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:
| 104 | XBRL Cover Page Interactive Data (embedded within the Inline XBRL document) | 1 |
| 1 | Filed herewith. | ||||
| 2 | Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 033-90866). | ||||
| 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. 033-90866) filed on March 31, 2017. | ||||
| 5 | Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 033-90866) filed on March 31, 2017. | ||||
| 6 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 033-90866) for the period ended September 30, 2008. | ||||
| 7 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 033-90866) dated July 2, 2009. | ||||
| 8 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 033-90866), dated September 9, 2019. | ||||
| 9 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 033-90866), dated February 25, 2011. | ||||
| 10 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 033-90866), dated February 22, 2013. | ||||
| 11 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 033-90866), dated September 9, 2019. | ||||
| 12 | Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 033-90866), dated August 8, 2013. | ||||
| 13 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 033-90866), dated February 21, 2014. | ||||
| 14 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated June 24, 2016. | ||||
| 15 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated July 30, 2015. | ||||
| 16 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated October 6, 2015. | ||||
| 17 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated October 26, 2016. | ||||
| 18 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated November 1, 2016. | ||||
| 19 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 033-90866), dated November 3, 2016. | ||||
| 20 | Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 033-90866), dated February 28, 2017. | ||||
| 21 | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 033-90866) 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. 033-90866) for the period ended September 30, 2017. | ||||
| 24 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 033-90866), dated May 24, 2018. | ||||
| 25 | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 033-90866), for the period ended June 30, 2018. | ||||
| 26 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 033-90866), dated September 14, 2018. | ||||
| 27 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 033-90866), dated January 31, 2019. |
| 28 | Filed as an exhibit to the Company's Current Report on Form 8-K (File No 033-90866), dated February 25, 2019. | ||||
| 29 | Filed as an exhibit to the Company's Annual Report on Form 10-K (File No 033-90866), dated February 27, 2019. | ||||
| 30 | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 033-90866), dated August 1, 2019. | ||||
| 31 | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 033-90866), dated May 9, 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 GE Transportation from its assessment of internal controls over financial reporting as of December 31, 2019 because the Company acquired GE Transportation effective February 25, 2019. GE Transportation is a subsidiary whose total assets and customer revenues represents 61% and 47%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
Based on its assessment, Management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019, 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, 2019, 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2019, 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, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
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, 2019, 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 24, 2020 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 provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Accounting for Business Combinations | |||||
| Description of the Matter | As described in Note 3 of the consolidated financial statements, the Company completed its merger with GE Transportation for net consideration of approximately $10.3 billion on February 25, 2019. The transaction was accounted for as a business combination. Auditing the Company's accounting for its merger with GE Transportation was complex due to the significant estimation in determining the fair value of the acquired intangible assets of approximately $3.2 billion, which included contract backlog, customer relationships and intellectual property, and assumed liabilities, which included certain off-market customer contract liabilities totaling $0.5 billion. The significant estimation in determining the fair value of such assets and liabilities was primarily due to the sensitivity of the respective fair values to underlying assumptions. The Company used a discounted cash flow model to estimate the fair values of acquired contract backlog, customer relationships, and intellectual property intangibles and assumed off-market customer contract liabilities. The significant assumptions used to estimate the value of the intangible assets and off-market customer contract liabilities included revenue growth rates, projected profit margins, discount rates, royalty rates, customer attrition rates, revenue obsolescence rates and market participant profit margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over accounting for acquisitions, including controls over the recognition and measurement of, identifiable intangible assets and off-market customer contract liabilities and management's judgments and evaluation of underlying assumptions with regard to the valuation models applied. We also tested management's controls to validate that the data used in the valuation models was complete and accurate. To test the estimated fair value of the Company’s identifiable intangible assets and off-market customer contract liabilities, our audit procedures included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, when evaluating the assumptions related to the revenue growth rates, projected profit margins, customer attrition rates, revenue obsolescence rates and market participant profit margins, we compared the assumptions to the past performance of GE Transportation, contractual arrangements that GE Transportation has with customers, the Company's history related to similar acquisitions and third-party industry data where available. We also performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value that would result from changes in the assumptions. When evaluating the assumptions related to discount rates and royalty rates, we compared the assumptions to the Company’s history related to similar acquisitions and third-party industry data. We involved a valuation specialist to assist with our evaluation of the methodologies used by the Company and significant assumptions included in the fair value estimates, including the discount rates and royalty rates. Our procedures also included comparison of the selected discount rates to the acquired business’s weighted average cost of capital, an evaluation of the relationship of the weighted average cost of capital, internal rate of return and weighted-average return on assets, and consideration of guideline public company benchmarking analyses reflecting the composition of purchase prices for similar transactions. |
| Over Time Revenue Recognition for Long-Term Contracts | |||||
| Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company has long-term customer arrangements involving the design and production of highly engineered products that require revenue to be recognized over time. The Company uses input-based measures for determining the amount of revenue, cost and gross margin to recognize over time for these customer arrangements. The input methods used for these arrangements include costs of material and labor. During the year ended December 31, 2019, a material amount of the Company's total revenues were derived from performance obligations that are satisfied over time. Auditing the Company's measurement of revenue recognized over time on long-term contracts is especially challenging because it involves subjective management assumptions regarding the estimated remaining costs of the long-term contract that could span several years. These assumptions could be impacted by the future 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 and may be affected by future market or economic conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested (except for those contracts pertaining to GE Transportation) the operating effectiveness of controls over the Company's process to recognize revenue over time on long-term contracts, including controls over management’s review of the significant underlying assumptions described above. Our audit procedures also included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management's calculations. This included, for example, inspection of the executed contract and testing management's cost estimates by comparing the inputs to the Company’s historical data or experience for similar contracts, the performance of sensitivity analysis and the performance of retrospective review analysis of prior management cost estimates to actual costs incurred for completed contracts. In addition, for a sample of contracts, we involved our construction and engineering specialists to assist in our evaluation of management’s cost estimates at completion. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002.
Pittsburgh, Pennsylvania
February 24, 2020
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, 2019, 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, 2019, 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 GE Transportation which is included in the 2019 consolidated financial statements of the Company and constituted 61% of total assets as of December 31, 2019 and 47% of revenues 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 GE Transportation.
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, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15.(2) and our report dated February 24, 2020 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 24, 2020
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||||||||
| In millions, except shares and par value | 2019 | 2018 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 604.2 | $ | 580.9 | ||||||||||||||||
| Restricted cash | — | 1,761.4 | ||||||||||||||||||
| Accounts receivable | 1,149.9 | 801.2 | ||||||||||||||||||
| Unbilled accounts receivables | 514.0 | 345.6 | ||||||||||||||||||
| Inventories | 1,773.1 | 844.9 | ||||||||||||||||||
| Other current assets | 150.9 | 115.6 | ||||||||||||||||||
| Total current assets | 4,192.1 | 4,449.6 | ||||||||||||||||||
| Property, plant and equipment | 2,216.0 | 1,036.6 | ||||||||||||||||||
| Accumulated depreciation | (560.2) | (472.8) | ||||||||||||||||||
| Property, plant and equipment, net | 1,655.8 | 563.8 | ||||||||||||||||||
| Other Assets | ||||||||||||||||||||
| Goodwill | 8,360.6 | 2,396.5 | ||||||||||||||||||
| Other intangibles, net | 4,104.0 | 1,129.9 | ||||||||||||||||||
| Other noncurrent assets | 631.7 | 109.4 | ||||||||||||||||||
| Total other assets | 13,096.3 | 3,635.8 | ||||||||||||||||||
| Total Assets | $ | 18,944.2 | $ | 8,649.2 | ||||||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Accounts payable | $ | 1,157.5 | $ | 589.4 | ||||||||||||||||
