco Aircraft Earnings 2019-06-30

Balance SheetIncome StatementCash Flow
2.52.01.51.00.50.02012201420172020
Assets, Equity
0.50.40.30.20.10.02012201420172020
Rev, G Profit, Net Income
0.60.40.1-0.1-0.4-0.62012201420172020
Ops, Inv, Fin

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the Quarterly Period Ended June 30, 2019
 OR
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 001-35253
 
WESCO AIRCRAFT HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
20-5441563
(State of Incorporation)
 
(I.R.S. Employer Identification Number)

24911 Avenue Stanford
Valencia, CA 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
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
WAIR
 
New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
 
 
Accelerated filer
Non-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 Exchange Act).  Yes    No 
 
The number of shares of common stock (par value $0.001 per share) of the registrant outstanding as of August 1, 2019 was 99,749,063.


Table of Contents

INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
June 30,
2019
 
September 30,
2018
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
45,418

 
$
46,222

Accounts receivable, net of allowance for doubtful accounts of $2,909 and $2,877 at June 30, 2019 and September 30, 2018, respectively
333,446

 
283,775

Inventories
879,565

 
884,212

Prepaid expenses and other current assets
18,110

 
15,291

Income taxes receivable
2,602

 
2,017

Total current assets
1,279,141

 
1,231,517

Property and equipment, net
54,186

 
44,205

Deferred debt issuance costs, net
1,848

 
2,827

Goodwill
266,644

 
266,644

Intangible assets, net
152,241

 
163,438

Deferred tax assets
67,823

 
65,135

Other assets
14,300

 
15,710

Total assets
$
1,836,183

 
$
1,789,476

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
216,400

 
$
180,494

Accrued expenses and other current liabilities
52,569

 
42,767

Income taxes payable
4,111

 
2,295

Capital lease obligations, current portion
1,877

 
2,205

Short-term borrowings and current portion of long-term debt
58,000

 
74,000

Total current liabilities
332,957

 
301,761

Capital lease obligations, less current portion
1,475

 
2,329

Long-term debt, less current portion
759,712

 
771,777

Deferred income taxes
3,507

 
2,803

Other liabilities
12,440

 
18,337

Total liabilities
1,110,091

 
1,097,007

Commitments and contingencies (Note 12)


 


Stockholders’ equity
 

 
 

Preferred stock, $0.001 par value per share: 50,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value, 950,000,000 shares authorized, 99,749,063 and 99,557,885 shares issued and outstanding at June 30, 2019 and September 30, 2018, respectively
100

 
99

Additional paid-in capital
451,544

 
444,531

Accumulated other comprehensive loss
(88,788
)
 
(82,980
)
Retained earnings
363,236

 
330,819

Total stockholders’ equity
726,092

 
692,469

Total liabilities and stockholders’ equity
$
1,836,183

 
$
1,789,476


See the accompanying notes to the consolidated financial statements

3

Table of Contents

Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Statements of Earnings and Comprehensive Income
(In thousands, except share data)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
442,374

 
$
410,359

 
$
1,264,159

 
$
1,163,633

Cost of sales
336,504

 
306,162

 
951,200

 
859,277

Gross profit
105,870

 
104,197

 
312,959

 
304,356

Selling, general and administrative expenses
83,368

 
74,869

 
238,539

 
217,260

Income from operations
22,502

 
29,328

 
74,420

 
87,096

Interest expense, net
(12,878
)
 
(12,717
)
 
(38,180
)
 
(36,520
)
Other (expense) income, net
(630
)
 
239

 
(1,161
)
 
391

Income before income taxes and equity method investment impairment charge
8,994

 
16,850

 
35,079

 
50,967

Benefit (provision) for income taxes
7,377

 
(6,096
)
 
(405
)
 
(25,587
)
Income before equity method investment impairment charge
16,371

 
10,754

 
34,674

 
25,380

Equity method investment impairment charge, net of income taxes
(2,257
)
 

 
(2,257
)
 

Net income
14,114

 
10,754

 
32,417

 
25,380

Other comprehensive (loss) income, net of income taxes
(1,576
)
 
(3,106
)
 
