filings.toolsItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements, financial statement schedules and exhibits listed below are filed as part of this annual report:
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | 1 | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | 1 |
| 1 | Filed herewith. | |
| 2 | Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 33-90866). | |
| 3 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 033-90866) for the period ended March 31, 2006. | |
| 4 | Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on April 13, 2006. | |
| 5 | Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on March 31, 2011. | |
| 6 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 1-13782) for the period ended September 30, 2008. | |
| 7 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782) dated July 2, 2009. | |
| 8 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated May 19, 2014. | |
| 9 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 25, 2011. | |
| 10 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 22, 2013. | |
| 11 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated May 15, 2013. | |
| 12 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated August 8, 2013. | |
| 13 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 21, 2014. | |
| 14 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated June 24, 2016. | |
| 15 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated July 30, 2015. | |
| 16 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated October 6, 2015. | |
| 17 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated October 26, 2016. | |
| 18 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated November 1, 2016. | |
| 19 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 1-13782), dated November 3, 2016. | |
| 20 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 28, 2017. | |
| 21 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 1-13782) for the period ended March 31, 2017. | |
| 22 | Filed as an exhibit to the Company’s Registration Statement on Form S-4 (File No. 333-219354). | |
| 23 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 1-13782) for the period ended September 30, 2017. | |
| 24 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 1-13782), dated May 24, 2018. | |
| 25 | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 1-13782), dated July 31, 2018. | |
| 26 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 1-13782), dated September 14, 2018. | |
| 27 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 1-13782), dated January 31, 2019. | |
| 28 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 1-13782), dated February 25, 2019. |
| * | Management contract or compensatory plan. |
| ** | Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Wabtec hereby undertakes to furnish supplementally, copies of any of the omitted schedules upon request by the SEC. |
MANAGEMENT’S REPORTS TO WABTEC SHAREHOLDERS
Management’s Report on Financial Statements and Practices
The accompanying consolidated financial statements of Westinghouse Air Brake Technologies Corporation and subsidiaries (the “Company”) were prepared by Management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with U.S. generally accepted accounting principles and include amounts that are based on Management’s best judgments and estimates. The other financial information included in the 10-K is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, Management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has excluded Annax GmbH ("Annax") from its assessment of internal controls over financial reporting as of December 31, 2018 because the Company acquired Annax effective March 22, 2018. Annax is a subsidiary whose total assets, net assets, customer revenues and net income represents 1.0%, 1.6%, 1.1% and 1.0%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Based on its assessment, Management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018, based on criteria in Internal Control-Integrated Framework issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Westinghouse Air Brake Technologies Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Westinghouse Air Brake Technologies Corporation (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15.(2) (collectively referred to as the “consolidated financial statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We did not audit the pre-acquisition historical basis consolidated financial statements of Faiveley Transport S.A., a consolidated subsidiary, which statements reflect total revenues constituting 3.8% in 2016 of the related consolidated total. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Faiveley Transport S.A., is based solely on the report of the other auditors. We audited the adjustments necessary to convert the pre-acquisition historical amounts included for Faiveley Transport S.A. to the basis reflected in the Company’s 2016 consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 2002.
Pittsburgh, Pennsylvania
February 27, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management Board of Faiveley Transport
In our opinion, the consolidated statement of income, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the results of operations and cash flows of Faiveley Transport and its subsidiaries for the period from November 30, 2016 to December 31, 2016 (not presented separately herein), in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 3, the company has not applied push down accounting for its acquisition by Wabtec.
PricewaterhouseCoopers Audit
/s/ Philippe Vincent
Partner
Neuilly-sur-Seine, France
February 23, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Westinghouse Air Brake Technologies Corporation
Opinion on Internal Control over Financial Reporting
We have audited Westinghouse Air Brake Technologies Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Westinghouse Air Brake Technologies Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Annax GmbH ("Annax") which is included in the 2018 consolidated financial statements of the Company and constituted 1.0% and 1.6% of total and net assets, respectively, as of December 31, 2018 and 1.1% and 1.0% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Annax.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15.(2) and our report dated February 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 27, 2019
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| In thousands, except shares and par value | 2018 | 2017 | ||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 580,908 | $ | 233,401 | ||||
| Restricted cash | 1,761,446 | — | ||||||
| Accounts receivable | 801,193 | 800,619 | ||||||
| Unbilled accounts receivable | 345,585 | 366,168 | ||||||
| Inventories | 844,886 | 742,634 | ||||||
| Other assets | 115,649 | 122,291 | ||||||
| Total current assets | 4,449,667 | 2,265,113 | ||||||
| Property, plant and equipment | 1,036,550 | 1,026,046 | ||||||
| Accumulated depreciation | (472,813 | ) | (452,074 | ) | ||||
| Property, plant and equipment, net | 563,737 | 573,972 | ||||||
| Other Assets | ||||||||
| Goodwill | 2,396,544 | 2,460,103 | ||||||
| Other intangibles, net | 1,129,880 | 1,204,432 | ||||||
| Other noncurrent assets | 109,406 | 76,360 | ||||||
| Total other assets | 3,635,830 | 3,740,895 | ||||||
| Total Assets | $ | 8,649,234 | $ | 6,579,980 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 589,449 | $ | 552,525 | ||||
| Customer deposits | 373,538 | 369,716 | ||||||
| Accrued compensation | 173,183 | 164,210 | ||||||
| Accrued warranty | 135,636 | 137,542 | ||||||
| Current portion of long-term debt | 64,099 | 47,225 | ||||||
| Other accrued liabilities | 310,785 | 302,112 | ||||||
| Total current liabilities | 1,646,690 | 1,573,330 | ||||||
| Long-term debt | 3,792,774 | 1,823,303 | ||||||
| Accrued postretirement and pension benefits | 95,446 | 103,734 | ||||||
| Deferred income taxes | 198,269 | 175,902 | ||||||
| Accrued warranty | 18,066 | 15,521 | ||||||
| Other long-term liabilities | 28,914 | 59,658 | ||||||
| Total liabilities | 5,780,159 | 3,751,448 | ||||||
| Commitment and Contingencies (Note 21) | ||||||||
| Equity | ||||||||
| Preferred stock, 1,000,000 shares authorized, no shares issued | — | — | ||||||
| Common stock, $.01 par value; 500,000,000 and 200,000,000 shares authorized: | ||||||||
| 132,349,534 shares issued and 96,614,946 and 96,034,352 outstanding | ||||||||
| at December 31, 2018 and December 31, 2017, respectively | 1,323 | 1,323 | ||||||
| Additional paid-in capital | 914,568 | 906,616 | ||||||
| Treasury stock, at cost, 35,734,588 and 36,315,182 shares, at | ||||||||
| December 31, 2018 and December 31, 2017, respectively | (816,145 | ) | (827,379 | ) | ||||
| Retained earnings | 3,021,968 | 2,773,300 | ||||||
| Accumulated other comprehensive loss | (256,583 | ) | (44,992 | ) | ||||
| Total Westinghouse Air Brake Technologies Corporation shareholders' equity | 2,865,131 | 2,808,868 | ||||||
| Noncontrolling interest | 3,944 | 19,664 | ||||||
| Total equity | 2,869,075 | 2,828,532 | ||||||
| Total Liabilities and Equity | $ | 8,649,234 | $ | 6,579,980 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| In thousands, except per share data | ||||||||||||
| Net sales | $ | 4,363,547 | $ | 3,881,756 | $ | 2,931,188 | ||||||
| Cost of sales | (3,129,662 | ) | (2,816,443 | ) | (2,006,949 | ) | ||||||
| Gross profit | 1,233,885 | 1,065,313 | 924,239 | |||||||||
| Selling, general and administrative expenses | (633,244 | ) | (512,552 | ) | (373,559 | ) | ||||||
| Engineering expenses | (87,450 | ) | (95,166 | ) | (71,375 | ) | ||||||
| Amortization expense | (39,754 | ) | (36,516 | ) | (22,698 | ) | ||||||
| Total operating expenses | (760,448 | ) | (644,234 | ) | (467,632 | ) | ||||||
| Income from operations | 473,437 | 421,079 | 456,607 | |||||||||
| Other income and expenses | ||||||||||||
| Interest expense, net | (112,235 | ) | (77,884 | ) | (50,298 | ) | ||||||
| Other income, net | 6,380 | 8,868 | 6,528 | |||||||||
| Income from operations before income taxes | 367,582 | 352,063 | 412,837 | |||||||||
| Income tax expense | (75,879 | ) | (89,773 | ) | (99,433 | ) | ||||||
| Net income | 291,703 | 262,290 | 313,404 | |||||||||
| Less: Net loss (income) attributable to noncontrolling interest | 3,241 | (29 | ) | (8,517 | ) | |||||||
| Net income attributable to Wabtec shareholders | $ | 294,944 | $ | 262,261 | $ | 304,887 | ||||||
| Earnings Per Common Share | ||||||||||||
| Basic | ||||||||||||
| Net income attributable to Wabtec shareholders | $ | 3.06 | $ | 2.74 | $ | 3.37 | ||||||
| Diluted | ||||||||||||
| Net income attributable to Wabtec shareholders | $ | 3.05 | $ | 2.72 | $ | 3.34 | ||||||
| Weighted average shares outstanding | ||||||||||||
| Basic | 95,994 | 95,453 | 90,359 | |||||||||
| Diluted | 96,464 | 96,125 | 91,141 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| In thousands, except per share data | ||||||||||||
| Net income attributable to Wabtec shareholders | $ | 294,944 | $ | 262,261 | $ | 304,887 | ||||||
| Foreign currency translation gain (loss) | (207,267 | ) | 326,096 | (93,684 | ) | |||||||
| Unrealized gain (loss) on derivative contracts | (5,307 | ) | 9,799 | 305 | ||||||||
| Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans | (3,774 | ) | 2,845 | (12,021 | ) | |||||||
| Other comprehensive gain (loss) before tax | (216,348 | ) | 338,740 | (105,400 | ) | |||||||
| Income tax (expense) benefit related to components of | ||||||||||||
| other comprehensive loss | 4,757 | (4,127 | ) | 2,514 | ||||||||
| Other comprehensive income (loss), net of tax | (211,591 | ) | 334,613 | (102,886 | ) | |||||||
| Comprehensive income attributable to Wabtec shareholders | $ | 83,353 | $ | 596,874 | $ | 202,001 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| In thousands, except per share data | ||||||||||||
| Operating Activities | ||||||||||||
| Net income | $ | 291,703 | $ | 262,290 | $ | 313,404 | ||||||
| Adjustments to reconcile net income to cash provided by operations: | ||||||||||||
| Depreciation and amortization | 109,297 | 103,248 | 69,795 | |||||||||
| Stock-based compensation expense | 25,315 | 21,287 | 20,813 | |||||||||
| Deferred income taxes | (5,299 | ) | (67,423 | ) | (10,228 | ) | ||||||
| Loss on disposal of property, plant and equipment | 898 | 1,907 | 232 | |||||||||
| Changes in operating assets and liabilities, net of acquisitions | ||||||||||||
| Accounts receivable and unbilled accounts receivable | (54,611 | ) | (68,676 | ) | 19,728 | |||||||
| Inventories | (108,883 | ) | (8,955 | ) | 45,340 | |||||||
| Accounts payable | 48,763 | (91,722 | ) | (18,932 | ) | |||||||
| Accrued income taxes | 7,880 | 47,644 | (11,759 | ) | ||||||||
| Accrued liabilities and customer deposits | 31,744 | (18,891 | ) | (11,338 | ) | |||||||
| Other assets and liabilities | (32,136 | ) | 8,102 | 33,475 | ||||||||
| Net cash provided by operating activities | 314,671 | 188,811 | 450,530 | |||||||||
| Investing Activities | ||||||||||||
| Purchase of property, plant and equipment | (93,305 | ) | (89,466 | ) | (50,216 | ) | ||||||
| Proceeds from disposal of property, plant and equipment | 11,293 | 1,291 | 363 | |||||||||
| Acquisitions of business, net of cash acquired | (51,153 | ) | (945,299 | ) | (183,113 | ) | ||||||
| Other | (14,122 | ) | — | — | ||||||||
| Net cash used for investing activities | (147,287 | ) | (1,033,474 | ) | (232,966 | ) | ||||||
| Financing Activities | ||||||||||||
| Proceeds from debt, net of issuance costs | 3,480,702 | 1,216,740 | 1,875,000 | |||||||||
| Payments of debt | (1,453,954 | ) | (1,269,537 | ) | (1,102,748 | ) | ||||||
| Stock re-purchase | — | — | (212,176 | ) | ||||||||
| Proceeds from exercise of stock options and other benefit plans | 9,962 | 4,428 | 1,983 | |||||||||
| Payment of income tax withholding on share-based compensation | (12,322 | ) | (6,844 | ) | (6,658 | ) | ||||||
| Cash dividends ($0.48, $0.44 and $0.36 per share for the years | ||||||||||||
| ended December 31, 2018, 2017 and 2016) | (46,277 | ) | (42,218 | ) | (32,430 | ) | ||||||
| Net cash provided by (used for) financing activities | 1,978,111 | (97,431 | ) | 522,971 | ||||||||
| Effect of changes in currency exchange rates | (36,542 | ) | 32,263 | (26,436 | ) | |||||||
| Increase (decrease) in cash | 2,108,953 | (909,831 | ) | 714,099 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 233,401 | 1,143,232 | 429,133 | |||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 2,342,354 | $ | 233,401 | $ | 1,143,232 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Common Stock | Additional Paid-in | Treasury Stock | Treasury Stock | Retained | Accumulated Other | Non-controlling | |||||||||||||||||||||||||||
| In thousands, except share and per share data | Shares | Amount | Capital | Shares | Amount | Earnings | Comprehensive Loss | Interest | Total | |||||||||||||||||||||||||
| Balance, December 31, 2015 | 132,349,534 | $ | 1,323 | $ | 469,326 | (40,513,428 | ) | $ | (775,124 | ) | $ | 2,280,801 | $ | (276,719 | ) | $ | 1,732 | $ | 1,701,339 | |||||||||||||||
| Cash dividends ($0.36 dividend per share) | — | — | — | — | — | (32,430 | ) | — | — | (32,430 | ) | |||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (8,490 | ) | 328,245 | 5,038 | — | — | — | (3,452 | ) | |||||||||||||||||||||||
| Stock based compensation | — | — | 17,748 | — | — | — | — | — | 17,748 | |||||||||||||||||||||||||
| Non-controlling interests associated with Faiveley Transport Acquisition | — | — | — | — | — | — | — | 760,599 | 760,599 | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 304,887 | — | 8,517 | 313,404 | |||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (102,886 | ) | — | (102,886 | ) | |||||||||||||||||||||||
| Stock issued for Faiveley Transport Acquisition | — | — | 391,367 | 6,307,489 | 143,312 | — | — | — | 534,679 | |||||||||||||||||||||||||
| Stock re-purchase | — | — | — | (3,046,408 | ) | (212,176 | ) | — | — | — | (212,176 | ) | ||||||||||||||||||||||
| Balance, December 31, 2016 | 132,349,534 | 1,323 | 869,951 | (36,924,102 | ) | (838,950 | ) | 2,553,258 | (379,605 | ) | 770,848 | 2,976,825 | ||||||||||||||||||||||
| Cash dividends ($0.44 dividend per share) | — | — | — | — | — | (42,218 | ) | — | — | (42,218 | ) | |||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (7,361 | ) | 608,920 | 4,945 | — | — | — | (2,416 | ) | |||||||||||||||||||||||
| Stock based compensation | — | — | 16,650 | — | — | — | — | — | 16,650 | |||||||||||||||||||||||||
| Acquisition of Faiveley Transport noncontrolling interest | — | — | 8,931 | — | — | — | — | (751,213 | ) | (742,282 | ) | |||||||||||||||||||||||
| Net income | — | — | — | — | — | 262,261 | — | 29 | 262,290 | |||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 334,613 | — | 334,613 | |||||||||||||||||||||||||
| Stock issued for Faiveley Transport Acquisition | — | — | 18,445 | — | 6,626 | — | — | — | 25,071 | |||||||||||||||||||||||||
| Balance, December 31, 2017 | 132,349,534 | 1,323 | 906,616 | (36,315,182 | ) | (827,379 | ) | 2,773,300 | (44,992 | ) | 19,664 | 2,828,532 | ||||||||||||||||||||||
| Cash dividends ($0.48 dividend per share) | — | — | — | — | — | (46,277 | ) | — | — | (46,277 | ) | |||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (13,594 | ) | 580,594 | 11,234 | — | — | — | (2,360 | ) | |||||||||||||||||||||||
| Stock based compensation | — | — | 21,546 | — | — | — | — | — | 21,546 | |||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 294,944 | — | (3,241 | ) | 291,703 | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (211,591 | ) | — | (211,591 | ) | |||||||||||||||||||||||
| Other owner changes | — | — | — | — | — | — | — | (12,479 | ) | (12,479 | ) | |||||||||||||||||||||||
| Balance, December 31, 2018 | 132,349,534 | $ | 1,323 | $ | 914,568 | (35,734,588 | ) | $ | (816,145 | ) | $ | 3,021,968 | $ | (256,583 | ) | $ | 3,944 | $ | 2,869,075 |
The accompanying notes are an integral part of these statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- BUSINESS
Wabtec is one of the world’s largest providers of value-added, technology-based equipment, systems and services for the global passenger transit and freight rail industries. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 30 countries and our products can be found in more than 100 countries throughout the world. In 2018, about 67% of the Company’s revenues came from customers outside the U.S.
