UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~March 31,~~June 30, 2019

o☐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.~~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, CA91355

(Address of Principal Executive Offices and Zip Code)

~~(661)~~ (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. Yesx☒ No o☐

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). Yesx☒ No o☐

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	x ☒	Accelerated filer	o ☐
Non-accelerated filer	o ☐	Smaller reporting company	o ☐
		Emerging growth company	o☐

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. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒

The number of shares of common stock (par value $0.001 per share) of the registrant outstanding as of ~~April 25,~~August 1, 2019 was ~~99,743,379.~~99,749,063.

INDEX



PART I		Page
FINANCIAL INFORMATION

Item 1.	Financial Statements:	3
	Consolidated Balance Sheets as of ~~March 31,~~June 30, 2019 and September 30, 2018	3
	Consolidated Statements of Earnings and Comprehensive Income for the Three and ~~Six~~Nine Months ended ~~March 31,~~June 30, 2019 and 2018	4
	Consolidated Statements of Cash Flows for the ~~Six~~Nine Months ended ~~March 31,~~June 30, 2019 and 2018	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3537
Item 4.	Controls and Procedures	3637

PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	3738
Item 1A.	Risk Factors	3738
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3739
Item 3.	Defaults Upon Senior Securities	3739
Item 4.	Mine Safety Disclosures	3739
Item 5	Other Information	3739
Item 6.	Exhibits	3840
SIGNATURES		3941

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Wesco Aircraft Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)


	March 31, 2019			September 30, 2018			June 30, 2019			September 30, 2018
Assets
Current assets
Cash and cash equivalents	$	32,726		$	46,222		$	45,418		$	46,222
Accounts receivable, net of allowance for doubtful accounts of $2,854 and $2,877 at March 31, 2019 and September 30, 2018, respectively	316,747			283,775
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	890,051			884,212			879,565			884,212
Prepaid expenses and other current assets	18,591			15,291			18,110			15,291
Income taxes receivable	3,380			2,017			2,602			2,017
Total current assets	1,261,495			1,231,517			1,279,141			1,231,517
Property and equipment, net	46,695			44,205			54,186			44,205
Deferred debt issuance costs, net	2,174			2,827			1,848			2,827
Goodwill	266,644			266,644			266,644			266,644
Intangible assets, net	155,973			163,438			152,241			163,438
Deferred tax assets	67,089			65,135			67,823			65,135
Other assets	17,445			15,710			14,300			15,710
Total assets	$	1,817,515		$	1,789,476		$	1,836,183		$	1,789,476

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	180,699		$	180,494		$	216,400		$	180,494
Accrued expenses and other current liabilities	40,937			42,767			52,569			42,767
Income taxes payable	7,227			2,295			4,111			2,295
Capital lease obligations, current portion	2,109			2,205			1,877			2,205
Short-term borrowings and current portion of long-term debt	87,000			74,000			58,000			74,000
Total current liabilities	317,972			301,761			332,957			301,761
Capital lease obligations, less current portion	1,564			2,329			1,475			2,329
Long-term debt, less current portion	763,734			771,777			759,712			771,777
Deferred income taxes	3,505			2,803			3,507			2,803
Other liabilities	19,557			18,337			12,440			18,337
Total liabilities	1,106,332			1,097,007			1,110,091			1,097,007
Commitments and contingencies
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, 99,743,379 and 99,557,885 shares issued and outstanding at March 31, 2019 and September 30, 2018, respectively	100			99
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	449,173			444,531			451,544			444,531
Accumulated other comprehensive loss	(87,212		)	(82,980		)	(88,788		)	(82,980		)
Retained earnings	349,122			330,819			363,236			330,819
Total stockholders’ equity	711,183			692,469			726,092			692,469
Total liabilities and stockholders’ equity	$	1,817,515		$	1,789,476		$	1,836,183		$	1,789,476

See the accompanying notes to the consolidated financial statements

Wesco Aircraft Holdings, Inc. and Subsidiaries

Consolidated Statements of Earnings and Comprehensive Income

(In thousands, except share data)

(Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Net sales	$	426,474		$	390,183		$	821,785		$	753,274		$	442,374		$	410,359		$	1,264,159		$	1,163,633
Cost of sales	317,727			284,448			614,696			553,115			336,504			306,162			951,200			859,277
Gross profit	108,747			105,735			207,089			200,159			105,870			104,197			312,959			304,356
Selling, general and administrative expenses	78,908			72,539			155,171			142,391			83,368			74,869			238,539			217,260
Income from operations	29,839			33,196			51,918			57,768			22,502			29,328			74,420			87,096
Interest expense, net	(12,388		)	(11,965		)	(25,302		)	(23,803		)	(12,878		)	(12,717		)	(38,180		)	(36,520		)
Other (expense) income, net	(314		)	(108		)	(531		)	152			(630		)	239			(1,161		)	391
Income before income taxes	17,137			21,123			26,085			34,117
Provision for income taxes	(5,127		)	(6,123		)	(7,782		)	(19,491		)
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	12,010			15,000			18,303			14,626			14,114			10,754			32,417			25,380
Other comprehensive (loss) income, net of income taxes	(1,263		)	2,850			(4,232		)	4,115			(1,576		)	(3,106		)	(5,808		)	1,009
Comprehensive income	$	10,747		$	17,850		$	14,071		$	18,741		$	12,538		$	7,648		$	26,609		$	26,389
Net income per share:
Basic	$	0.12		$	0.15		$	0.18		$	0.15		$	0.14		$	0.11		$	0.33		$	0.26
Diluted	$	0.12		$	0.15		$	0.18		$	0.15		$	0.14		$	0.11		$	0.32		$	0.26
Weighted average shares outstanding:
Basic	99,626,736			99,136,015			99,555,589			99,116,250			99,647,188			99,180,632			99,586,122			99,137,710
Diluted	99,950,811			99,519,925			99,930,999			99,441,385			100,205,475			99,739,217			100,029,458			99,396,613

See the accompanying notes to the consolidated financial statements

Wesco Aircraft Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended March 31,						Nine Months Ended June 30,
	2019			2018			2019			2018
Cash flows from operating activities
Net income	$	18,303		$	14,626		$	32,417		$	25,380
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	14,165			14,541			21,327			21,909
Amortization of deferred debt issuance costs	2,610			2,911			3,914			4,300
Bad debt and sales return reserve	208			519			232			503
Stock-based compensation expense	5,058			3,688			7,418			6,286
Net inventory provision	2,521			4,820			(1,555		)	10,976
Equity method investment impairment charge							2,966			—
Deferred income taxes	(14		)	581			(24		)	523
Other non-cash items	289			367			(556		)	(678		)
Subtotal	43,140			42,053			66,139			69,199
Changes in assets and liabilities:
Accounts receivable	(34,129		)	(30,962		)	(50,321		)	(47,008		)
Income taxes receivable	(1,369		)	1,091			(582		)	995
Inventories	(8,788		)	(66,582		)	6,219			(76,884		)
Prepaid expenses and other assets	(6,599		)	(2,500		)	(6,476		)	1,608
Accounts payable	(187		)	9,682			33,400			9,122
Accrued expenses and other liabilities	(3,406		)	6,034			(870		)	14,648
Income taxes payable	4,937			5,275			1,805			9,255
Net cash used in operating activities	(6,401		)	(35,909		)
Net cash provided by (used in) operating activities							49,314			(19,065		)

Cash flows from investing activities
Purchase of property and equipment	(7,996		)	(2,909		)	(16,481		)	(4,009		)
Net cash used in investing activities	(7,996		)	(2,909		)	(16,481		)	(4,009		)

Cash flows from financing activities
Proceeds from short-term borrowings	47,000			60,000			57,000			67,500
Repayment of short-term borrowings	(34,000		)	(34,000		)	(73,000		)	(41,000		)
Repayment of long-term debt	(10,000		)	(10,000		)	(15,000		)	(15,000		)
Debt issuance costs	—			(1,900		)	—			(1,900		)
Repayment of capital lease obligations	(1,444		)	(1,346		)	(2,094		)	(2,207		)
Net proceeds from exercise of stock options	12			34			37			63
Settlement on restricted stock tax withholding	(428		)	(100		)	(442		)	(126		)
Net cash provided by financing activities	1,140			12,688
Net cash (used in) provided by financing activities							(33,499		)	7,330
Effect of foreign currency exchange rate on cash and cash equivalents	(239		)	428			(138		)	(293		)
Net decrease in cash and cash equivalents	(13,496		)	(25,702		)	(804		)	(16,037		)
Cash and cash equivalents, beginning of period	46,222			61,625			46,222			61,625
Cash and cash equivalents, end of period	$	32,726		$	35,923		$	45,418		$	45,588

See the accompanying notes to the consolidated financial statements

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), werecognize 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~~contracts for hardware and chemical product sales have a single performance obligation. Revenues from these ~~Contract~~contract sales are recognized when the customer obtains control of our products, which occurs at a point in time, typically upon delivery in accordance with the terms of the sales contract. Services under our hardware just-in-time (JIT) arrangements are provided by us contemporaneously with the delivery of these products and are not separately identifiable from the products, and as such, once the products are delivered, we do not have a post-delivery obligation to provide services to the customer. Accordingly, the price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the products. Payment is generally due within 30 to 90 days of delivery; therefore, our contracts do not create significant financing components. Warranties are limited to replacement of goods that are defective upon delivery. The Company does not provide service-type warranties.

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

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

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

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

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

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

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, ~~selected a~~completed our evaluation of the completeness of our lease ~~accounting software vendor,~~population and are in the process of ~~evaluating the completeness of~~uploading our leases into a new cloud-based lease ~~population.~~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 inAugust 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 ~~six~~nine months ended ~~March 31,~~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.

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 ~~March 31,~~June 30, 2019 and 2018, net adjustments to cost of sales related to E&O inventory related activities were ~~$(2.5)~~$(4.1) million and ~~$0.4~~$6.2 million, respectively. The net adjustments for the three months ended June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($~~3.7~~2.4 million and ~~$5.6~~$12.9 million, respectively) offset by sales and disposals ($~~6.2~~6.5 million and ~~$5.2~~$6.7 million, respectively) of inventory for which an E&O provision was provided previously through expense recognized in prior periods. During the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018, ~~charges~~net adjustments to cost of sales related to ~~provisions for~~ E&O inventory related ~~expenses~~activities were ~~$2.6~~$(1.6) million and ~~$4.8~~$11.0 million, respectively. The net adjustments for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($~~13.8~~17.0 million and ~~$15.2~~$28.1 million, respectively) offset by sales and disposals ($~~11.2~~18.6 million and ~~$10.4~~$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 ~~E&O~~our inventory to its net realizable value.

Note 4. Goodwill

As of ~~March 31,~~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

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 March 31, 2019, gross 773,384
51,190
16,955
841,529
Accumulated impairment (569,201 ) —
(5,684 ) (574,885 )
Goodwill as of March 31, 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 ~~$225.0~~$200.0 million on ~~March 31,~~June 30, 2019, and matures on September 30, 2019, giving us the contractual right to pay a fixed interest rate

of 2.2625% plus the applicable margin under the term loan B facility (as defined in Note 6 below; see Note 6 for the applicable margin). The remaining two interest rate swap agreements (the “Remaining Swap Agreements”), entered into on May 14, 2018, have variable notional amounts which initially will increase in amount approximately equal to amortization of the notional amount of the First Swap Agreement and then amortize thereafter. The Remaining Swap Agreements totaled ~~$185.8~~$198.3 million on ~~March 31,~~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 ~~six~~nine months ended ~~March 31,~~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 ~~March 31,~~June 30, 2019, we expect to reclassify ~~$0.9~~$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 ~~March 31,~~June 30, 2019 and September 30, 2018.

The following table summarizes the notional principal amounts at ~~March 31,~~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

Derivative Notional
March 31, 2019 September 30, 2018
Instruments designated as accounting hedges:
Interest rate swap contracts $ 410,800
$ 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 ~~March 31,~~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		—

Fair Value
Balance Sheet Locations March 31, 2019 September 30, 2018
Instruments designated as accounting hedge:
Interest rate swap contracts Other current assets $ 327
$ 1,045
Interest rate swap contracts Other assets —
1,051
Interest rate swap contracts Accrued expenses and other current liabilities 1,206
289
Interest rate swap contracts Other liabilities 1,920
—

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 ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018 (in thousands).


		Location in Consolidated Statements of Earnings and Comprehensive Income		Three Months Ended March 31,								Six Months Ended March 31,								Location in Consolidated Statements of Earnings and Comprehensive Income		Three Months Ended June 30,								Nine Months Ended June 30,
				Three Months Ended March 31,																		Three Months Ended June 30,								Nine Months Ended June 30,
Cash Flow Hedge			2019				2018				2019				2018						2019				2018				2019				2018
Interest rate swap contracts			Interest (income) expense, net		$	(152	)		$	304		Six Months Ended March 31,		$	(70	)		$	861			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	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			$	12,388			$	11,965			$	25,302			$	23,803		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 ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018 (in thousands).