(5,808
)
 
1,009

Comprehensive income
$
12,538

 
$
7,648

 
$
26,609

 
$
26,389

Net income per share:
 

 
 

 
 

 
 

Basic
$
0.14

 
$
0.11

 
$
0.33

 
$
0.26

Diluted
$
0.14

 
$
0.11

 
$
0.32

 
$
0.26

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
99,647,188

 
99,180,632

 
99,586,122

 
99,137,710

Diluted
100,205,475

 
99,739,217

 
100,029,458

 
99,396,613

 
See the accompanying notes to the consolidated financial statements

4

Table of Contents

Wesco Aircraft Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Nine Months Ended 
 June 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income
$
32,417

 
$
25,380

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
21,327

 
21,909

Amortization of deferred debt issuance costs
3,914

 
4,300

Bad debt and sales return reserve
232

 
503

Stock-based compensation expense
7,418

 
6,286

Net inventory provision
(1,555
)
 
10,976

Equity method investment impairment charge
2,966

 

Deferred income taxes
(24
)
 
523

Other non-cash items
(556
)
 
(678
)
Subtotal
66,139

 
69,199

Changes in assets and liabilities:
 

 
 

Accounts receivable
(50,321
)
 
(47,008
)
Income taxes receivable
(582
)
 
995

Inventories
6,219

 
(76,884
)
Prepaid expenses and other assets
(6,476
)
 
1,608

Accounts payable
33,400

 
9,122

Accrued expenses and other liabilities
(870
)
 
14,648

Income taxes payable
1,805

 
9,255

Net cash provided by (used in) operating activities
49,314

 
(19,065
)
 
 
 
 
Cash flows from investing activities
 

 
 

Purchase of property and equipment
(16,481
)
 
(4,009
)
Net cash used in investing activities
(16,481
)
 
(4,009
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from short-term borrowings
57,000

 
67,500

Repayment of short-term borrowings
(73,000
)
 
(41,000
)
Repayment of long-term debt
(15,000
)
 
(15,000
)
Debt issuance costs

 
(1,900
)
Repayment of capital lease obligations
(2,094
)
 
(2,207
)
Net proceeds from exercise of stock options
37

 
63

Settlement on restricted stock tax withholding
(442
)
 
(126
)
Net cash (used in) provided by financing activities
(33,499
)
 
7,330

Effect of foreign currency exchange rate on cash and cash equivalents
(138
)
 
(293
)
Net decrease in cash and cash equivalents
(804
)
 
(16,037
)
Cash and cash equivalents, beginning of period
46,222

 
61,625

Cash and cash equivalents, end of period
$
45,418

 
$
45,588

 
See the accompanying notes to the consolidated financial statements

5

Table of Contents

Wesco Aircraft Holdings, Inc. & Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
 
Note 1. Basis of Presentation and Significant Accounting Policies
 
The accompanying unaudited consolidated financial statements include the accounts of Wesco Aircraft Holdings, Inc. and its wholly owned subsidiaries (referred to herein as Wesco or the Company) prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements presented herein have not been audited by an independent registered public accounting firm but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for fair statement of the financial position, results of operations and cash flows for the period. However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year. The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. Actual amounts could differ from these estimates. Our financial statements have been prepared under the assumption that our Company will continue as a going concern.

Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (the SEC). The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2018 filed with the SEC on November 16, 2018 (the 2018 Form 10-K).

Except for the changes below, no material changes have been made to our significant accounting policies disclosed in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of the 2018 Form 10-K.

Revenue from Contracts with Customers

Pursuant to Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (ASC 606), we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Typically, our master purchase contracts with our customer run for three to five years without minimum purchase requirements annually or for over the term of the contract, and contain termination for convenience provisions, which generally allow for our customers to terminate their contracts on short notice without meaningful penalties. Pursuant to ASC 606, we have concluded that for revenue recognition purposes, our customers’ purchase orders (P.O.'s) are considered contracts, which are supplemented by certain contract terms such as service fee arrangements and variable price considerations in our master purchase contracts. The P.O.'s are typically fulfilled within one year.
 