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the accounts of the Company and all subsidiaries that it controls. For consolidated subsidiaries in which the Company's ownership is less than 100%, the outside shareholders' interests are shown as noncontrolling interests. These statements have been prepared in accordance with U.S. generally accepted accounting principles. Sales between subsidiaries are billed at prices consistent with sales to third parties and are eliminated in consolidation.
Cash Equivalents Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
Allowance for Doubtful Accounts The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. The allowance for doubtful accounts was $16.9 million and $12.3 million as of December 31, 2018 and 2017, respectively.
Inventories Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead.
Property, Plant and Equipment Property, plant and equipment additions are stated at cost. Expenditures for renewals and improvements are capitalized. Expenditures for ordinary maintenance and repairs are expensed as incurred. The Company computes book depreciation principally on the straight-line method. Accelerated depreciation methods are utilized for income tax purposes.
Leasing Arrangements The Company conducts a portion of its operations from leased facilities and finances certain equipment purchases through lease agreements. In those cases in which the lease term approximates the useful life of the leased asset or the lease meets certain other prerequisites, the leasing arrangement is classified as a capital lease. The remaining arrangements are treated as operating leases.
Goodwill and Intangible Assets Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Amortizable intangible assets are reviewed for impairment when indicators of impairment are present. The Company tests goodwill and indefinite-lived intangible assets for impairment at the reporting unit level and at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed, and also tests for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Periodically, Management of the Company assesses whether or not an indicator of impairment is present that would necessitate an impairment analysis be performed.
For 2018, the Company opted to proceed directly to the quantitative impairment test for all reporting units with goodwill. In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. The income approach and the market approach are weighted at 50% and 50%, respectively, in arriving at fair value. The discounted cash flow model requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins and capital expenditures for the reporting units. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the years forecasted by the reporting units), as well as projections of future operating margins. The market approach requires several assumptions including EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies that operate in the same markets as the Company’s reporting units. The estimated fair value of all reporting units was in excess of its respective carrying value, which resulted in a conclusion that no impairment existed.
Additionally, the Company proceeded directly to the quantitative impairment test for some trade names with indefinite lives. The fair value of all trade names subject to the quantitative impairment test exceeded its respective carrying value, resulting in a conclusion that no impairment existed. For trade names not subject to the quantitative testing, the Company opted to perform a qualitative trade name impairment assessment and determined from the qualitative assessment that it was not more likely than not that the estimated fair values of the trade names were less than their carrying values; therefore, no further analysis was required. In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a trade name is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the trade name. The identification of relevant events and circumstances and how these may impact a trade name’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Wabtec specific events, share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
Warranty Costs Warranty costs are accrued based on Management’s estimates of repair or upgrade costs per unit and historical experience. Warranty expense was $58.0 million, $50.4 million and $28.9 million for 2018, 2017 and 2016, respectively. Accrued warranty was $153.7 million and $153.1 million at December 31, 2018 and 2017, respectively.
Income Taxes Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws. The provision for income taxes includes federal, state and foreign income taxes.
Stock-Based Compensation The Company recognizes compensation expense for stock-based compensation based on the grant date fair value amortized ratably over the requisite service period following the date of grant.
Financial Derivatives and Hedging Activities The Company uses forward contracts to mitigate its foreign currency exchange rate exposure. Foreign currency forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date, the Company can either take delivery of the currency or settle on a net basis. For further information regarding the foreign currency forward contracts, see Footnote 19.
The Company uses interest rate swaps to manage interest rate exposures, The Company entered into an interest rate swap agreement with a notional value of $150 million. As of December 19, 2018, the interest swap agreement has expired. For further information regarding the interest rate swap agreement, see Footnote 19.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions, and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings. Foreign exchange transaction losses recognized in other income, net were $5.7 million, $6.6 million and $4.0 million for 2018, 2017 and 2016, respectively.
Noncontrolling Interests In accordance with ASC 810, the Company has classified noncontrolling interests as equity on our condensed consolidated balance sheets as of December 31, 2018 and 2017. Net loss attributable to noncontrolling interests was $3.2 million for the year ended December 31, 2018. Net income attributable to noncontrolling interest was $8.5 million for the year ended December 31, 2016. Net income attributable to noncontrolling interests for the year ended December 31, 2017 was not material.
Revenue Recognition On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.
Approximately 75% of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer which is generally at the time of shipment in accordance with agreed upon delivery
terms. The remaining revenues are earned over time. This approach is consistent with our revenue recognition approach in prior years.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. This approach is consistent with our revenue recognition approach in prior years. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and adjustments are reflected in the accounting period as such amounts are determined.
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” on the consolidated balance sheet. The Company has elected to use the practical expedient and not consider unbilled amounts anticipated to be paid within one year as significant financing components.
Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. These contract liabilities are classified as current liabilities under the caption “Customer Deposits” on the consolidated balance sheet. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract and revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were $71.2 million and $94.0 million at December 31, 2018 and 2017, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the consolidated balance sheet.
Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined quarterly estimate-at-completion process where management reviews the progress of long term-projects. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any quarterly adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration that the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.
Remaining performance obligations represent transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of December 31, 2018, the Company's remaining performance obligations were $4.5 billion. The Company expects to recognize revenue of approximately 55% of remaining performance obligations over the next 12 months, with the remainder recognized thereafter.
Letters of Credit In the ordinary course of its business, the Company issues letters of credit related to commercial products. The outstanding amount, including the letters of credit issues under the credit facility, were $354.2 million and $364.6 million at December 31, 2018 and 2017, respectively.
Pre-Production Costs Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $16.4 million and $20.2 million at December 31, 2018 and 2017, respectively.
Significant Customers and Concentrations of Credit Risk The Company’s trade receivables are from rail and transit industry original equipment manufacturers, Class I railroads, railroad carriers and commercial companies that utilize rail cars in their operations, such as utility and chemical companies. No one customer accounted for more than 10% of the Company’s consolidated net sales in 2018, 2017 or 2016.
Shipping and Handling Fees and Costs All fees billed to the customer for shipping and handling are classified as a component of net revenues. All costs associated with shipping and handling are classified as a component of cost of sales.
Research and Development Research and development costs are charged to expense as incurred. For the years ended December 31, 2018, 2017 and 2016, the Company incurred costs of approximately $87.5 million, $95.2 million, and $71.4 million, respectively.
Earnings Per Share Basic and diluted earnings per common share is computed in accordance with ASC 260 “Earnings Per Share.” Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and included in the computation of earnings per share pursuant to the two-class method included in ASC 260-10-55 (See Note 13 “Earnings Per Share” included herein).
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Refer to Recently Adopted Accounting Pronouncements below.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ materially from the estimates. On an ongoing basis, Management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Recently Issued Accounting Pronouncements In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Act related to items remaining in AOCI are recognized or at the beginning of the period of adoption. The Company has evaluated the potential impact of adopting this guidance and determined it will not have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this update eliminate the requirement to perform Step 2 of the goodwill impairment test. Instead, an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value up to the carrying amount of the goodwill. This ASU is effective for public companies in the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The impact of adopting this guidance could result in a change in the overall conclusion as to whether or not a reporting unit's goodwill is impaired and the amount of an impairment charge recognized in the event a reporting units' carrying value exceeds its fair value. All of the Company's reporting units had fair values that were greater than the carrying value as of the Company's last quantitative goodwill impairment test, which was performed as of October 1, 2018. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. This guidance becomes effective for the Company on January 1, 2019. The Company plans to elect
the practical expedient which does not require the capitalization of leases with terms of 12 months or less. And the Company does not plan to elect the practical expedient which allows hindsight to be used to determine the term of a lease. The Company has completed the accumulation of its lease portfolio into a lease management system and has validated the information for accuracy and completeness. The Company has implemented the system which will be used as the primary source for the Company’s lease information and related accounting. Management expects to record a right-of-use asset and lease liability on the Consolidated Balance Sheet for several types of operating leases, including land and buildings, plant equipment, and vehicles. The amount of the respective asset and liability is estimated to be within a range of $165 million to $185 million. The FASB recently proposed a transition alternative, which would allow for the application of the guidance at beginning of the period in which it is adopted, rather than requiring the adjustment of prior comparative periods. The Company has adopted this transition alternative on the January 1, 2019 adoption date.
Recently Adopted Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU supersedes most of the previous revenue recognition requirements in U.S. GAAP and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2017. The Company adopted this accounting standard update using the modified retrospective method. The impact of adopting the new standard was not material to the consolidated statement of income or the consolidated balance sheet.
In March 2017, the FASB issued ASU No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in this update require the service cost component of net benefit costs to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside income from operations. This update also allows the service cost component to be eligible for capitalization when applicable. In accordance with this update, the Company began recognizing the interest expense component of net periodic benefit cost in interest expense in the income statement and the expected return on plan assets, net amortization/deferrals, and curtailments in other income (expense), net in the income statement. This update has been adopted by the Company and applied retrospectively for presentation of the service cost component and other components of net benefit costs in accordance with the ASU. The impact of adoption resulted in increases of $0.6 million, $9.2 million and $9.8 million to selling, general, and administrative expense, interest expense, net and other income, net, respectively, in the income statement for the year ended December 31, 2017. The impact of adoption resulted in increases of $1.8 million, $7.7 million and $9.5 million to selling, general, and administrative expense, interest expense, net and other income, net, respectively, in the income statement for the year ended December 31, 2016. Also, the capitalization of the service cost component of net benefit cost will be adopted prospectively in accordance with the ASU.
In November 2016, the FASB issued ASU No. 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash". The amendments in this update require a statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The requirements of this update have been adopted by the Company and applied retrospectively. As a result, restricted cash related to the acquisition of Faiveley Transport is included in the change in cash for the years ended December 31, 2017 and 2016.
- ACQUISITIONS
Faiveley Transport
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport under the terms of a Share Purchase Agreement. Faiveley Transport is a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries. Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of value-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes and Safety (braking systems and couplers). The transaction was structured as a step acquisition as follows:
| • | On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest under the terms of the Share Purchase Agreement, which directed the Company to pay €100 per share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately 49% of the outstanding voting shares of Faiveley Transport. Upon completion of the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to elect to receive €100 per share in cash or 1.1538 shares of Wabtec common stock per share of Faiveley Transport. The common stock portion of the consideration was subject to a cap on issuance of Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners. |
| • | On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights. |
| • | On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport. |
| • | On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport. |
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport.
The purchase price paid for 100% ownership of Faiveley Transport was $1,507 million. The $744.7 million included as deposits in escrow on the consolidated balance sheet at December 31, 2016 was cash designated for use as consideration for the tender offers.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The December 31, 2016 consolidated balance sheet includes the assets and liabilities of Faiveley Transport, which have been measured at fair value. The fair value of the noncontrolling interest was determined using the market price of Faiveley Transport’s publicly traded common stock multiplied by the number of publicly traded common shares outstanding at the acquisition date and is considered Level 1. The acquisition of the noncontrolling interest during the three months ended March 31, 2017 resulted in a $8.9 million increase to additional paid-in capital on the consolidated balance sheet which represents the difference in consideration paid to acquire the noncontrolling interest and the carrying value of noncontrolling interest at acquisition.
The following table summarizes the final fair values of the Faiveley Transport assets acquired and liabilities assumed.
| In thousands | ||||
| Assets acquired | ||||
| Cash and cash equivalents | $ | 178,318 | ||
| Accounts receivable | 439,631 | |||
| Inventories | 205,649 | |||
| Other current assets | 70,930 | |||
| Property, plant, and equipment | 148,746 | |||
| Goodwill | 1,262,350 | |||
| Trade names | 346,328 | |||
| Customer Relationships | 233,529 | |||
| Patents | 1,201 | |||
| Other noncurrent assets | 184,564 | |||
| Total assets acquired | 3,071,246 | |||
| Liabilities assumed | ||||
| Current liabilities | 819,493 | |||
| Debt | 409,899 | |||
| Other noncurrent liabilities | 335,039 | |||
| Total liabilities assumed | 1,564,431 | |||
| Net assets acquired | $ | 1,506,815 |
Other Acquisitions
The Company made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment:
| • | On December 4, 2017, the Company acquired Melett Limited ("Melett"), a leader in the design, manufacture, and supply of high-quality turbochargers and replacement parts to the turbocharger aftermarket, for a purchase price of approximately $71.9 million, net of cash acquired, resulting in goodwill of $26.7 million, none of which will be deductible for tax purposes. |
| • | On April 5, 2017, the Company acquired Thermal Transfer Corporation ("TTC"), a leading provider of heat |
transfer solutions for industrial applications, for a purchase price of approximately $32.5 million, net of cash
acquired, resulting in goodwill of $14.1 million, all of which will be deductible for tax purposes.
| • | On March 13, 2017, the Company acquired Aero Transportation Products ("ATP"), a manufacturer of engineered covering systems for hopper freight cars, for a purchase price of approximately $65.3 million, net of cash |
acquired, resulting in goodwill of $29.0 million, all of which will be deductible for tax purposes.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of the acquisitions.
| Melett | TTC | ATP | ||||||||||
| December 4, 2017 | April 5, 2017 | March 13, 2017 | ||||||||||
| In thousands | ||||||||||||
| Current assets, net of cash acquired | $ | 34,491 | $ | 3,744 | $ | 11,666 | ||||||
| Property, plant & equipment | 5,917 | 5,413 | 5,354 | |||||||||
| Goodwill | 26,653 | 14,095 | 29,034 | |||||||||
| Other intangible assets | 28,590 | 12,300 | 25,000 | |||||||||
| Total assets acquired | 95,651 | 35,552 | 71,054 | |||||||||
| Total liabilities assumed | (23,758 | ) | (3,041 | ) | (5,800 | ) | ||||||
| Net assets acquired | $ | 71,893 | $ | 32,511 | $ | 65,254 |
The Company made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment:
| • | On March 22, 2018, the Company acquired Annax GmbH ("Annax"), a leading supplier of public address and passenger information systems for transit vehicles, for a purchase price of approximately $28.7 million, net of cash acquired, resulting in preliminary goodwill of $25.5 million, none of which will be deductible for tax purposes. |
| • | On October 2, 2017, the Company acquired AM General Contractor ("AM General"), a manufacturer of safety systems, mainly for transit rail cars for a purchase price of approximately $10.4 million, net of cash acquired, resulting in goodwill of $6.1 million, none of which will be deductible for tax purposes. |
For the Annax acquisition, the following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. For the AM General acquisition, the following table summarizes the final fair value of the assets acquired and liabilities assumed at the date of the acquisition.
| Annax | AM General | |||||||
| March 22, 2018 | October 2, 2017 | |||||||
| In thousands | ||||||||
| Current assets, net of cash acquired | $ | 34,036 | $ | 6,805 | ||||
| Property, plant & equipment | 674 | 4,140 | ||||||
| Goodwill | 25,471 | 6,114 | ||||||
| Other intangible assets | 12,828 | 19,427 | ||||||
| Total assets acquired | 73,009 | 36,486 | ||||||
| Total liabilities assumed | (44,345 | ) | (26,070 | ) | ||||
| Net assets acquired | $ | 28,664 | $ | 10,416 |
The acquisitions listed above include escrow deposits of $24.4 million, which may be released to the Company for indemnity and other claims in accordance with the purchase and escrow agreements.