| Customer deposits | 604.2 | 373.5 | ||||||||||||||||||
| Accrued compensation | 343.8 | 173.2 | ||||||||||||||||||
| Accrued warranty | 226.5 | 135.6 | ||||||||||||||||||
| Current portion of long-term debt | 95.7 | 64.1 | ||||||||||||||||||
| Other accrued liabilities | 830.3 | 310.8 | ||||||||||||||||||
| Total current liabilities | 3,258.0 | 1,646.6 | ||||||||||||||||||
| Long-term debt | 4,333.6 | 3,792.8 | ||||||||||||||||||
| Accrued postretirement and pension benefits | 113.0 | 95.4 | ||||||||||||||||||
| Deferred income taxes | 145.3 | 198.3 | ||||||||||||||||||
| Contingent consideration | 291.8 | — | ||||||||||||||||||
| Other long term liabilities | 808.9 | 47.0 | ||||||||||||||||||
| Total Liabilities | 8,950.6 | 5,780.1 | ||||||||||||||||||
| Commitment and Contingencies (Note 20) | ||||||||||||||||||||
| Equity | ||||||||||||||||||||
| Convertible preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding, at December 31, 2019 and December 31, 2018 | — | — | ||||||||||||||||||
| Common stock, $.01 par value; 500,000,000 shares authorized: 226,947,180 and 132,349,534 shares issued and 191,699,193 and 96,614,946 outstanding at December 31, 2019 and December 31, 2018, respectively | 2.0 | 1.3 | ||||||||||||||||||
| Additional paid-in capital | 7,877.2 | 914.6 | ||||||||||||||||||
| Treasury stock, at cost, 35,247,987 and 35,734,588 shares, at December 31, 2019 and December 31, 2018, respectively | (807.1) | (816.1) | ||||||||||||||||||
| Retained earnings | 3,267.0 | 3,022.0 | ||||||||||||||||||
| Accumulated other comprehensive loss | (382.6) | (256.6) | ||||||||||||||||||
| Total Westinghouse Air Brake Technologies Corporation shareholders’ equity | 9,956.5 | 2,865.2 | ||||||||||||||||||
| Noncontrolling interest | 37.1 | 3.9 | ||||||||||||||||||
| Total Equity | 9,993.6 | 2,869.1 | ||||||||||||||||||
| Total Liabilities and Equity | $ | 18,944.2 | $ | 8,649.2 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| In millions, except per share data | ||||||||||||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||||||||
| Sales of goods | $ | 6,907.9 | $ | 4,178.0 | $ | 3,685.6 | ||||||||||||||||||||||||||
| Sales of services | 1,292.1 | 185.5 | 196.1 | |||||||||||||||||||||||||||||
| Total net sales | 8,200.0 | 4,363.5 | 3,881.7 | |||||||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||||||||
| Cost of goods | (5,128.4) | (2,973.5) | (2,667.8) | |||||||||||||||||||||||||||||
| Cost of services | (793.6) | (156.1) | (148.6) | |||||||||||||||||||||||||||||
| Total cost of sales | (5,922.0) | (3,129.6) | (2,816.4) | |||||||||||||||||||||||||||||
| Gross profit | 2,278.0 | 1,233.9 | 1,065.3 | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (1,166.6) | (633.2) | (512.5) | |||||||||||||||||||||||||||||
| Engineering expenses | (209.9) | (87.5) | (95.2) | |||||||||||||||||||||||||||||
| Amortization expense | (238.4) | (39.8) | (36.5) | |||||||||||||||||||||||||||||
| Total operating expenses | (1,614.9) | (760.5) | (644.2) | |||||||||||||||||||||||||||||
| Income from operations | 663.1 | 473.4 | 421.1 | |||||||||||||||||||||||||||||
| Other income and expenses | ||||||||||||||||||||||||||||||||
| Interest expense, net | (219.1) | (112.2) | (77.9) | |||||||||||||||||||||||||||||
| Other income, net | 2.8 | 6.4 | 8.9 | |||||||||||||||||||||||||||||
| Income from operations before income taxes | 446.8 | 367.6 | 352.1 | |||||||||||||||||||||||||||||
| Income tax expense | (120.3) | (75.9) | (89.8) | |||||||||||||||||||||||||||||
| Net income | 326.5 | 291.7 | 262.3 | |||||||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | 0.2 | 3.2 | — | |||||||||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 326.7 | $ | 294.9 | $ | 262.3 | ||||||||||||||||||||||||||
| Earnings Per Common Share | ||||||||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 1.91 | $ | 3.06 | $ | 2.74 | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 1.84 | $ | 3.05 | $ | 2.72 | ||||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||||||||
| Basic | 170.5 | 96.0 | 95.5 | |||||||||||||||||||||||||||||
| Diluted | 177.3 | 96.5 | 96.1 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 326.7 | $ | 294.9 | $ | 262.3 | ||||||||||||||||||||||||||
| Foreign currency translation (loss) gain | (106.4) | (207.3) | 326.1 | |||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivative contracts | (4.3) | (5.3) | 9.8 | |||||||||||||||||||||||||||||
| Unrealized (loss) gain on pension benefit plans and post-retirement benefit plans | (21.5) | (3.8) | 2.8 | |||||||||||||||||||||||||||||
| Other comprehensive (loss) gain before tax | (132.2) | (216.4) | 338.7 | |||||||||||||||||||||||||||||
| Income tax benefit (expense) related to components of other comprehensive loss | 6.2 | 4.8 | (4.1) | |||||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (126.0) | (211.6) | 334.6 | |||||||||||||||||||||||||||||
| Comprehensive income attributable to Wabtec shareholders | $ | 200.7 | $ | 83.3 | $ | 596.9 |
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||
| Operating Activities | ||||||||||||||||||||||||||||||||
| Net income | $ | 326.5 | $ | 291.7 | $ | 262.3 | ||||||||||||||||||||||||||
| Adjustments to reconcile net income to cash provided by operations: | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 401.4 | 109.3 | 103.2 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | 50.0 | 25.3 | 21.3 | |||||||||||||||||||||||||||||
| Below market intangible amortization | (82.2) | — | — | |||||||||||||||||||||||||||||
| Deferred income taxes | (27.3) | (5.3) | (67.4) | |||||||||||||||||||||||||||||
| Loss on disposal of property, plant and equipment | 15.9 | 0.9 | 1.9 | |||||||||||||||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions | ||||||||||||||||||||||||||||||||
| Accounts receivable and unbilled accounts receivable | (6.3) | (54.6) | (68.7) | |||||||||||||||||||||||||||||
| Inventories | 255.9 | (108.9) | (9.0) | |||||||||||||||||||||||||||||
| Accounts payable | (144.3) | 48.8 | (91.7) | |||||||||||||||||||||||||||||
| Accrued income taxes | 10.7 | 7.9 | 47.6 | |||||||||||||||||||||||||||||
| Accrued liabilities and customer deposits | (11.9) | 31.7 | (18.9) | |||||||||||||||||||||||||||||
| Other assets and liabilities | 227.1 | (32.1) | 8.2 | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | 1,015.5 | 314.7 | 188.8 | |||||||||||||||||||||||||||||
| Investing Activities | ||||||||||||||||||||||||||||||||
| Purchase of property, plant and equipment | (185.3) | (93.3) | (89.5) | |||||||||||||||||||||||||||||
| Proceeds from disposal of property, plant and equipment | 3.9 | 11.3 | 1.3 | |||||||||||||||||||||||||||||
| Acquisitions of business, net of cash acquired | (2,996.4) | (51.2) | (945.3) | |||||||||||||||||||||||||||||
| Other | — | (14.1) | — | |||||||||||||||||||||||||||||
| Net cash used for investing activities | (3,177.8) | (147.3) | (1,033.5) | |||||||||||||||||||||||||||||
| Financing Activities | ||||||||||||||||||||||||||||||||
| Proceeds from debt, net of issuance costs | 3,982.4 | 3,480.7 | 1,216.7 | |||||||||||||||||||||||||||||
| Payments of debt | (3,423.6) | (1,454.0) | (1,269.5) | |||||||||||||||||||||||||||||
| Proceeds from exercise of stock options and other benefit plans | 0.8 | 10.0 | 4.4 | |||||||||||||||||||||||||||||
| Payment of income tax withholding on share-based compensation | (6.3) | (12.3) | (6.8) | |||||||||||||||||||||||||||||
| Payment of contingent consideration on acquisitions | (10.1) | — | — | |||||||||||||||||||||||||||||
| Cash dividends | (81.7) | (46.3) | (42.2) | |||||||||||||||||||||||||||||
| Net cash provided by (used for) financing activities | 461.5 | 1,978.1 | (97.4) | |||||||||||||||||||||||||||||
| Effect of changes in currency exchange rates | (37.3) | (36.6) | 32.3 | |||||||||||||||||||||||||||||
| (Decrease) increase in cash | (1,738.1) | 2,108.9 | (909.8) | |||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 2,342.3 | 233.4 | 1,143.2 | |||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 604.2 | $ | 2,342.3 | $ | 233.4 |
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 millions, except share and per share data | Shares | Amount | Capital | Shares | Amount | Earnings | Comprehensive Loss | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | 132,349,534 | $ | 1.3 | $ | 870.0 | (36,924,102) | $ | (839.0) | $ | 2,553.3 | $ | (379.6) | $ | 770.8 | $ | 2,976.8 | ||||||||||||||||||||||||||||||||||||||||
| Cash dividends ($0.44 dividend per share) | — | — | — | — | — | (42.2) | — | — | (42.2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (7.4) | 608,920 | 5.0 | — | — | — | (2.4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 16.7 | — | — | — | — | — | 16.7 | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Faiveley Transport noncontrolling interest | — | — | 8.9 | — | — | — | — | (751.1) | (742.2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 262.3 | — | — | 262.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 334.6 | — | 334.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for Faiveley Transport Acquisition | — | — | 18.4 | — | 6.6 | — | — | — | 25.0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 132,349,534 | 1.3 | 906.6 | (36,315,182) | (827.4) | 2,773.4 | (45.0) | 19.7 | 2,828.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends ($0.48 dividend per share) | — | — | — | — | — | (46.3) | — | — | (46.3) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (13.5) | 580,594 | 11.3 | — | — | — | (2.2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 21.5 | — | — | — | — | — | 21.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 294.9 | — | (3.2) | 291.7 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (211.6) | — | (211.6) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for Faiveley Transport Acquisition | — | — | — | — | — | — | — | (12.6) | (12.6) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 132,349,534 | 1.3 | 914.6 | (35,734,588) | (816.1) | 3,022.0 | (256.6) | 3.9 | 2,869.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends ($0.48 dividend per share) | — | — | — | — | — | (81.7) | — | — | (81.7) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (14.6) | 486,601 | 9.0 | — | — | — | (5.6) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 38.2 | — | — | — | — | — | 38.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 326.7 | — | (0.2) | 326.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (126.0) | — | (126.0) | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of GE Transportation | 94,597,646 | 0.7 | 6,939.0 | — | — | — | — | 30.6 | 6,970.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other owner changes | — | — | — | — | — | — | — | 2.8 | 2.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 226,947,180 | $ | 2.0 | $ | 7,877.2 | (35,247,987) | $ | (807.1) | $ | 3,267.0 | $ | (382.6) | $ | 37.1 | $ | 9,993.6 |
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Wabtec is one of the world’s largest providers of locomotives, value-added, technology-based equipment, systems and services for the global freight rail and passenger transit 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 over 50 countries and our products can be found in more than 100 countries throughout the world. In 2019, about 60% of the Company’s net sales came from customers outside the U.S.