Our contracts for hardware and chemical product sales have a single performance obligation. Revenues from these contract sales are recognized when the customer obtains control of our products, which occurs at a point in time, typically upon delivery in accordance with the terms of the sales contract. Services under our hardware just-in-time (JIT) arrangements are provided by us contemporaneously with the delivery of these products and are not separately identifiable from the products, and as such, once the products are delivered, we do not have a post-delivery obligation to provide services to the customer. Accordingly, the price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the products. Payment is generally due within 30 to 90 days of delivery; therefore, our contracts do not create significant financing components. Warranties are limited to replacement of goods that are defective upon delivery. The Company does not provide service-type warranties.

Our chemical management services (CMS) contracts include the sale of chemical products as well as services such as product procurement, receiving and quality inspection, warehouse and inventory management, and waste disposal. The CMS contracts represent an end-to-end integrated chemical management solution. While each of the products and various services benefits the customer, we determined that they are a single output in the context of the CMS contract due to the significant

6

Table of Contents

commercial integration of these products and services. Therefore, chemical products and services provided under a CMS contract represent a single performance obligation and revenue is recognized over time for these contracts using product deliveries as our output measure of progress under the CMS contract to depict the transfer of control to the customer.    

We report revenue on a gross or net basis in our presentation of net sales and costs of sales based on management’s assessment of whether we act as a principal or agent in the transaction. If we are the principal in the transaction and have control of the specified good or service before that good or service is transferred to a customer, the transactions are recorded as gross in the consolidated statements of comprehensive income. If we do not act as a principal in the transaction, the transactions are recorded on a net basis in the consolidated statements of earnings and comprehensive income. This assessment requires significant judgment to evaluate indicators of control within our contracts. We base our judgment on various indicators that include whether we take possession of the products, whether we are responsible for their acceptability, whether we have inventory risk, and whether we have discretion in establishing the price paid by the customer. The majority of our revenue is recorded on a gross basis with the exception of certain gas, energy and chemical management service contracts that are recorded on a net basis.

With respect to variable consideration, we apply judgment in estimating its impact to determine the amount of revenue to recognize. Sales rebates and profit-sharing arrangements are accounted for as a reduction to gross sales and recorded based upon estimates at the time products are sold. These estimates are based upon historical experience for similar programs and products. We review such rebates and profit-sharing arrangements on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available. We provide allowances for credits and returns based on historic experience and adjust such allowances as considered necessary. To date, such provisions have been within the range of our expectations and the allowance established. Returns and refunds are allowed only for materials that are defective or not compliant with the customer’s order. Sales tax collected from customers is excluded from net sales in the consolidated statements of comprehensive income.

We have determined that sales backlog is not a relevant measure of our business. Few, if any, of our contracts include minimum purchase requirements, annually or over the term of the agreement. As a result, we have no material sales backlog.

Equity Method Investment

We apply the equity method of accounting for investments in which we have significant influence but not a controlling interest. Our APAC reporting unit has an equity investment in a joint venture in China, the carrying value of which was $7.4 million and $10.4 million as of June 30, 2019 and September 30, 2018, respectively, and was included in “Other assets” in the unaudited Consolidated Balance Sheets. During the three months ended June 30, 2019, we recorded an impairment charge of $3.0 million ($2.3 million net of income taxes) resulting from a decline in value below the carrying amount of our equity method investment which we determined was other than temporary in nature.
 
Note 2. Recent Accounting Pronouncements
 
Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASB’s Accounting Standards Codification (ASC).

We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

New Accounting Standards Issued

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company in fiscal year 2021, including interim reporting periods within that reporting period, and all annual and interim reporting periods thereafter. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 is amended by ASU 2018-01, ASU2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, which FASB issued in January 2018, July 2018, July 2018, December 2018 and March 2019, respectively (collectively, the amended ASU 2016-02). The amended ASU 2016-02 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and presentation of

7

Table of Contents

expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. The amended ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The amended ASU 2016-02 also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. A modified retrospective transition approach is permitted to be used when an entity adopts the amended ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. The amended ASU 2016-02 is effective for the Company in fiscal year 2020 and interim periods therein, with early application permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. We have compiled our worldwide lease population, completed our evaluation of the completeness of our lease population and are in the process of uploading our leases into a new cloud-based lease accounting system. The adoption of the amended ASU 2016-02 is expected to result in material increases to our balance sheet for the recognition of right-of-use assets and lease liabilities. As of September 30, 2018, total future minimum payments under our operating leases amounted to $50.8 million.
 