The total goodwill and other intangible assets for acquisitions listed in the tables above was $199.5 million, of which $101.4 million and $98.1 million was related to goodwill and other intangible assets, respectively. Of the allocation of $98.1 million of acquired intangible assets, $22.3 million was assigned to trade names, and $70.2 million was assigned to customer relationships. The trade names are considered to have an indefinite useful life while the intellectual property and customer relationships’ useful life is 20 years.
The Company also made smaller acquisitions not listed above which are individually and collectively immaterial.
The following unaudited pro forma financial information presents income statement results as if the acquisitions listed above had occurred January 1, 2017:
| For the year ended December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Net sales | $ | 4,376,972 | $ | 3,994,515 | ||||
| Gross profit | 1,235,821 | 1,099,878 | ||||||
| Net income attributable to Wabtec shareholders | 292,207 | 273,301 | ||||||
| Diluted earnings per share | ||||||||
| As Reported | $ | 3.05 | $ | 2.72 | ||||
| Pro forma | $ | 3.06 | $ | 2.84 |
The historical consolidated financial information of the Company and the acquisitions detailed above have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.
- MERGER OF WABTEC WITH GE TRANSPORTATION
Wabtec, General Electric Company ("GE"), Transportation System Holdings Inc. ("SpinCo"), which was a newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc. ("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company, entered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo, Wabtec and Wabtec US Rail Holdings, Inc. ("Direct Sale Purchaser") entered into the Original Separation Agreement on May 20, 2018,
which together provided for the combination of Wabtec and GE Transportation. The Original Merger Agreement and Original Separation Agreement were subsequently amended on January 25, 2019 and the merger was completed on February 25, 2019.
In connection with the Direct Sale, certain assets of GE Transportation, including the equity interests of certain pre-Transaction subsidiaries of GE that compose part of GE Transportation, were sold to Direct Sale Purchaser for a cash payment of $2.875 billion, and Direct Sale Purchaser assumed certain liabilities of GE Transportation in connection with this purchase. Thereafter, GE transferred the SpinCo Business to SpinCo and its subsidiaries (to the extent not already held by SpinCo and its subsidiaries), and SpinCo issued to GE shares of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class C preferred stock and additional shares of SpinCo common stock in the SpinCo Transfer. Following this issuance of additional SpinCo common stock to GE, and immediately prior to the Distribution, GE owned 8,700,000,000 shares of SpinCo common stock, 15,000 shares of SpinCo Class A preferred stock, 10,000 shares of SpinCo Class B preferred stock and one share of SpinCo Class C preferred stock, which constituted all of the outstanding stock of SpinCo.
Following the Direct Sale, GE distributed the Distribution Shares of SpinCo in a spin-off transaction. Immediately after the Distribution, Merger Sub merged with and into SpinCo, whereby the separate corporate existence of Merger Sub ceased and SpinCo continued as the surviving company and a wholly owned subsidiary of Wabtec (except with respect to shares of SpinCo Class A preferred stock held by GE). In the Merger, subject to adjustment in accordance with the Merger Agreement, each share of SpinCo common stock converted into the right to receive a number of shares of Wabtec common stock based on the common stock exchange ratio set forth in the Merger Agreement and the share of SpinCo Class C preferred stock was converted into the right to receive (a) 10,000 shares of Wabtec convertible preferred stock and (b) a number of shares of Wabtec common stock equal to 9.9% of the fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec paid $10.0 million in cash to GE in exchange for all of the shares of SpinCo Class B preferred stock.
Upon consummation of the Merger and calculated based on Wabtec’s outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as of December 31, 2018, approximately 49.2% of the outstanding shares of Wabtec common stock would be held collectively by GE and Spin-Off record date holders of GE common stock (with 9.9% to be held by GE directly in shares of Wabtec common stock and 15% underlying the shares of Wabtec convertible preferred stock to be held by GE) and approximately 50.8% of the outstanding shares of Wabtec common stock would be held by pre-Merger Wabtec stockholders. Following the effective time of the Merger, GE will also own 15,000 shares of SpinCo Class A preferred stock, and Wabtec will hold 10,000 shares of SpinCo Class B preferred stock. The shares of Wabtec common stock and Wabtec convertible preferred stock held by GE will be subject to GE’s obligations under the Shareholders Agreement, including, among other things, and in each case subject to certain exceptions, (i) restrictions on the ability to sell, transfer or otherwise divest such shares for a period of 30 days and (ii) an obligation to sell, transfer or otherwise divest (A) by no later than 120 days following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not less than 14.9% and not more than 19.9% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, (B) by no later than one year following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not more than 18.5% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, in each case of clauses (A) and (B) treating the Wabtec convertible preferred stock as the Wabtec common stock into which it is convertible both for purposes of determining the number of shares of Wabtec common stock owned and for purposes of determining the number of shares of Wabtec common stock outstanding and (C) by no later than the third anniversary of the closing date of the Merger, all of the subject shares that GE (together with its affiliates) beneficially owns, and (iii) an obligation to vote all of such shares of Wabtec common stock in the proportion required under the Shareholders Agreement.
The estimated total value of the consideration to be paid by Wabtec in the Transactions was subject to the market price of shares of Wabtec common stock at the date of closing. Using Wabtec’s closing stock price on the NYSE as of February 22, 2019, the total value of the consideration for the Transactions was approximately $10.2 billion, including the Direct Sale Purchase Price, contingent consideration, assumed debt and net of cash acquired.
On September 14, 2018, Wabtec completed a public offering and sale of (i) $500 million aggregate principal amount of floating rate senior notes, (ii) $750 million aggregate principal amount of 2024 Senior Notes and (iii) $1.25 billion aggregate principal amount of 2028 Senior Notes. The Company used the net proceeds from the offering and sale of these notes combined with the proceeds from a $400 million delayed draw term loan that was entered into on June 8, 2018 to finance the Direct Sale. Wabtec used a portion of the proceeds from the September 14, 2018 notes to pay debt associated with its revolving credit facility. The remaining proceeds are classified as Restricted Cash on the consolidated balance sheet, as the Company used these cash amounts to finance the Direct Sale. Refer to Footnote 10 for further information regarding debt.
After the Merger, SpinCo, which is Wabtec’s wholly owned subsidiary (except with respect to shares of SpinCo Class A preferred stock held by GE), holds the SpinCo Business and Direct Sale Purchaser, which also is Wabtec’s wholly owned subsidiary, holds the assets purchased and the liabilities assumed in connection with the Direct Sale. Together, SpinCo and Direct Sale Purchaser own and operate the post-Transaction GE Transportation. All shares of the Company’s common stock, including those issued in the Merger, are listed on the NYSE under the Company’s current trading symbol “WAB.”
On the date of the Distribution, GE or its subsidiaries and SpinCo or the SpinCo Transferred Subsidiaries entered into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development and transition services.
- SUPPLEMENTAL CASH FLOW DISCLOSURES
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| In thousands | ||||||||||||
| Interest paid during the year | $ | 81,756 | $ | 75,317 | $ | 30,211 | ||||||
| Income taxes paid during the year, net of amount refunded | $ | 83,949 | $ | 89,379 | $ | 121,563 | ||||||
| Business acquisitions: | ||||||||||||
| Fair value of assets acquired | 91,758 | 452,209 | 3,118,420 | |||||||||
| Liabilities assumed | 32,908 | 207,788 | 1,453,382 | |||||||||
| Non-controlling interest (acquired) assumed | — | (761,786 | ) | 760,343 | ||||||||
| Stock and cash paid | 58,850 | 1,006,207 | 904,695 | |||||||||
| Less: Cash acquired | 7,697 | 35,408 | 186,903 | |||||||||
| Stock used for acquisition | — | 25,500 | 534,679 | |||||||||
| Net cash paid | $ | 51,153 | $ | 945,299 | $ | 183,113 |
- INVENTORIES
The components of inventory, net of reserves, were:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Raw materials | $ | 465,873 | $ | 378,481 | ||||
| Work-in-progress | 154,485 | 167,390 | ||||||
| Finished goods | 224,528 | 196,763 | ||||||
| Total inventories | $ | 844,886 | $ | 742,634 |
- PROPERTY, PLANT & EQUIPMENT
The major classes of depreciable assets are as follows:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Machinery and equipment | $ | 749,782 | $ | 728,257 | ||||
| Buildings and improvements | 248,111 | 259,561 | ||||||
| Land and improvements | 38,657 | 38,228 | ||||||
| Property, plant and equipment | 1,036,550 | 1,026,046 | ||||||
| Less: accumulated depreciation | (472,813 | ) | (452,074 | ) | ||||
| Total | $ | 563,737 | $ | 573,972 |
The estimated useful lives of property, plant and equipment are as follows:
| Years | |
| Land improvements | 10 to 20 |
| Building and improvements | 20 to 40 |
| Machinery and equipment | 3 to 15 |
Depreciation expense was $66.4 million, $66.7 million, and $47.1 million for 2018, 2017 and 2016, respectively.
- INTANGIBLES
Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles with definite lives are amortized on a straight-line basis over their estimated economic lives. Goodwill and indefinite lived intangible assets are reviewed annually during the fourth quarter for impairment (See Note 2 “Summary of Significant Accounting Policies” included herein). Goodwill and indefinite live intangible assets were not impaired at December 31, 2018 and 2017.
The change in the carrying amount of goodwill by segment for the year ended December 31, 2018 is as follows:
| Freight | Transit | |||||||||||
| In thousands | Segment | Segment | Total | |||||||||
| Balance at December 31, 2017 | $ | 718,958 | $ | 1,741,145 | $ | 2,460,103 | ||||||
| Additions | 6,478 | 16,790 | 23,268 | |||||||||
| Foreign currency impact | (12,045 | ) | (74,782 | ) | (86,827 | ) | ||||||
| Balance at December 31, 2018 | $ | 713,391 | $ | 1,683,153 | $ | 2,396,544 |
As of December 31, 2018 and 2017, the Company’s trade names had a net carrying amount of $582.8 million and $603.4 million, respectively, and the Company believes these intangibles have indefinite lives. Intangible assets of the Company, other than goodwill and trade names, consist of the following:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Patents, non-compete and other intangibles, net of accumulated | ||||||||
| amortization of $42,446 and $43,021 | $ | 15,328 | $ | 17,554 | ||||
| Customer relationships, net of accumulated amortization | ||||||||
| of $158,533 and $126,824 | 531,761 | 583,459 | ||||||
| Total | $ | 547,089 | $ | 601,013 |
The remaining weighted average useful lives of patents, customer relationships and intellectual property were 10 years, 16 years and 13 years respectively. Amortization expense for intangible assets was $39.8 million, $36.5 million, and $22.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Estimated amortization expense for the five succeeding years is as follows (in thousands):
| 2019 | $ | 38,289 | |
| 2020 | 36,552 | ||
| 2021 | 35,595 | ||
| 2022 | 35,283 | ||
| 2023 | 34,945 |
- CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract, advanced customer payments that are in excess of revenue recognized, and provisions for estimated losses from uncompleted contracts.
The change in the carrying amount of contract assets and contract liabilities for the twelve months ended December 31, 2018 is as follows:
| In thousands | Contract Assets | |||
| Balance at beginning of year | $ | 366,168 | ||
| Recognized in current year | 426,829 | |||
| Reclassified to accounts receivable | (432,307 | ) | ||
| Foreign currency impact | (15,105 | ) | ||
| Balance at December 31, 2018 | $ | 345,585 | ||
| In thousands | Contract Liabilities | |||
| Balance at beginning of year | $ | 463,704 | ||
| Recognized in current year | 230,159 | |||
| Amounts in beginning balance reclassified to revenue | (199,735 | ) | ||
| Current year amounts reclassified to revenue | (30,914 | ) | ||
| Foreign currency impact | (18,409 | ) | ||
| Balance at December 31, 2018 | $ | 444,805 |
- LONG-TERM DEBT
Long-term debt consisted of the following:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Floating Senior Notes, due 2021, net of unamortized debt issuance costs of $3,204 | $ | 496,796 | $ | — | ||||
| 4.150% Senior Notes, due 2024, net of unamortized debt issuance costs of $7,043 | 742,957 | — | ||||||
| 4.70% Senior Notes, due 2028, net of unamortized debt issuance costs of $10,343 | 1,239,657 | — | ||||||
| 3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $1,718 and $2,345 | 748,282 | 747,655 | ||||||
| 4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $1,177 and $1,433 | 248,823 | 248,567 | ||||||
| Revolving Credit Facility, net of unamortized debt issuance costs of $3,138 and $2,451 | 338,112 | 853,124 | ||||||
| Other Borrowings | 42,246 | 21,182 | ||||||
| Total | 3,856,873 | 1,870,528 | ||||||
| Less - current portion | 64,099 | 47,225 | ||||||
| Long-term portion | $ | 3,792,774 | $ | 1,823,303 |
On September 14, 2018 the Company issued $2.5 billion of senior notes with three different maturities.
| • | Floating Rate Senior Notes due 2021 - The Company issued $500.0 million of Floating Rate Senior Notes due 2021 (the "Floating Rate Notes"). The Floating Rate Notes, which are non-callable for one year, were issued at 100% of face value. Interest on the Floating Rate Notes accrues at a floating rate per annum equal to three-month Libor plus 105 basis points. The interest rate for the Floating Rate Notes for the initial interest period was the three-month Libor plus 105 basis points determined on September 12, 2018 and is payable quarterly on December 15, March 15, June 15, and September 15 of each year. The Company incurred $3.5 million of deferred financing costs related to the issuance of the Floating Rate Notes. |
| • | 4.150% Senior Notes due 2024 - The Company issued $750.0 million of 4.150% Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were issued at 99.805% of face value. Interest on the 2024 Notes accrues at a rate of 4.150% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $7.4 million of deferred financing costs related to the issuance of the 2024 Notes. |
| • | 4.70% Senior Notes Due 2028 - The Company issued $1,250.0 million of 4.70% Senior Notes due 2028 (the "2028 Notes" and together with the Floating Rate Notes and 2024 Notes, the "Senior Notes"). The 2028 Notes were issued at 99.889% of face value. Interest on the 2028 Notes accrues at a rate of 4.700% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $10.6 million of deferred financing costs related to the issuance of the 2028 Notes. |
The net proceeds from the issuance and sale of the Senior Notes was used to finance the cash portion of the GE Transportation acquisition. The principal balances are due in full at maturity. The Senior Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Senior Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sales of assets, change in control, mergers and consolidations and the incurrence of liens.
On February 12, 2019, the rating assigned by Moody's was decreased to Ba1. Accordingly, pursuant to the respective terms of the Senior Notes issued on September 14, 2018, the interest rate shall be increased by 0.25%. The interest rate increase shall take effect from the next interest period following February 12, 2019.
The Company is in compliance with the restrictions and covenants in the indenture under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
3.45% Senior Notes Due November 2026
In October 2016, the Company issued $750.0 million of Senior Notes due in 2026 (the “2016 Notes”). The 2016 Notes were issued at 99.965% of face value. Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport’s indebtedness, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.7 million of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (the “2013 Notes”). The 2013 Notes were issued at 99.879% of face value. Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2018 Refinancing Credit Agreement
On June 8, 2018, the Company entered into a credit agreement (the “2018 Refinancing Credit Agreement”), which replaced the Company’s then-existing “2016 Refinancing Credit Agreement.” As part of the 2018 Refinancing Credit Agreement, the Company entered into (i) a $1.2 billion revolving credit facility (the “Revolving Credit Facility”), which replaced the Company’s revolving credit facility under the 2016 Refinancing Credit Agreement, and includes a letter of credit sub-facility of up to $450.0 million and a swing line sub-facility of $75.0 million, (ii) a $350.0 million term loan (the “Refinancing Term Loan”), which refinanced the term loan under the 2016 Refinancing Credit Agreement, and (iii) a new $400.0 million delayed draw term loan (the “Delayed Draw Term Loan”). The 2018 Refinancing Credit Agreement also provided for a bridge loan facility (the “Bridge Loan Facility”) in an amount not to exceed $2.5 billion, such facility to become effective at the Company’s request. Commitments in respect of the Bridge Loan Facility were terminated upon the issuance and sale of the Senior Notes on September 14, 2018. In addition, the 2018 Refinancing Credit Agreement contains an uncommitted accordion feature allowing the Company to request, in an aggregate amount not to exceed $600.0 million, increases to the borrowing commitments under the Revolving Credit Facility or a new incremental term loan commitment. At December 31, 2018, the Company had available bank borrowing capacity, net of $29.2 million of letters of credit, of approximately $1,170.8 million subject to certain financial covenant restrictions.