	Three Months Ended June 30,						Nine Months Ended June 30,
	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

Three Months Ended
March 31, Six Months Ended
March 31,

Cash Flow Hedge 2019 2018 2019 2018
Interest rate swap contracts $ (1,088 ) $ 1,461
$ (3,282 ) $ 2,832

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 ~~six~~nine months ended ~~March 31,~~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	)

AOCI - Unrealized Gain (Loss) on Hedging Instruments Three Months Ended March 31, 2019 Six Months Ended March 31, 2019
Balance at beginning of period $ (737 ) $ 1,375
Change in fair value of hedging instruments (1,088 ) (3,282 )
Amounts reclassified to earnings (152 ) (70 )
Net current period other comprehensive loss (1,240 ) (3,352 )
Balance at end of period $ (1,977 ) $ (1,977 )

Other Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable and payable, accrued expenses and other current liabilities, and ~~a credit facility including two term loans and a revolving line of credit.~~the 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		)

March 31, 2019 September 30, 2018

Principal
Amount

Fair
Value

Principal
Amount

Fair
Value
Term loan A facility $ 350,000
$ 346,325
$ 360,000
$ 357,840
Term loan B facility 440,562
432,632
440,562
432,192
Revolving facility 67,000
67,000
54,000
54,000
Interest rate swap contract liability (assets), net 2,799
2,799
(1,807 ) (1,807 )

Fair Value Measurement

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

minimizes the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:



Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3:	Unobservable inputs for the asset or liability.

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

There were no transfers between the assets and liabilities under Level 1 and Level 2 during the ~~six~~nine months ended ~~March 31,~~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 ~~March 31,~~June 30, 2019 and September 30, 2018 (in thousands).


March 31, 2019		Balance Sheet Locations	Total		Level 1		Level 2		Level 3
June 30, 2019											June 30, 2019	Balance Sheet Locations	Total		Level 1		Level 2		Level 3

Instruments designated as accounting hedge:	Instruments designated as accounting hedge:										Instruments designated as accounting hedge:
Interest rate swap contracts	Interest rate swap contracts	Other current assets	$	327	$	—	$	327	$	—	Interest rate swap contracts	Other current assets	$	34	$	—	$	34	$	—
Interest rate swap contracts	Interest rate swap contracts	Accrued expenses and other current liabilities	1,206		—		1,206		—		Interest rate swap contracts	Accrued expenses and other current liabilities	3,038		—		3,038		—
Interest rate swap contracts	Interest rate swap contracts	Other liabilities	1,920		—		1,920		—		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		—

September 30, 2018 Balance Sheet Locations Total Level 1 Level 2 Level 3

Instrument designated as accounting hedge:
Interest rate swap contracts Other current assets $ 1,045
$ —
$ 1,045
$ —
Interest rate swap contracts Other assets 1,051
—
1,051
—
Interest rate swap contracts Accrued expenses and other current liabilities 289
—
289
—

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

Note 6. Long-Term Debt

Long-term debt consists of the following (in thousands):



	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

March 31, 2019 September 30, 2018

Principal
Amount
Deferred Debt Issuance Costs
Carrying
Amount

Principal
Amount
Deferred Debt Issuance Costs
Carrying
Amount
Term loan A facility $ 350,000
$ (4,494 ) $ 345,506
$ 360,000
$ (5,842 ) $ 354,158
Term loan B facility 440,562
(2,334 ) 438,228
440,562
(2,943 ) 437,619
Revolving facility 67,000
—
67,000
54,000
—
54,000
857,562
(6,828 ) 850,734
854,562
(8,785 ) 845,777
Less: current portion 87,000
—
87,000
74,000
—
74,000
Non-current portion $ 770,562
$ (6,828 ) $ 763,734
$ 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 ~~March 31,~~June 30, 2019, our outstanding indebtedness under our Credit Facilities was ~~$857.6~~$823.6 million, which consisted of (1) ~~$350.0~~$345.0 million of indebtedness under the term loan A facility, (2) ~~$67.0~~$38.0 million of indebtedness under the revolving facility, and (3) $440.6 million of indebtedness under the term loan B facility. As of ~~March 31,~~June 30, 2019, ~~$113.0~~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 ~~six~~nine months ended ~~March 31,~~June 30, 2019, we borrowed ~~$47.0~~$57.0 million under the revolving facility, and made our required quarterly payments of ~~$10.0~~$15.0 million on our term loan A facility and voluntary prepayments totaling ~~$34.0~~$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 ~~March 31,~~June 30, 2019, the interest rate for borrowings under the term loan A facility was ~~5.50%~~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 ~~March 31,~~June 30, 2019, the interest rate for borrowings under the term loan B facility was ~~5.00%~~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 ~~March 31,~~June 30, 2019, the weighted-average interest rate for borrowings under the revolving facility was ~~5.50%~~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).

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 ~~5.50~~5.25 for the quarter ending ~~March 31,~~June 30, 2019. As of ~~March 31,~~June 30, 2019, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was ~~4.27.~~4.02. The Consolidated Total Leverage Ratio requirement for the financial covenant

is scheduled to step-down to ~~5.25 for the quarter ending June 30, 2019;~~ 4.75 for the quarters ending September 30, 2019, December 31, 2019 and March 31, 2020; 4.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021; and 3.00 for the quarter ending June 30, 2021 and thereafter. Based on our current covenants and forecasts, we expect to be in compliance for the ~~one year~~one-year period after ~~May 2,~~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 ~~March 31,~~June 30, 2019 and September 30, 2018 (dollars in thousands). The remaining deferred debt issuance costs as of ~~March 31,~~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

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 (1,348 ) (609 ) (653 ) (2,610 )
Deferred debt issuance costs as of March 31, 2019 $ 4,494
$ 2,334
$ 2,174
$ 9,002

UK Line of Credit

Our subsidiary, Wesco Aircraft EMEA, Ltd., has a £5.0 million ($~~6.5~~6.3 million based on the ~~March 31,~~June 30, 2019 exchange rate) line of credit that automatically renews annually on ~~October~~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 ~~March 31,~~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

Three Months Ended
March 31, Six Months Ended
March 31,
2019 2018 2019 2018
Net income $ 12,010
$ 15,000
$ 18,303
$ 14,626
Foreign currency translation (loss) gain (22 ) 1,389
(879 ) 1,284
Unrealized (loss) gain on cash flow hedging instruments (1,241 ) 1,461
(3,353 ) 2,831
Total comprehensive income $ 10,747
$ 17,850
$ 14,071
$ 18,741

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 ~~six~~nine months ended ~~March 31,~~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

Three Months Ended
March 31, Six Months Ended
March 31,
2019 2018 2019 2018
Net income $ 12,010
$ 15,000
$ 18,303
$ 14,626
Basic weighted average shares outstanding 99,626,736
99,136,015
99,555,589
99,116,250
Dilutive effect of stock options and restricted stock 324,075
383,910
375,410
325,135
Dilutive weighted average shares outstanding 99,950,811
99,519,925
99,930,999
99,441,385
Basic net income per share $ 0.12
$ 0.15
$ 0.18
$ 0.15
Diluted net income per share $ 0.12
$ 0.15
$ 0.18
$ 0.15

For the three months ended ~~March 31,~~June 30, 2019 and 2018, ~~3,171,626~~2,498,189 and ~~2,337,503~~2,367,729 shares of common stock equivalents, respectively, were not included in the diluted calculation due to their anti-dilutive effect. For the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018, ~~3,188,879~~3,122,135 and ~~3,115,284~~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 March 31, 2019															Three Months Ended June 30, 2019
	Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated			Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated
Net sales	$	347,301		$	66,300		$	12,873		$	—		$	426,474		$	364,098		$	63,634		$	14,642		$	—		$	442,374
Income from operations	35,393			1,778			1,156			(8,488		)	29,839
Income (loss) from operations																32,852			(1,948		)	1,492			(9,894		)	22,502
Interest expense, net	(11,143		)	(1,220		)	(25		)	—			(12,388		)	(11,518		)	(1,336		)	(24		)	—			(12,878		)
Capital expenditures	5,087			433			236			—			5,756			8,271			161			53			—			8,485
Depreciation and amortization	6,115			865			87			—			7,067			6,160			898			104			—			7,162

	Three Months Ended March 31, 2018															Three Months Ended June 30, 2018
	Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated			Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated
Net sales	$	313,250		$	68,147		$	8,786		$	—		$	390,183		$	333,602		$	66,728		$	10,029		$	—		$	410,359
Income from operations	35,691			6,830			777			(10,102		)	33,196			35,979			4,749			332			(11,732		)	29,328
Interest expense, net	(10,943		)	(997		)	(25		)	—			(11,965		)	(11,115		)	(1,578		)	(24		)	—			(12,717		)
Capital expenditures	1,412			75			87			—			1,574			997			75			28			—			1,100
Depreciation and amortization	6,283			929			73			—			7,285			6,417			863			88			—			7,368



	Nine Months Ended June 30, 2019
	Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated
Net sales	$	1,032,524		$	191,672		$	39,963		$	—		$	1,264,159
Income from operations	97,236			2,326			3,722			(28,864		)	74,420
Interest expense, net	(33,918		)	(4,187		)	(75		)	—			(38,180		)
Capital expenditures	14,818			1,085			578			—			16,481
Depreciation and amortization	18,441			2,612			274			—			21,327

	Nine Months Ended June 30, 2018
	Americas			EMEA			APAC			Unallocated Corporate Costs			Consolidated
Net sales	$	936,367		$	199,113		$	28,153		$	—		$	1,163,633
Income from operations	96,867			16,731			2,607			(29,109		)	87,096
Interest expense, net	(32,706		)	(3,739		)	(75		)	—			(36,520		)
Capital expenditures	3,367			475			167			—			4,009
Depreciation and amortization	19,076			2,598			235			—			21,909

Six Months Ended March 31, 2019
Americas EMEA APAC Unallocated Corporate Costs Consolidated
Net sales $ 668,426
$ 128,038
$ 25,321
$ —
$ 821,785
Income from operations 64,384
4,274
2,230
(18,970 ) 51,918
Interest expense, net (22,400 ) (2,851 ) (51 ) —
(25,302 )
Capital expenditures 6,547
924
525
—
7,996
Depreciation and amortization 12,281
1,714
170
—
14,165

Six Months Ended March 31, 2018
Americas EMEA APAC Unallocated Corporate Costs Consolidated
Net sales $ 602,765
$ 132,385
$ 18,124
$ —
$ 753,274
Income from operations 60,888
11,982
2,275
(17,377 ) 57,768
Interest expense, net (21,591 ) (2,161 ) (51 ) —
(23,803 )
Capital expenditures 2,370
400
139
—
2,909
Depreciation and amortization 12,659
1,735
147
—
14,541


	As of March 31, 2019								As of June 30, 2019
	Americas		EMEA		APAC		Consolidated		Americas		EMEA		APAC		Consolidated
Total assets	$	1,500,383	$	250,986	$	66,146	$	1,817,515	$	1,498,600	$	270,957	$	66,626	$	1,836,183
Goodwill	204,183		51,190		11,271		266,644		204,183		51,190		11,271		266,644



	As of September 30, 2018
	Americas		EMEA		APAC		Consolidated
Total assets	$	1,485,453	$	248,937	$	55,086	$	1,789,476
Goodwill	204,183		51,190		11,271		266,644

As of September 30, 2018
Americas EMEA APAC Consolidated
Total assets $ 1,485,453
$ 248,937
$ 55,086
$ 1,789,476
Goodwill 204,183
51,190
11,271
266,644

Product and Service Information

Net sales by product categories for the three months and ~~six~~nine months ended ~~March 31,~~June 30, 2019 were as follows (dollars in thousands):


	Three Months Ended March 31, 2019																Three Months Ended June 30, 2019
	Americas				EMEA				APAC				Consolidated				Americas				EMEA				APAC				Consolidated
	Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total
Hardware	$	165,163	47.6	%	$	29,466	44.4	%	$	4,130	32.1	%	$	198,759	46.6	%	$	168,220	46.2	%	$	28,253	44.4	%	$	5,675	38.8	%	$	202,148	45.7	%
Chemicals (1)	140,293		40.4	%	30,656		46.2	%	7,156		55.6	%	178,105		41.8	%	148,985		40.9	%	31,379		49.3	%	7,668		52.4	%	188,032		42.5	%
Electronic components	29,459		8.5	%	1,835		2.8	%	287		2.2	%	31,581		7.4	%	31,530		8.7	%	2,107		3.3	%	310		2.1	%	33,947		7.7	%
Bearings	3,710		1.0	%	1,377		2.1	%	989		7.7	%	6,076		1.4	%	7,946		2.2	%	1,176		1.8	%	546		3.7	%	9,668		2.2	%
Machined parts and other	8,676		2.5	%	2,966		4.5	%	311		2.4	%	11,953		2.8	%	7,417		2.0	%	719		1.2	%	443		3.0	%	8,579		1.9	%
Total	$	347,301	100.0	%	$	66,300	100.0	%	$	12,873	100.0	%	$	426,474	100.0	%	$	364,098	100.0	%	$	63,634	100.0	%	$	14,642	100.0	%	$	442,374	100.0	%