Adopted Accounting Standards

On October 1, 2018, we adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements.

On October 1, 2018, we adopted 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. The adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which the FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017, respectively (collectively, the amended ASU 2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.

Effective October 1, 2018, we adopted the amended ASU 2014-09 (ASC 606) using the modified retrospective method of adoption, which resulted in no changes to our opening consolidated balance sheet at the beginning of October 1, 2018. Our initial and incremental contract acquisition costs including sign up commissions and set up costs, which are required to be capitalized under ASC 606, are insignificant and expensed as incurred. Our revenues recognized under ASC 606 for the three and nine months ended June 30, 2019 were not materially different from what would have been recognized under the previous revenue standard, ASC 605, that is superseded. Prior period consolidated statements of earnings and comprehensive income remain unchanged.

We have designed and implemented internal controls, policies and processes to comply with ASC 606. The additional disclosures required by ASC 606 are included in Note 1 and Note 9.


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Note 3. Inventory
 
Our inventory is comprised solely of finished goods. We record provisions to write down excess and obsolete (E&O) inventory to estimated net realizable value.

We continually assess and refine our methodology for evaluating E&O inventory based on current facts and circumstances. Our hardware inventory E&O assessment requires the use of subjective judgments and estimates including the forecasted demand for each part. The forecasted demand considers a number of factors, including historical sales trends, current and forecasted customer demand, including customer liability provisions based on selected contractual rights, consideration of available sales channels and the time horizon over which we expect the hardware part to be sold. 

During the three months ended June 30, 2019 and 2018, net adjustments to cost of sales related to E&O inventory related activities were $(4.1) million and $6.2 million, respectively. The net adjustments for the three months ended June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($2.4 million and $12.9 million, respectively) offset by sales and disposals ($6.5 million and $6.7 million, respectively) of inventory for which an E&O provision was provided previously through expense recognized in prior periods. During the nine months ended June 30, 2019 and 2018, net adjustments to cost of sales related to E&O inventory related activities were $(1.6) million and $11.0 million, respectively. The net adjustments for the nine months ended June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($17.0 million and $28.1 million, respectively) offset by sales and disposals ($18.6 million and $17.1 million, respectively) of inventory for which an E&O provision was provided previously through expense recognized in prior periods. We believe that these amounts appropriately write-down our inventory to its net realizable value. 

Note 4. Goodwill
  
As of June 30, 2019, goodwill consists of the following (in thousands):
 
 
Americas
 
EMEA
 
APAC
 
Total
Goodwill as of September 30, 2018, gross
 
$
773,384

 
$
51,190

 
$
16,955

 
$
841,529

Accumulated impairment
 
(569,201
)
 

 
(5,684
)
 
(574,885
)
Goodwill as of September 30, 2018, net
 
204,183

 
51,190

 
11,271

 
266,644

 
 
 
 
 
 
 
 
 
Changes during the period
 

 

 

 

 
 
 
 
 
 
 
 
 
Goodwill as of June 30, 2019, gross
 
773,384

 
51,190

 
16,955

 
841,529

Accumulated impairment
 
(569,201
)
 

 
(5,684
)
 
(574,885
)
Goodwill as of June 30, 2019, net
 
$
204,183

 
$
51,190

 
$
11,271

 
$
266,644



Note 5. Fair Value of Financial Instruments
 
Derivative Financial Instruments

Our primary objective in using financial derivatives is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign exchange rates and changes in interest rates. Our use of financial derivatives exposes us to credit risk to the extent that associated counter-parties may be unable to meet the terms of the derivatives. We, however, seek to mitigate such risks by limiting our counter-parties to major financial institutions. In addition, the potential risk of loss with any one counter-party resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counter-parties.
 
Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We have three interest rate swap agreements outstanding, which we have designated as cash flow hedges, in order to reduce our exposure to variability in cash flows related to interest payments on a portion of our outstanding debt. The first interest rate swap agreement (the "First Swap Agreement") has an amortizing notional amount, which was $200.0 million on June 30, 2019, and matures on September 30, 2019, giving us the contractual right to pay a fixed interest rate

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of 2.2625% plus the applicable margin under the term loan B facility (as defined in Note 6 below; see Note 6 for the applicable margin). The remaining two interest rate swap agreements (the “Remaining Swap Agreements”), entered into on May 14, 2018, have variable notional amounts which initially will increase in amount approximately equal to amortization of the notional amount of the First Swap Agreement and then amortize thereafter. The Remaining Swap Agreements totaled $198.3 million on June 30, 2019, and mature on February 26, 2021, giving us the contractual right to pay a fixed interest rate of 2.79% plus the applicable margin under the term loan B facility (as defined in Note 6 below; see Note 6 for the applicable margin).

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended June 30, 2019, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. No portion of our interest rate swap agreements is excluded from the assessment of hedge effectiveness.

Amounts reported in AOCI related to derivatives and the related deferred tax are reclassified to interest expense as interest payments are made on our variable-rate debt. As of June 30, 2019, we expect to reclassify $3.0 million from accumulated other comprehensive loss and the related deferred tax to earnings as an increase to interest expense over the next 12 months when the underlying hedged item impacts earnings.

Non-Designated Derivatives

From time to time, we enter into foreign currency forward contracts to partially reduce our exposure to foreign currency fluctuations for a subsidiary's net monetary assets, which are denominated in a foreign currency. The derivatives are not designated as a hedging instrument. The change in their fair value is recognized as periodic gain or loss in the other income, net line of our consolidated statements of earnings and comprehensive income. We did not have foreign currency forward contracts as of June 30, 2019 and September 30, 2018.

The following table summarizes the notional principal amounts at June 30, 2019, and September 30, 2018 of our outstanding interest rate swap agreements discussed above (in thousands).

 
 
 
Derivative Notional
 
 
 
June 30, 2019
 
September 30, 2018
Instruments designated as accounting hedges:
 
 
 
 
Interest rate swap contracts
 
$
398,300

 
$
435,800


 
The following table provides the location and fair value amounts of our financial instruments, which are reported in our consolidated balance sheets as of June 30, 2019 and September 30, 2018 (in thousands).
 
 
 
 
 
Fair Value
 
 
Balance Sheet Locations
 
June 30, 2019
 
September 30, 2018
Instruments designated as accounting hedge:
 
 
 
 
 
 
Interest rate swap contracts
 
Other current assets
 
$
34

 
$
1,045

Interest rate swap contracts
 
Other assets
 

 
1,051

Interest rate swap contracts
 
Accrued expenses and other current liabilities
 
3,038

 
289

Interest rate swap contracts
 
Other liabilities
 
2,431

 


 
The following table provides the (gain) losses of our cash flow hedging instruments (net of income tax benefit), which were transferred from AOCI to interest expense on our consolidated statements of earnings and comprehensive income during the three and nine months ended June 30, 2019 and 2018 (in thousands).
 

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Location in Consolidated
Statements of Earnings and
Comprehensive Income
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
 
 
 
Cash Flow Hedge
 
 
2019
 
2018
 
2019
 
2018
Interest rate swap contracts
 
Interest (income) expense, net
 
$
(27
)
 
$
(20
)
 
$
(97
)
 
$
841

 
 
 
 
 
 
 
 
 
 
 
Total interest expense, net presented in the consolidated statements of earnings and comprehensive income in which the above effects of cash flow hedges are recorded
 
$
12,878

 
$
12,717

 
$
38,180

 
$
36,520


 
The following table provides the effective portion of the amount of (loss) gain recognized in other comprehensive income (net of income taxes) for the three and nine months ended June 30, 2019 and 2018 (in thousands).
 