The Revolving Credit Facility matures on June 8, 2023 and is unsecured. The Refinancing Term Loan matures on June 8, 2021 and is unsecured. The Delayed Draw Term Loan matures on the third anniversary of the date on which it is borrowed and is unsecured. The applicable interest rate for borrowings under the 2018 Refinancing Credit Agreement includes interest rate spreads based on the lower of the pricing corresponding to (i) the Company’s ratio of total debt (less unrestricted cash up to $300.0 million) to EBITDA (“Leverage Ratio”) or (ii) the Company’s public rating, in each case that range between 1.000% and 1.875% for LIBOR/CDOR-based borrowings and 0.0% and 0.875% for Alternate Base Rate based borrowings. The obligations of the Company under the 2018 Refinancing Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
The 2018 Refinancing Credit Agreement contains customary representations and warranties by the Company and its subsidiaries, including customary use of materiality, material adverse effect, and knowledge qualifiers. The Company and its subsidiaries are also subject to (i) customary affirmative covenants that impose certain reporting obligations on the Company and its subsidiaries and (ii) customary negative covenants, including limitations on: indebtedness; liens; restricted payments; fundamental changes; business activities; transactions with affiliates; restrictive agreements; changes in fiscal year; and use of proceeds. In addition, the Company is required to maintain (i) an Interest Coverage ratio at least 3.00 to 1.00 over each period of four consecutive fiscal quarters ending on the last day of a fiscal quarter and (ii) a Leverage Ratio, calculated as of the last day of a fiscal quarter for a period of four consecutive fiscal quarters, of 3.25 to 1.00 or less; provided that, in the event the Company completes the Direct Sale and the Merger or any other material acquisition in which the cash consideration paid exceeds $500.0 million, the maximum Leverage Ratio permitted will be 3.75 to 1.00 at the end of the fiscal quarter in which such acquisition is consummated and each of the three fiscal quarters immediately following such fiscal quarter and 3.50 to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of such acquisition. The Company is in compliance with the restrictions and covenants of the 2018 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
At December 31, 2018, the weighted average interest rate on the Company’s variable rate debt was 3.68%. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was November 7, 2016, and the termination date was December 19, 2018.
2016 Refinancing Credit Agreement
On June 22, 2016, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2016 Refinancing Credit Agreement” provided the Company with a $1.2 billion, 5 year revolving credit facility and a $400.0 million delayed draw term loan (the “Term Loan”). The Company incurred approximately $3.3 million of deferred financing cost related to the 2016 Refinancing Credit Agreement. The 2016 Refinancing Credit Agreement borrowings bore variable interest rates indexed as described below.
Under the 2016 Refinancing Credit Agreement, the Company could elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.50% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on the quoted rates specific to the applicable currency, plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin was 0 basis points and the Alternate Rate margin is 175 basis points.
Debt and Capital Leases
| Scheduled principal repayments of debt and capital lease balances as of December 31, 2018 are as follows: | |||
| 2019 | $ | 64,099 | |
| 2020 | 36,387 | ||
| 2021 | 764,980 | ||
| 2022 | 54 | ||
| 2023 | 248,873 | ||
| Future years | 2,742,480 | ||
| Total | $ | 3,856,873 |
- EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German, and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee. The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.
Obligations and Funded Status
| U.S. | International | |||||||||||||||
| In thousands | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Change in projected benefit obligation | ||||||||||||||||
| Obligation at beginning of year | $ | (44,213 | ) | $ | (45,512 | ) | $ | (353,017 | ) | $ | (319,551 | ) | ||||
| Opening balance sheet adjustment | — | — | — | (5,321 | ) | |||||||||||
| Service cost | (349 | ) | (344 | ) | (2,611 | ) | (2,740 | ) | ||||||||
| Interest cost | (1,332 | ) | (1,422 | ) | (7,047 | ) | (7,310 | ) | ||||||||
| Employee contributions | — | — | (448 | ) | (880 | ) | ||||||||||
| Plan settlements and amendments | — | — | 15,191 | 4,153 | ||||||||||||
| Benefits paid | 3,476 | 3,079 | 13,453 | 12,906 | ||||||||||||
| Acquisition | — | — | (864 | ) | — | |||||||||||
| Actuarial gain (loss) | 2,942 | (14 | ) | 6,740 | (3,009 | ) | ||||||||||
| Effect of currency rate changes | — | — | 19,337 | (31,265 | ) | |||||||||||
| Obligation at end of year | $ | (39,476 | ) | $ | (44,213 | ) | $ | (309,266 | ) | $ | (353,017 | ) | ||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 37,432 | $ | 35,802 | $ | 281,602 | $ | 241,283 | ||||||||
| Opening balance sheet adjustment | — | — | — | 2,058 | ||||||||||||
| Actual return on plan assets | (1,983 | ) | 4,223 | (6,938 | ) | 19,102 | ||||||||||
| Employer contributions | — | 486 | 10,821 | 13,479 | ||||||||||||
| Employee contributions | — | — | 448 | 880 | ||||||||||||
| Benefits paid | (3,476 | ) | (3,079 | ) | (13,453 | ) | (12,905 | ) | ||||||||
| Settlements | — | — | (16,601 | ) | (4,523 | ) | ||||||||||
| Effect of currency rate changes | — | — | (16,380 | ) | 22,228 | |||||||||||
| Fair value of plan assets at end of year | $ | 31,973 | $ | 37,432 | $ | 239,499 | $ | 281,602 | ||||||||
| Funded status | ||||||||||||||||
| Fair value of plan assets | $ | 31,973 | $ | 37,432 | $ | 239,499 | $ | 281,602 | ||||||||
| Benefit obligations | (39,476 | ) | (44,213 | ) | (309,266 | ) | (353,017 | ) | ||||||||
| Funded status | $ | (7,503 | ) | $ | (6,781 | ) | $ | (69,767 | ) | $ | (71,415 | ) | ||||
| Amounts recognized in the statement of financial position consist of: | ||||||||||||||||
| Noncurrent assets | $ | — | $ | — | $ | 8,910 | $ | 10,577 | ||||||||
| Current liabilities | — | — | (2,062 | ) | (2,158 | ) | ||||||||||
| Noncurrent liabilities | (7,503 | ) | (6,781 | ) | (76,615 | ) | (79,834 | ) | ||||||||
| Net amount recognized | $ | (7,503 | ) | $ | (6,781 | ) | $ | (69,767 | ) | $ | (71,415 | ) | ||||
| Amounts recognized in accumulated other comprehensive income (loss) consist of: | ||||||||||||||||
| Prior service cost | (3 | ) | (6 | ) | (1,419 | ) | (32 | ) | ||||||||
| Net actuarial loss | (20,268 | ) | (20,418 | ) | (58,748 | ) | (54,043 | ) | ||||||||
| Net amount recognized | $ | (20,271 | ) | $ | (20,424 | ) | $ | (60,167 | ) | $ | (54,075 | ) |
The aggregate accumulated benefit obligation for the U.S. pension plans was $38.8 million and $43.3 million as of December 31, 2018 and 2017, respectively. The aggregate accumulated benefit obligation for the international pension plans was $301.1 million and $344.3 million as of December 31, 2018 and 2017, respectively.
| U.S. | International | |||||||||||||||
| In thousands | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Information for pension plans with accumulated benefit obligations in | ||||||||||||||||
| excess of Plan assets: | ||||||||||||||||
| Projected benefit obligation | $ | (39,476 | ) | $ | (44,213 | ) | $ | (251,010 | ) | $ | (282,077 | ) | ||||
| Accumulated benefit obligation | (38,805 | ) | (43,340 | ) | (243,613 | ) | (274,557 | ) | ||||||||
| Fair value of plan assets | 31,973 | 37,432 | 172,333 | 200,218 | ||||||||||||
| Information for pension plans with projected benefit obligations in | ||||||||||||||||
| excess of plan assets: | ||||||||||||||||
| Projected benefit obligation | $ | (39,476 | ) | $ | (44,213 | ) | $ | (251,010 | ) | $ | (283,106 | ) | ||||
| Fair value of plan assets | 31,973 | 37,432 | 172,333 | 201,115 |
Components of Net Periodic Benefit Costs
| U.S. | International | |||||||||||||||||||||||
| In thousands | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
| Service cost | $ | 349 | $ | 344 | $ | 337 | $ | 2,611 | $ | 2,740 | $ | 1,379 | ||||||||||||
| Interest cost | 1,332 | 1,422 | 1,475 | 7,047 | 7,310 | 5,774 | ||||||||||||||||||
| Expected return on plan assets | (1,780 | ) | (1,731 | ) | (2,076 | ) | (13,458 | ) | (12,412 | ) | (9,971 | ) | ||||||||||||
| Amortization of initial net obligation and prior service cost | 3 | 3 | 3 | 22 | 27 | 61 | ||||||||||||||||||
| Amortization of net loss | 970 | 989 | 914 | 2,149 | 2,846 | 1,818 | ||||||||||||||||||
| Settlement and curtailment losses recognized | — | — | — | 3,112 | 768 | 218 | ||||||||||||||||||
| Net periodic benefit cost | $ | 874 | $ | 1,027 | $ | 653 | $ | 1,483 | $ | 1,279 | $ | (721 | ) |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income during 2018 are as follows:
| In thousands | U.S. | International | ||||||
| Net gain (loss) arising during the year | $ | (820 | ) | $ | (13,655 | ) | ||
| Effect of exchange rates | — | 3,690 | ||||||
| Amortization, settlement, or curtailment recognition of net transition obligation | — | 3,112 | ||||||
| Amortization or curtailment recognition of prior service cost | 3 | (1,388 | ) | |||||
| Amortization or settlement recognition of net loss | 970 | 2,149 | ||||||
| Total recognized in other comprehensive gain | $ | 153 | $ | (6,092 | ) | |||
| Total recognized in net periodic benefit cost and other comprehensive gain | $ | (721 | ) | $ | (7,575 | ) |
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed.
| U.S. | International | |||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Discount rate | 4.30 | % | 3.56 | % | 3.95 | % | 2.53 | % | 2.40 | % | 2.51 | % | ||||||
| Expected return on plan assets | 5.15 | % | 4.95 | % | 5.70 | % | 5.10 | % | 5.02 | % | 6.07 | % | ||||||
| Rate of compensation increase | 3.00 | % | 3.00 | % | 3.00 | % | 2.61 | % | 2.54 | % | 2.54 | % |
The discount rate is based on settling the pension obligation with high grade, high yield corporate bonds, and the rate of compensation increase is based on actual experience. The expected return on plan assets is based on historical performance as well as expected future rates of return on plan assets considering the current investment portfolio mix and the long-term investment strategy.
As of December 31, 2018, the following table represents the amounts included in other comprehensive loss that are expected to be recognized as components of periodic benefit costs in 2019.
| In thousands | U.S. | International | ||||||
| Prior service cost | 3 | 53 | ||||||
| Net actuarial loss | 826 | 2,512 | ||||||
| $ | 829 | $ | 2,565 |
Pension Plan Assets
The Company has established formal investment policies for the assets associated with our pension plans. Objectives include maximizing long-term return at acceptable risk levels and diversifying among asset classes. Asset allocation targets are based on periodic asset liability study results which help determine the appropriate investment strategies. The investment policies permit variances from the targets within certain parameters. The plan assets consist primarily of equity security funds, debt security funds, and temporary cash and cash equivalent investments. The assets held in these funds are generally actively managed and are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. (See Note 20 “Fair Value Measurement” included herein). Plan assets by asset category at December 31, 2018 and 2017 are as follows:
| U.S. | International | |||||||||||||||
| In thousands | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Pension Plan Assets | ||||||||||||||||
| Equity security funds | $ | 13,162 | $ | 18,122 | $ | 95,058 | $ | 100,453 | ||||||||
| Debt security funds and other | 17,528 | 18,304 | 140,894 | 178,730 | ||||||||||||
| Cash and cash equivalents | 1,283 | 1,006 | 3,547 | 2,419 | ||||||||||||
| Fair value of plan assets | $ | 31,973 | $ | 37,432 | $ | 239,499 | $ | 281,602 |
The U.S. plan has a target asset allocation of 50% equity securities and 50% debt securities. The International plan has a target asset allocation of 31% equity securities, 40% debt securities and 29% in other investments. Investment policies are determined by the respective Plan’s Pension Committee and set forth in its Investment Policy. Rebalancing of the asset allocation occurs on a quarterly basis.
The following tables summarize our pension plan assets measured at fair value on a recurring basis by fair value hierarchy level (See Note 20):
| December 31, 2018 | ||||||||||||||||||||
| In thousands | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| US: | ||||||||||||||||||||
| Equity | $ | — | $ | 13,162 | $ | — | $ | — | $ | 13,162 | ||||||||||
| Debt Securities and other | — | 4,523 | 13,005 | — | 17,528 | |||||||||||||||
| Cash and cash equivalents | — | 1,283 | — | — | 1,283 | |||||||||||||||
| International: | ||||||||||||||||||||
| Equity | $ | 3,710 | $ | 34,848 | $ | 56,500 | $ | — | $ | 95,058 | ||||||||||
| Debt Securities and other | — | — | 125,587 | — | 125,587 | |||||||||||||||
| Insurance Contracts | — | — | 5,383 | 9,924 | 15,307 | |||||||||||||||
| Cash and cash equivalents | — | 3,547 | — | — | 3,547 | |||||||||||||||
| Total | $ | 3,710 | $ | 57,363 | $ | 200,475 | $ | 9,924 | $ | 271,472 |
| December 31, 2017 | ||||||||||||||||||||
| In thousands | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| US: | ||||||||||||||||||||
| Equity | $ | — | $ | 18,122 | $ | — | $ | — | $ | 18,122 | ||||||||||
| Debt Securities | — | 4,273 | 14,031 | — | 18,304 | |||||||||||||||
| Cash and cash equivalents | — | 1,006 | — | — | 1,006 | |||||||||||||||
| International: | ||||||||||||||||||||
| Equity | $ | 4,586 | $ | 38,647 | $ | 95,641 | $ | — | $ | 138,874 | ||||||||||
| Debt Securities | — | — | 111,204 | — | 111,204 | |||||||||||||||
| Insurance Contracts | — | — | 15,893 | 13,123 | 29,016 | |||||||||||||||
| Cash and cash equivalents | — | 2,507 | — | — | 2,507 | |||||||||||||||
| Total | $ | 4,586 | $ | 64,555 | $ | 236,769 | $ | 13,123 | $ | 319,033 |
The following table presents a reconciliation of Level 3 assets:
| In thousands | Total | |||
| Balance at December 31, 2016 | $ | 12,996 | ||
| Net purchases, issuances, and settlements | 778 | |||
| Actual return of plan assets | 375 | |||
| Opening balance sheet adjustment | (1,308 | ) | ||
| Effect of currency rate changes | 282 | |||
| Balance at December 31, 2017 | $ | 13,123 | ||
| Net purchases, issuances, and settlements | (3,611 | ) | ||
| Actual return of plan assets | 277 | |||
| Transfers | 658 | |||
| Effect of currency rate changes | (523 | ) | ||
| Balance at December 31, 2018 | $ | 9,924 |
Cash Flows
The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $6.4 million to the international plans during 2019. The company does not expect to make contributions to the U.S. plans during 2019.
Benefit payments expected to be paid to plan participants are as follows:
| In thousands | U.S. | International | ||||||
| Year ended December 31, | ||||||||
| 2019 | $ | 3,233 | $ | 11,556 | ||||
| 2020 | 3,242 | 12,017 | ||||||
| 2021 | 3,100 | 12,489 | ||||||
| 2022 | 3,095 | 13,353 | ||||||
| 2023 | 3,077 | 13,583 | ||||||
| 2024 through 2028 | 13,623 | 75,457 |
Postretirement Benefit Plans
In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.
The Company uses a December 31 measurement date for all postretirement plans. The following tables provide information regarding the Company’s post retirement benefit plans summarized by U.S. and international components.