	Six Months Ended March 31, 2019																Nine Months Ended June 30, 2019
	Americas				EMEA				APAC				Consolidated				Americas				EMEA				APAC				Consolidated
	Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total		Sales		% of Total
Hardware	$	316,160	47.3	%	$	56,605	44.2	%	$	8,093	32.0	%	$	380,858	46.3	%	$	484,380	46.9	%	$	84,858	44.3	%	$	13,768	34.5	%	$	583,006	46.1	%
Chemicals (1)	271,905		40.7	%	60,995		47.6	%	13,714		54.2	%	346,614		42.2	%	420,890		40.8	%	92,374		48.2	%	21,382		53.5	%	534,646		42.3	%
Electronic components	55,924		8.4	%	3,794		3.0	%	638		2.5	%	60,356		7.3	%	87,454		8.5	%	5,901		3.0	%	948		2.4	%	94,303		7.5	%
Bearings	9,329		1.3	%	3,013		2.4	%	2,184		8.6	%	14,526		1.8	%	17,275		1.6	%	4,189		2.2	%	2,730		6.8	%	24,194		1.9	%
Machined parts and other	15,108		2.3	%	3,631		2.8	%	692		2.7	%	19,431		2.4	%	22,525		2.2	%	4,350		2.3	%	1,135		2.8	%	28,010		2.2	%
Total	$	668,426	100.0	%	$	128,038	100.0	%	$	25,321	100.0	%	$	821,785	100.0	%	$	1,032,524	100.0	%	$	191,672	100.0	%	$	39,963	100.0	%	$	1,264,159	100.0	%

(1) Includes CMS contracts

Note 10. Income Taxes



	Three Months Ended June 30,						Nine Months Ended June 30,
(dollars in thousands)	2019			2018			2019			2018
Benefit (provision) for income taxes	$	7,377		$	(6,096	)	$	(405	)	$	(25,587	)
Effective tax rate	(82.0		)%	36.2		%	1.2		%	50.2		%

Three Months Ended
March 31, Six Months Ended
March 31,
(dollars in thousands) 2019 2018 2019 2018
Provision for income taxes $ 5,127
$ 6,123
$ 7,782
$ 19,491
Effective tax rate 29.9 % 29.0 % 29.8 % 57.1 %

For the three months ended ~~March 31,~~June 30, 2019, our effective tax rate ~~increased 0.9~~changed 118.2 percentage points compared to the same period in the prior year and also reflects a movement from tax expense to a tax benefit in the current quarter. The difference in effective tax rates is primarily related to a favorable $9.2 million adjustment to the one-time tax imposed on accumulated earnings and profits of foreign operations (the “Transition Tax”) as a result of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. Without consideration of this discrete adjustment, our effective tax rate would have been 19.0% for the three months ended June 30, 2019 and 32.8% for three months ended June 30, 2018. The decrease of our effective tax rate without consideration of discrete adjustments reflects other impacts of the Tax Act, including the reduction of the U.S. federal statutory tax rate, the inclusion of certain foreign earnings under the global intangible low-taxed income (“GILTI”) rules and changes to the foreign tax credit provisions.

For the nine months ended June 30, 2019, our effective tax rate decreased 49.0 percentage points compared to the same period in the prior year. The difference in effective tax rates is primarily related to ~~discrete adjustments recognized~~a favorable $9.2 million adjustment to the Transition Tax which occurred during the

three months ended ~~March~~June 30, 2019 as well as a provisional $37.7 million charge to tax expense related to the remeasurement of deferred tax assets and liabilities, a provisional $37.7 million tax benefit related to the partial reversal of a deferred tax liability for unremitted foreign earnings and a provisional $8.8 million Transition Tax charge,

each of which occurred during the three months ended December 31, ~~2019.~~2018 as a result of the Tax Act. An additional $0.4 million Transition Tax charge was recorded in subsequent quarters. Without consideration of these discrete adjustments, our effective tax rate would have been ~~29.4%~~26.4% for the ~~three~~nine months ended ~~March 31, 2018~~June 30, 2019 and ~~29.0%~~30.3% for the ~~three~~nine months ended ~~March 31, 2019.~~

~~For the six months ended March 31, 2019,~~June 30, 2018. The decrease of our effective tax rate ~~decreased 27.3 percentage points compared~~without consideration of discrete adjustments reflects other impacts of the Tax Act, including the reduction of the U.S. federal statutory tax rate, the inclusion of certain foreign earnings under the GILTI rules and changes to the ~~same period in~~foreign tax credit provisions.

The completion of our calculations for the ~~prior year. The difference in effective~~fiscal year 2018 U.S. federal tax ~~rates is primarily related to discrete adjustments recognized~~return during the three months ended ~~December 31, 2017~~June 30, 2019 resulted in a $9.2 million adjustment to the Transition Tax which we had previously recorded. The adjustment results from the ~~one-time~~utilization of additional foreign tax ~~imposed~~credits for which we had previously recorded a valuation allowance. Our tax return calculation of the Transition Tax complies with the Tax Act as enacted, which is inconsistent with final regulations issued by the U.S. Treasury Department on ~~accumulated earnings~~June 21, 2019 and ~~profits~~proposed regulations which were previously issued on November 28, 2018. Based on the final regulations, we would incur an additional Transition Tax liability of $7.1 million but would also utilize, and release the valuation allowance on, an additional $7.1 million of foreign ~~operations~~tax credits to offset the additional Transition Tax liability, with the result being that no Transition Tax payment would be required. We therefore recorded an uncertain tax position of $7.1 million for the potential Transaction Tax liability, reduced our foreign tax credits by $7.1 million and released a $7.1 million valuation allowance against the foreign tax credits. Taking into consideration the foreign tax credits which we utilized related to both the $9.2 million adjustment to the Transition Tax and the additional $7.1 million of foreign tax credits which we would utilize to offset the Transition Tax liability under the final regulations, we had a foreign tax credit carryforward of $10.6 million as of September 30, 2018.

The Company also recorded a $0.7 million tax benefit related to an impairment loss from equity method investment. This tax benefit is not included in the Company’s provision for income taxes but rather is a component of the impairment loss, which is shown separately as equity method investment impairment charge, net of income taxes.

In May 2019 we received a letter from the Canada Revenue Agency for the 2014 fiscal year. The letter addressed the purchase price paid by our Canadian subsidiary to our U.K. subsidiary in September 2014 for the transfer of the Canadian portion of the Interfast business which our U.K. subsidiary had previously acquired in July 2012. The letter does not represent an assessment of tax from the Canada Revenue Agency, nor has any assessment been received as of the date of this filing. Based on limited information received at this time we believe that we have been, and continue to be, in compliance with Canadian tax law. As a result we have not recorded a contingent liability for an uncertain tax position in connection with the ~~enactment~~letter. If an assessment of tax were to occur, an unfavorable resolution of this matter could have a material effect on our result of operations or cash flows in the ~~Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. Without consideration~~period or periods in which an adjustment is recorded or the tax is due or paid. In the event of ~~discrete adjustments, our effective~~a Canadian tax ~~rate~~assessment, the Company may seek corresponding U.K. tax relief through administrative proceedings in the U.K. but it is uncertain whether any tax relief would ~~have been 29.1% for the six months ended March 31, 2018 and 29.0% for the six months ended March 31, 2019.~~be granted.

Note 11. Shareholders' Equity

The following tables provide changes to our shareholders' equity for the three months ended ~~March 31,~~June 30, 2019 and 2018 (dollars in thousands):


	Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Loss			Retained Earnings				Total Shareholders' Equity			Common Stock					Additional Paid-in Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total Shareholders' Equity
	Shares		Amount		Additional Paid-in Capital				Accumulated Other Comprehensive Loss						Shares					Amount								Accumulated Other Comprehensive Loss				Retained Earnings				Total Shareholders' Equity
Balance at December 31, 2018	99,749,451		$	100	$	447,059			$	(85,949	)	Retained Earnings	$	337,112		Total Shareholders' Equity		$	698,322
Issuance of common stock	(6,072	)	—		—				—			—				—
Stock-based compensation expense	—		—		2,114				—			—				2,114
Net income	—		—		—				—			12,010				12,010
Other comprehensive loss	—		—		—				(1,263		)	—				(1,263		)
Balance at March 31, 2019	99,743,379		$	100	$	449,173			$	(87,212	)	$	349,122			$	711,183		99,743,379			$	100	Additional Paid-in Capital	$	449,173			$	(87,212	)		$	349,122			$	711,183

	Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Loss			Retained Earnings				Total Shareholders' Equity
	Shares		Amount		Additional Paid-in Capital				Accumulated Other Comprehensive Loss
Balance at December 31, 2017	99,517,543		$	99	$	438,310			$	(83,361	)	Retained Earnings	$	297,361		Total Shareholders' Equity				$	652,409
Issuance of common stock	(26,895	)	—		34			—	—			—				34			5,684			—		25				—				—				25
Settlement on restricted stock tax withholding	—		—		(74		)		—			—				(74		)	—			—		(14		)		—				—				(14		)
Stock-based compensation expense	—		—		1,873				—			—				1,873			—			—		2,360				—				—				2,360
Net income	—		—		—				—			15,000				15,000			—			—		—				—				14,114				14,114
Other comprehensive income	—		—		—				2,850			—				2,850
Other comprehensive loss																			—			—		—				(1,576		)		—				(1,576		)
Balance at June 30, 2019																			99,749,063			$	100	$	451,544			$	(88,788	)		$	363,236			$	726,092

																			Common Stock					Additional Paid-in Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total Shareholders' Equity
																			Shares			Amount						Accumulated Other Comprehensive Loss				Retained Earnings				Total Shareholders' Equity
Balance at March 31, 2018	99,490,648		$	99	$	440,143			$	(80,511	)	$	312,361			$	672,092		99,490,648			$	99	Additional Paid-in Capital			$	440,143			$	(80,511	)		$	312,361			$	672,092
Issuance of common stock																			3,234			—		30				—				1				31
Settlement on restricted stock tax withholding																			—			—		(26		)		—				—				(26		)
Stock-based compensation expense																			—			—		2,598				—				—				2,598
Net income																			—			—		—				—				10,754				10,754
Other comprehensive loss																			—			—		—				(3,106		)		—				(3,106		)
Balance at June 30, 2018																			99,493,882			$	99	$	442,745			$	(83,617	)		$	323,116			$	682,343

The following tables provide changes to our shareholders' equity for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018 (dollars in thousands):



	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders' Equity
Balance at September 30, 2018	99,557,885	$	99	$	444,531		$	(82,980	)	$	330,819	$	692,469
Issuance of common stock	191,178	1		37			—			—		38
Settlement on restricted stock tax withholding	—	—		(442		)	—			—		(442		)
Stock-based compensation expense	—	—		7,418			—			—		7,418
Net income	—	—		—			—			32,417		32,417
Other comprehensive loss	—	—		—			(5,808		)	—		(5,808		)
Balance at June 30, 2019	99,749,063	$	100	$	451,544		$	(88,788	)	$	363,236	$	726,092

	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders' Equity
Balance at September 30, 2017	99,450,902	$	99	$	436,522		$	(84,626	)	$	297,736	$	649,731
Issuance of common stock	42,980	—		63			—			—		63
Settlement on restricted stock tax withholding	—	—		(126		)	—			—		(126		)
Stock-based compensation expense	—	—		6,286			—			—		6,286
Net income	—	—		—			—			25,380		25,380
Other comprehensive income	—	—		—			1,009			—		1,009
Balance at June 30, 2018	99,493,882	$	99	$	442,745		$	(83,617	)	$	323,116	$	682,343

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings
Total Shareholders'
Equity
Shares Amount
Balance at September 30, 2018 99,557,885
$ 99
$ 444,531
$ (82,980 ) $ 330,819
$ 692,469
Issuance of common stock 185,494
1
12
—
—
13
Settlement on restricted stock tax withholding —
—
(428 ) —
—
(428 )
Stock-based compensation expense —
—
5,058
—
—
5,058
Net income —
—
—
—
18,303
18,303
Other comprehensive loss —
—
—
(4,232 ) —
(4,232 )
Balance at March 31, 2019 99,743,379
$ 100
$ 449,173
$ (87,212 ) $ 349,122
$ 711,183

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings
Total Shareholders'
Equity
Shares Amount
Balance at September 30, 2017 99,450,902
$ 99
$ 436,522
$ (84,626 ) $ 297,736
$ 649,731
Issuance of common stock 39,746
—
33
—
(1 ) 32
Settlement on restricted stock tax withholding —
—
(100 ) —
—
(100 )
Stock-based compensation expense —
—
3,688
—
—
3,688
Net income —
—
—
—
14,626
14,626
Other comprehensive income —
—
—
4,115
—
4,115
Balance at March 31, 2018 99,490,648
$ 99
$ 440,143
$ (80,511 ) $ 312,361
$ 672,092

Note 12. Commitments and Contingencies

We are involved in various legal matters that arise in the ordinary course of business. Our management, after consulting with outside legal counsel, believes that the ultimate outcome of such matters will not have a material adverse effect on our business, financial position, results of operations or cash flows. There can be no assurance, however, that such actions will not be material or adversely affect our business, financial position, results of operations or cash flows.