2. 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 $19.9 million and $16.9 million as of December 31, 2019 and 2018, 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 financing lease. The remaining arrangements are treated as operating leases. Right-of-use lease assets are classified as long-term assets under the caption "Other noncurrent assets" and lease liabilities are classified under the captions "Other accrued liabilities' and "Other long-term liabilities."
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 2019, the Company opted to proceed directly to the quantitative impairment test for all reporting units with goodwill. The discounted cash flow approach and the market approach were used to estimate the fair value of each reporting unit using a weighting of 75% and 25%, respectively. The discounted cash flow model requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins, capital expenditures, a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the years forecasted by the reporting units) for each reporting unit. 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 material trade names subject to the quantitative impairment test exceeded its respective carrying
value, resulting in a conclusion that no material 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.
Equity Method Investments The Company invests in privately-held companies which are accounted for using the equity method. The equity method is applied in situations where the Company has the ability to exercise significant influence, but not control, over the investee. Equity method investments were $95.2 million and $30.8 million at December 31, 2019 and 2018, respectively.
Warranty Costs Warranty costs are accrued based on Management’s estimates of repair or upgrade costs per unit and historical experience. Warranty expense was $105.5 million, $58.0 million and $50.4 million for 2019, 2018 and 2017, respectively. Accrued warranty was $267.7 million and $153.7 million at December 31, 2019 and 2018, 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 In the normal course of business, the Company is exposed to interest rate, commodity price and foreign currency exchange rate fluctuations. At times, the Company limits these risks through the use of derivatives such as cross-currency swaps, foreign currency forward contracts, interest rate swaps, commodity forwards and futures. In accordance with the Company's policy, derivatives are only used for hedging purposes. The Company does not use derivatives for trading or speculative purposes. 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 Note 18.
Foreign Currency Translation Certain of our international operations have determined that the local currency is the functional currency whereas others have determined the U.S. dollar is their functional currency. Assets and liabilities of foreign subsidiaries where the functional currency is the local currency 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 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 $13.5 million, $5.7 million and $6.6 million for 2019, 2018 and 2017, 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, 2019 and 2018. Net loss attributable to noncontrolling interests was not material for the years ended December 31, 2019, 2018 and 2017, respectively.
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.
A majority 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.
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. 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 periodically through the year 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. The current portion of the contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” while the noncurrent contract assets are classified as other assets under the caption "Other Noncurrent Assets" on the consolidated balance sheet. Noncurrent contract assets were $109.4 million at December 31, 2019 and were not material at December 31, 2018. Included in noncurrent contract assets are certain costs that are specifically related to a contract, however, do not directly contribute to the transfer of control of the tangible product being created, such as pre-production costs. 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. The current portion of contract liabilities are classified as current liabilities under the caption “Customer Deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other Long-Term Liabilities" on the consolidated balance sheet. Noncurrent contract liabilities were $77.0 million at December 31, 2019 and were not material at December 31, 2018. 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 $118.5 million and $71.2 million at December 31, 2019 and 2018, 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 process where management reviews the progress of long term-projects periodically throughout the year. 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 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; however, a single contract may have multiple performance obligations comprising multiple promises to customers. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. 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 the Company typically has include volume discounts, prompt payment discounts, price escalation clauses, 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 the allocated transaction price of unsatisifed or partially unsatisfied performance obligations. As of December 31, 2019, the Company's remaining performance obligations were $21.3 billion. The Company expects to recognize revenue of approximately 25% of remaining performance obligations over the next 12 months, with the remainder recognized thereafter.
SEC regulations require that revenue categories that exceed 10% of total revenue are presented separately on the company's statement of income. As such, the Company has displayed sales of goods and sales of services, and the related cost, in line with those regulations. Additionally, those regulations also require that goods are to include all sales of tangible products, and services must include all other sales. In Note 21 we refer to sales of both goods, such as spare parts and equipment upgrades, and related services, such as monitoring, maintenance and repairs, as sales in our Services product line.
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 $714.0 million and $354.2 million at December 31, 2019 and 2018, 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 $88.0 million and $16.4 million at December 31, 2019 and 2018, respectively.
Significant Customers and Concentrations of Credit Risk The Company’s trade receivables are primarily 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 2019, 2018 or 2017.
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.
Engineering Expenses Engineering expenses are charged to expense as incurred. For the years ended December 31, 2019, 2018 and 2017, the Company incurred costs of approximately $209.9 million, $87.5 million, and $95.2 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 12 “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 December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for certain income tax transactions by removing specific exceptions to the general principles in Topic 740, Income Taxes. This guidance is effective for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update ("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. The 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, 2019.
In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This updated guidance sets forth a current expected credit loss model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The Company has evaluated the potential impact of adopting this guidance on its consolidated financial statements and does not expect the impact of adopting this new standard to be material.
Recently Adopted Accounting Pronouncements In February 2018, FASB issued 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 AOCI 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 became effective for reporting periods beginning after December 15, 2018. The Company adopted this accounting standard at the beginning of the period and elected to not retrospectively apply the new standard. The impact of adopting the new standard was not material to the consolidated statement of income or the consolidated balance sheet.
In February 2016, 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. This guidance became effective for the Company on January 1, 2019. The Company elected the practical expedient which does not require the capitalization of leases with terms of 12 months or less, and the Company did not elect the practical expedient which allows hindsight to be used to determine the term of a lease. The Company adopted the standard using the transition alternative, which allowed 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. For further information regarding the Company's adoption of the new standard, see Note 15.
3. ACQUISITIONS
General Electric Transportation
Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec company formerly known as 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, 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.
As part of the Merger, 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 (the "Direct Sale"). 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. Following this issuance of additional SpinCo common stock to GE, and immediately prior to the Distribution (as defined below), 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 to its stockholder (the "Distribution"). Immediately after the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), 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, Wabtec issued 46,763,975 shares of common stock to the holders of GE common stock, 19,018,207 shares of common stock to GE and 10,000 shares of preferred stock to GE and made a cash payment to GE of $2.885 billion. As a result and calculated based on Wabtec’s outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as of February 25, 2019, approximately 49.2% of the outstanding shares of Wabtec common stock was held collectively by GE and holders of GE common stock (with 9.9% held by GE directly in shares of Wabtec common stock and 15% underlying the shares of Wabtec convertible preferred stock held by GE) and approximately 50.8% of the outstanding shares of Wabtec common stock would be held by pre-Merger Wabtec stockholders, in each case calculated on a fully-diluted, as-converted and as-exercised basis. Following the Merger, GE also retained 15,000 shares of SpinCo Class A non-voting preferred stock, and Wabtec held 10,000 shares of SpinCo Class B non-voting preferred stock.
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), and Direct Sale Purchaser, which also is Wabtec’s wholly owned subsidiary, 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 and SpinCo, directly or through subsidiaries entered into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development and transition services.