Obligations and Funded Status
| U.S. | International | |||||||||||||||
| In thousands | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Change in projected benefit obligation | ||||||||||||||||
| Obligation at beginning of year | $ | (11,345 | ) | $ | (11,876 | ) | $ | (3,720 | ) | $ | (3,425 | ) | ||||
| Service cost | (5 | ) | (5 | ) | (31 | ) | (28 | ) | ||||||||
| Interest cost | (326 | ) | (350 | ) | (100 | ) | (98 | ) | ||||||||
| Benefits paid | 786 | 970 | 201 | 199 | ||||||||||||
| Actuarial gain (loss) | 1,072 | (84 | ) | 646 | (131 | ) | ||||||||||
| Effect of currency rate changes | — | — | 335 | (237 | ) | |||||||||||
| Obligation at end of year | $ | (9,818 | ) | $ | (11,345 | ) | $ | (2,669 | ) | $ | (3,720 | ) | ||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | — | $ | — | $ | — | $ | — | ||||||||
| Employer contributions | 786 | 970 | 201 | 199 | ||||||||||||
| Benefits paid | (786 | ) | (970 | ) | (201 | ) | (199 | ) | ||||||||
| Fair value of plan assets at end of year | $ | — | $ | — | $ | — | $ | — | ||||||||
| Funded status | ||||||||||||||||
| Fair value of plan assets | $ | — | $ | — | $ | — | $ | — | ||||||||
| Benefit obligations | (9,818 | ) | (11,345 | ) | (2,669 | ) | (3,720 | ) | ||||||||
| Funded status | $ | (9,818 | ) | $ | (11,345 | ) | $ | (2,669 | ) | $ | (3,720 | ) | ||||
| U.S. | International | |||||||||||||||
| In thousands | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Amounts recognized in the statement of financial position consist of: | ||||||||||||||||
| Current liabilities | $ | (984 | ) | $ | (1,046 | ) | $ | (175 | ) | $ | (208 | ) | ||||
| Noncurrent liabilities | (8,834 | ) | (10,299 | ) | (2,494 | ) | (3,512 | ) | ||||||||
| Net amount recognized | $ | (9,818 | ) | $ | (11,345 | ) | $ | (2,669 | ) | $ | (3,720 | ) | ||||
| Amounts recognized in accumulated other comprehensive income (loss) | ||||||||||||||||
| consist of: | ||||||||||||||||
| Prior service credit | 18,097 | 19,616 | 2 | 9 | ||||||||||||
| Net actuarial (loss) gain | (16,593 | ) | (18,882 | ) | 748 | 154 | ||||||||||
| Net amount recognized | $ | 1,504 | $ | 734 | $ | 750 | $ | 163 |
Components of Net Periodic Benefit Cost
| U.S. | International | |||||||||||||||||||||||
| In thousands | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
| Service cost | $ | 5 | $ | 5 | $ | 4 | $ | 31 | $ | 28 | $ | 29 | ||||||||||||
| Interest cost | 326 | 350 | 389 | 100 | 98 | 99 | ||||||||||||||||||
| Amortization of initial net obligation and prior service cost | (1,519 | ) | (1,519 | ) | (1,709 | ) | (7 | ) | (7 | ) | (7 | ) | ||||||||||||
| Amortization of net loss (gain) | 1,216 | 1,225 | 1,287 | (8 | ) | (23 | ) | (29 | ) | |||||||||||||||
| Net periodic benefit cost (credit) | $ | 28 | $ | 61 | $ | (29 | ) | $ | 116 | $ | 96 | $ | 92 |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income during 2018 are as follows:
| In thousands | U.S. | International | ||||||
| Net loss arising during the year | 1,072 | 646 | ||||||
| Effect of exchange rates | — | (44 | ) | |||||
| Amortization or curtailment recognition of prior service cost | (1,519 | ) | (7 | ) | ||||
| Amortization or settlement recognition of net loss (gain) | 1,216 | (8 | ) | |||||
| Total recognized in other comprehensive income (loss) | $ | 769 | $ | 587 | ||||
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 741 | $ | 471 |
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. The discount rate is based on settling the pension obligation with high grade, high yield corporate bonds.
| U.S. | International | |||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Discount rate | 4.17 | % | 3.43 | % | 3.76 | % | 3.49 | % | 3.21 | % | 3.46 | % |
As of December 31, 2018, the following table represents the amounts included in other comprehensive loss that are expected to be recognized as components of periodic benefit costs in 2019.
| In thousands | U.S. | International | ||||||
| Prior service credit | (1,519 | ) | (2 | ) | ||||
| Net actuarial loss (gain) | 1,116 | (88 | ) | |||||
| Total | $ | (403 | ) | $ | (90 | ) |
The assumed health care cost trend rate for the U.S. plans grades from an initial rate of 6.30% to an ultimate rate of 4.50% by 2028 and for international plans from 6.04% to 4.50% by 2027.
Cash Flows
Benefit payments expected to be paid to plan participants are as follows:
| In thousands | U.S. | International | ||||||
| Year ended December 31, | ||||||||
| 2019 | $ | 983 | $ | 175 | ||||
| 2020 | 949 | 171 | ||||||
| 2021 | 920 | 181 | ||||||
| 2022 | 879 | 184 | ||||||
| 2023 | 854 | 196 | ||||||
| 2024 through 2028 | 3,661 | 912 |
Defined Contribution Plans
The Company also participates in certain defined contribution plans and multiemployer pension plans. Costs recognized under these plans are summarized as follows:
| For the year ended December 31, | ||||||||||||
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Multi-employer pension and health & welfare plans | $ | 965 | $ | 1,522 | $ | 2,054 | ||||||
| 401(k) savings and other defined contribution plans | 27,869 | 23,209 | 23,062 | |||||||||
| Total | $ | 28,834 | $ | 24,731 | $ | 25,116 |
The 401(k) savings plan is a participant directed defined contribution plan that holds shares of the Company’s stock as one of the investment options. At December 31, 2018 and 2017, the plan held on behalf of its participants about 442,239 shares with a market value of $31.1 million, and 495,274 shares with a market value of $40.3 million, respectively.
Additionally, the Company has stock option based benefit and other plans further described in Note 14.
The Company contributes to a multi-employer defined benefit pension plan under a collective bargaining agreement that covers certain of its union-represented employees. The risks of participating in such plans are different from the risks of single-employer plans. Assets contributed to a multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer ceases to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If the Company ceases to have an obligation to contribute to the multi-employer plan in which it had been a contributing employer, it may be required to pay to the plan an amount based on the underfunded status of the plan and on the history of the Company’s participation in the plan prior to the cessation of its obligation to contribute. The amount that an employer that has ceased to have an obligation to contribute to a multi-employer plan is required to pay to the plan is referred to as a withdrawal liability.
The Company’s participation in multi-employer plans for the year ended December 31, 2018 is outlined in the table below. For plans that are not individually significant to the Company, the total amount of contributions is presented in the aggregate.
| Pension Protection Act Zone Status (b) | FIP/ | Contributions by the Company | Expiration Dates of | ||||||||||||||||||||||||||||||
| RP Status Pending/ | Surcharge Imposed | Collective Bargaining | |||||||||||||||||||||||||||||||
| Pension Fund | EIN/PN (a) | 2017 | 2016 | Implemented (c) | 2018 | 2017 | 2016 | (d) | Agreements | ||||||||||||||||||||||||
| Idaho Operating Engineers- | EIN # | 91-6075538 | Green | Green | No | $ | 965 | (1) | $ | 1,020 | (1 | ) | $ | 1,306 | (1 | ) | No | 8/6/2021 | |||||||||||||||
| Employers Pension Trust Fund | Plan# | 001 | |||||||||||||||||||||||||||||||
| Total Contributions | $ | 965 | $ | 1,020 | $ | 1,306 |
| (1) | The Company’s contribution represents more than 5% of the total contributions to the plan. |
| (a) | The “EIN / PN” column provides the Employer Identification Number and the three-digit plan number assigned to a plan by the Internal Revenue Service. |
| (b) | The most recent Pension Protection Act Zone Status available for 2018 and 2017 is for plan years that ended in 2017 and 2016, respectively. The zone status is based on information provided to the Company and other participating employers by each plan and is certified by the plan’s actuary. A plan in the “red” zone has been determined to be in “critical status”, based on criteria established under the Internal Revenue Code (“Code”), and is generally less than 65% funded. A plan in the “yellow” zone has been determined to be in “endangered status”, based on criteria established under the Code, and is generally less than 80% funded. A plan in the “green” zone has been determined to be neither in “critical status” nor in “endangered status” and is generally at least 80% funded. |
| (c) | The “FIP/RP Status Pending/Implemented” column indicates whether a Funding Improvement Plan, as required under the Code to be adopted by plans in the “yellow” zone, or a Rehabilitation Plan, as required under the Code to be adopted by plans in the “red” zone, is pending or has been implemented as of the end of the plan year that ended in 2018. |
| (d) | The “Surcharge Imposed” column indicates whether the Company’s contribution rate for 2018 included an amount in addition the contribution rate specified in the applicable collective bargaining agreement, as imposed by a plan in “critical status”, in accordance with the requirements of the Code. |
- INCOME TAXES
The Company is responsible for filing consolidated U.S., foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities.
On December 23, 2017, the French government enacted the Finance Act for 2018 and it was published in the Official Bulletin on December 31, 2017. The Finance act reduced the French corporate tax rate from 28% in 2020 to 25%, enacting an additional 1.5% reduction in each year 2021 and 2022.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affected fiscal 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"). The Tax Act also established new tax laws that affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate tax rate from 35% to 21%, repeals the Domestic Manufacturing Deduction, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, new provisions designed to tax global intangible low-taxed income ("GILTI"), tax certain deductible base erosion payments called base erosion and anti-abuse tax (“BEAT”), and new interest expense limitation provisions.
In relation to the analysis of the impact of the all tax law changes, the Company recorded a net tax expense of $4.3 million in fiscal 2017. This included a provisional expense for the U.S. tax reform bill of $55.0 million, as well as a net benefit for the revaluation of deferred tax assets and liabilities of $50.7 million. Of this amount, net tax expense of $27.2 million is related to the Tax Act and a benefit of $22.9 million is related to the French Finance Act for 2018.
In the current year, the Company has completed its accounting for the income tax effects of the Tax Act. The Company has adjusted the provisional amounts previously recorded in accordance with SEC Staff Accounting Bulletin No. 118. As such, the Company has included the following tax provisions in its financial statements as of December 31, 2018:
Revaluation of deferred tax assets and liabilities: The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act made certain changes to the depreciation rules and implemented new limits on the deductibility of certain executive compensation. The Company evaluated these changes and recorded a provisional benefit to net deferred taxes of $24.6 million at December 31, 2017. As a result of the completion of its 2017 U.S. corporate tax return in the current year, the Company has adjusted its U.S. deferred tax balances which has resulted
in a current period benefit of $5.1 million. The Company has completed its calculation of the impact of these changes on its deferred tax balances. As of December 31, 2018, the Company has completed its analysis of the impact of the Tax Act on the deductibility of certain executive compensation. As a result, no further adjustments were made as of December 31, 2018.
Transition Tax on unrepatriated foreign earnings: The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company had to determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax expense of $51.8 million at December 31, 2017. As of December 31, 2018, the Company has completed its calculation of the Transition Tax which resulted in a benefit of $14.4 million for the twelve months ended December 31, 2018.
Global intangible low taxed income ("GILTI"): The Tax Act created a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has made the election to treat taxes due on future inclusions related to GILTI as current period expense and has included a current period expense of $9.3 million in its financial statements as of December 31, 2018.
Indefinite reinvestment assertion: Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. While the Company has finalized its calculation of the Transition Tax on the deemed repatriated earnings that were previously indefinitely reinvested, the Company was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for its remaining outside basis differences. Therefore, the Company has not included a provisional amount for this item in its financial statements for fiscal year ended December 31, 2018.
The components of the income from operations before provision for income taxes for the Company’s domestic and foreign operations for the years ended December 31 are provided below:
| For the year ended December 31, | ||||||||||||
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Domestic | $ | 145,096 | $ | 140,325 | $ | 276,218 | ||||||
| Foreign | 222,486 | 211,738 | 136,619 | |||||||||
| Income from operations before income taxes | $ | 367,582 | $ | 352,063 | $ | 412,837 |
The consolidated provision for income taxes included in the Statement of Income consisted of the following:
| For the year ended December 31, | ||||||||||||
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Current taxes | ||||||||||||
| Federal | $ | 6,940 | $ | 86,157 | $ | 72,317 | ||||||
| State | 5,771 | 3,644 | 9,953 | |||||||||
| Foreign | 68,467 | 67,395 | 27,391 | |||||||||
| 81,178 | 157,196 | 109,661 | ||||||||||
| Deferred taxes | ||||||||||||
| Federal | 4,689 | (22,863 | ) | 11,013 | ||||||||
| State | 1,263 | (1,024 | ) | 1,953 | ||||||||
| Foreign | (11,251 | ) | (43,536 | ) | (23,194 | ) | ||||||
| (5,299 | ) | (67,423 | ) | (10,228 | ) | |||||||
| Total provision | $ | 75,879 | $ | 89,773 | $ | 99,433 |
A reconciliation of the United States federal statutory income tax rate to the effective income tax rate on operations for the years ended December 31 is provided below:
| For the year ended December 31, | |||||||||
| In thousands | 2018 | 2017 | 2016 | ||||||
| U.S. federal statutory rate | 21.0 | % | 35.0 | % | 35.0 | % | |||
| State taxes | 1.6 | 0.4 | 2.1 | ||||||
| Foreign | 0.7 | (8.3 | ) | (4.3 | ) | ||||
| Research and development credit | (1.1 | ) | (0.8 | ) | (1.0 | ) | |||
| Manufacturing deduction | — | (1.1 | ) | (1.8 | ) | ||||
| France tax rate change | — | (6.5 | ) | (6.5 | ) | ||||
| U.S. tax rate change | (0.6 | ) | (7.9 | ) | — | ||||
| U.S. tax reform (benefit) provision | (1.4 | ) | 15.6 | — | |||||
| Transaction costs related to acquisitions | — | — | 1.5 | ||||||
| Other, net | 0.4 | (0.9 | ) | (0.9 | ) | ||||
| Effective rate | 20.6 | % | 25.5 | % | 24.1 | % |
The decrease in the effective tax rate in 2018 is primarily due to the application of the U.S. tax rate change which resulted in the reduction of the corporate income tax rate in the U.S. from 35.0% to 21.0%, a higher earnings mix in lower tax jurisdictions as well as a benefit from the completion of the accounting for the income tax effects of the Tax Act and the adjustment to the provisional amounts previously recorded in accordance with SEC Staff Accounting Bulletin No. 118.
Components of deferred tax assets and liabilities were as follows:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Deferred income tax assets: | ||||||||
| Accrued expenses and reserves | $ | 13,795 | $ | 10,961 | ||||
| Warranty reserve | 25,944 | 20,211 | ||||||
| Deferred compensation/employee benefits | 8,994 | 18,353 | ||||||
| Pension and postretirement obligations | 19,532 | 21,637 | ||||||
| Inventory | 16,769 | 19,620 | ||||||
| Net operating loss carry forwards | 85,051 | 65,671 | ||||||
| Other | 20,048 | 14,974 | ||||||
| Gross deferred income tax assets | 190,133 | 171,427 | ||||||
| Valuation allowance | 41,779 | 25,683 | ||||||
| Total deferred income tax assets | 148,354 | 145,744 | ||||||
| Deferred income tax liabilities: | ||||||||
| Property, plant & equipment | 35,440 | 37,015 | ||||||
| Intangibles | 287,419 | 288,141 | ||||||
| Total deferred income tax liabilities | 322,859 | 325,156 | ||||||
| Net deferred income tax liability | $ | (174,505 | ) | $ | (179,412 | ) |
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2018, the valuation allowance for certain foreign deferred tax asset carryforwards was $41.8 million primarily in China, France, the Netherlands, United Kingdom, and South Africa.
Net operating loss carry-forwards in the amount of $342.5 million expire in various periods from December 31, 2019 to December 31, 2038.
As of December 31, 2018, the liability for income taxes associated with unrecognized tax benefits was $9.5 million, of which $8.4 million, if recognized, would favorably affect the Company’s effective income tax rate. As of December 31, 2017, the liability for income taxes associated with unrecognized tax benefits was $6.9 million, of which $4.4 million, if recognized, would favorably affect the Company’s effective tax rate. A reconciliation of the beginning and ending amount of the liability for income taxes associated with unrecognized tax benefits follows:
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Gross liability for unrecognized tax benefits at beginning of year | $ | 6,910 | $ | 8,423 | $ | 10,557 | ||||||
| Gross increases - unrecognized tax benefits in prior periods | 5,389 | 2,466 | 6 | |||||||||
| Gross decreases - audit settlement during year | — | (3,979 | ) | — | ||||||||
| Gross decreases - expiration of audit statute of limitations | (2,756 | ) | — | (2,140 | ) | |||||||
| Gross liability for unrecognized tax benefits at end of year | $ | 9,543 | $ | 6,910 | $ | 8,423 |
The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2018, the total interest and penalties accrued was approximately $0.9 million. As of December 31, 2017, the total interest and penalties accrued was approximately $0.8 million.