Note 13. Subsequent Event

On August 8, 2019, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Wolverine Intermediate Holding II Corporation, a Delaware corporation (Parent), and Wolverine Merger Corporation, a Delaware corporation and a direct wholly owned subsidiary of Parent (Merger Sub). Parent and Merger Sub are subsidiaries of investment funds advised by Platinum Equity Advisors, LLC, a New-York-based private equity firm. Capitalized terms used herein not otherwise defined have the meanings set forth in the Merger Agreement.

The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, (i) Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the Merger), and (ii) at the Effective Time, and as a result of the Merger, each share of common stock, par value $0.001 per share, of the Company (each a Share and collectively, the Shares), that is issued and outstanding immediately prior to the Effective Time, other than shares to be cancelled pursuant to Section 2.1(b) of the Merger Agreement or Dissenting Shares, shall be automatically converted into the right to receive $11.05 in cash, without interest, subject to any withholding of Taxes required by applicable law as provided in Section 2.5 of the Merger Agreement.

The closing of the Merger is subject to various closing conditions, including (i) adoption of the Merger Agreement by holders of a majority of the Shares then outstanding, (ii) the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of requisite competition and merger controls approvals in the United Kingdom, Germany, Poland and Canada, (iii) the absence of any order of any court of competent jurisdiction or any other Governmental Entity enjoining or prohibiting the consummation of the Merger which continues to be in effect, (iv) authorization of the Transactions by the French Ministry of Economy and Finance pursuant to French foreign investment regulations and (v) subject to Company Material Adverse Effect and other customary materiality qualifications, the accuracy of the representations and warranties contained in the Merger Agreement and compliance with the covenants and agreements contained in the Merger Agreement as of the Closing of the Merger. The closing of the Merger is not subject to a financing condition. Assuming the satisfaction of the conditions set forth in the Merger Agreement, the Company expects the Merger to close in the fourth calendar quarter of 2019. Upon the closing of the Merger, the Shares will be delisted from the New York Stock Exchange and deregistered under the Securities Exchange Act of 1934.

ITEM 2. 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 interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q.

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” in our Annual Report on Form 10-K for the year ended September 30, 2018 filed with the Securities and Exchange Commission (the SEC) on November 16, 2018 (the 2018 Form 10-K) and "— Cautionary Note Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Unless otherwise noted in this Quarterly Report on Form 10-Q, 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. References to “fiscal year” mean the year ending or ended September 30. For example, “fiscal year 2019” or “fiscal 2019” means the period from October 1, 2018 to September 30, 2019.

Agreement and Plan of Merger

Subsequent to quarter end, on August 8, 2019, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Wolverine Intermediate Holding II Corporation, a Delaware corporation (Parent), and Wolverine Merger Corporation, a Delaware corporation and a direct wholly owned subsidiary of Parent (Merger Sub), pursuant to which Parent will acquire the Company for $11.05 per share through the merger of Merger Sub with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are affiliates of Platinum

Equity Advisors, LLC. The closing of the Merger is subject to customary closing conditions, including the approval of the Company’s stockholders and regulatory approvals.

Executive Overview

We are one of the world’s leading ~~independent distributor~~distributors and ~~provider~~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 ~~560,000~~550,000 active stock-keeping units (SKUs), including C-class hardware, chemicals, electronic components, bearings, tools and machined parts. 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.

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 providers. We also service customers in the automotive, energy, health care, industrial, pharmaceutical and space sectors.

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. Large commercial OEMs have indicated that they expect a high level of deliveries with the exception of the Boeing Company's 737 MAX aircraft impact, primarily due to continued demand and their unprecedented level of backlogs.The recent pause in deliveries and reduced production rate of the 737 MAX aircraft by the Boeing company could negatively affect total large commercial aircraft deliveries. The impact is dependent upon when the aircraft returns to service, which will be determined by factors such as certification by the FAA and other regulatory authorities, when the OEM resumes deliveries and returns to its previous production schedule and whether or not the delay creates disruptions to the related supply chain.

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. While overall business aviation production levels remain below their pre-recession peak, recent indicators point to improved market conditions. Production has increased for new models, and the number of pre-owned aircraft relative to the total business aviation in-service fleet has fallen to multi-year lows. Whether these improved conditions lead to increased deliveries in the future remains uncertain.

Military Aerospace Market

Military production has fluctuated for many aircraft programs in the past few years. Increases in the U.S. Department of Defense budget for fiscal years 2018 and 2019 have supported greater production of certain military programs. In particular, we believe the services we provide the Joint Strike Fighter program will benefit our business as production for that program increases. We believe increased sales from other established programs that directly benefit from these changes also will benefit our business.

U.S. Department of Defense spending continues to be uncertain for fiscal years 2020 through 2023, given that the limits imposed upon U.S. government discretionary spending by the Budget Control Act and the Bipartisan Budget Act of 2013 remain in effect for these fiscal years, unless Congress acts to raise the spending limits or repeal or suspend the provisions of these laws. Future budget cuts or changes in spending priorities could result in existing program delays, changes or cancellations.

Goodwill

For the EMEA reporting unit, our most recent Step 1 goodwill impairment test occurred on July 1, 2018, which reflected fair value in excess of carrying value of 32.4%. For the three and ~~six~~nine months ended ~~March 31,~~June 30, 2019, EMEA has underperformed relative to the forecasts included in the July 1, 2018 Step 1 analysis. On ~~March 31,~~June 30, 2019, we evaluated whether there were any events or changes in circumstances that would indicate that it was more likely than not that the EMEA reporting unit's carrying value was less than its fair value. Our evaluation considered macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Wesco entity specific operating results and other relevant Wesco entity specific events. Our evaluation did not indicate it was more likely than not that the carrying value of the EMEA reporting unit exceeded its fair value. We consider our current forecasts to be reasonable and achievable based upon our historical performance and management’s actions currently being executed; and have concluded, as a result, that no interim triggering event has occurred. We will ~~continue to monitor EMEA’s performance relative to the forecasts until~~perform our next annual goodwill impairment test ~~to be performed~~ on July 1, 2019.

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.

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 or owned inventory and increases or decreases in customer inventory levels, that can cause fluctuations in our financial results from quarter to quarter. Ad hoc business also can be further influenced by the amount of supply chain disruption in the market due to changes in aircraft build rates, new aircraft introduction, customer or site consolidations, and other factors. While we try to mitigate the degree of fluctuations in our ad hoc business through establishing longer-term contractual relationships with our customers, such variability still will occur. We consider both shorter-term fluctuations and longer-term trends in the operation of our business which can affect quarterly trends of financial results at any given time.

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 or owned 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 attempts 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 primarily impacted by changes in the product mix of our ~~sales.~~sales, the price of our products and the cost of our inventory. Generally, our hardware products have higher gross profit margins than chemicals and electronic ~~components.~~components and ad hoc hardware products have a higher margin than Contract hardware products.

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 portions of Contract-related sales. However, we believe any potential adverse impact on our gross profit margins would be outweighed by the benefits of a more stable long-term revenue stream attributable to Contract customers as well as potential market share growth and higher revenues and gross profit supported by more aggressive product pricing to compete.

Our Contracts generally provide for fixed prices, which can expose us to risks if the 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 principally 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) purchases to take advantage of favorable ~~pricing,~~pricing; (2) purchases to acquire high-volume products that are typically difficult to obtain in sufficient quantities; (3) changes in supplier lead times and the timing of inventory deliveries; (4) purchases made in anticipation of future growth; and (5) purchases made in connection with new customer Contracts or the expansion of existing Contracts. Customer liability provisions in many of our ~~contracts~~Contracts also may serve to mitigate our risk to related inventory remaining at the time a ~~contract~~Contract expires or is terminated. Because effective inventory management is a key competitive skill, we continuously work to improve our procurement planning and management 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 and magnitude 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 required to make payments and the volume of purchases or payments made to our suppliers.

Segment Presentation

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 or loss 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.

Key Components of Our Results of Operations

The following is a discussion of the key line items included in our financial statements for the periods presented below under the heading “Results of Operations.” These are the measures that management utilizes to assess our results of operations, anticipate future trends and evaluate risks in our business.

Net Sales

Our net sales include sales of hardware, chemicals, electronic components, bearings, tools and machined parts, and eliminate all intercompany sales. We also provide certain services to our customers, including quality assurance, kitting, JIT delivery, CMS, 3PL or 4PL programs and point-of-use inventory management. Services under our hardware JIT arrangements are provided by us contemporaneously with the delivery of these 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. Our CMS contracts also include the sale of chemical products as well as services. 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 a CMS contract and revenue is recognized over time using product deliveries as our output measure of progress under the CMS contract.

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.

Income from Operations

Income from operations is the result of subtracting the cost of sales and selling, general and administrative (SG&A) expenses from net sales and is one of several key measures to evaluate our performance and profitability.

The principal component of our cost of sales is product cost, which was ~~94.6%~~94.2% and ~~94.3%~~94.4% of our total cost of sales for the three months ended ~~March 31,~~June 30, 2019 and 2018, respectively, and 94.4% ~~and 94.5%~~ of our total cost of sales for both the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and ~~2018, respectively.~~2018. The remaining components are freight and expediting fees, import duties, tooling repair charges, packaging supplies, excess and obsolete (E&O) inventory and inventory valuation adjustments.

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 E&O inventory. 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 Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Inventories” in the 2018 Form 10-K. During the three months ended ~~March 31,~~June 30, 2019 and 2018, net adjustments to cost of sales related to E&O inventory related activities were ~~$(2.5)~~$(4.1) million and ~~$0.4~~$6.2 million, respectively. The net adjustments for the three months ended June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($~~3.7~~2.4 million and ~~$5.6~~$12.9 million, respectively) offset by sales and disposals ($~~6.2~~6.5 million and ~~$5.2~~$6.7 million, respectively) of inventory for which an E&O provision was provided previously through expense recognized in prior periods. During the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018, net adjustments to cost of sales related to ~~provisions for~~ E&O inventory related ~~expenses~~activities were ~~$2.6~~$(1.6) million and ~~$4.8~~$11.0 million, respectively. The net adjustments for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 and 2018 reflect a combination of additional expense for E&O related provisions ($~~13.8~~17.0 million and ~~$15.2~~$28.1 million, respectively) offset by sales and disposals ($~~11.2~~18.6 million and ~~$10.4~~$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 E&O inventory to its net realizable value.

The principal components of our SG&A 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; fees for professional services (including consulting, legal, audit and tax); and other ordinary day-to-day business expenses. Depreciation and amortization expense is also included in SG&A expenses, and consists primarily of scheduled depreciation for leasehold improvements, machinery and equipment, vehicles, computers, software and furniture and fixtures. Depreciation and amortization also includes intangible asset amortization expense.

Other Expenses

Interest Expense, Net. Interest expense, net consists of the interest we pay on our long-term debt, interest and fees on our revolving facility (as defined below under “—Liquidity and Capital Resources—Credit Facilities”) and our line-of-credit and deferred debt issuance costs, net of interest income.

Other (Expense) Income, Net. Other (expense) income, 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 evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported results. For a description of our critical accounting policies and estimates, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the 2018 Form 10-K.

Effective October 1, 2018, we adopted the amended ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606). The following describes our new accounting policy related to our recognition of revenue from contracts with customers pursuant to ASC 606.

Revenue from Contracts with Customers

Typically, our master purchase contracts with our customer run for three to five years without minimum purchase requirements annually or 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 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; and the Company does not give service-type warranties.

Our 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 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 for these contracts over time using product deliveries as our output measure of progress under the CMS contract to depict the transfer of control to the customer.

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 allowances 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.