On May 6, 2019, GE completed the sale of approximately 8,780 shares of Wabtec's Series A Preferred stock which converted upon the sale to 25,300,000 shares of Wabtec's common stock. On August 9, 2019, GE completed a sale of the remaining shares of Series A Preferred Stock outstanding which converted to approximately 3,515,500 shares of common stock, as well as 16,969,656 shares of common stock owned directly by GE. Finally, on September 12, 2019, GE completed a sale of all of its remaining shares of common stock of Wabtec, approximately 2,048,515 shares. In conjunction with these secondary offerings, the Company waived the requirements under the shareholders agreement for GE to maintain certain ownership levels of Wabtec's stock following the closing date of the Merger. The Company did not receive any proceeds from the sale of any of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment of $470.0 million, which is directly related to the timing of tax benefits expected to be realized by Wabtec as a result of the acquisition of GE Transportation. This payment is considered contingent consideration because the timing of cash payments to GE is directly related to the future timing of tax benefits received by the Company as a result of the acquisition of GE Transportation. The estimated total value of
the consideration to be paid by Wabtec in the acquisition transactions is approximately $10.3 billion, including the cash paid for the Direct Sales Assets, equity transferred for SpinCo, contingent consideration, assumed debt and net of cash acquired. The consideration is based on the Company’s closing share price of $73.36 on February 22, 2019 and the fair value of the contingent consideration.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. Discounted cash flow models were used to estimate the fair values of acquired contract backlog, customer relationships, intellectual property intangibles, and below-market customer contracts liabilities. 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, 2019 consolidated balance sheet includes the assets and liabilities of GE Transportation, which have been initially measured at fair value. The noncontrolling interest includes equity interests in GE Transportation's Brazil operations held by third parties on the date of acquisition. At the time of acquisition, quotable market prices of the noncontrolling interest existed; therefore, the noncontrolling interest in the GE Transportation Brazil operations were measured using a Level 1 input. In April 2019, the Company acquired the noncontrolling interest in GE Transportation's Brazil operations for $56.2 million which approximated the fair value assigned to the noncontrolling interest on the date of acquisition. The remaining noncontrolling interest value was determined based on inputs that are not observable in the market and are considered Level 3.
The following table summarizes the preliminary fair value of the GE Transportation assets acquired and liabilities assumed:
| In millions | ||||||||
| Assets acquired | ||||||||
| Cash and cash equivalents | $ | 177.6 | ||||||
| Accounts receivable | 515.5 | |||||||
| Inventories | 1,189.2 | |||||||
| Other current assets | 71.5 | |||||||
| Property, plant, and equipment | 1,089.6 | |||||||
| Goodwill | 5,987.5 | |||||||
| Trade names | 55.0 | |||||||
| Customer relationships | 550.0 | |||||||
| Intellectual property | 1,180.0 | |||||||
| Backlog | 1,440.0 | |||||||
| Other noncurrent assets | 330.3 | |||||||
| Total assets acquired | 12,586.2 | |||||||
| Liabilities assumed | ||||||||
| Current liabilities | 1,587.5 | |||||||
| Contingent consideration | 440.0 | |||||||
| Other noncurrent liabilities | 652.9 | |||||||
| Total liabilities assumed | 2,680.4 | |||||||
| Net assets acquired | 9,905.8 | |||||||
| Noncontrolling interest | $ | 86.8 |
These estimates are preliminary in nature; however the Company is in the final stages of completing the purchase price allocation and does not expect the final allocation to differ materially from the preliminary allocation included in the table above. Any necessary adjustments will be finalized within one year from the date of acquisition. During the year ended December 31, 2019, the estimated fair value current liabilities and other noncurrent liabilities decreased $92.1 million and increased $129.1 million, respectively, primarily due to estimate revisions for long term contracts and deferred tax liabilities. The revisions to the initial estimates were based on information that existed at the date of acquisition. Substantially all of the accounts receivable acquired are expected to be collectible. Trade names, customer relationships, patents and backlog intangible assets are all subject to amortization. Contingent liabilities assumed as part of the transaction were not material. The contingent liabilities are related to legal and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting. Included in other noncurrent liabilities are approximately $504.7 million of customer contracts whose terms are unfavorable compared to market terms at the date of consummation of the GE Transportation acquisition.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the consummation of the acquisition of GE Transportation. A majority of the purchased goodwill is expected to be deductible for tax purposes. The goodwill has been allocated to the Freight segment.
Included in the Company's consolidated statement of income for the year ended December 31, 2019 is $3.8 billion of revenues and $358.0 million of operating income from GE Transportation. Costs related to the acquisition of GE Transportation were approximately $63.0 million for the year ended December 31, 2019 and are included in selling, general and administrative expenses on the consolidated statements of income.
Other Acquisitions
The Company made the following acquisition 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 $45.2 million, net of cash acquired and including contingent consideration, resulting in final goodwill of $38.5 million, none of which will be deductible for tax purposes. A payment of $10.1 million was made in the three months ended June 30, 2019 related to contingent consideration associated with the purchase of Annax.
The following table summarizes the final estimated fair value of the assets acquired and liabilities assumed at the date of acquisition for Annax:
| Annax | ||||||||
| March 22, 2018 | ||||||||
| In millions | ||||||||
| Current assets, net of cash acquired | $ | 32.8 | ||||||
| Property, plant & equipment | 0.7 | |||||||
| Goodwill | 38.5 | |||||||
| Other intangible assets | 11.7 | |||||||
| Total assets acquired | 83.7 | |||||||
| Total liabilities assumed | (55.1) | |||||||
| Net assets acquired | $ | 28.6 |
The $11.7 million of total acquired other intangible assets includes $3.8 million assigned to trade names and $7.5 million assigned to customer relationships. The trade names were determined to have indefinite useful lives, while the customer relationships’ average useful lives are 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, 2018:
| For the year ended December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Net sales | $ | 8,675.6 | $ | 8,030.5 | ||||||||||||||||
| Gross profit | 2,528.3 | 2,102.8 | ||||||||||||||||||
| Net income attributable to Wabtec shareholders | 485.1 | 234.8 | ||||||||||||||||||
| Diluted earnings per share | ||||||||||||||||||||
| As Reported | $ | 1.84 | $ | 3.05 | ||||||||||||||||
| Pro forma | $ | 2.53 | $ | 1.22 |
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.
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||
| Interest paid during the year | $ | 193.1 | $ | 81.8 | $ | 75.3 | ||||||||||||||||||||||||||
| Income taxes paid during the year, net of amount refunded | $ | 99.5 | $ | 83.9 | $ | 89.4 | ||||||||||||||||||||||||||
| Business acquisitions: | ||||||||||||||||||||||||||||||||
| Fair value of assets acquired | 12,612.9 | 91.8 | 452.2 | |||||||||||||||||||||||||||||
| Liabilities assumed | 2,466.3 | 32.9 | 207.8 | |||||||||||||||||||||||||||||
| Non-controlling interest (acquired) assumed | 30.9 | — | (761.8) | |||||||||||||||||||||||||||||
| Stock and cash paid | 10,115.7 | 58.9 | 1,006.2 | |||||||||||||||||||||||||||||
| Less: Cash acquired | 179.6 | 7.7 | 35.4 | |||||||||||||||||||||||||||||
| Stock used for acquisition | 6,939.7 | — | 25.5 | |||||||||||||||||||||||||||||
| Net cash paid | $ | 2,996.4 | $ | 51.2 | $ | 945.3 |
5. INVENTORIES
The components of inventory, net of reserves, were:
| December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Raw materials | $ | 786.4 | $ | 465.9 | ||||||||||||||||
| Work-in-progress | 374.0 | 154.5 | ||||||||||||||||||
| Finished goods | 612.7 | 224.5 | ||||||||||||||||||
| Total inventories | $ | 1,773.1 | $ | 844.9 |
6. PROPERTY, PLANT & EQUIPMENT
The major classes of depreciable assets are as follows:
| December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Machinery and equipment | $ | 1,363.8 | $ | 749.8 | ||||||||||||||||
| Buildings and improvements | 774.2 | 248.1 | ||||||||||||||||||
| Land and improvements | 78.0 | 38.7 | ||||||||||||||||||
| Property, plant and equipment | 2,216.0 | 1,036.6 | ||||||||||||||||||
| Less: accumulated depreciation | (560.2) | (472.8) | ||||||||||||||||||
| Total | $ | 1,655.8 | $ | 563.8 |
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 $157.8 million, $66.4 million, and $66.7 million for 2019, 2018 and 2017, respectively.
7. 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 lived intangible assets were not impaired at December 31, 2019 and 2018.