With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2013. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $4.1 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.
- EARNINGS PER SHARE
The computation of earnings per share from operations is as follows:
| For the Year Ended December 31, | ||||||||||||
| In thousands, except per share data | 2018 | 2017 | 2016 | |||||||||
| Numerator | ||||||||||||
| Numerator for basic and diluted earnings per common share - net income attributable | ||||||||||||
| to Wabtec shareholders | $ | 294,944 | $ | 262,261 | $ | 304,887 | ||||||
| Less: dividends declared - common shares and non-vested restricted stock | (46,277 | ) | (42,218 | ) | (32,430 | ) | ||||||
| Undistributed earnings | 248,667 | 220,043 | 272,457 | |||||||||
| Percentage allocated to common shareholders (1) | 99.7 | % | 99.7 | % | 99.7 | % | ||||||
| 247,921 | 219,383 | 271,640 | ||||||||||
| Add: dividends declared - common shares | 46,173 | 42,092 | 32,333 | |||||||||
| Numerator for basic and diluted earnings per common share | $ | 294,094 | $ | 261,475 | $ | 303,973 | ||||||
| Denominator | ||||||||||||
| Denominator for basic earnings per common share - weighted average shares | 95,994 | 95,453 | 90,359 | |||||||||
| Effect of dilutive securities: | ||||||||||||
| Assumed conversion of dilutive stock-based compensation plans | 470 | 672 | 782 | |||||||||
| Denominator for diluted earnings per common share - adjusted weighted average | ||||||||||||
| shares and assumed conversion | 96,464 | 96,125 | 91,141 | |||||||||
| Net income per common share attributable to Wabtec shareholders | ||||||||||||
| Basic | $ | 3.06 | $ | 2.74 | $ | 3.37 | ||||||
| Diluted | $ | 3.05 | $ | 2.72 | $ | 3.34 | ||||||
| (1) Basic weighted-average common shares outstanding | 95,994 | 95,453 | 90,359 | |||||||||
| Basic weighted-average common shares outstanding and non-vested restricted | ||||||||||||
| stock expected to vest | 96,281 | 95,740 | 90,627 | |||||||||
| Percentage allocated to common shareholders | 99.7 | % | 99.7 | % | 99.7 | % |
Options to purchase approximately 135,000, 24,000, and 20,000 shares of Common Stock were outstanding in 2018, 2017 and 2016, respectively, but were not included in the computation of diluted earnings because their impact would have been antidilutive.
- STOCK-BASED COMPENSATION PLANS
As of December 31, 2018, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027 and as of December 31, 2018 the number of shares available for future grants under the 2011 Plan was 2,800,836 shares, which includes remaining shares to grant under the 2000 Plan. The amendment and restatement of the 2011 Plan was approved by stockholders of Wabtec on May 10, 2017. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”). The amendment and restatement of the Directors Plan was approved by stockholders of Wabtec on May 10, 2017. The Directors Plan, as amended, authorizes a total of 1,000,000 shares of Common Stock to be issued. Under the Directors Plan options issued become exercisable over a three-year vesting period and expire ten years from the date of grant and restricted stock issued under the plan vests one year from the date of grant. As compensation for directors’ fees for the years ended December 31, 2018, 2017 and 2016, the Company issued a total of 12,960, 16,500 and 16,972 shares of restricted stock to non-employee directors. The total number of shares issued under the plan as of December 31, 2018 was 894,152 shares.
Stock-based compensation expense for all of the plans was $25.3 million, $21.3 million and $20.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company recognized associated tax benefits related to the stock-based compensation plans of $6.3 million, $8.9 million and $14.9 million for the respective periods. Included in the stock-based compensation expense for 2018 above is $1.6 million of expense related to stock options, $7.1 million related to non-vested restricted stock, $5.1 million related to restricted stock units, $10.3 million related to incentive stock units and $1.2 million related to units issued for Directors’ fees. At December 31, 2018, unamortized compensation expense related to those stock options, non-vested restricted shares and incentive stock units expected to vest totaled $27.1 million and will be recognized over a weighted period of 1.3 years.
Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four year vesting period and expire 10 years from the date of grant.
The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and Directors Plan for the years ended December 31:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic value (in thousands) | ||||||||||
| Outstanding at December 31, 2015 | 1,097,323 | $ | 32.70 | 4.8 | $ | 42,154 | |||||||
| Granted | 94,115 | 61.39 | 2,035 | ||||||||||
| Exercised | (83,790 | ) | 25.58 | (4,813 | ) | ||||||||
| Canceled | (8,825 | ) | 71.47 | (102 | ) | ||||||||
| Outstanding at December 31, 2016 | 1,098,823 | $ | 35.39 | 4.3 | $ | 52,332 | |||||||
| Granted | 65,522 | 86.91 | — | ||||||||||
| Exercised | (166,838 | ) | 21.37 | (10,020 | ) | ||||||||
| Canceled | (13,995 | ) | 76.89 | (64 | ) | ||||||||
| Outstanding at December 31, 2017 | 983,512 | $ | 32.52 | 4.0 | $ | 40,137 | |||||||
| Granted | 82,580 | 77.54 | — | ||||||||||
| Exercised | (582,303 | ) | 28.29 | (24,433 | ) | ||||||||
| Canceled | (17,112 | ) | 69.76 | (8 | ) | ||||||||
| Outstanding at December 31, 2018 | 466,677 | $ | 61.04 | 5.7 | $ | 4,298 | |||||||
| Exercisable at December 31, 2018 | 283,169 | $ | 50.60 | 4.6 | $ | 5,564 |
Options outstanding at December 31, 2018 were as follows:
| Number of Options | Weighted Average Exercise Price of Options | Weighted Average Remaining Contractual | Number of Options Currently | Weighted Average Exercise Price of Options Currently | ||||||||||||
| Range of exercise prices | Outstanding | Outstanding | Life | Exercisable | Exercisable | |||||||||||
| Under $35.00 | 71,765 | $ | 27.84 | 2.0 | 71,765 | $ | 27.84 | |||||||||
| 35.00 - 50.00 | 107,034 | 41.36 | 3.6 | 107,034 | 41.36 | |||||||||||
| 50.00 - 65.00 | 65,199 | 61.33 | 7.1 | 24,615 | 61.33 | |||||||||||
| 65.00 - 80.00 | 98,981 | 72.21 | 7.6 | 38,187 | 72.85 | |||||||||||
| Over 80.00 | 123,698 | 88.25 | 7.5 | 41,568 | 86.90 | |||||||||||
| 466,677 | $ | 61.04 | 283,169 | $ | 50.60 |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| For the year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Dividend yield | 0.31 | % | 0.23 | % | 0.26 | % | ||||||
| Risk-free interest rate | 2.8 | % | 2.2 | % | 1.5 | % | ||||||
| Stock price volatility | 23.9 | % | 23.4 | % | 26.9 | % | ||||||
| Expected life (years) | 5.0 | 5.0 | 5.0 | |||||||||
| Weighted average fair value of options granted during the year | $ | 20.59 | $ | 20.69 | $ | 14.96 |
The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the 7 years U.S. Treasury bond rates for the expected life of the option.
Restricted Stock and Incentive Stock Beginning in 2006 the Company adopted a restricted stock program. As provided for under the 2011 and 2000 Plans, eligible employees are granted restricted stock that generally vests over four years from the date of grant. Under the Directors Plan, restricted stock units vest one year from the date of grant.
In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three year period then ended, the incentive stock units can vest and be awarded ranging from 0% to 200% of the initial incentive stock units granted. The incentive stock units included in the table below represent the number of shares that are expected to vest based on the
Company’s estimate for meeting those established performance targets. As of December 31, 2018, the Company estimates that it will achieve 81%, 97% and 107% for the incentive stock units expected to vest based on performance for the three year periods ending December 31, 2018, 2019, and 2020, respectively, and has recorded incentive compensation expense accordingly. If estimates of the number of these stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.
Compensation expense for the non-vested restricted stock and incentive stock units is based on the closing price of the Company’s common stock on the date of grant and recognized over the applicable vesting period.
The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan, and Directors Plan, and incentive stock units activity and related information for the 2011 Plan and the 2000 Plan with related information for the years ended December 31:
| Restricted Stock and Units | Incentive Stock Awards | Weighted Average Grant Date Fair Value | ||||||||
| Outstanding at December 31, 2015 | 356,885 | 541,638 | $ | 65.89 | ||||||
| Granted | 212,600 | 167,850 | 66.03 | |||||||
| Vested | (159,975 | ) | (236,591 | ) | 51.80 | |||||
| Adjustment for incentive stock awards expected to vest | — | (38,164 | ) | 74.42 | ||||||
| Canceled | (13,215 | ) | (9,983 | ) | 71.84 | |||||
| Outstanding at December 31, 2016 | 396,295 | 424,750 | $ | 72.18 | ||||||
| Granted | 153,516 | 157,025 | 86.66 | |||||||
| Vested | (137,088 | ) | (153,271 | ) | 70.34 | |||||
| Adjustment for incentive stock awards expected to vest | — | (87,592 | ) | 73.69 | ||||||
| Canceled | (13,723 | ) | (13,579 | ) | 76.61 | |||||
| Outstanding at December 31, 2017 | 399,000 | 327,333 | $ | 78.76 | ||||||
| Granted | 224,060 | 175,100 | 73.76 | |||||||
| Vested | (148,644 | ) | (93,312 | ) | 81.55 | |||||
| Adjustment for incentive stock awards expected to vest | — | 32,996 | 74.62 | |||||||
| Canceled | (29,327 | ) | (26,875 | ) | 78.60 | |||||
| Outstanding at December 31, 2018 | 445,089 | 415,242 | $ | 75.51 |
- OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were:
| December 31, | ||||||||
| In thousands | 2018 | 2017 | ||||||
| Foreign currency translation gain (loss) | $ | (202,204 | ) | $ | 5,063 | |||
| Unrealized gain (loss) on interest rate swap contracts, net of tax of $16 and $1,338 | (53 | ) | 4,015 | |||||
| Unrealized loss on pension and post-retirement benefit plans, net of tax of $23,049 and $19,532 | (54,326 | ) | (54,070 | ) | ||||
| Total accumulated other comprehensive loss | $ | (256,583 | ) | $ | (44,992 | ) |
The changes in accumulated other comprehensive loss by component, net of tax, for the year-ended December 31, 2018 are as follows:
| Foreign currency | Derivative | Pension and post retirement | ||||||||||||||
| In thousands | translation | contracts | benefits plans | Total | ||||||||||||
| Balance at December 31, 2017 | $ | 5,063 | $ | 4,015 | $ | (54,070 | ) | $ | (44,992 | ) | ||||||
| Other comprehensive income before reclassifications | (207,267 | ) | (7,803 | ) | (2,319 | ) | (217,389 | ) | ||||||||
| Amounts reclassified from accumulated other | ||||||||||||||||
| comprehensive income | — | 3,735 | 2,063 | 5,798 | ||||||||||||
| Net current period other comprehensive income | (207,267 | ) | (4,068 | ) | (256 | ) | (211,591 | ) | ||||||||
| Balance at December 31, 2018 | $ | (202,204 | ) | $ | (53 | ) | $ | (54,326 | ) | $ | (256,583 | ) |
Reclassifications out of accumulated other comprehensive loss for the year-ended December 31, 2018 are as follows:
| Amount reclassified from accumulated other | Affected line item in the Condensed Consolidated | |||||
| In thousands | comprehensive income | Statements of Income | ||||
| Amortization of defined pension and post retirement items | ||||||
| Amortization of initial net obligation and prior service cost | $ | (1,501 | ) | Other income, net | ||
| Amortization of net loss (gain) | 4,327 | Other income, net | ||||
| 2,826 | Other income, net | |||||
| (763 | ) | Income tax expense | ||||
| $ | 2,063 | Net income | ||||
| Derivative contracts | ||||||
| Realized loss on derivative contracts | 4,915 | Interest expense, net | ||||
| (1,180 | ) | Income tax expense | ||||
| $ | 3,735 | Net income |
The changes in accumulated other comprehensive loss by component, net of tax, for the year-ended December 31, 2017 are as follows:
| Foreign currency | Derivative | Pension and post retirement | ||||||||||||||
| In thousands | translation | contracts | benefits plans | Total | ||||||||||||
| Balance at December 31, 2016 | $ | (321,033 | ) | $ | (2,957 | ) | $ | (55,615 | ) | $ | (379,605 | ) | ||||
| Other comprehensive income before reclassifications | 326,096 | 6,712 | (1,017 | ) | 331,791 | |||||||||||
| Amounts reclassified from accumulated other | ||||||||||||||||
| comprehensive income | — | 260 | 2,562 | 2,822 | ||||||||||||
| Net current period other comprehensive income | 326,096 | 6,972 | 1,545 | 334,613 | ||||||||||||
| Balance at December 31, 2017 | $ | 5,063 | $ | 4,015 | $ | (54,070 | ) | $ | (44,992 | ) |
Reclassifications out of accumulated other comprehensive loss for the year-ended December 31, 2017 are as follows:
| Amount reclassified from accumulated other | Affected line item in the Condensed Consolidated | |||||
| In thousands | comprehensive income | Statements of Income | ||||
| Amortization of defined pension and post retirement items | ||||||
| Amortization of initial net obligation and prior service cost | $ | (1,496 | ) | Other income, net | ||
| Amortization of net loss (gain) | 5,037 | Other income, net | ||||
| 3,541 | Other income, net | |||||
| (979 | ) | Income tax expense | ||||
| $ | 2,562 | Net income | ||||
| Derivative contracts | ||||||
| Realized loss on derivative contracts | 400 | Interest expense, net | ||||
| (140 | ) | Income tax expense | ||||
| $ | 260 | Net income |
- OPERATING LEASES
The Company leases office and manufacturing facilities under operating leases with terms ranging from one to 15 years, excluding renewal options.
Total net rental expense charged to operations in 2018, 2017, and 2016 was $40.1 million, $34.6 million and $27.2 million, respectively. The amounts above are shown net of sublease rentals which were immaterial for the years 2018, 2017 and 2016, respectively.
Future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year are as follows:
| Real | ||||||||||||
| In thousands | Estate | Equipment | Total | |||||||||
| 2019 | $ | 31,428 | $ | 5,001 | $ | 36,429 | ||||||
| 2020 | 28,132 | 2,636 | 30,768 | |||||||||
| 2021 | 22,897 | 1,752 | 24,649 | |||||||||
| 2022 | 18,020 | 825 | 18,845 | |||||||||
| 2023 | 16,267 | 391 | 16,658 | |||||||||
| 2024 and after | 63,061 | — | 63,061 |
- WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
| In thousands | 2018 | 2017 | ||||||
| Balance at beginning of year | $ | 153,063 | $ | 138,992 | ||||
| Warranty expense | 57,988 | 50,385 | ||||||
| Acquisitions | 3,135 | 806 | ||||||
| Warranty claim payments | (54,111 | ) | (48,548 | ) | ||||
| Foreign currency impact | (6,373 | ) | 11,428 | |||||
| Balance at end of year | $ | 153,702 | $ | 153,063 |
- PREFERRED STOCK
The Company’s authorized capital stock includes 1,000,000 shares of preferred stock. The Board of Directors has the authority to issue the preferred stock and to fix the designations, powers, preferences and rights of the shares of each such class or series, including dividend rates, conversion rights, voting rights, terms of redemption and liquidation preferences, without any further vote or action by the Company’s shareholders. The rights and preferences of the preferred stock would be superior to those of the common stock. At December 31, 2018 and 2017 there was no preferred stock issued or outstanding.
- DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Foreign Currency Hedging The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gains and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. The contracts are scheduled to mature within two years. For the years ended December 31, 2018, 2017 and 2016, the amounts reclassified into income were not material.