Results of Operations


	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended June 30,						Nine Months Ended June 30,
Consolidated Results of Operations	2019			2018			2019			2018			2019			2018			2019			2018
	(dollars in thousands)												(dollars in thousands)
Net sales	$	426,474		$	390,183		$	821,785		$	753,274		$	442,374		$	410,359		$	1,264,159		$	1,163,633

Gross profit	$	108,747		$	105,735		$	207,089		$	200,159		$	105,870		$	104,197		$	312,959		$	304,356
Selling, general & administrative expenses	78,908			72,539			155,171			142,391			83,368			74,869			238,539			217,260
Income from operations	29,839			33,196			51,918			57,768			22,502			29,328			74,420			87,096
Interest expense, net	(12,388		)	(11,965		)	(25,302		)	(23,803		)	(12,878		)	(12,717		)	(38,180		)	(36,520		)
Other (expense) income, net	(314		)	(108		)	(531		)	152			(630		)	239			(1,161		)	391
Income before income taxes	17,137			21,123			26,085			34,117
Provision for income taxes	(5,127		)	(6,123		)	(7,782		)	(19,491		)
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	$	12,010		$	15,000		$	18,303		$	14,626		$	14,114		$	10,754		$	32,417		$	25,380


(as a percentage of net sales, numbers rounded)	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended June 30,				Nine Months Ended June 30,
	2019		2018		2019		2018		2019		2018		2019		2018

Gross profit	25.5	%	27.1	%	25.2	%	26.6	%	23.9	%	25.4	%	24.8	%	26.2	%
Selling, general & administrative expenses	18.5	%	18.6	%	18.9	%	18.9	%	18.8	%	18.3	%	18.9	%	18.7	%
Income from operations	7.0	%	8.5	%	6.3	%	7.7	%	5.1	%	7.1	%	5.9	%	7.5	%
Interest expense, net	(2.9	)%	(3.1	)%	(3.1	)%	(3.2	)%	(2.9	)%	(3.1	)%	(3.0	)%	(3.1	)%
Other (expense) income, net	(0.1	)%	—	%	(0.1	)%	—	%	(0.2	)%	0.1	%	(0.1	)%	—	%
Income before income taxes	4.0	%	5.4	%	3.1	%	4.5	%
Provision for income taxes	(1.2	)%	(1.6	)%	(0.9	)%	(2.6	)%
Income before income taxes and equity method investment impairment charge									2.0	%	4.1	%	2.8	%	4.4	%
Benefit (provision) for income taxes									1.7	%	(1.5	)%	(0.1	)%	(2.2	)%
Income before equity method investment impairment charge									3.7	%	2.6	%	2.7	%	2.2	%
Equity method investment impairment charge, net of income taxes									(0.5	)%	—	%	(0.2	)%	—	%
Net income	2.8	%	3.8	%	2.2	%	1.9	%	3.2	%	2.6	%	2.5	%	2.2	%

Three Months Ended ~~March 31,~~June 30, 2019 compared with Three Months Ended ~~March 31,~~June 30, 2018

Net Sales

Consolidated net sales increased ~~$36.3~~$32.0 million, or ~~9.3%~~7.8% to ~~$426.5~~$442.4 million for the three months ended ~~March 31,~~June 30, 2019 compared to ~~$390.2~~$410.4 million for the same period in the prior year. The ~~$36.3~~$32.0 million or 7.8% increase reflects primarily 10.8% higher sales ~~across all major product categories including chemicals, Ad~~in total for Contract hardware products and chemical products, partially offset by a 1.1%decline in ad hoc hardware ~~and Contract hardware. The net~~ sales ~~increase was~~compared with the ~~result overall of~~same period in the prior year. Net sales benefited from continued market growth, and ~~additional market penetration, reflecting~~reflects the company’s strong position with major customers. In addition, approximately one-third of the $32.0 million net sales increase in the current year represents higher revenue from sales related to contract liability claims compared with the same period in the prior year. Ad hoc hardware sales and Contract sales as a percentage of net sales represented ~~26%~~22% and ~~74%~~78%, respectively, for the three months ended ~~March 31,~~June 30, 2019, as compared to ~~25%~~24% and ~~75%,~~76% respectively, for the same period in the prior year.

Income from Operations

Consolidated income from operations declined ~~$3.4~~$6.8 million to ~~$29.8~~$22.5 million for the three months ended ~~March 31,~~June 30, 2019 compared to ~~$33.2~~$29.3 million for the same period in the prior year. The ~~$3.4~~$6.8 million decline in income from operations was due to an $8.5 million increase in SG&A expenses, ~~of $6.4 million,~~ partially offset by higher gross profit of ~~$3.0~~$1.7 million. Income from operations as a percentage of net sales declined ~~1.5~~2.0 percentage points compared with the same period in the prior year.

The higher gross profit was driven by increases in sales volume compared with the same period in the prior ~~year. Average~~year, partially offset by a decline in gross margin. Gross margins declined ~~1.6~~1.5 percentage points overall, primarily reflecting weaker margins in the EMEA segment resulting from more aggressive pricing for hardware products, including for certain ~~contract~~Contract renewals, and lower chemical margins due to increased pass-through sales, as well as the impact on revenues of weaker British Pound and Euro exchange rates versus the U.S. dollar for local currency denominated business. The gross margin decline also reflects the effect of

lower margins in the Americas segment reflecting several factors: for AdContract hardware sales, margins on end of contract related sales were significantly higher in the prior year period; for ad hoc sales of hardware products, ~~in the Americas segment due to~~lower current year margins reflect more aggressive pricing to gain ~~revenue increases as well as changes~~sales volume; a shift in product ~~mix.~~mix towards lower margin chemical and certain contracted hardware sales. The overall gross profit was also higher as a result of lower net write-downs to net realizable value for excess and obsolete inventory and other inventory adjustments for the three months ended June 30, 2019 compared with the same period in the prior year.

~~The $6.4 million increase in~~ SG&A expenses increased $8.5 million, primarily ~~reflects~~reflecting increases in personnel related costs of ~~$6.9~~$5.8 million, ~~with information technology~~warehouse related costs ~~also higher by $0.4 million. These increases were partially offset by lower~~of $2.1 million and professional ~~fees~~services costs of ~~$0.8 million.~~$0.7 million largely related to the Wesco 2020 project and business growth. While higher personnel related costs primarily reflect investment to execute Wesco 2020 initiatives, the majority of these cost increases are the result of execution steps that are expected to have a defined end point. Key examples include duplicative staffing costs required during transition and consolidation of single product warehouses into multi-product service centers, severance expense and project performance incentives. The Wesco 2020 related costs, including professional fees for consulting support, totaled ~~$9.4~~$10.6 million for the three months ended ~~March 31,~~June 30, 2019, compared with ~~$4.2~~$7.5 million for the same period in the prior year. The company estimates that the 2020 initiatives have captured approximately ~~$2.0~~$2.9 million of savings for the quarter, excluding temporary and one-time costs, which more than offset higher personnel related costs supporting revenue growth and related activities. SG&A as a percent of net sales ~~declined 0.1~~increased 0.5 percentage ~~point~~points compared with the same period in the prior year, including the increased staffing, severance, performance incentives, and site related costs related to Wesco 2020 initiatives.

Interest Expense, Net

Interest expense, net was ~~$12.4~~$12.9 million for the three months ended ~~March 31,~~June 30, 2019 compared to ~~$12.0~~$12.7 million for the same period in the prior year. The increase was primarily due to an increase in interest rates, partially offset by a decreased average borrowing amount compared with the same period in the prior year.

~~Provision~~Benefit (Provision) for Income Taxes

The income tax ~~provision~~benefit for the three months ended ~~March 31,~~June 30, 2019 was ~~$5.1~~$7.4 million, compared to an income tax provision of $6.1 million for the same period in the prior year. ~~For~~As a result, for the three months ended ~~March 31,2019,~~June 30, 2019, our effective tax rate ~~increased 0.9~~changed 118.2 percentage points compared to the same period in the prior year. The difference in effective tax rates is primarily related to ~~discrete adjustments recognized during~~a favorable $9.2 million adjustment to the ~~three months ended March 31, 2019.~~one-time tax imposed on accumulated earnings and profits of foreign operations (the “Transition Tax”) as a result of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. Without consideration of this discrete ~~adjustments,~~adjustment, our effective tax rate would have been ~~29.4%~~19.0% for the three months ended ~~March 31, 2018~~June 30, 2019 and ~~29.0%~~32.8% for three months ended June 30, 2018. The decrease of our effective tax rate without consideration of discrete adjustments reflects other impacts of the Tax Act, including the reduction of the U.S. federal statutory tax rate, the inclusion of certain foreign earnings under the global intangible low-taxed income (“GILTI”) rules and changes to the foreign tax credit provisions.

Equity Method Investment Impairment Charge, net of Income Taxes

Our APAC segment has an investment in a joint venture in China for which we apply the equity method of accounting. During the three months ended ~~March 31, 2019.~~June 30, 2019, we recorded a $3.0 million impairment resulting from a decline in the carrying value of this investment, which was determined to be other than temporary in nature. This impairment charge was partially

offset by $0.7 million of the related income tax benefit. See further discussion of this impairment under “—Equity Method Investment” section above.

Net Income

Net income for the three months ended ~~March 31,~~June 30, 2019 was ~~$12.0~~$14.1 million, compared to a net income of $15.0 million for the same period in the prior year. This decrease in net income of $3.0 million was primarily driven by an increase in SG&A expense of $6.4 million and an increase in interest expense of $0.4 million, partially offset by an increase in gross profit of $3.0 million, as discussed above.

~~Six Months Ended March 31, 2019 compared with Six Months Ended March 31, 2018~~

~~Net Sales~~

~~Consolidated net sales increased $68.5 million, or 9.1% to $821.8 million for the six months ended March 31, 2019 compared to $753.3~~$10.8 million for the same period in the prior year. The ~~$68.5~~decline in income from operations and equity method investment impairment charge were more than offset by the favorable change in income tax.

Nine Months Ended June 30, 2019 compared with Nine Months Ended June 30, 2018

Net Sales

Consolidated net sales increased $100.5 million, or 8.6% to $1,264.2 million for the nine months ended June 30, 2019 compared to $1,163.6 million for the same period in the prior year. The $100.5 million increase reflects higher sales across all major product categories including chemicals, ~~Ad hoc~~Contract hardware and ~~Contract~~ad hoc hardware. The net sales increase ~~was the result overall of~~benefited from continued market growth, and ~~additional market penetration, reflecting~~reflects the company’s strong position with major customers. Ad hoc hardware sales and Contract sales as a percentage of net sales represented ~~25% and 75%, respectively, for the six months ended March 31, 2019 as compared to~~ 24% and 76%, respectively, for both the ~~same period in the prior year.~~nine months ended June 30, 2019 and 2018.

Income from Operations

Consolidated income from operations declined ~~$5.9~~$12.7 million to ~~$51.9~~$74.4 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 compared to ~~$57.8~~$87.1 million for the same period in the prior year. The ~~$5.9~~$12.7 million decline in income from operations was due to an increase in SG&A expenses of ~~$12.8~~$21.3 million, partially offset by higher gross profit of ~~$6.9~~$8.6 million. Income from operations as a percentage of net sales declined ~~1.4~~1.6 percentage points compared with the same period in the prior year.

The higher gross profit was driven by increases in sales volume compared with the same period in the prior ~~year. Average~~year, partially offset by a decline in gross margin. Gross margins declined 1.4 percentage points, primarily reflecting weaker margins in the EMEA segment resulting from more aggressive pricing for hardware products, including for certain ~~contract~~Contract renewals, and lower chemical margins due to increased pass-through sales, as well as the impact on revenues of weaker British Pound and Euro exchange rates versus the U.S. dollar for local currency denominated business. The gross margin decline also reflects the effect of lower margins

in the Americas segment reflecting several factors: for Contract hardware sales, margins on Adend of contract related sales were significantly higher in the prior year period; for ad hoc sales of hardware products, ~~in the Americas segment due to~~lower current year margins reflect more aggressive pricing ~~which supported the increase~~to gain sales volume; and a shift in ~~sales, as well as~~ product mix ~~impacts. For~~towards lower margin chemical ~~products,~~and certain contracted hardware sales. The overall gross profit was also higher as a ~~gross margin decline resulted primarily from a higher volume~~result of ~~pass-through revenues.~~lower net write-downs to net realizable value for excess and obsolete inventory and other inventory adjustments for the nine months ended June 30, 2019 compared with the same period in the prior year.

The ~~$12.8~~$21.3 million increase in SG&A expenses largely reflects increases in payroll and other personnel related costs of ~~$10.8~~$15.1 million, building and equipment costs of $2.8 million and professional fees of ~~$1.4 million, marketing and travel expenses of $0.7 million, and stock-based compensation expense of $1.4~~$2.1 million. While higher personnel related costs primarily reflect investment to execute Wesco 2020 initiatives, the majority of these cost increases are the result of execution steps that have a defined end point. Key examples include duplicative staffing costs required during transition and consolidation of single product warehouses into multi-product service centers, severance expense and project performance incentives. The Wesco 2020 related costs, including professional fees for consulting support, totaled ~~$17.8~~$28.3 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared with ~~$5.8~~$13.3 million for the same period in the prior year. The company estimates that the 2020 initiatives have captured approximately ~~$3.0~~$8.2 million of savings for the ~~six~~nine months of this year, excluding temporary and one-time costs, which more than offset higher personnel related costs supporting revenue growth and related activities. SG&A as a percent of net sales ~~was 18.9 percent for six months ended March 31, 2019 and 2018,~~increased 0.2 percentage points compared with the same period in the prior year, including the increase in expense in the current year due to increased staffing, severance, performance incentives, and site related costs required for the execution of Wesco 2020 initiatives.

Interest Expense, Net

Interest expense, net was ~~$25.3~~$38.2 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 compared to ~~$23.8~~$36.5 million for the same period in the prior year. The increase was primarily due to an increase in interest rates, partially offset by a decreased average borrowing amount compared with the same period in the prior year.