The change in the carrying amount of goodwill by segment for the year ended December 31, 2019 is as follows:
| Freight | Transit | |||||||||||||||||||
| In millions | Segment | Segment | Total | |||||||||||||||||
| Balance at December 31, 2018 | $ | 899.1 | $ | 1,497.4 | $ | 2,396.5 | ||||||||||||||
| Additions | 5,989.3 | 12.2 | 6,001.5 | |||||||||||||||||
| Foreign currency impact | (11.8) | (25.6) | (37.4) | |||||||||||||||||
| Balance at December 31, 2019 | $ | 6,876.6 | $ | 1,484.0 | $ | 8,360.6 |
As of December 31, 2019 and 2018, the Company’s trade names had a net carrying amount of $623.1 million and $582.8 million, respectively, and the Company believes these intangibles have indefinite lives, with the exception of the GE Transportation trade name, to which the Company has assigned a useful life of 5 years.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
| December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Intellectual property, patents, and other intangibles, net of accumulated amortization of $123.8 and $40.1 | $ | 1,108.9 | $ | 13.3 | ||||||||||||||||
| Backlog, net of accumulated amortization of $92.0 and $2.0 | 1,342.1 | 2.0 | ||||||||||||||||||
| Customer relationships, net of accumulated amortization of $212.9 and $158.5 | 1,029.9 | 531.8 | ||||||||||||||||||
| Total | $ | 3,480.9 | $ | 547.1 |
The remaining weighted average useful lives of backlog, intellectual property, customer relationships, and other intangibles were 14 years, 9 years, 18 years, and 13 years, respectively. Amortization expense for intangible assets was $238.4 million, $39.8 million, and $36.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Estimated amortization expense for the five succeeding years is as follows (in millions):
| 2020 | $ | 278.7 | |||
| 2021 | 277.7 | ||||
| 2022 | 277.3 | ||||
| 2023 | 276.8 | ||||
| 2024 | 267.3 |
8. 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, 2019, and 2018 is as follows:
| Contract Assets | |||||||||||||||||
| In millions | 2019 | 2018 | |||||||||||||||
| Balance at beginning of year | $ | 345.6 | $ | 366.2 | |||||||||||||
| Acquisitions | 237.5 | 0.0 | |||||||||||||||
| Recognized in current year | 619.3 | 426.8 | |||||||||||||||
| Reclassified to accounts receivable | (578.6) | (432.3) | |||||||||||||||
| Foreign currency impact | (0.4) | (15.1) | |||||||||||||||
| Balance at December 31 | $ | 623.4 | $ | 345.6 | |||||||||||||
| Contract Liabilities | |||||||||||||||||
| In millions | 2019 | 2018 | |||||||||||||||
| Balance at beginning of year | $ | 444.8 | $ | 463.7 | |||||||||||||
| Acquisitions | 333.9 | 0.0 | |||||||||||||||
| Recognized in current year | 917.5 | 230.1 | |||||||||||||||
| Amounts in beginning balance reclassified to revenue | (410.6) | (199.7) | |||||||||||||||
| Current year amounts reclassified to revenue | (483.5) | (30.9) | |||||||||||||||
| Foreign currency impact | (2.4) | (18.4) | |||||||||||||||
| Balance at December 31 | $ | 799.7 | $ | 444.8 |
9. LONG-TERM DEBT
Long-term debt consisted of the following:
| December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Effective | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| In millions | Interest Rate | Book Value | Fair Value 1 | Book Value | Fair Value 1 | ||||||||||||||||||||||||||||||||||||||||||
| Senior Credit Facility: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. dollar-denominated Term Loans, net of unamortized debt issuance costs of $1.1 and $1.2 | 3.1 | % | $ | 684.7 | $ | 684.7 | $ | 338.1 | $ | 338.1 | |||||||||||||||||||||||||||||||||||||
| Multi-Currency Revolving loan facility net of unamortized debt issuance costs of $0.9 and $1.9 | 3.4 | % | 231.5 | 231.5 | — | — | |||||||||||||||||||||||||||||||||||||||||
| Floating Senior Notes, due 2021, net of unamortized debt issuance costs of $2.0 and $3.2 | 3.9 | % | 498.0 | 500.0 | 496.8 | 497.4 | |||||||||||||||||||||||||||||||||||||||||
| 4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $0.9 and $1.2 | 4.5 | % | 249.1 | 263.9 | 248.8 | 254.2 | |||||||||||||||||||||||||||||||||||||||||
| 4.15% Senior Notes, due 2024, net of unamortized debt issuance costs of $5.7 and $7.0 | 4.6 | % | 744.3 | 805.5 | 743.0 | 727.4 | |||||||||||||||||||||||||||||||||||||||||
| 4.70% Senior Notes, due 2028, net of unamortized debt issuance costs of $9.2 and $10.3 | 5.0 | % | 1,240.8 | 1,378.3 | 1,239.7 | 1,179.6 | |||||||||||||||||||||||||||||||||||||||||
| 3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $1.5 and $1.7 | 3.5 | % | 748.5 | 759.1 | 748.3 | 675.1 | |||||||||||||||||||||||||||||||||||||||||
| Other Borrowings | 32.4 | 32.4 | 42.2 | 42.2 | |||||||||||||||||||||||||||||||||||||||||||
| Total | 4,429.3 | 4,655.4 | 3,856.9 | 3,714.0 | |||||||||||||||||||||||||||||||||||||||||||
| Less - current portion | 95.7 | 95.7 | 64.1 | 64.1 | |||||||||||||||||||||||||||||||||||||||||||
| Long-term portion | $ | 4,333.6 | $ | 4,559.7 | $ | 3,792.8 | $ | 3,649.9 |
1 See Note 19 for information on the fair value measurement of the Company's long-term debt.
| As of December 31, 2019, the annual repayment requirements for debt obligations are as follows: | ||||||||
| In millions | ||||||||
| 2020 | $ | 95.7 | ||||||
| 2021 | 809.8 | |||||||
| 2022 | 300.0 | |||||||
| 2023 | 479.0 | |||||||
| 2024 | 755.5 | |||||||
| Thereafter | 1,989.3 | |||||||
| Total | $ | 4,429.3 |
For those debt securities that have a premium or discount at the time of issuance, the Company amortizes the amount through interest expense based on the maturity date or the first date the holders may require the Company to repurchase the debt securities, if applicable. A premium would result in a decrease in interest expense, and a discount would result in an increase in interest expense in future periods. Additionally, the Company has debt issuance costs related to certain financing transactions which are also amortized through interest expense. As of December 31, 2019 and 2018, the Company had total unamortized debt issuance costs of $21.3 million and $26.5 million, respectively.
Debt Transactions
See Note 3 for further information regarding the Company’s acquisition of GE Transportation.
Senior Notes
On September 14, 2018 in order to fund the GE Acquisition and related fees and expenses, we issued a total of $2.5 billion in aggregate principal amount of unsecured senior notes (in two separate series of fixed rate unsecured senior notes “Senior Notes” and one series of floating rate unsecured senior notes “Floating Senior Notes”). We collectively refer to the Floating Senior Notes and the Senior Notes as the “Notes.” Upon issuance, the Senior Notes and Floating Senior Notes were reflected on our Consolidated Balance Sheets net of discount of $2.9 million and net of the capitalized debt issuance costs, including commissions and offering expenses of $18.0 million, both of which will be amortized in interest expense through the respective maturity dates of each series of unsecured senior notes using the effective interest method.
The Floating Senior Notes bear interest at a floating rate equal to the three-month LIBOR rate plus 1.050% per year; the Senior Notes due 2024 bear interest at 4.150% per year; and the Senior Notes due 2028 bear interest at 4.700% per year. The interest rate payable on the Notes will be subject to adjustment based on certain rating events. Interest on the Senior Notes is payable semi-annually in arrears on March 15th and September 15th of each year, commencing on March 15, 2019. Interest on
the Floating Senior Notes is payable quarterly in arrears on December 15, March 15, June 15, and September 15 of each year, which commenced on December 15, 2018.
The issuance was comprised of the following three series of notes:
| Senior Notes (in millions) | Par Value | Discount at Issuance | Net Price at Issuance | Issuance Cost | Net Proceeds | |||||||||||||||||||||||||||
| Floating Senior Notes due 2021 | $ | 500.0 | $ | — | $ | 500.0 | $ | 3.5 | $ | 496.5 | ||||||||||||||||||||||
| 4.15% Senior Notes due 2024 | 750.0 | 1.5 | 748.5 | 7.4 | 741.1 | |||||||||||||||||||||||||||
| 4.70% Senior Notes due 2028 | 1,250.0 | 1.4 | 1,248.6 | 10.6 | 1,238.0 | |||||||||||||||||||||||||||
| Total | $ | 2,500.0 | $ | 2.9 | $ | 2,497.1 | $ | 21.5 | $ | 2,475.6 |
Consistent with the Company's existing senior notes, the newly issued 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 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. But the covenants do not require the Company to maintain any financial ratios or specified levels of net worth or liquidity. The Company may redeem each series of the Notes at any time in whole or from time to time in part in accordance with the provisions of the indenture, under which such series of Notes was issued.
Upon the occurrence of a change of control repurchase event with respect to the Notes, each holder of the Notes has the right to require the Company to purchase that holder’s Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, unless the Company has exercised its option to redeem all the Notes.
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 increased by 0.25%. The interest rate increase took 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 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
Term Loan Agreement
On June 8, 2018, the Company arranged (i) a $350.0 million term loan with proceeds used to refinance existing loans (the “Refinancing Term Loan”), and (ii) a new $400.0 million delayed draw term loan in order to fund the GE Acquisition and related fees and expenses (the “Delayed Draw Term Loan”). The Company collectively refers to the Refinance Term Loans and the Delayed Draw Term Loans as the “Term Loans.”
Consistent with our other debt securities, the Term Loan Agreement includes covenants that, among other things, limit our liens and the liens of certain of our consolidated subsidiaries. In addition, it requires us to maintain the same financial maintenance covenants as discussed below.