Other Activities The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized gain related to these contracts was $2.9 million and $2.1 million for the years ended December 31, 2018 and 2017, respectively. The net unrealized gain related to these contracts for the year ended December 31, 2016 was not material. These contracts are scheduled to mature within one year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2018:
| In millions | Designated | Non-Designated | Total | |||||||||
| Gross notional amount | $ | 863.0 | $ | 834.0 | $ | 1,697.0 | ||||||
| Fair Value: | ||||||||||||
| Other current assets | $ | — | $ | 1.3 | $ | 1.3 | ||||||
| Other current liabilities | (2.3 | ) | — | (2.3 | ) | |||||||
| Total | $ | (2.3 | ) | $ | 1.3 | $ | (1.0 | ) |
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedged discussed in the above sections as of December 31, 2017:
| In millions | Designated | Non-Designated | Total | |||||||||
| Gross notional amount | $ | 805.1 | $ | 379.7 | $ | 1,184.8 | ||||||
| Fair Value: | ||||||||||||
| Other current assets | 3.5 | 2.1 | $ | 5.6 | ||||||||
| Other current liabilities | — | — | $ | — | ||||||||
| Total | $ | 3.5 | $ | 2.1 | $ | 5.6 |
Interest Rate Hedging The Company used interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of debt obligations are recognized in current period earnings. Refer to footnote 20 for further information on interest rate swaps.
- FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2017, which are included in other current liabilities on the Consolidated Balance sheet:
| Fair Value Measurements at December 31, 2017 Using | ||||||||||||||||
| Total Carrying Value at December 31, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
| In thousands | 2017 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Interest rate swap agreements | 1,163 | — | 1,163 | — | ||||||||||||
| Total | $ | 1,163 | $ | — | $ | 1,163 | $ | — |
To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap
contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at December 31, 2018 and December 31, 2017. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets. Trusts are valued at the net asset value (“NAV”) as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates. The 2013 and 2016 Notes are considered Level 2 based on the fair value valuation hierarchy.
The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Carry | Fair | Carry | Fair | |||||||||||||
| In thousands | Value | Value | Value | Value | ||||||||||||
| Interest rate swap agreements | $ | — | $ | — | $ | 1,163 | $ | 1,163 | ||||||||
| 4.375% Senior Notes, due 2023 | 248,823 | 254,218 | 248,567 | 262,033 | ||||||||||||
| 3.45% Senior Notes, due 2026 | 748,282 | 675,075 | 747,655 | 741,113 | ||||||||||||
| Floating Rate Notes, due 2021 | 496,796 | 497,425 | — | — | ||||||||||||
| 4.15% Senior Notes, due 2024 | 742,957 | 727,350 | — | — | ||||||||||||
| 4.7% Senior Notes, due 2028 | 1,239,657 | 1,179,625 | — | — |
The fair value of the Company’s interest rate swap agreements and all the Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement.
- COMMITMENTS AND CONTINGENCIES
The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. The Company believes its operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements.
Under terms of the purchase agreement and related documents for the 1990 Acquisition, Ingersoll Rand, the successor-in-interest to American Standard, Inc. (“Ingersoll”), has indemnified the Company for certain items including, among other things, certain environmental claims the Company asserted prior to 2000. If Ingersoll was unable to honor or meet these indemnifications, the Company would be responsible for such items. In the opinion of Management, Ingersoll currently has the ability to meet its indemnification obligations.
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (“RFPC”), and are based on a product sold by RFPC prior to the time that the Company acquired any interest in RFPC.
Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated.
It is management’s belief that the potential range of loss for asbestos-related bodily injury cases is not reasonably determinable at present due to a variety of factors, including: (1) the asbestos case settlement history of the Company’s wholly owned subsidiary, RFPC; (2) the unpredictable nature of personal injury litigation in general; and (3) the uncertainty of asbestos litigation in particular. Despite this uncertainty, and although the results of the Company’s operations and cash flows for any given period could be adversely affected by asbestos-related lawsuits, Management believes that the final resolution of the Company’s asbestos-related cases will not be material to the Company’s overall financial position, results of operations and cash flows. In general, this belief is based upon: (1) Wabtec’s and RFPC’s history of settlements and dismissals of asbestos-related cases to date; (2) the inability of many plaintiffs to establish any exposure or causal relationship to RFPC’s product; and (3) the inability of many plaintiffs to demonstrate any identifiable injury or compensable loss.
More specifically, as to RFPC, management’s belief that any losses due to asbestos-related cases would not be material is also based on the fact that RFPC owns insurance which provides coverage for asbestos-related bodily injury claims. To date, RFPC’s insurers have provided RFPC with defense and indemnity in these actions. The overall number of new claims being filed against RFPC has dropped significantly in recent years; however, these new claims, and all previously filed claims, may take a significant period of time to resolve. As to Wabtec and its divisions, Management’s belief that asbestos-related cases will not have a material impact is also based on its position that it has no legal liability for asbestos-related bodily injury claims, and that the former owners of Wabtec’s assets retained asbestos liabilities for the products at issue. To date, Wabtec has been able to successfully defend itself on this basis, including two arbitration decisions and a judicial opinion, all of which confirmed Wabtec’s position that it did not assume any asbestos liabilities from the former owners of certain Wabtec assets. Although Wabtec has incurred defense and administrative costs in connection with asbestos bodily injury actions, these costs have not been material, and the Company has no information that would suggest these costs would become material in the foreseeable future.
On April 21, 2016, Siemens Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company has infringed seven patents owned by Siemens related to Positive Train Control (PTC) technology. On November 2, 2016, Siemens amended its complaint to add six additional patents they also claim are infringed by the Company’s PTC Products or End of Train (EOT) Products (Siemen Patent Case). The Company has filed Answers, and asserted counterclaims, in response to Siemens’ complaints. Additionally, after filings by the Company, the US Patent & Trademark Office’s Patent Trail and Appeal Board (PTAB) has granted Inter-Parties Review (IPR) proceedings on ten (10) of the patents asserted by Siemens to contest their validity. Following pre-trial rulings that greatly reduced Siemens’ alleged damages, a jury trial was held in federal district court in Delaware in January 2019 on eight patents, two of which were still subject to an IPR decision on validity from the PTAB. At the conclusion of the trial, the jury awarded Siemens damages of $5.6 million related to PTC patents and $1.1 million related to EOT patents; as of February 25, 2019, a final verdict has not yet been entered by the Court. Since the jury’s verdict was issued, one of the PTC patents found to be infringed was held to be invalid by the PTAB, and a ruling on another of the PTC patents is still pending. Once a verdict is entered, the parties will file post-trial motions which could also potentially affect the verdict, and potential appeals could follow.
Wabtec’s initial counterclaims in the Siemens Patent Case alleging that Siemens has violated three (3) of Wabtec’s patents were severed from the Siemens Patent case and were re-filed by Wabtec in a separate case now pending in the federal district court in Delaware (Wabtec Patent Case); a trial date of April 13, 2020 has been set in this case.
On July 19, 2018, Siemens amended its pleadings in the Wabtec Patent Case to add new counterclaims alleging violations of federal antitrust and state trade practices laws related to Wabtec’s PTC sales. On January 29, 2019, Wabtec’s motion to sever the antitrust claims was granted; it is expected that Siemens will re-file the antitrust claims as a separate action (Siemens Antitrust Case).
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed. Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, DTC alleged that total damages were $36.8 million through July 31, 2017 and are continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC. Xorail has denied DTC's assertions, stating that its system satisfied the contractual requirements. Xorail has worked with DTC to modify its system an implement the FRA's and PUC's previously undefined approval requirements; the FRA and PUC have both approved modified wireless crossing system, and as of August 2018, DTC completed the process of certifying the crossings and eliminating the use of flaggers. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the
flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements. The complaint generally supports Xorail’s position and does not name or implicate Xorail. DTC has not updated its notices against Xorail nor has any formal claim been filed against Xorail by DTC.
On April 3, 2018, the United States Department of Justice entered into a proposed consent decree resolving allegations that the Company and Knorr-Bremse AG had maintained unlawful agreements not to compete for each other’s employees. The allegations also related to Faiveley Transport before it was acquired by the Company in November 2016. The proposed consent decree is pending review and approval by the U.S. District Court for the District of Columbia. No monetary fines or penalties have been imposed on the Company. The Company elected to settle this matter with the Department of Justice to avoid the cost and distraction of litigation. Putative class action lawsuits were filed in several different federal district courts naming the Company and Knorr as defendants in connection with the allegations contained in the proposed consent decree. The lawsuits seek unspecified damages on behalf of employees of the Company (including Faiveley Transport) and Knorr allegedly caused by the defendants’ actions. A federal Multi-District Litigation (MDL) Panel decided to consolidate the cases in the Western District of Pennsylvania, and on October 12, 2018, a consolidated class action complaint was filed in the Western District of PA with five named plaintiffs, three of whom were Company employees. The litigation is in its very early stages and the Company does not believe that it has diminished competition for talent in the marketplace and intends to contest these claims vigorously. The Company has filed a motion to dismiss, which is pending
From time to time the Company is involved in litigation relating to claims arising out of its operations in the ordinary course of business. As of the date hereof, the Company is involved in no litigation that the Company believes will have a material adverse effect on its financial condition, results of operations or liquidity.
- SEGMENT INFORMATION
Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:
Freight Segment primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.
Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment, and doors for buses and subways. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
| Segment financial information for 2018 is as follows: | ||||||||||||||||
| Corporate | ||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||
| In thousands | Segment | Segment | Elimination | Total | ||||||||||||
| Sales to external customers | $ | 1,564,297 | $ | 2,799,250 | $ | — | $ | 4,363,547 | ||||||||
| Intersegment sales/(elimination) | 54,228 | 17,583 | (71,811 | ) | — | |||||||||||
| Total sales | $ | 1,618,525 | $ | 2,816,833 | $ | (71,811 | ) | $ | 4,363,547 | |||||||
| Income (loss) from operations | $ | 304,832 | $ | 227,939 | $ | (59,334 | ) | $ | 473,437 | |||||||
| Interest expense and other, net | — | — | (105,855 | ) | (105,855 | ) | ||||||||||
| Income (loss) from operations before income taxes | $ | 304,832 | $ | 227,939 | $ | (165,189 | ) | $ | 367,582 | |||||||
| Depreciation and amortization | $ | 39,979 | $ | 64,287 | $ | 5,031 | $ | 109,297 | ||||||||
| Capital expenditures | 26,568 | 59,603 | 7,134 | 93,305 | ||||||||||||
| Segment assets | 3,774,689 | 9,087,026 | (4,212,481 | ) | 8,649,234 | |||||||||||
| Segment financial information for 2017 is as follows: | ||||||||||||||||
| Corporate | ||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||
| In thousands | Segment | Segment | Elimination | Total | ||||||||||||
| Sales to external customers | $ | 1,396,588 | $ | 2,485,168 | $ | — | $ | 3,881,756 | ||||||||
| Intersegment sales/(elimination) | 37,630 | 21,548 | (59,178 | ) | $ | — | ||||||||||
| Total sales | $ | 1,434,218 | $ | 2,506,716 | $ | (59,178 | ) | $ | 3,881,756 | |||||||
| Income (loss) from operations | $ | 264,276 | $ | 188,219 | $ | (31,416 | ) | $ | 421,079 | |||||||
| Interest expense and other, net | — | — | (69,016 | ) | (69,016 | ) | ||||||||||
| Income (loss) from operations before income taxes | $ | 264,276 | $ | 188,219 | $ | (100,432 | ) | $ | 352,063 | |||||||
| Depreciation and amortization | $ | 43,721 | $ | 57,441 | $ | 2,086 | $ | 103,248 | ||||||||
| Capital expenditures | 33,921 | 50,762 | 4,783 | 89,466 | ||||||||||||
| Segment assets | 3,504,289 | 7,562,122 | (4,486,431 | ) | 6,579,980 |
| Segment financial information for 2016 is as follows: | ||||||||||||||||
| Corporate | ||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||
| In thousands | Segment | Segment | Elimination | Total | ||||||||||||
| Sales to external customers | $ | 1,543,098 | $ | 1,388,090 | $ | — | $ | 2,931,188 | ||||||||
| Intersegment sales/(elimination) | 39,519 | 9,393 | (48,912 | ) | — | |||||||||||
| Total sales | $ | 1,582,617 | $ | 1,397,483 | $ | (48,912 | ) | $ | 2,931,188 | |||||||
| Income (loss) from operations | $ | 343,578 | $ | 170,569 | $ | (57,540 | ) | $ | 456,607 | |||||||
| Interest expense and other, net | — | — | (43,770 | ) | (43,770 | ) | ||||||||||
| Income (loss) from operations before income taxes | $ | 343,578 | $ | 170,569 | $ | (101,310 | ) | $ | 412,837 | |||||||
| Depreciation and amortization | $ | 36,519 | $ | 31,545 | $ | 1,731 | $ | 69,795 | ||||||||
| Capital expenditures | 22,726 | 20,987 | 6,503 | 50,216 | ||||||||||||
| Segment assets | 2,949,668 | 6,720,302 | (3,088,952 | ) | 6,581,018 |
The following geographic area data as of and for the years ended December 31, 2018, 2017 and 2016, respectively, includes net sales based on product shipment destination and long-lived assets, which consist of plant, property and equipment, net of depreciation, resident in their respective countries:
| Net Sales | Long-Lived Assets | |||||||||||||||||||||||
| In thousands | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
| United States | $ | 1,460,278 | $ | 1,323,781 | $ | 1,362,255 | $ | 204,279 | $ | 211,608 | $ | 205,895 | ||||||||||||
| United Kingdom | 395,767 | 356,493 | 322,563 | 54,848 | 57,668 | 54,215 | ||||||||||||||||||
| Germany | 314,703 | 208,817 | 98,364 | 75,498 | 71,709 | 57,902 | ||||||||||||||||||
| Canada | 278,979 | 279,013 | 206,258 | 5,271 | 5,822 | 5,156 | ||||||||||||||||||
| France | 247,804 | 237,454 | 66,287 | 56,651 | 57,849 | 33,636 | ||||||||||||||||||
| Mexico | 200,642 | 160,029 | 183,583 | 9,184 | 9,117 | 8,766 | ||||||||||||||||||
| Italy | 189,839 | 142,037 | 45,771 | 29,806 | 30,329 | 27,253 | ||||||||||||||||||
| India | 178,491 | 137,837 | 24,161 | 12,782 | 12,519 | 1,271 | ||||||||||||||||||
| Australia | 173,539 | 136,127 | 82,099 | 9,587 | 10,483 | 8,039 | ||||||||||||||||||
| China | 170,297 | 178,137 | 106,357 | 33,438 | 36,388 | 42,672 | ||||||||||||||||||
| Brazil | 67,572 | 69,378 | 51,493 | 13,490 | 13,184 | 13,227 | ||||||||||||||||||
| Other international | 685,636 | 652,653 | 381,997 | 58,903 | 57,296 | 60,344 | ||||||||||||||||||
| Total | $ | 4,363,547 | $ | 3,881,756 | $ | 2,931,188 | $ | 563,737 | $ | 573,972 | $ | 518,376 |
Export sales from the Company’s United States operations were $512.5 million, $448.0 million and $470.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Sales by product are as follows:
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Specialty Products & Electronics | $ | 1,631,966 | $ | 1,350,727 | $ | 1,374,580 | ||||||
| Brake Products | 885,464 | 749,959 | 588,081 | |||||||||
| Remanufacturing, Overhaul & Build | 537,122 | 522,275 | 559,284 | |||||||||
| Transit Products | 1,111,549 | 1,112,340 | 276,124 | |||||||||
| Other | 197,446 | 146,455 | 133,119 | |||||||||
| Total sales | $ | 4,363,547 | $ | 3,881,756 | $ | 2,931,188 |
- GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's 2016 Notes, 2013 Notes and Revolving Credit Facility and Term Loan are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.