 
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
 
 
Cash Flow Hedge
 
2019
 
2018
 
2019
 
2018
Interest rate swap contracts
 
$
(1,892
)
 
$
(91
)
 
$
(5,174
)
 
$
2,740



The following table provides a summary of changes to our AOCI related to our cash flow hedging instrument (net of income taxes) during the three and nine months ended June 30, 2019 (in thousands).

AOCI - Unrealized (Loss) Gain on Hedging Instruments
 
Three Months Ended June 30, 2019
 
Nine Months Ended June 30, 2019
Balance at beginning of period
 
$
(1,977
)
 
$
1,375

Change in fair value of hedging instruments
 
(1,892
)
 
(5,174
)
Amounts reclassified to earnings
 
(27
)
 
(97
)
Net current period other comprehensive loss
 
(1,919
)
 
(5,271
)
Balance at end of period
 
$
(3,896
)
 
$
(3,896
)



Other Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable and payable, accrued expenses and other current liabilities, and the Credit Facilities (as defined below in Note 6). The carrying amounts of these instruments approximate fair value because of their short-term duration. The fair value of interest rate swap agreements is determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement (as defined below). The fair value of the long-term debt instruments is determined using current applicable rates for similar instruments as of the balance sheet date, a Level 2 measurement (as defined below). The principal amounts and fair values of the debt instruments and interest rate swap agreements were as follows (in thousands):

 
June 30, 2019
 
September 30, 2018
 
Principal
Amount
 
Fair
Value
 
Principal
Amount
 
Fair
Value
Term loan A facility
$
345,000

 
$
341,550

 
$
360,000

 
$
357,840

Term loan B facility
440,562

 
433,514

 
440,562

 
432,192

Revolving facility
38,000

 
38,000

 
54,000

 
54,000

Interest rate swap contract liability (assets), net
5,435

 
5,435

 
(1,807
)
 
(1,807
)


Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, we primarily utilize reported market transactions and discounted cash flow analysis. We use a three-tier fair value hierarchy that maximizes the use of observable inputs and

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minimizes the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3:
Unobservable inputs for the asset or liability.

The definition of fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counter-party or us) will not be fulfilled. For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

There were no transfers between the assets and liabilities under Level 1 and Level 2 during the nine months ended June 30, 2019. The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring basis in our consolidated balance sheets as of June 30, 2019 and September 30, 2018 (in thousands).

June 30, 2019
Balance Sheet Locations
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
Instruments designated as accounting hedge:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other current assets
 
$
34

 
$

 
$
34

 
$

Interest rate swap contracts
Accrued expenses and other current liabilities
 
3,038

 

 
3,038

 

Interest rate swap contracts
Other liabilities
 
2,431

 

 
2,431

 


September 30, 2018
Balance Sheet Locations
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
Instrument designated as accounting hedge:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other current assets
 
$
1,045

 
$

 
$
1,045

 
$

Interest rate swap contracts
Other assets
 
1,051

 

 
1,051

 

Interest rate swap contracts
Accrued expenses and other current liabilities
 
289

 

 
289

 



We use observable market-based inputs to calculate fair value of our interest rate swap agreements and outstanding debt instruments, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market‑based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.


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Note 6. Long-Term Debt
 
Long-term debt consists of the following (in thousands):
 
 
June 30, 2019
 
September 30, 2018
 
 
Principal
 Amount
 
Deferred Debt Issuance Costs
 
Carrying
Amount
 
Principal
 Amount
 
Deferred Debt Issuance Costs
 
Carrying
Amount
Term loan A facility
 
$
345,000

 
$
(3,820
)
 
$
341,180

 
$
360,000

 
$
(5,842
)
 
$
354,158

Term loan B facility
 
440,562

 
(2,030
)
 
438,532

 
440,562

 
(2,943
)
 
437,619

Revolving facility
 
38,000

 

 
38,000

 
54,000

 

 
54,000

 
 
823,562

 
(5,850
)
 
817,712

 
854,562

 
(8,785
)
 
845,777

Less: current portion
 
58,000

 

 
58,000

 
74,000

 

 
74,000

Non-current portion
 
$
765,562

 
$
(5,850
)
 
$
759,712

 
$
780,562

 
$
(8,785
)
 
$
771,777


 
Senior Secured Credit Facilities

The credit agreement, dated as of December 7, 2012 (as amended, the Credit Agreement), by and among the Company, Wesco Aircraft Hardware Corp. and the lenders and agents party thereto, which governs our senior secured credit facilities, provides for (1) a $400.0 million senior secured term loan A facility (the term loan A facility), (2) a $180.0 million revolving facility (the revolving facility) and (3) a $525.0 million senior secured term loan B facility (the term loan B facility). We refer to the term loan A facility, the revolving facility and the term loan B facility, together, as the “Credit Facilities.”