Loans under the Term Loan bear interest at a variable rate based on, at the Company’s option, either the ABR rate or the LIBOR rate (each as defined in the Term Loan Agreement) plus an applicable margin that is determined based on our credit ratings or the Company’s ratio of total debt (less unrestricted cash up to $300.0 million) to EBITDA (“Leverage Ratio”). As of December 31, 2019, the applicable margin was 0.375% for base rate loans and 1.375% for Eurodollar rate loans.
Senior Credit Facility
On June 8, 2018, the Company entered into a credit agreement (the “Senior Credit Facility”), which replaced the Company’s then-existing “2016 Refinancing Credit Agreement.” The Senior Credit Facility is with a syndicate of lenders and provides for borrowings consisting of (i) term loans denominated in euros and U.S. dollars; and (ii) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $1,200.0 million in multi-currency revolving loans (inclusive of swingline loans of up to $75.0 million and letters of credit of up to $450.0 million).
The multi-currency revolving loan facility will mature on June 8, 2023, and the Term Loans will mature on June 8, 2021. Subject to any mandatory or optional prepayments, the Term Loans are required to be repaid on a quarterly basis in an amount equal to 2.5% of the principal amount drawn, with the final payment due at maturity.
The following table presents availability under our credit facilities:
| (in millions) | Multi-currency revolving loan facility | |||||||
| Maximum Availability | $ | 1,200.0 | ||||||
| Outstanding Borrowings | 232.0 | |||||||
| Letters of Credit Under Credit Agreement | 30.0 | |||||||
| Current Availability | $ | 938.0 |
Under the Senior Credit Facility, we can elect to receive advances bearing interest based on either the ABR rate or the LIBOR rate (each as defined in the Credit Agreement) plus an applicable margin that is determined based on our credit ratings or the Company’s Leverage Ratio. As of December 31, 2019, the applicable margin was 0.375% for base rate advances and 1.375% for LIBOR rate advances.
The Company also pays fees related to the Senior Credit Facility. The largest of these fees is a commitment fee on the unused portion of the multi-currency revolving loan facility of 0.10% to 0.30% per annum (currently 0.15% per annum), depending on our credit ratings or Leverage Ratio. None of the fees were material to interest expense.
The obligations under the Senior Credit Facility are guaranteed by Wabtec and each of Wabtec’s wholly owned subsidiaries (collectively, the “Subsidiary Guarantors”). In addition, the Senior Credit Facility contains a number of customary affirmative and negative covenants. In addition to other and customary covenants, the Senior Credit Facility require that we maintain the financial covenants listed below as of the end of each fiscal quarter for the period of four fiscal quarters then ended. The Company was in compliance with all of our covenants in the Credit Agreement and the Term Loans as of December 31, 2019.
| Interest Coverage Ratio 1 | 3.0x | |||||||
| Leverage Ratio 2 | 3.25x |
-
The interest coverage ratio is defined as EBITDA, as defined in the Credit Agreement and Term Loan Agreement, to net interest expense for the four quarters then ended.
-
The leverage ratio is defined as net debt as of the last day of such fiscal quarter to EBITDA, as defined in the Amendment Credit Agreement and Term Loan Agreement, for the four quarters then ended.
The 2018 Senior Credit Facility contains an uncommitted accordion feature allowing the Company to request the establishment, in an aggregate amount not to exceed $600.0 million, of incremental borrowing commitments under the Revolving Credit Facility or of incremental term loan commitment.
At December 31, 2019, the weighted average interest rate on the Company’s variable rate debt was 3.08%.
Cash Pooling
Wabtec aggregates the Company's domestic cash position on a daily basis. Outside the United States, the Company uses cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, Wabtec subsidiary “Participants” agree with a single bank that the cash balances of any of the pool Participants with the bank will be subject to a full right of set-off against amounts other Participants owe the bank, and the bank provides for overdrafts as long as the net balance for all Participants does not exceed an agreed-upon level. Typically, each Participant pays interest on outstanding overdrafts and receives interest on cash balances. The Company's Consolidated Balance Sheets reflect cash, net of bank overdrafts, under all pooling arrangements.
10. 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 significant defined benefit pension plans summarized by U.S. and international components.
Obligations and Funded Status
| U.S. | International | |||||||||||||||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| Change in projected benefit obligation | ||||||||||||||||||||||||||||||||||||||
| Obligation at beginning of year | $ | (39.4) | $ | (44.2) | $ | (309.2) | $ | (353.0) | ||||||||||||||||||||||||||||||
| Service cost | (0.3) | (0.3) | (2.7) | (2.6) | ||||||||||||||||||||||||||||||||||
| Interest cost | (1.5) | (1.3) | (7.0) | (7.0) | ||||||||||||||||||||||||||||||||||
| Employee contributions | — | — | (0.5) | (0.4) | ||||||||||||||||||||||||||||||||||
| Plan settlements and amendments | — | — | 4.4 | 15.2 | ||||||||||||||||||||||||||||||||||
| Benefits paid | 3.0 | 3.5 | 13.1 | 13.5 | ||||||||||||||||||||||||||||||||||
| Acquisition | — | — | (5.0) | (0.9) | ||||||||||||||||||||||||||||||||||
| Actuarial gain (loss) | (2.9) | 2.9 | (32.4) | 6.7 | ||||||||||||||||||||||||||||||||||
| Effect of currency rate changes | — | — | (8.0) | 19.3 | ||||||||||||||||||||||||||||||||||
| Obligation at end of year | $ | (41.1) | $ | (39.4) | $ | (347.3) | $ | (309.2) | ||||||||||||||||||||||||||||||
| Change in plan assets | ||||||||||||||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 31.9 | $ | 37.4 | $ | 239.4 | $ | 281.6 | ||||||||||||||||||||||||||||||
| Actual return on plan assets | 5.3 | (2.0) | 23.9 | (6.9) | ||||||||||||||||||||||||||||||||||
| Employer contributions | — | — | 9.4 | 10.8 | ||||||||||||||||||||||||||||||||||
| Employee contributions | — | — | 0.5 | 0.4 | ||||||||||||||||||||||||||||||||||
| Benefits paid | (2.9) | (3.5) | (13.1) | (13.5) | ||||||||||||||||||||||||||||||||||
| Settlements | — | — | (0.4) | (16.6) | ||||||||||||||||||||||||||||||||||
| Acquisition | — | — | 1.2 | — | ||||||||||||||||||||||||||||||||||
| Effect of currency rate changes | — | — | 8.9 | (16.4) | ||||||||||||||||||||||||||||||||||
| Fair value of plan assets at end of year | $ | 34.3 | $ | 31.9 | $ | 269.8 | $ | 239.4 | ||||||||||||||||||||||||||||||
| Funded status | ||||||||||||||||||||||||||||||||||||||
| Fair value of plan assets | $ | 34.3 | $ | 31.9 | $ | 269.8 | $ | 239.4 | ||||||||||||||||||||||||||||||
| Benefit obligations | (41.1) | (39.4) | (347.3) | (309.2) | ||||||||||||||||||||||||||||||||||
| Funded status | $ | (6.8) | $ | (7.5) | $ | (77.5) | $ | (69.8) | ||||||||||||||||||||||||||||||
| Amounts recognized in the statement of financial position consist of: | ||||||||||||||||||||||||||||||||||||||
| Noncurrent assets | $ | — | $ | — | $ | 11.8 | $ | 8.9 | ||||||||||||||||||||||||||||||
| Current liabilities | — | — | (2.4) | (2.1) | ||||||||||||||||||||||||||||||||||
| Noncurrent liabilities | (6.9) | (7.5) | (86.9) | (76.6) | ||||||||||||||||||||||||||||||||||
| Net amount recognized | $ | (6.9) | $ | (7.5) | $ | (77.5) | $ | (69.8) | ||||||||||||||||||||||||||||||
| Amounts recognized in accumulated other comprehensive income (loss) consist of: | ||||||||||||||||||||||||||||||||||||||
| Prior service cost | — | — | (1.4) | (1.4) | ||||||||||||||||||||||||||||||||||
| Net actuarial loss | (18.8) | (20.3) | (78.3) | (58.7) | ||||||||||||||||||||||||||||||||||
| Net amount recognized | $ | (18.8) | $ | (20.3) | $ | (79.7) | $ | (60.1) |
The aggregate accumulated benefit obligation for the U.S. pension plans was $40.2 million and $38.8 million as of December 31, 2019 and 2018, respectively. The aggregate accumulated benefit obligation for the international pension plans was $336.0 million and $301.1 million as of December 31, 2019 and 2018, respectively.