Balance Sheet for December 31, 2018:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 1,782,682 | $ | (119 | ) | $ | 559,791 | $ | — | $ | 2,342,354 | ||||||||
| Receivables, net | 106,815 | 61,513 | 978,450 | — | 1,146,778 | ||||||||||||||
| Inventories | 149,622 | 69,116 | 626,148 | — | 844,886 | ||||||||||||||
| Current assets - other | 11,884 | 690 | 103,075 | — | 115,649 | ||||||||||||||
| Total current assets | 2,051,003 | 131,200 | 2,267,464 | — | 4,449,667 | ||||||||||||||
| Property, plant and equipment | 51,551 | 24,755 | 487,431 | — | 563,737 | ||||||||||||||
| Goodwill | 25,275 | 283,241 | 2,088,028 | — | 2,396,544 | ||||||||||||||
| Investment in subsidiaries | 6,707,979 | 4,022,107 | — | (10,730,086 | ) | — | |||||||||||||
| Other intangibles, net | 29,254 | 78,547 | 1,022,079 | — | 1,129,880 | ||||||||||||||
| Other long term assets | 8,775 | 149 | 100,482 | — | 109,406 | ||||||||||||||
| Total assets | $ | 8,873,837 | $ | 4,539,999 | $ | 5,965,484 | $ | (10,730,086 | ) | $ | 8,649,234 | ||||||||
| Current liabilities | $ | 264,630 | $ | 91,004 | $ | 1,291,056 | $ | — | $ | 1,646,690 | |||||||||
| Inter-company | 1,947,504 | (1,436,222 | ) | (511,282 | ) | — | — | ||||||||||||
| Long-term debt | 3,779,627 | — | 13,147 | — | 3,792,774 | ||||||||||||||
| Long-term liabilities - other | 16,945 | 48,714 | 275,036 | — | 340,695 | ||||||||||||||
| Total liabilities | 6,008,706 | (1,296,504 | ) | 1,067,957 | — | 5,780,159 | |||||||||||||
| Shareholders' equity | 2,865,131 | 5,836,503 | 4,893,583 | (10,730,086 | ) | 2,865,131 | |||||||||||||
| Non-controlling interest | — | — | 3,944 | — | 3,944 | ||||||||||||||
| Total shareholders' equity | $ | 2,865,131 | $ | 5,836,503 | $ | 4,897,527 | $ | (10,730,086 | ) | $ | 2,869,075 | ||||||||
| Total Liabilities and Shareholders' Equity | $ | 8,873,837 | $ | 4,539,999 | $ | 5,965,484 | $ | (10,730,086 | ) | $ | 8,649,234 |
Balance Sheet for December 31, 2017:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Cash and cash equivalents | $ | 933 | $ | 625 | $ | 231,843 | $ | — | $ | 233,401 | |||||||||
| Receivables, net | 77,046 | 59,166 | 1,030,575 | — | 1,166,787 | ||||||||||||||
| Inventories | 120,937 | 46,626 | 575,071 | — | 742,634 | ||||||||||||||
| Current assets - other | 1,142 | 563 | 120,586 | — | 122,291 | ||||||||||||||
| Total current assets | 200,058 | 106,980 | 1,958,075 | — | 2,265,113 | ||||||||||||||
| Property, plant and equipment | 52,532 | 26,492 | 494,948 | — | 573,972 | ||||||||||||||
| Goodwill | 25,274 | 283,242 | 2,151,587 | — | 2,460,103 | ||||||||||||||
| Investment in subsidiaries | 6,517,205 | 2,440,665 | — | (8,957,870 | ) | — | |||||||||||||
| Other intangibles, net | 30,575 | 81,037 | 1,092,820 | — | 1,204,432 | ||||||||||||||
| Other long term assets | 17,414 | (23,892 | ) | 82,838 | — | 76,360 | |||||||||||||
| Total assets | $ | 6,843,058 | $ | 2,914,524 | $ | 5,780,268 | $ | (8,957,870 | ) | $ | 6,579,980 | ||||||||
| Current liabilities | $ | 196,827 | $ | 77,284 | $ | 1,299,219 | $ | — | $ | 1,573,330 | |||||||||
| Inter-company | 2,121,546 | (1,307,410 | ) | (814,136 | ) | — | — | ||||||||||||
| Long-term debt | 1,661,771 | 14 | 161,518 | — | 1,823,303 | ||||||||||||||
| Long-term liabilities - other | 54,046 | 20,594 | 280,175 | — | 354,815 | ||||||||||||||
| Total liabilities | 4,034,190 | (1,209,518 | ) | 926,776 | — | 3,751,448 | |||||||||||||
| Shareholders' equity | 2,808,868 | 4,124,042 | 4,833,828 | (8,957,870 | ) | 2,808,868 | |||||||||||||
| Non-controlling interest | — | — | 19,664 | — | 19,664 | ||||||||||||||
| Total shareholders' equity | $ | 2,808,868 | $ | 4,124,042 | $ | 4,853,492 | $ | (8,957,870 | ) | $ | 2,828,532 | ||||||||
| Total Liabilities and Shareholders' Equity | $ | 6,843,058 | $ | 2,914,524 | $ | 5,780,268 | $ | (8,957,870 | ) | $ | 6,579,980 |
Income Statement for the Year Ended December 31, 2018:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net Sales | $ | 671,035 | $ | 483,058 | $ | 3,442,229 | $ | (232,775 | ) | $ | 4,363,547 | ||||||||
| Cost of sales | (495,090 | ) | (304,286 | ) | (2,462,536 | ) | 132,250 | (3,129,662 | ) | ||||||||||
| Gross profit (loss) | 175,945 | 178,772 | 979,693 | (100,525 | ) | 1,233,885 | |||||||||||||
| Total operating expenses | (172,978 | ) | (57,274 | ) | (530,196 | ) | — | (760,448 | ) | ||||||||||
| Income (loss) from operations | 2,967 | 121,498 | 449,497 | (100,525 | ) | 473,437 | |||||||||||||
| Interest (expense) income, net | (110,801 | ) | 12,794 | (14,228 | ) | — | (112,235 | ) | |||||||||||
| Other income (expense), net | 13,452 | 20 | (7,092 | ) | — | 6,380 | |||||||||||||
| Equity earnings (loss) | 396,944 | 369,376 | — | (766,320 | ) | — | |||||||||||||
| Pretax income (loss) | 302,562 | 503,688 | 428,177 | (866,845 | ) | 367,582 | |||||||||||||
| Income tax expense | (7,618 | ) | (3,299 | ) | (64,962 | ) | — | (75,879 | ) | ||||||||||
| Net income (loss) | 294,944 | 500,389 | 363,215 | (866,845 | ) | 291,703 | |||||||||||||
| Less: Net income attributable to noncontrolling interest | — | — | 3,241 | — | 3,241 | ||||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 294,944 | $ | 500,389 | $ | 366,456 | $ | (866,845 | ) | $ | 294,944 | ||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 295,774 | $ | 500,389 | $ | 154,035 | $ | (866,845 | ) | $ | 83,353 |
Income Statement for the Year Ended December 31, 2017:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net Sales | $ | 577,397 | $ | 398,220 | $ | 3,035,464 | $ | (129,325 | ) | $ | 3,881,756 | ||||||||
| Cost of sales | (440,911 | ) | (255,792 | ) | (2,218,460 | ) | 98,720 | (2,816,443 | ) | ||||||||||
| Gross profit (loss) | 136,486 | 142,428 | 817,004 | (30,605 | ) | 1,065,313 | |||||||||||||
| Total operating expenses | (114,199 | ) | (50,902 | ) | (479,133 | ) | — | (644,234 | ) | ||||||||||
| Income (loss) from operations | 22,287 | 91,526 | 337,871 | (30,605 | ) | 421,079 | |||||||||||||
| Interest (expense) income, net | (76,823 | ) | 10,916 | (11,977 | ) | — | (77,884 | ) | |||||||||||
| Other income (expense), net | 10,020 | 274 | (1,426 | ) | — | 8,868 | |||||||||||||
| Equity earnings (loss) | 416,068 | 317,614 | — | (733,682 | ) | — | |||||||||||||
| Pretax income (loss) | 371,552 | 420,330 | 324,468 | (764,287 | ) | 352,063 | |||||||||||||
| Income tax (expense) income | (109,294 | ) | 18,762 | 759 | — | (89,773 | ) | ||||||||||||
| Net income (loss) | 262,258 | 439,092 | 325,227 | (764,287 | ) | 262,290 | |||||||||||||
| Less: Net income attributable to noncontrolling interest | — | — | (29 | ) | — | (29 | ) | ||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 262,258 | $ | 439,092 | $ | 325,198 | $ | (764,287 | ) | $ | 262,261 | ||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 263,907 | $ | 439,092 | $ | 658,162 | $ | (764,287 | ) | $ | 596,874 |
Income Statement for the Year Ended December 31, 2016:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net Sales | $ | 641,809 | $ | 435,864 | $ | 1,995,465 | $ | (141,950 | ) | $ | 2,931,188 | ||||||||
| Cost of sales | (473,700 | ) | (280,973 | ) | (1,350,401 | ) | 98,125 | (2,006,949 | ) | ||||||||||
| Gross (loss) profit | 168,109 | 154,891 | 645,064 | (43,825 | ) | 924,239 | |||||||||||||
| Total operating expenses | (142,817 | ) | (50,361 | ) | (274,454 | ) | — | (467,632 | ) | ||||||||||
| Income (loss) from operations | 25,292 | 104,530 | 370,610 | (43,825 | ) | 456,607 | |||||||||||||
| Interest (expense) income, net | (38,843 | ) | 9,294 | (20,749 | ) | — | (50,298 | ) | |||||||||||
| Other income (expense), net | 25,254 | (1,689 | ) | (17,037 | ) | — | 6,528 | ||||||||||||
| Equity earnings (loss) | 322,650 | 292,184 | — | (614,834 | ) | — | |||||||||||||
| Pretax income (loss) | 334,353 | 404,319 | 332,824 | (658,659 | ) | 412,837 | |||||||||||||
| Income tax expense | (29,466 | ) | (52,308 | ) | (17,659 | ) | — | (99,433 | ) | ||||||||||
| Net income (loss) | 304,887 | 352,011 | 315,165 | (658,659 | ) | 313,404 | |||||||||||||
| Less: Net income attributable to noncontrolling interest | — | — | (8,517 | ) | — | (8,517 | ) | ||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 304,887 | $ | 352,011 | $ | 306,648 | $ | (658,659 | ) | $ | 304,887 | ||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 305,180 | $ | 352,011 | $ | 203,469 | $ | (658,659 | ) | $ | 202,001 |
Condensed Statement of Cash Flows for the year ended December 31, 2018:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (87,122 | ) | $ | 130,125 | $ | 372,193 | $ | (100,525 | ) | $ | 314,671 | |||||||
| Net cash used in investing activities | (16,808 | ) | (2,024 | ) | (128,455 | ) | — | (147,287 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 1,885,679 | (128,845 | ) | 120,752 | 100,525 | 1,978,111 | |||||||||||||
| Effect of changes in currency exchange rates | — | — | (36,542 | ) | — | (36,542 | ) | ||||||||||||
| Increase (decrease) in cash | 1,781,749 | (744 | ) | 327,948 | — | 2,108,953 | |||||||||||||
| Cash and cash equivalents, beginning of year | 933 | 625 | 231,843 | — | 233,401 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 1,782,682 | $ | (119 | ) | $ | 559,791 | $ | — | $ | 2,342,354 |
Condensed Statement of Cash Flows for the year ended December 31, 2017:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (49,231 | ) | $ | 130,298 | $ | 138,349 | $ | (30,605 | ) | $ | 188,811 | |||||||
| Net cash used in investing activities | (11,156 | ) | (3,357 | ) | (1,018,961 | ) | — | (1,033,474 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 58,798 | (127,542 | ) | (59,292 | ) | 30,605 | (97,431 | ) | |||||||||||
| Effect of changes in currency exchange rates | — | — | 32,263 | — | 32,263 | ||||||||||||||
| (Decrease) increase in cash | (1,589 | ) | (601 | ) | (907,641 | ) | — | (909,831 | ) | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of year | 2,522 | 1,226 | 1,139,484 | — | 1,143,232 | ||||||||||||||
| Cash and cash equivalents, end of year | $ | 933 | $ | 625 | $ | 231,843 | $ | — | $ | 233,401 |
Condensed Statement of Cash Flows for the year ended December 31, 2016:
| In thousands | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (44,611 | ) | $ | 142,839 | $ | 396,127 | $ | (43,825 | ) | $ | 450,530 | |||||||
| Net cash used in (provided by) investing activities | (829,783 | ) | (2,653 | ) | 599,470 | — | (232,966 | ) | |||||||||||
| Net cash provided by (used in) financing activities | 876,916 | (147,586 | ) | (250,184 | ) | 43,825 | 522,971 | ||||||||||||
| Effect of changes in currency exchange rates | — | — | (26,436 | ) | — | (26,436 | ) | ||||||||||||
| Increase (decrease) in cash | 2,522 | (7,400 | ) | 718,977 | — | 714,099 | |||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of year | — | 8,626 | 420,507 | — | 429,133 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 2,522 | $ | 1,226 | $ | 1,139,484 | $ | — | $ | 1,143,232 |
- OTHER INCOME, NET
The components of other income, net are as follows:
| For the year ended December 31, | ||||||||||||
| In thousands | 2018 | 2017 | 2016 | |||||||||
| Foreign currency loss | $ | (5,745 | ) | $ | (6,618 | ) | $ | (4,001 | ) | |||
| Equity income | 1,931 | 2,579 | 409 | |||||||||
| Expected return on pension assets/amortization | 9,047 | 9,834 | 9,491 | |||||||||
| Other miscellaneous (expense) income | 1,147 | 3,073 | 629 | |||||||||
| Total other income, net | $ | 6,380 | $ | 8,868 | $ | 6,528 |
- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
| First | Second | Third | Fourth | |||||||||||||
| In thousands, except per share data | Quarter | Quarter | Quarter | Quarter (1) | ||||||||||||
| 2018 | ||||||||||||||||
| Net sales | $ | 1,056,177 | $ | 1,111,680 | $ | 1,077,814 | $ | 1,117,876 | ||||||||
| Gross profit | 310,881 | 323,967 | 302,012 | 297,025 | ||||||||||||
| Income from operations | 131,279 | 123,523 | 125,179 | 93,456 | ||||||||||||
| Net income attributable to Wabtec shareholders | 88,366 | 84,416 | 87,739 | 34,423 | ||||||||||||
| Basic earnings from operations per common share | $ | 0.92 | $ | 0.88 | $ | 0.91 | $ | 0.36 | ||||||||
| Diluted earnings from operations per common share | $ | 0.92 | $ | 0.87 | $ | 0.91 | $ | 0.36 | ||||||||
| 2017 | ||||||||||||||||
| Net sales | $ | 916,034 | $ | 932,253 | $ | 957,931 | $ | 1,075,538 | ||||||||
| Gross profit | 269,707 | 273,963 | 253,203 | 268,440 | ||||||||||||
| Income from operations | 114,512 | 113,356 | 101,666 | 91,545 | ||||||||||||
| Net income attributable to Wabtec shareholders | 73,889 | 72,025 | 67,399 | 48,948 | ||||||||||||
| Basic earnings from operations per common share | $ | 0.77 | $ | 0.75 | $ | 0.70 | $ | 0.51 | ||||||||
| Diluted earnings from operations per common share | $ | 0.77 | $ | 0.75 | $ | 0.70 | $ | 0.51 |
(1) Results from the fourth quarter of 2017 include project adjustments related to prior periods which decreased income from operations by approximately $14.8 million. The effect of these project adjustments was not material.
The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30 and September 30. The fiscal year ends on December 31.
SCHEDULE II
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For each of the three years ended December 31
| In thousands | Balance at beginning of period | Charged/ (credited) to expense | Charged/ (credited) to other accounts (1) | Deductions from reserves (2) | Balance at end of period | |||||||||||||||
| 2018 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 12,342 | $ | 9,458 | $ | (360 | ) | $ | 4,513 | $ | 16,927 | |||||||||
| Valuation allowance-taxes | 25,683 | 27,410 | — | 11,314 | 41,779 | |||||||||||||||
| 2017 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 7,340 | $ | 2,632 | $ | 4,979 | $ | 2,609 | $ | 12,342 | ||||||||||
| Valuation allowance-taxes | 21,418 | 4,265 | — | — | 25,683 | |||||||||||||||
| 2016 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 5,614 | $ | 3,635 | $ | — | $ | 1,909 | $ | 7,340 | ||||||||||
| Valuation allowance-taxes | 12,623 | 3,405 | 5,390 | — | 21,418 |
| (1) | Reserves of acquired/(sold) companies; valuation allowances for state and foreign deferred tax assets; impact of fluctuations in foreign currency exchange rates. |
| (2) | Actual disbursements and/or charges. |
Previous: Item 9B. OTHER INFORMATION · Next: Item 16. FORM 10-K SUMMARY