As of June 30, 2019, our outstanding indebtedness under our Credit Facilities was $823.6 million, which consisted of (1) $345.0 million of indebtedness under the term loan A facility, (2) $38.0 million of indebtedness under the revolving facility, and (3) $440.6 million of indebtedness under the term loan B facility. As of June 30, 2019, a $1.0 million letter of credit was outstanding and $141.0 million was available for borrowing under the revolving facility to fund our operating and investing activities without breaching any covenants contained in the Credit Agreement.

During the nine months ended June 30, 2019, we borrowed $57.0 million under the revolving facility, and made our required quarterly payments of $15.0 million on our term loan A facility and voluntary prepayments totaling $73.0 million on our borrowings under the revolving facility.

The interest rate for the term loan A facility is based on our Consolidated Total Leverage Ratio (as such term is defined in the Credit Agreement) as determined in the most recently delivered financial statements, with the respective margins ranging from 2.00% to 3.00% for Eurocurrency loans and 1.00% to 2.00% for ABR loans. The term loan A facility amortizes in equal quarterly installments of 1.25% of the original principal amount of $400.0 million with the balance due on the earlier of (1) 90 days before the maturity of the term loan B facility, and (2) October 4, 2021. As of June 30, 2019, the interest rate for borrowings under the term loan A facility was 5.44%, which approximated the effective interest rate.

The interest rate for the term loan B facility has a margin of 2.50% per annum for Eurocurrency loans (subject to a minimum Eurocurrency rate floor of 0.75% per annum) or 1.50% per annum for ABR loans (subject to a minimum ABR floor of 1.75% per annum). The term loan B facility amortizes in equal quarterly installments of 0.25% of the original principal amount of $525.0 million, with the balance due at maturity on February 28, 2021. As of June 30, 2019, the interest rate for borrowings under the term loan B facility was 4.94%, which approximated the effective interest rate. We have an interest rate swap agreement relating to this indebtedness, which is described in greater detail in Note 5 above.

The interest rate for the revolving facility is based on our Consolidated Total Leverage Ratio as determined in the most recently delivered financial statements, with the respective margins ranging from 2.00% to 3.00% for Eurocurrency loans and 1.00% to 2.00% for ABR loans. The revolving facility expires on the earlier of (1) 90 days before the maturity of the term loan B facility, and (2) October 4, 2021. As of June 30, 2019, the weighted-average interest rate for borrowings under the revolving facility was 5.42%.

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).


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The Credit Agreement contains customary negative covenants, including restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness or enter into transactions with affiliates. Our borrowings under the Credit Facilities are subject to a financial covenant based upon our Consolidated Total Leverage Ratio, with the maximum ratio set at 5.25 for the quarter ending June 30, 2019. As of June 30, 2019, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was 4.02. The Consolidated Total Leverage Ratio requirement for the financial covenant
is scheduled to step-down to 4.75 for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020; 4.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and 3.00 for the quarter ending June 30, 2021 and thereafter. Based on our current covenants and forecasts, we expect to be in compliance for the one-year period after August 8, 2019.

The Credit Agreement also includes an Excess Cash Flow Percentage (as such term is defined in the Credit Agreement), which is currently set at 75%, provided that the Excess Cash Flow Percentage shall be reduced to (1) 50%, if the Consolidated Total Leverage Ratio is less than 4.00 but greater than or equal to 3.00, (2) 25%, if the Consolidated Total Leverage Ratio is less than 3.00 but greater than or equal to 2.50, and (3) 0%, if the Consolidated Total Leverage Ratio is less than 2.50. The excess cash flow payment calculation is determined annually, and for fiscal year 2018, no excess cash flow payment was required.