| U.S. | International | |||||||||||||||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| Information for pension plans with accumulated benefit obligations in excess of Plan assets: | ||||||||||||||||||||||||||||||||||||||
| Projected benefit obligation | $ | (41.1) | $ | (39.4) | $ | (283.1) | $ | (251.0) | ||||||||||||||||||||||||||||||
| Accumulated benefit obligation | (40.2) | (38.8) | (272.6) | (243.6) | ||||||||||||||||||||||||||||||||||
| Fair value of plan assets | 34.3 | 31.9 | 193.9 | 172.3 | ||||||||||||||||||||||||||||||||||
| Information for pension plans with projected benefit obligations in | ||||||||||||||||||||||||||||||||||||||
| excess of plan assets: | ||||||||||||||||||||||||||||||||||||||
| Projected benefit obligation | $ | (41.1) | $ | (39.5) | $ | (284.4) | $ | (251.0) | ||||||||||||||||||||||||||||||
| Fair value of plan assets | 34.3 | 32.0 | 195.1 | 172.3 |
Components of Net Periodic Benefit Costs
| U.S. | International | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | 0.3 | $ | 0.3 | $ | 0.3 | $ | 2.7 | $ | 2.6 | $ | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest cost | 1.5 | 1.3 | 1.4 | 7.0 | 7.0 | 7.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (1.7) | (1.8) | (1.7) | (11.8) | (13.5) | (12.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial net obligation and prior service cost | — | — | — | 0.1 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of net loss | 0.8 | 1.0 | 1.0 | 2.5 | 2.1 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement and curtailment losses recognized | — | — | — | — | 3.1 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic benefit cost | $ | 0.9 | $ | 0.8 | $ | 1.0 | $ | 0.5 | $ | 1.3 | $ | 1.2 |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income during 2019 are as follows:
| In millions | U.S. | International | ||||||||||||
| Net gain (loss) arising during the year | $ | 0.7 | $ | (20.3) | ||||||||||
| Effect of exchange rates | — | (2.1) | ||||||||||||
| Amortization, settlement, or curtailment recognition of net transition obligation | — | 0.4 | ||||||||||||
| Amortization or curtailment recognition of prior service cost | — | 0.1 | ||||||||||||
| Amortization or settlement recognition of net loss | 0.8 | 2.5 | ||||||||||||
| Total recognized in other comprehensive gain | $ | 1.5 | $ | (19.4) | ||||||||||
| Total recognized in net periodic benefit cost and other comprehensive gain | $ | 0.6 | $ | (19.9) |
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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 3.27 | % | 4.30 | % | 3.56 | % | 1.84 | % | 2.53 | % | 2.40 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | 5.35 | % | 5.15 | % | 4.95 | % | 5.01 | % | 5.10 | % | 5.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Rate of compensation increase | 3.00 | % | 3.00 | % | 3.00 | % | 2.64 | % | 2.61 | % | 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, 2019, the following table represents the amounts included in other comprehensive loss that are expected to be recognized as components of periodic benefit costs in 2020.
| In millions | U.S. | International | ||||||||||||
| Prior service cost | — | 0.1 | ||||||||||||
| Net actuarial loss | 1.0 | 4.3 | ||||||||||||
| $ | 1.0 | $ | 4.4 |
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 19 “Fair Value Measurement” included herein). Plan assets by asset category at December 31, 2019 and 2018 are as follows:
| U.S. | International | |||||||||||||||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| Pension Plan Assets | ||||||||||||||||||||||||||||||||||||||
| Equity security funds | $ | 16.4 | $ | 13.2 | $ | 70.8 | $ | 95.1 | ||||||||||||||||||||||||||||||
| Debt security funds and other | 16.3 | 17.5 | 191.3 | 140.9 | ||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 1.6 | 1.2 | 7.7 | 3.4 | ||||||||||||||||||||||||||||||||||
| Fair value of plan assets | $ | 34.3 | $ | 31.9 | $ | 269.8 | $ | 239.4 |
The U.S. plan has a target asset allocation of 55% equity securities and 45% debt securities. The International plan has a target asset allocation of 26% equity securities, 53% debt securities and 21% 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 19):
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| US: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | $ | — | $ | 16.4 | $ | — | $ | — | $ | 16.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities and other | — | 3.5 | 12.8 | — | 16.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | — | 1.5 | — | — | 1.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| International: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | $ | 4.9 | $ | 19.9 | $ | 46.0 | $ | — | $ | 70.8 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities and other | — | 3.1 | 179.2 | — | 182.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance Contracts | — | — | 4.3 | 4.6 | 8.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | — | 7.0 | 0.7 | — | 7.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4.9 | $ | 51.5 | $ | 243.1 | $ | 4.6 | $ | 304.1 |
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| US: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | $ | — | $ | 13.2 | $ | — | $ | — | $ | 13.2 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities | — | 4.5 | 13.0 | — | 17.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | — | 1.3 | — | — | 1.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| International: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | $ | 3.7 | $ | 34.8 | $ | 56.5 | $ | — | $ | 95.1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities | — | — | 125.6 | — | 125.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance Contracts | — | — | 5.4 | 9.9 | 15.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | — | 3.5 | — | — | 3.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3.7 | $ | 57.4 | $ | 200.5 | $ | 9.9 | $ | 271.5 |
The following table presents a reconciliation of Level 3 assets:
| In millions | Total | |||||||
| Balance at December 31, 2017 | $ | 13.1 | ||||||
| Net purchases, issuances, and settlements | (3.6) | |||||||
| Actual return of plan assets | 0.3 | |||||||
| Transfers | 0.7 | |||||||
| Effect of currency rate changes | (0.5) | |||||||
| Balance at December 31, 2018 | $ | 9.9 | ||||||
| Net purchases, issuances, and settlements | 0.2 | |||||||
| Actual return of plan assets | 0.3 | |||||||
| Transfers | (5.8) | |||||||
| Effect of currency rate changes | — | |||||||
| Balance at December 31, 2019 | $ | 4.6 |
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 $2.1 million and $8.8 million to the U.S. and international plans respectively during 2020.
Benefit payments expected to be paid to plan participants are as follows:
| In millions | U.S. | International | ||||||||||||
| Year ended December 31, | ||||||||||||||
| 2020 | $ | 3.2 | $ | 16.0 | ||||||||||
| 2021 | 3.1 | 16.5 | ||||||||||||
| 2022 | 3.0 | 17.0 | ||||||||||||
| 2023 | 3.0 | 17.7 | ||||||||||||
| 2024 | 2.9 | 17.9 | ||||||||||||
| 2025 through 2029 | 13.0 | 93.4 |
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 millions | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Multi-employer pension and health & welfare plans | $ | 0.9 | $ | 1.0 | $ | 1.5 | ||||||||||||||||||||||||||
| 401(k) savings and other defined contribution plans | 55.7 | 27.9 | 23.2 | |||||||||||||||||||||||||||||
| Total | $ | 56.6 | $ | 28.8 | $ | 24.7 |
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, 2019 and 2018, the plan held on behalf of its participants about 431,744 shares with a market value of $33.6 million, and 442,239 shares with a market value of $31.1 million, respectively. Additionally, the Company has stock option based benefit and other plans further described in Note 13.
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, 2019 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In thousands | RP Status Pending/ | Surcharge Imposed | Collective Bargaining | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension Fund | EIN/PN (a) | 2019 | 2018 | Implemented (c) | 2019 | 2018 | 2017 | (d) | Agreements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Idaho Operating Engineers- | EIN # | 91-6075538 | Green | Green | No | $ | 881 | (1) | $ | 965 | (1) | $ | 1,020 | (1) | No | 8/6/2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Employers Pension Trust Fund | Plan# | 001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Contributions | $ | 881 | $ | 965 | $ | 1,020 |
(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 2019 and 2018 is for plan years that ended in 2019 and 2018, 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 2019.
(d) The “Surcharge Imposed” column indicates whether the Company’s contribution rate for 2019 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.
11. 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 fiscal 2018, the Company completed its accounting for the income tax effects of the Tax Act. The Company adjusted the provisional amounts previously recorded in accordance with SEC Staff Accounting Bulletin No. 118. As such, the Company included the following tax provisions in its financial statements for the year ending December 31, 2018:
Revaluation of deferred tax assets and liabilities: The Tax Act reduced 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 fiscal 2018, the Company adjusted its U.S. deferred tax balances which resulted in a benefit of $5.1 million being recorded fiscal 2018. The Company has completed its calculation of the impact of these changes on its
deferred tax balances. As of December 31, 2018, the Company 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 during the year ended 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 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 $11.9 million and $9.3 million in its financial statements for the twelve months ended December 31, 2019 and December 31, 2018, respectively.
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 recorded deferred taxes for this item in its financial statements for fiscal year ended December 31, 2019.