Provision for Income Taxes

The income tax provision for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 was ~~$7.8~~$0.4 million, compared to ~~$19.5~~$25.6 million for the same period in the prior year. For the ~~six~~nine months ended ~~March 31,~~June 30, 2019, our effective tax rate decreased ~~27.3~~49.0 percentage points compared to the same period in the prior year. The difference in effective tax rates is primarily related to ~~discrete adjustments recognized~~a favorable $9.2 million adjustment to the Transition Tax which occurred during the three months ended June 30, 2019 as well as a provisional $37.7 million charge to tax expense related to the remeasurement of deferred tax assets and liabilities, a provisional $37.7 million tax benefit related to the partial reversal of a deferred tax liability for unremitted foreign earnings and a provisional $8.8 million Transition Tax charge, each of which occurred during the three months ended December 31, ~~2017 from the one-time tax imposed on accumulated earnings and profits of foreign operations~~2018 as a result ~~the enactment~~ of the Tax ~~Cuts and Jobs Act (the “Tax Act”) on December 22, 2017.~~Act. An additional $0.4 million Transition Tax charge was recorded in subsequent quarters. Without consideration of these discrete adjustments, our effective tax rate would have been ~~29.1%~~26.4% for the ~~six~~nine months ended ~~March 31, 2018~~June 30, 2019 and ~~29.0%~~30.3% for the ~~six~~nine months ended ~~March 31, 2019.~~June 30, 2018. The decrease of our effective tax rate without consideration of discrete adjustments reflects other impacts of the Tax Act, including the reduction of the U.S. federal statutory tax rate, the inclusion of certain foreign earnings under the GILTI rules and changes to the foreign tax credit provisions.

Equity Method Investment Impairment Charge, net of Income Taxes

Our APAC segment has an investment in a joint venture in China for which we apply the equity method of accounting. During the three months ended June 30, 2019, we recorded a $3.0 million impairment resulting from a decline in the carrying value of this investment, which was determined to be other than temporary in nature. This impairment charge was partially

offset by $0.7 million of related income tax benefit. See further discussion of this impairment under “—Equity Method Investment” section above.

Net Income

Net income for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 was ~~$18.3~~$32.4 million, compared to a net income of $14.6 million for the same period in the prior year. This increase in net income of $3.7 million was primarily driven by an increase of $6.9 million in gross profit and a decrease of $11.7 million in the provision for income taxes, partially offset by an increase in SG&A expense of $12.8 million, an increase in interest expense of $1.5 million and an increase of other expense of $0.7 million, as discussed above.

~~Americas Segment~~

Three Months Ended March 31, Six Months Ended March 31,
Americas Results of Operations 2019 2018 2019 2018
(dollars in thousands)
Net sales $ 347,301
$ 313,250
$ 668,426
$ 602,765

Gross profit $ 91,375
$ 84,351
$ 172,942
$ 159,331
Selling, general & administrative expenses 55,982
48,660
108,558
98,443
Income from operations $ 35,393
$ 35,691
$ 64,384
$ 60,888

(as a percentage of net sales,
numbers rounded)

Gross profit 26.3 % 26.9 % 25.9 % 26.4 %
Selling, general & administrative expenses 16.1 % 15.5 % 16.2 % 16.3 %
Income from operations 10.2 % 11.4 % 9.7 % 10.1 %

~~Three Months Ended March 31, 2019 compared with Three Months Ended March 31, 2018~~

~~Net Sales~~

~~Net sales for our Americas segment increased $34.1 million, or 10.9%, to $347.3 million for the~~ ~~three months ended March 31, 2019, compared to $313.3~~$25.4 million for the same period in the prior year. The ~~$34.1~~decline in income from operations and equity method investment impairment charge were more than offset by the favorable change in income tax.

Americas Segment



	Three Months Ended June 30,				Nine Months Ended June 30,
Americas Results of Operations	2019		2018		2019		2018
	(dollars in thousands)
Net sales	$	364,098	$	333,602	$	1,032,524	$	936,367

Gross profit	$	92,092	$	85,532	$	265,034	$	244,863
Selling, general & administrative expenses	59,240		49,553		167,798		147,996
Income from operations	$	32,852	$	35,979	$	97,236	$	96,867



	(as a percentage of net sales, numbers rounded)

Gross profit	25.3	%	25.6	%	25.7	%	26.2	%
Selling, general & administrative expenses	16.3	%	14.8	%	16.3	%	15.9	%
Income from operations	9.0	%	10.8	%	9.4	%	10.3	%

Three Months Ended June 30, 2019 compared with Three Months Ended June 30, 2018

Net Sales

Net sales for our Americas segment increased $30.5 million, or 9.1%, to $364.1 million for the three months ended June 30, 2019, compared to $333.6 million for the same period in the prior year. The $30.5 million increase in net sales for the three months ended ~~March 31,~~June 30, 2019 reflects growth ~~across all product groups including~~in chemicals ~~Ad hoc hardware~~ and Contract hardware ~~sales.~~sales with ad hoc hardware sales relatively flat. In addition, approximately one-third of the $30.5 million net sales increase in the current year represents higher revenue from sales related to contract liability claims compared with the same period in the prior year.

Income from Operations

Income from operations ~~decreased $0.3~~declined $3.1 million to ~~$35.4~~$32.9 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~income from operations of $35.7~~$36.0 million for the same period in the prior year. The ~~$0.3~~$3.1 million ~~decrease~~decline in income from operations resulted from an increase in SG&A expenses of ~~$7.3~~$9.7 million, ~~largely~~which was offset partially by higher gross profit of ~~$7.0~~$6.6 million. Income from operations as a percentage of net sales decreased ~~1.2~~1.8 percentage points, compared with the same period in the prior year.

The ~~$7.0~~$6.6 million increase in gross profit ~~was primarily driven by~~reflects the result of sales increases, partially offset by a decline in gross margin. A gross margin decline of 0.3 percentage points reflects lower margins on ad hoc hardware and Contract sales largely related to more aggressive pricing in hardware as well as a change in overall product mix. The overall gross profit was also higher as a result of lower net write-downs to net realizable value for excess and obsolete inventory and other inventory adjustments for the three months ended June 30, 2019 compared with the same period in the prior year. Average gross margins declined 0.6 percentage points, due primarily to a change in overall sales mix and lower margins on ad hoc sales. The gross margin decline also reflects the effect of more aggressive pricing of Ad hoc sales of hardware products in the Americas segment. For chemical products, a gross margin decline resulted primarily from a higher volume of pass-through revenues.

The ~~$7.3~~$9.7 million increase in SG&A expenses primarily reflects increases in payroll and other personnel related costs of ~~$6.0~~$7.4 million, warehouse-related costs of $1.5 million and professional fees of ~~$0.7 million, information technology related costs of $0.4 million, and marketing and travel expenses of $0.2~~$0.8 million. While higher personnel related costs primarily reflect investment to execute Wesco 2020 initiatives, the majority of these cost increases are the result of execution steps that have a defined end point. Key examples include duplicative staffing costs required during transition and consolidation of single product warehouses into multi-product service centers, severance expense and project performance incentives. The Wesco 2020 related costs totaled ~~$5.4~~$4.7 million for the three months ended ~~March 31,~~June 30, 2019. The company estimates that the 2020 initiatives have captured approximately ~~$1.0~~$2.3 million of savings for the quarter, excluding temporary and one-time costs, which ~~substantially~~more than offset higher personnel related costs supporting revenue growth and related activities. SG&A as a percent of net sales increased ~~0.6~~1.4 percentage points, including the increase in expense that was due to increased staffing, severance, performance incentives, and site related costs required for the execution of Wesco 2020 initiatives.

~~Six~~Nine Months Ended ~~March 31,~~June 30, 2019 compared with ~~Six~~Nine Months Ended ~~March 31,~~June 30, 2018

Net Sales

Net sales for our Americas segment increased ~~$65.7~~$96.1 million, or ~~10.9%~~10.3%, to ~~$668.4~~$1,032.5 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~$602.8~~$936.4 million for the same period in the prior year. The ~~$65.7~~$96.1 million increase in net sales for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 reflects growth across all product groups including chemicals, Adad hoc hardware and Contract hardware sales.

Income from Operations

Income from operations increased ~~$3.5~~$0.3 million to ~~$64.4~~$97.2 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to income from operations of ~~$60.9~~$96.9 million for the same period in the prior year. The ~~$3.5~~$0.3 million increase in income from operations resulted from higher gross profit of ~~$13.6~~$20.1 million, offset ~~partially~~ by an increase in SG&A expenses of ~~$10.1~~

$19.8 million. Income from operations as a percentage of net sales decreased ~~0.4~~0.9 percentage points, compared with the same period in the prior year.

The ~~$13.6~~$20.1 million increase in gross profit ~~was primarily driven by~~reflects the result of sales increases, partially offset by a decline in gross margin. A gross margin decline of 0.5 percentage points reflects lower margins on ad hoc hardware and Contract sales largely related to more aggressive pricing in hardware as well as a change in overall product mix. The overall gross profit was also higher as a result of lower net write-downs to net realizable value for excess and obsolete inventory and other inventory adjustments for the nine months ended June 30, 2019 compared with the same period in the prior year. Average gross margins declined 0.5 percentage points, due primarily to a change in overall sales mix, lower margins on ad hoc sales, offset partially by higher hardware Contract margins compared with the same period in the prior year. The gross margin decline also reflects the effect of more aggressive pricing on Ad hoc sales of hardware products in the Americas segment which supported the increase in sales. For chemical products, a gross margin decline resulted primarily from a higher volume of pass-through revenues.

The ~~$10.1~~$19.8 million increase in SG&A expenses primarily reflects increases in payroll and other personnel related costs of ~~$9.1~~$16.6 million, professional fees of ~~$0.5~~$1.2 million and information technology related costs of ~~$0.7~~$0.9 million related to the investment in infrastructure and ~~travel expenses of $0.3 million, partially offset by a $0.4 million decline in depreciation.~~overall IT capabilities. While higher personnel related costs primarily reflect investment to

execute Wesco 2020 initiatives, the majority of these cost increases are the result of execution steps that have a defined end point. Key examples include duplicative staffing costs required during transition and consolidation of single product warehouses into multi-product service centers, severance expense and project performance incentives. The Wesco 2020 related costs totaled ~~$7.9~~$12.6 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019. The company estimates that the 2020 initiatives have captured approximately ~~$2.0~~$6.6 million of savings for the year to date, excluding temporary and one-time costs, which ~~substantially~~more than offset higher personnel related costs supporting revenue growth and related activities. SG&A as a percent of net sales ~~declined 0.1~~increased 0.4 percentage point, including the increase in expense that was due to increased staffing, severance, performance incentives, and site related costs required for the execution of Wesco 2020 initiatives.

EMEA Segment


	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended June 30,					Nine Months Ended June 30,
EMEA Results of Operations	2019		2018		2019		2018		2019			2018		2019		2018
	(dollars in thousands)								(dollars in thousands)
Net sales	$	66,300	$	68,147	$	128,038	$	132,385	$	63,634		$	66,728	$	191,672	$	199,113

Gross profit	$	14,121	$	19,140	$	27,806	$	35,783	$	11,065		$	16,571	$	38,871	$	52,354
Selling, general & administrative expenses	12,343		12,310		23,532		23,801		13,013			11,822		36,545		35,623
Income from operations	$	1,778	$	6,830	$	4,274	$	11,982
(Loss) income from operations									$	(1,948	)	$	4,749	$	2,326	$	16,731


	(as a percentage of net sales, numbers rounded)								(as a percentage of net sales, numbers rounded)

Gross profit	21.3	%	28.1	%	21.7	%	27.0	%	17.4	%	24.8	%	20.3	%	26.3	%
Selling, general & administrative expenses	18.6	%	18.1	%	18.4	%	17.9	%	20.5	%	17.7	%	19.1	%	17.9	%
Income from operations	2.7	%	10.0	%	3.3	%	9.1	%
(Loss) income from operations									(3.1	)%	7.1	%	1.2	%	8.4	%

Three Months Ended ~~March 31,~~June 30, 2019 compared with Three Months Ended ~~March 31,~~June 30, 2018

Net Sales

Net sales for our EMEA segment declined ~~$1.8~~$3.1 million, or ~~2.7%~~4.6%, to ~~$66.3~~$63.6 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~$68.1~~$66.7 million for the same period in the prior year. The lower net sales for the three months ended ~~March 31,~~June 30, 2019, reflects primarily a decline in ~~chemical product~~ad hoc hardware sales, and to a lesser degree, ~~ad hoc~~chemical product sales, partially offset by higher hardware Contract sales compared with the same period in the prior year.

~~Income~~(Loss) income from Operations

Income from operations declined ~~$5.1~~$6.7 million, or ~~74.0%~~141.0%, to ~~$1.8~~a loss from operations of $1.9 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~$6.8~~income from operations of $4.7 million for the same period in the prior year. The ~~$5.1~~$6.7 million decline in income from operations was comprised primarily of a decline in gross profit of ~~$5.0~~$5.5 million as well as an increase in SG&A expenses of $1.2 million. ~~Income~~Loss from operations as a percentage of net sales was ~~2.7%~~3.1% for the three months ended ~~March 31,~~June 30, 2019, compared to ~~10.0%~~income from operations as a percentage of net sales of 7.1% for the same period in the prior year, a decline of ~~7.3~~10.2 percentage points.