The following table summarizes the total deferred debt issuance costs for the term loan A facility, the term loan B facility and the revolving facility as of June 30, 2019 and September 30, 2018 (dollars in thousands). The remaining deferred debt issuance costs as of June 30, 2019 will be amortized over their remaining terms.
 
 
Term Loan A Facility
 
Term Loan B Facility
 
Revolving Facility
 
Total
Deferred debt issuance costs as of September 30, 2018
 
$
5,842

 
$
2,943

 
$
2,827

 
$
11,612

Amortization of deferred debt issuance costs
 
(2,022
)
 
(913
)
 
(979
)
 
(3,914
)
Deferred debt issuance costs as of June 30, 2019
 
$
3,820

 
$
2,030

 
$
1,848

 
$
7,698



UK Line of Credit

Our subsidiary, Wesco Aircraft EMEA, Ltd., has a £5.0 million ($6.3 million based on the June 30, 2019 exchange rate) line of credit that automatically renews annually on November 1 (the UK line of credit). The line of credit bears interest based on the base rate plus an applicable margin of 1.65%. As of June 30, 2019, the full £5.0 million was available for borrowing under the UK line of credit without breaching any covenants contained in the agreements governing our indebtedness.
 
Note 7. Comprehensive Income
 
Comprehensive income, which is net of income taxes, consists of the following (in thousands):
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
14,114

 
$
10,754

 
$
32,417

 
$
25,380

Foreign currency translation gain (loss)
343

 
(3,015
)
 
(537
)
 
(1,731
)
Unrealized (loss) gain on cash flow hedging instruments
(1,919
)
 
(91
)
 
(5,271
)
 
2,740

Total comprehensive income
$
12,538

 
$
7,648

 
$
26,609

 
$
26,389


 

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Note 8. Net Income Per Share
 
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share includes the dilutive effect of both outstanding stock options and restricted stock, if any, calculated using the treasury stock method. Assumed proceeds from in-the-money awards are calculated under the “as-if” method as prescribed by ASC 718, Compensation—Stock Compensation. The following table provides our basic and diluted net income per share for the three and nine months ended June 30, 2019 and 2018 (dollars in thousands except share data):
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
14,114

 
$
10,754

 
$
32,417

 
$
25,380

Basic weighted average shares outstanding
99,647,188

 
99,180,632

 
99,586,122

 
99,137,710

Dilutive effect of stock options and restricted stock
558,287

 
558,585

 
443,336

 
258,903

Dilutive weighted average shares outstanding
100,205,475

 
99,739,217

 
100,029,458

 
99,396,613

Basic net income per share
$
0.14

 
$
0.11

 
$
0.33

 
$
0.26

Diluted net income per share
$
0.14

 
$
0.11

 
$
0.32

 
$
0.26


 
For the three months ended June 30, 2019 and 2018, 2,498,189 and 2,367,729 shares of common stock equivalents, respectively, were not included in the diluted calculation due to their anti-dilutive effect. For the nine months ended June 30, 2019 and 2018, 3,122,135 and 2,874,825 shares of common stock equivalents, respectively, were not included in the diluted calculation due to their anti-dilutive effect. 

Note 9. Segment Reporting
 
We are organized based on geographical location. We conduct our business through three reportable segments: the Americas, EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific).

We evaluate segment performance based primarily on segment income from operations. Each segment reports its results of operations and makes requests for capital expenditures and working capital needs to our chief operating decision-maker (CODM). Our Chief Executive Officer serves as our CODM.

The following tables present operating and financial information by business segment (in thousands):
 
Three Months Ended June 30, 2019
 
Americas
 
EMEA
 
APAC
 
Unallocated Corporate Costs
 
Consolidated
Net sales
$
364,098

 
$
63,634

 
$
14,642

 
$

 
$
442,374

Income (loss) from operations
32,852

 
(1,948
)
 
1,492

 
(9,894
)
 
22,502

Interest expense, net
(11,518
)
 
(1,336
)
 
(24