The ~~$5.0~~$5.5 million decline in gross profit was partially driven by lower chemical product sales and ad hoc hardware sales compared with the same period in the prior year. Average gross margins declined ~~6.8~~7.4 percentage points primarily reflecting more aggressive pricing for hardware products, including for certain ~~contract~~Contract renewals, and the impact of weaker Euro and British Pound exchange rates relative to the U.S. dollar for local currency denominated business. ~~As well, the higher concentration of electronic products within ad hoc sales lowered gross margin, while~~In addition, for chemical products, the gross margin decline resulted primarily from a higher volume of pass-through revenues. Supply costs were also higher for certain chemicals ~~contracts.~~Contracts, and there were higher costs related to inventory write-downs to net realizable value.

SG&A expenses were ~~$12.3~~$13.0 million for ~~both the~~ three months ended ~~March 31,~~June 30, 2019, ~~and 2018.~~compared to $11.8 million same period of last year. SG&A as a percent of net sales increased ~~0.5~~2.8 percentage points. The increase in SG&A expenses of $1.2 million was

~~Six~~due primarily to the professional fees and warehouse related costs incurred to support performance improvement initiatives that primarily reflect investment to execute Wesco 2020 initiatives.

Nine Months Ended ~~March 31,~~June 30, 2019 compared with ~~Six~~Nine Months Ended ~~March 31,~~June 30, 2018

Net Sales

Net sales for our EMEA segment declined ~~$4.3~~$7.4 million, or ~~3.3%~~3.7%, to ~~$128.0~~$191.7 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~$132.4~~$199.1 million for the same period in the prior year. The lower net sales for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, primarily reflects ~~primarily~~ a decline in ad hoc hardware sales, and to lesser degree, chemical product sales, partially offset by higher hardware Contract sales compared with the same period in the prior year.

Income from Operations

Income from operations declined ~~$7.7~~$14.4 million, or ~~64.3%~~86.1%, to ~~$4.3~~$2.3 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~$12.0~~$16.7 million for the same period in the prior year. The ~~$7.7~~$14.4 million decline in income from operations was comprised of a decline in gross profit of ~~$8.0~~$13.5 million ~~slightly offset by a decrease~~and an increase in SG&A expenses of ~~$0.3~~$0.9 million. Income from operations as a percentage of net sales was ~~3.3%~~1.2% for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~9.1%~~8.4% for the same period in the prior year, a decline of ~~5.8~~7.2 percentage points.

The ~~$8.0~~$13.5 million decline in gross profit was primarily driven by lower ad hoc hardware sales and chemical ~~product~~ sales as well as a gross margin decline on ad hoc hardware sales, chemical ~~product~~sales and hardware Contract sales compared with the same period in the prior year. Average gross margins declined ~~5.3~~6.0 percentage points primarily reflecting more aggressive pricing for hardware products, including for certain ~~contract~~Contract renewals, and the impact of weaker Euro and British Pound exchange rates for local currency denominated business. ~~As well, the higher concentration of electronic products within ad hoc sales lowered gross margin, while~~In addition, for chemical products, the gross margin decline resulted primarily from a higher volume of pass-through revenues. Supply costs were also higher for certain chemicals ~~contracts.~~Contracts, and there were higher costs related to inventory write-downs to net realizable value.

The ~~$0.3~~$0.9 million ~~decrease~~increase in SG&A expenses primarily reflects ~~decreases~~increases in ~~payroll and other personnel related costs of $0.5 million and other miscellaneous expense of $0.1 million, partially offset by increased~~ professional fees ~~$0.3 million.~~and warehouse-related costs incurred to support performance improvement initiatives that primarily reflect investment to execute Wesco 2020 initiatives. SG&A as a percent of net sales increased ~~0.5~~1.2 percentage points.

APAC Segment



	Three Months Ended June 30,				Nine Months Ended June 30,
APAC Results of Operations	2019		2018		2019		2018
	(dollars in thousands)				(dollars in thousands)
Net sales	$	14,642	$	10,029	$	39,963	$	28,153

Gross profit	$	2,713	$	2,094	$	9,054	$	7,139
Selling, general & administrative expenses	1,221		1,762		5,332		4,532
Income from operations	$	1,492	$	332	$	3,722	$	2,607



	(as a percentage of net sales, numbers rounded)

Gross profit	18.5	%	20.9	%	22.7	%	25.4	%
Selling, general & administrative expenses	8.3	%	17.6	%	13.3	%	16.1	%
Income from operations	10.2	%	3.3	%	9.4	%	9.3	%

~~APAC Segment~~

Three Months Ended March 31, Six Months Ended March 31,
APAC Results of Operations 2019 2018 2019 2018
(dollars in thousands) (dollars in thousands)
Net sales $ 12,873
$ 8,786
$ 25,321
$ 18,124

Gross profit $ 3,251
$ 2,244
$ 6,341
$ 5,045
Selling, general & administrative expenses 2,095
1,467
4,111
2,770
Income from operations $ 1,156
$ 777
$ 2,230
$ 2,275

(as a percentage of net sales,
numbers rounded)

Gross profit 25.3 % 25.5 % 25.0 % 27.8 %
Selling, general & administrative expenses 16.3 % 16.7 % 16.2 % 15.2 %
Income from operations 9.0 % 8.8 % 8.8 % 12.6 %

Three Months Ended ~~March 31,~~June 30, 2019 compared with Three Months Ended ~~March 31,~~June 30, 2018

Net Sales

Net sales for our APAC segment increased ~~$4.1~~$4.6 million, or ~~46.5%~~46.0%, to ~~$12.9~~$14.6 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~$8.8~~$10.0 million for the same period in the prior year. The ~~$4.1~~$4.6 million increase in net sales for the three months ended ~~March 31,~~June 30, 2019 primarily reflects increases in hardware Contract sales, ~~of hardware products,~~ chemical ~~product~~ sales and ad hoc hardware sales compared with the same period in the prior year.

Income from Operations

Income from operations increased ~~$0.4~~$1.2 million to ~~$1.2~~$1.5 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~income from operations of $0.8~~$0.3 million for the same period in the prior year. The ~~$0.4~~$1.2 million increase in income from operations is due primarily to an increase in gross profit of ~~$1.0~~$0.6 million ~~partially offset by an increase~~and a decrease in SG&A expenses of $0.6 million. Income from operations as a percentage of net sales increased ~~0.2~~6.9 percentage points compared with the same period in the prior year.

The ~~$1.0~~$0.6 million increase in gross profit was primarily driven by increases in hardware Contract sales, chemical ~~product~~ sales and ad hoc hardware sales compared with the same period in the prior year. Average gross margins declined ~~0.2~~2.4 percentage points due primarily to a weaker sales mix and slightly lower margins for ~~ad hoc sales and~~ chemical product sales, partially offset by higher margins for hardware Contract sales compared with the same period in the prior year.

The $0.6 million ~~increase~~decrease in SG&A expenses was due primarily to ~~increases~~decreases in payroll and other personnel related costs of ~~$0.5~~$0.8 million, ~~and~~partially offset by increased rent expenses of ~~$0.1~~$0.2 million reflecting investments made to grow the business in this area of the world. SG&A as a percent of net sales decreased ~~0.4~~9.3 percentage points.

~~Six~~Nine Months Ended ~~March 31,~~June 30, 2019 compared with ~~Six~~Nine Months Ended ~~March 31,~~June 30, 2018

Net Sales

Net sales for our APAC segment increased ~~$7.2~~$11.8 million, or ~~39.7%~~41.9%, to ~~$25.3~~$40.0 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~$18.1~~$28.2 million for the same period in the prior year. The ~~$7.2~~$11.8 million increase in net sales for the ~~six~~nine months ended ~~March 31,~~June 30, 2019 primarily reflects increases in chemical ~~product~~ sales and ad hoc hardware sales compared with the same period in the prior year.

Income from Operations

Income from operations ~~declined $0.1~~increased $1.1 million to ~~$2.2~~$3.7 million for the ~~six~~nine months ended ~~March 31,~~June 30, 2019, compared to ~~income from operations of $2.3~~$2.6 million for the same period in the prior year. The ~~$0.1~~$1.1 million ~~decline~~increase in income from operations is primarily due to an increase in gross profit of $1.9 million, partially offset by an increase in SG&A expenses of ~~$1.3 million, partially offset by an increase in gross profit of $1.2~~$0.8 million. Income from operations as a percentage of net sales ~~declined 3.8~~increased 0.1 percentage ~~points~~point compared with the same period in the prior year.

The ~~$1.2~~$1.9 million increase in gross profit was primarily driven by increases in hardware Contract sales, ~~of hardware products,~~ chemical ~~product~~ sales and ad hoc hardware sales compared with the same period in the prior year. Average gross margins declined ~~2.8~~2.7 percentage points due primarily to a weaker sales mix and lower margins for ad hoc hardware sales, partially offset by higher margins for ~~chemical product~~hardware Contract sales compared with the same period in the prior year.

The ~~$1.3~~$0.8 million increase in SG&A expenses was due primarily to increases in payroll and other personnel related costs of ~~$1.0 million, marketing and travel expenses of~~ $0.1 million and ~~other miscellaneous expenses~~building and equipment costs of ~~$0.2~~$0.4 million, reflecting investment being made to grow the business in this area of the world. SG&A as a percent of net sales ~~increased 1.0~~decreased 2.8 percentage ~~point.~~points.

Unallocated Corporate Costs


	Selling, General and Administrative Expenses										Selling, General and Administrative Expenses
	(dollars in thousands)										(dollars in thousands)
Three Months Ended March 31, 2019	Americas		EMEA		APAC		Unallocated Corporate Costs		Consolidated
Three Months Ended June 30, 2019											Americas		EMEA		APAC		Unallocated Corporate Costs		Consolidated
2019	$	55,982	$	12,343	$	2,095	$	8,488	$	78,908	$	59,240	$	13,013	$	1,221	$	9,894	$	83,368
2018	48,660		12,310		1,467		10,102		72,539		49,553		11,822		1,762		11,732		74,869

Six Months Ended March 31,	Americas		EMEA		APAC		Unallocated Corporate Costs		Consolidated
Nine Months Ended June 30,											Americas		EMEA		APAC		Unallocated Corporate Costs		Consolidated
	(dollars in thousands)										(dollars in thousands)
2019	$	108,558	$	23,532	$	4,111	$	18,970	$	155,171	$	167,798	$	36,545	$	5,332	$	28,864	$	238,539
2018	98,443		23,801		2,770		17,377		142,391		147,996		35,623		4,532		29,109		217,260

SG&A expenses for the Americas, EMEA and APAC segments are discussed previously. The following is a discussion onof SG&A expenses not allocated to the three segments. Unallocated corporate costs include costs for corporate headquarters, along with our Wesco 2020 initiatives.

Three Months Ended ~~March 31,~~June 30, 2019 compared with Three Months Ended ~~March 31,~~June 30, 2018

Unallocated corporate costs were ~~$1.6~~$1.8 million lower than the same period in the prior year, primarily driven by ~~a decrease~~decreases in payroll related costs of $0.7 million and professional fees of ~~$1.9~~$0.9 million ~~mainly~~ reflecting costs for outside consultants assisting with the Company's Wesco 2020 initiatives. ~~The decreases were offset by an increase in the unallocated stock-based compensation expense of $0.3 million.~~ Unallocated costs included ~~$3.2~~$4.8 million of Wesco 2020 costs in the three months ended ~~March 31,~~June 30, 2019 compared to ~~$4.2~~$7.0 million for the same period in the prior year.

~~Six~~Nine Months Ended ~~March 31,~~June 30, 2019 compared with ~~Six~~Nine Months Ended ~~March 31,~~June 30, 2018

Unallocated corporate costs were ~~$1.6~~$0.2 million ~~higher~~lower than the same period in the prior year, primarily driven by ~~increases~~decreases in payroll related costs of $1.0 million and professional fees of ~~$0.6~~$0.3 million, ~~mainly~~ reflecting costs for outside consultants assisting with the Company's Wesco 2020 ~~initiatives and~~initiatives. Those decreases were partially offset by an increase in stock-based compensation expense of ~~$1.4 million. Those increases were partially offset by a decrease in~~$1.1 million related to the ~~unallocated payroll and other personnel related costs of $0.3 million.~~Wesco 2020 initiatives. Unallocated costs included ~~$8.7~~$13.5 million of Wesco 2020 costs in the ~~six~~nine months ended ~~March 31,~~June 30, 2019 compared to ~~$5.8~~$12.8 million for the same period in the prior year.

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 of ~~$32.7~~$45.4 million and $46.2 million as of ~~March 31,~~June 30, 2019 and September 30, 2018, respectively, of which ~~$24.6~~$34.1 million, or ~~75.2%~~75.1%, and $21.3 million, or 46.1%, was held by our foreign subsidiaries as of ~~March 31,~~June 30, 2019 and September 30, 2018, respectively. All of our cash and cash equivalents as of ~~March 31,~~June 30, 2019 and September 30, 2018 were non-restricted. All of our foreign cash and cash equivalents are readily convertible into U.S. dollars or other foreign currencies.

Our primary uses of cash currently are for:



•	Operating expenses;
•	Working capital requirements to fund the growth of our business, principally inventory;
•	Capital expenditures that primarily relate to IT equipment, software development and implementation and our warehouse operations; and
•	Debt service requirements, including interest expense, for borrowings under the Credit Facilities (as defined below under “—Credit Facilities”).

Generally, cash provided by operating activities has been adequate to fund our operations. Due to fluctuations in our cash flows, including for investment in working capital to fund growth in 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 ~~$113.0~~$141.0 million was available as of ~~March 31,~~June 30, 2019. 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. For additional information about our revolving facility, see “—Credit Facilities” below. As of ~~March 31,~~June 30, 2019, we did not have any material capital expenditure commitments.

Cash Flows

Our cash and cash equivalents declined by ~~$13.5~~$0.8 million during the ~~six~~nine months ended ~~March 31,~~June 30, 2019. The decrease was primarily due to cash used in investing and ~~operating~~financing activities, partially offset ~~partially~~ by cash provided by ~~financing~~operating activities.

A summary of our operating, investing and financing activities are shown in the following table (in thousands):


	Six Months Ended March 31,						Nine Months Ended June 30,
Consolidated statements of cash flows data:	2019			2018			2019			2018
Net income	$	18,303		$	14,626		$	32,417		$	25,380
Adjustments to reconcile net income to net cash used in operating activities	24,837			27,427
Adjustments to reconcile net income to net cash provided by (used in) operating activities							33,722			43,819
Subtotal	43,140			42,053			66,139			69,199
Changes in assets and liabilities	(49,541		)	(77,962		)	(16,825		)	(88,264		)
Net cash used in operating activities	(6,401		)	(35,909		)
Net cash provided by (used in) operating activities							49,314			(19,065		)

Net cash used in investing activities	(7,996		)	(2,909		)	(16,481		)	(4,009		)

Net cash provided by financing activities	1,140			12,688
Net cash (used in) provided by financing activities							(33,499		)	7,330

Effect of foreign currency exchange rate on cash and cash equivalents	(239		)	428			(138		)	(293		)
Net decrease in cash and cash equivalents	$	(13,496	)	$	(25,702	)	$	(804	)	$	(16,037	)

Operating Activities

Our cash flows from operating activities fluctuate 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 the timing of cash payments or receipts associated with other working capital accounts such as changes in our prepaid expenses and accrued liabilities or the timing of our tax payments.

Our operating activities ~~used $6.4~~provided $49.3 million of cash in the ~~six~~nine months ended ~~March 31,~~June 30, 2019, ~~$29.5~~a $68.4 million ~~lower than~~increase from the ~~$35.9~~$19.1 million of cash used in operating activities for the same period in the prior year. The ~~$29.5~~$68.4 million ~~decrease~~increase in net cash ~~used in~~provided by operating activities reflects a ~~$1.1~~$3.0 million ~~increase~~decrease in cash provided from net income excluding non-cash items and a series of year-over-year differences in balance sheet changes ~~reducing~~increasing cash ~~used~~provided by operations for ~~operations by $28.4~~$71.4 million. Comparing the ~~six~~nine months ended ~~March 31,~~June 30, 2019 with the ~~six~~nine months ended ~~March 31,~~June 30, 2018, the key balance sheet changes include:

a favorable change of ~~$57.8~~$83.1 million ~~less~~as a result of lower cash used for inventory,

a ~~$3.2~~$24.3 million favorable difference in the change for accounts payable due to the timing of payments and accruals,

a $3.3 million unfavorable impact ~~on operating cash flow~~ due to higher accounts receivable largely driven by the timing of collections along with increased sales,

a ~~$9.4~~$15.5 million unfavorable impact ~~on operating cash flow~~ due to a change in accrued expenses and other liabilities as a result of the timing of accruals and actual payments,

a net ~~$2.8~~$9.0 million unfavorable change in combined income taxes payable and receivable, and

~~a $9.9~~an $8.1 million unfavorable difference in the change ~~for accounts payable due to the timing of payments~~in prepaid expenses and ~~accruals, and~~other assets.

~~a $4.1 million unfavorable difference in the change for remaining working capital assets and liabilities.~~

Investing Activities

Our investing activities used ~~$8.0~~$16.5 million of cash during the ~~six~~nine months ended ~~March 31,~~June 30, 2019 as compared to ~~$2.9~~$4.0 million used during the ~~six~~nine months ended ~~March 31,~~June 30, 2018. Investing activities consist primarily of software development and implementation and the purchase of property and equipment related to Wesco 2020 initiatives.

Financing Activities

Our financing activities ~~were a net source of $1.1~~used $33.5 million of cash during the ~~six~~nine months ended ~~March 31,~~June 30, 2019, which consisted primarily of ~~$47.0 million of short-term borrowings, partially offset by $34.0~~$73 million and ~~$10.0~~$15.0 million for repayments of our borrowings under our revolving facility and long-term debt, respectively, ~~$1.4~~and $2.1 million for repayments of our capital lease obligations, ~~and a $0.4~~partially offset by $57.0 million ~~payment as settlement on restricted stock tax withholding~~of short-term borrowings (see Note 6 of the Notes to the Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q).

Our financing activities were a net source of ~~$12.7~~$7.3 million of cash during the ~~six~~nine months ended ~~March 31,~~June 30, 2018, which consisted primarily of ~~$60.0~~$67.5 million of short-term borrowings, partially offset by ~~$34.0~~$41.0 million and ~~$10.0~~$15.0 million for repayments of our borrowings under our revolving facility and long-term debt, respectively, ~~$1.3~~$2.2 million for repayments of our capital lease obligations and a $1.9 million payment for debt issuance costs.

Credit Facilities

As disclosed in Note 6 of the Notes to the Consolidated Financial Statements in Part 1, Item 1. of this Quarterly Report on Form 10-Q, 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 ~~5.50~~5.25 for the quarter ended ~~March 31,~~June 30, 2019. In addition, the Excess Cash Flow Percentage (as such term is defined in the Credit Agreement) 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 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 ~~March 31,~~June 30, 2019, we were in compliance with all of the foregoing covenants, and our Consolidated Total Leverage Ratio was ~~4.27~~4.02.

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 our debt in full.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 2 of the Notes to the Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for a summary of recent accounting pronouncements.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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,” “can,” “continue,” “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: our inability to consummate the Merger within the anticipated time period, or at all, due to any reason, including the failure to obtain stockholder approval to adopt the Merger Agreement, the failure to obtain required regulatory approvals or the failure to satisfy the other conditions to the consummation of the Merger; the failure by Parent or Merger Sub to obtain the necessary debt and equity financing arrangements set forth in the commitment letters received in connection with the Merger; the risk that the Merger Agreement may be terminated in circumstances requiring us to pay a termination fee of approximately $39 million; the risk that the Merger disrupts our current plans and operations or diverts management’s attention from our ongoing business; the effect of the announcement of the Merger on our ability to retain and hire key personnel and maintain relationships with our customers, suppliers and others with whom we does business; the effect of the announcement of the Merger on our operating results and business generally; the amount of costs, fees and expenses related to the Merger; the risk that our stock price may decline significantly if the Merger is not consummated; the nature, cost and outcome of any litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against us and others; 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 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; risks associated with our long-term, fixed-price agreements that have no guarantee of future sales volumes; 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, while also meeting our customers’ quality standards; our ability to maintain effective information technology systems and effectively implement our new warehouse management system; our ability to successfully execute and realize the expected financial benefits from our “Wesco 2020” initiative; our ability to retain key personnel; risks associated with our international operations, including exposure to foreign currency movements; changes in trade policies; 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. income 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.

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” in the 2018 Form 10-K, Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q and the other documents we file from time to time with the ~~SEC, including this Quarterly Report on Form 10-Q.~~SEC. All forward-looking statements included in this Quarterly Report on Form 10-Q (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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of our exposure to market risks, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in the 2018 Form 10-K. There have been no material changes to our market risks since September 30, 2018.

ITEM 4. 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 our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended ~~March 31,~~June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.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.

ITEM 1A.RISK FACTORS

~~There have been no material changes to~~The risk factors presented below supplement the risk factors previously disclosed in ~~Part I, Item 1A. “Risk Factors” of~~ the 2018 Form 10-K.

Our inability to complete the Merger, or to complete the Merger in a timely manner, including as a result of the failure to obtain stockholder approval to adopt the Merger Agreement, the failure to obtain required regulatory approvals or the failure to satisfy the other conditions to the consummation of the Merger could negatively affect our business, financial condition and results of operations.

The Merger is subject to various closing conditions such as the approval of our stockholders, as well as certain regulatory approvals in the United States and other jurisdictions, among other customary closing conditions. It is possible that our stockholders will not approve the Merger or that a government entity may prohibit, enjoin or refuse to grant approval for the consummation of the Merger. If any condition to the closing of the Merger is not satisfied or, if permissible, not waived, the Merger will not be completed. In addition, satisfying the conditions to the closing of the Merger may take longer than we expect. There can be no assurance that any of the conditions to closing will be satisfied or waived or that other events will not intervene to delay or result in the failure to consummate the Merger.

If the Merger is not completed for any reason, our stockholders would not receive any payment for their shares in connection with the Merger, and we would remain an independent public company, with our shares continuing to be traded on the New York Stock Exchange. Depending on the circumstances that would have caused the Merger not to be completed, the price of our common stock may decline materially. If that were to occur, it is uncertain when, if ever, our common stock would return to the price levels at which the shares currently trade.

Failure to complete the Merger could trigger the payment of a termination fee, and, whether or not the Merger is consummated, we have incurred and will continue to incur significant costs, fees and expenses relating to professional services and transaction fees.

Under the Merger Agreement, we may be required to pay a termination fee of approximately $39.0 million, if the Merger Agreement is terminated under specified circumstances, including, among others, circumstances in which (i) the Board of Directors changes its recommendation with respect to the transaction or we terminate the Merger Agreement to accept a superior proposal or (ii) Parent terminates the Merger Agreement due to our uncured material breach of the non-solicitation obligations under the Merger Agreement. There can be no assurance that the Merger Agreement will not be terminated under the circumstances triggering these termination fee obligations. Furthermore, whether or not the Merger is consummated, we have incurred, and will continue to incur, significant costs, fees and expenses relating to professional services and transaction fees in connection with the proposed Merger. Payment of these costs, fees and expenses could adversely affect our business, financial condition and results of operations.

Uncertainties associated with the Merger may cause us to lose key customers or suppliers and make it more difficult to retain and hire key personnel, and the Merger may disrupt our current plans and operations or divert management’s attention from our ongoing business.

As a result of the uncertainty surrounding the conduct of our business while the Merger is pending, our relationships with customers, suppliers and other parties may be adversely affected. Due to uncertainty about our future while the Merger is pending, we may lose customers or suppliers, or customers, suppliers and other parties may alter their business relationships with us.

In addition, our employees, including key personnel, may be uncertain about their future roles and relationships with us following the completion of the Merger, which may adversely affect our ability to retain them or to hire new employees, and, while the Merger is pending, the potential disruption of plans or diversion of management’s attention from our ongoing business operations could adversely affect our business, financial condition and results of operations.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~None.~~During the quarter ended June 30, 2019, we repurchased 1,733 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 Wesco Aircraft Holdings, Inc. 2014 Incentive Award Plan. We expended approximately $14,600 to repurchase these shares.



Period	Total Number of Shares Purchased		Average Price Paid per Share		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)
April 1, 2019 - April 30, 2019		—	$	—		—	$	—
May 1, 2019 - May 31, 2019		1,733		8.40		—		—
June 1, 2019 - June 30, 2019		—		—		—		—
Total		1,733	$	8.40		—	$	—

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

(a)Exhibits



Exhibit Number			Description

~~10.1~~2.1			~~Amendment to the~~Agreement and Plan of Merger, dated as of August 8, 2019, among Wesco Aircraft Holdings, Inc. ~~2014 Incentive Award Plan (incorporated~~, Wolverine Intermediate II Corporation and Wolverine Merger Corporation (Incorporated by reference to ~~Appendix B of~~Exhibit 2.1 to the ~~Registrant’s Definitive Proxy Statement~~Registrant's Current Report on Form 8-K dated ~~December 14, 2018~~August 9, 2019 (File No. 001-35253))

10.1			First Amendment to Lease Agreement between Wesco Aircraft Hardware Corp. and Avenue Scott, LLC, dated as of June 24, 2019

10.2			First Amendment to Lease Agreement between Wesco Aircraft Hardware Corp. and WATX Properties, LLC, dated as of June 24, 2019

31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1			Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

SIGNATURES

Pursuant to the requirements 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.



Date: ~~May 2,~~August 8, 2019	WESCO AIRCRAFT HOLDINGS, INC.

	By:	/s/ Todd S. Renehan
		Name: Todd S. Renehan
		Title: Chief Executive Officer

Date: ~~May 2,~~August 8, 2019	By:	/s/ Kerry A. Shiba
		Name: Kerry A. Shiba
		Title: Executive Vice President and Chief Financial Officer

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