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 millions | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Domestic | $ | 117.9 | $ | 145.1 | $ | 140.3 | ||||||||||||||||||||||||||
| Foreign | 328.9 | 222.5 | 211.8 | |||||||||||||||||||||||||||||
| Income from operations before income taxes | $ | 446.8 | $ | 367.6 | $ | 352.1 |
The consolidated provision for income taxes included in the Statement of Income consisted of the following:
| For the year ended December 31, | ||||||||||||||||||||||||||||||||
| In thousands | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Current taxes | ||||||||||||||||||||||||||||||||
| Federal | $ | 5.7 | $ | 6.9 | $ | 86.2 | ||||||||||||||||||||||||||
| State | 0.5 | 5.8 | 3.6 | |||||||||||||||||||||||||||||
| Foreign | 141.4 | 68.5 | 67.4 | |||||||||||||||||||||||||||||
| 147.6 | 81.2 | 157.2 | ||||||||||||||||||||||||||||||
| Deferred taxes | ||||||||||||||||||||||||||||||||
| Federal | 19.8 | 4.7 | (22.9) | |||||||||||||||||||||||||||||
| State | 2.9 | 1.3 | (1.0) | |||||||||||||||||||||||||||||
| Foreign | (50.0) | (11.3) | (43.5) | |||||||||||||||||||||||||||||
| (27.3) | (5.3) | (67.4) | ||||||||||||||||||||||||||||||
| Total provision | $ | 120.3 | $ | 75.9 | $ | 89.8 |
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 millions | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||||||||||||||||||||||||||
| State taxes | 0.7 | 1.6 | 0.4 | |||||||||||||||||||||||||||||
| Foreign | 3.2 | 0.7 | (8.3) | |||||||||||||||||||||||||||||
| Research and development credit | (1.7) | (1.1) | (0.8) | |||||||||||||||||||||||||||||
| Manufacturing deduction | — | — | (1.1) | |||||||||||||||||||||||||||||
| France tax rate change | — | — | (6.5) | |||||||||||||||||||||||||||||
| U.S. tax rate change | — | (0.6) | (7.9) | |||||||||||||||||||||||||||||
| U.S. tax reform (benefit) provision | 2.0 | (1.4) | 15.6 | |||||||||||||||||||||||||||||
| Transaction costs related to acquisitions | 1.0 | — | — | |||||||||||||||||||||||||||||
| Other, net | 0.7 | 0.4 | (0.9) | |||||||||||||||||||||||||||||
| Effective rate | 26.9 | % | 20.6 | % | 25.5 | % |
The increase in the effective tax rate in 2019 is primarily the result of non-deductible transaction related expenses incurred as a result of the acquisition of GE Transportation, a higher earnings mix in higher tax jurisdictions, increased estimated liabilities resulting from provisions of the 2017 Tax Cuts and Jobs Act as well as a benefit from the completion of the accounting for the income tax effects of the Tax Act that was recorded in the tax year ending December 31, 2018.
Components of deferred tax assets and liabilities were as follows:
| December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Deferred income tax assets: | ||||||||||||||||||||
| Accrued expenses and reserves | $ | 35.8 | $ | 13.8 | ||||||||||||||||
| Warranty reserve | 46.6 | 25.9 | ||||||||||||||||||
| Deferred compensation/employee benefits | 32.3 | 9.8 | ||||||||||||||||||
| Right-of-use asset | 63.1 | — | ||||||||||||||||||
| Pension and postretirement obligations | 28.1 | 19.5 | ||||||||||||||||||
| Inventory | 25.8 | 16.8 | ||||||||||||||||||
| Net operating loss carry forwards | 95.6 | 85.1 | ||||||||||||||||||
| Other | 18.8 | 19.2 | ||||||||||||||||||
| Gross deferred income tax assets | 346.1 | 190.1 | ||||||||||||||||||
| Valuation allowance | 58.0 | 41.7 | ||||||||||||||||||
| Total deferred income tax assets | 288.1 | 148.4 | ||||||||||||||||||
| Deferred income tax liabilities: | ||||||||||||||||||||
| Property, plant & equipment | 42.7 | 35.5 | ||||||||||||||||||
| Right-of-use liability | 63.1 | — | ||||||||||||||||||
| Intangibles | 235.6 | 287.4 | ||||||||||||||||||
| Total deferred income tax liabilities | 341.4 | 322.9 | ||||||||||||||||||
| Net deferred income tax liability | $ | (53.3) | $ | (174.5) |
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, 2019, the valuation allowance for certain foreign deferred tax asset carryforwards was $58.0 million primarily in China, France, the Netherlands, United Kingdom, and South Africa.
Net operating loss carry-forwards in the amount of $390.5 million expire in various periods from December 31, 2019 to December 31, 2039.
As of December 31, 2019, the liability for income taxes associated with unrecognized tax benefits was $17.2 million, of which $17.2 million, if recognized, would favorably affect the Company’s effective income tax rate. 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 tax rate. A reconciliation of the beginning and ending amount of the liability for income taxes associated with unrecognized tax benefits follows:
| In millions | 2019 | 2018 | 2017 | |||||||||||||||||
| Gross liability for unrecognized tax benefits at beginning of year | $ | 9.5 | $ | 6.9 | $ | 8.4 | ||||||||||||||
| Gross increases - unrecognized tax benefits in prior periods | 9.7 | 5.4 | 2.5 | |||||||||||||||||
| Gross decreases - audit settlement during year | — | — | (4.0) | |||||||||||||||||
| Gross decreases - expiration of audit statute of limitations | (2.0) | (2.8) | — | |||||||||||||||||
| Gross liability for unrecognized tax benefits at end of year | $ | 17.2 | $ | 9.5 | $ | 6.9 |
The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2019, the total interest and penalties accrued was approximately $4.0 million. As of December 31, 2018, the total interest and penalties accrued was approximately $0.9 million.
With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2014. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $7.6 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.
12. EARNINGS PER SHARE
The computation of earnings per share from operations is as follows:
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||
| In millions, except per share data | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Numerator | ||||||||||||||||||||||||||||||||
| Numerator for basic and diluted earnings per common share - net income attributable | ||||||||||||||||||||||||||||||||
| to Wabtec shareholders | $ | 326.7 | $ | 294.9 | $ | 262.3 | ||||||||||||||||||||||||||
| Less: dividends declared - common shares and non-vested restricted stock | (80.3) | (46.3) | (42.2) | |||||||||||||||||||||||||||||
| Undistributed earnings | 246.4 | 248.6 | 220.1 | |||||||||||||||||||||||||||||
| Percentage allocated to common shareholders (1) | 99.7 | % | 99.7 | % | 99.7 | % | ||||||||||||||||||||||||||
| 245.7 | 247.9 | 219.4 | ||||||||||||||||||||||||||||||
| Add: dividends declared - common shares | 80.0 | 46.3 | 42.2 | |||||||||||||||||||||||||||||
| Less: dividends declared - preferred shares | (0.4) | — | — | |||||||||||||||||||||||||||||
| Numerator for basic earnings per common share | $ | 325.3 | $ | 294.2 | $ | 261.6 | ||||||||||||||||||||||||||
| Add: dividends declared - preferred shares | 0.4 | — | — | |||||||||||||||||||||||||||||
| Numerator for diluted earnings per common share | $ | 325.7 | $ | 294.2 | $ | 261.6 | ||||||||||||||||||||||||||
| Denominator | ||||||||||||||||||||||||||||||||
| Denominator for basic earnings per common share - weighted average shares | 170.5 | 96.0 | 95.5 | |||||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
| Assumed conversion of preferred shares | 6.4 | — | — | |||||||||||||||||||||||||||||
| Assumed conversion of dilutive stock-based compensation plans | 0.4 | 0.5 | 0.6 | |||||||||||||||||||||||||||||
| Denominator for diluted earnings per common share - adjusted weighted average | ||||||||||||||||||||||||||||||||
| shares and assumed conversion | 177.3 | 96.5 | 96.1 | |||||||||||||||||||||||||||||
| Net income per common share attributable to Wabtec shareholders | ||||||||||||||||||||||||||||||||
| Basic | $ | 1.91 | $ | 3.06 | $ | 2.74 | ||||||||||||||||||||||||||
| Diluted | $ | 1.84 | $ | 3.05 | $ | 2.72 | ||||||||||||||||||||||||||
| (1) Basic weighted-average common shares outstanding | 170.5 | 96.0 | 95.5 | |||||||||||||||||||||||||||||
| Basic weighted-average common shares outstanding and non-vested restricted | ||||||||||||||||||||||||||||||||
| stock expected to vest | 171.0 | 96.3 | 95.7 | |||||||||||||||||||||||||||||
| Percentage allocated to common shareholders | 99.7 | % | 99.7 | % | 99.7 | % |
Options to purchase approximately 312,000, 135,000, and 24,000 shares of Common Stock were outstanding in 2019, 2018 and 2017, respectively, but were not included in the computation of diluted earnings because their impact would have been antidilutive.
13. STOCK-BASED COMPENSATION PLANS
As of December 31, 2019, 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, 2019 the number of shares available for future grants under the 2011 Plan was 1,870,396 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, 2019, 2018 and 2017, the Company issued a total of 15,729, 12,960 and 16,500 shares of restricted stock to non-employee directors. The total number of shares issued under the plan as of December 31, 2019 was 909,881 shares.
Stock-based compensation expense for all of the plans was $50.0 million, $25.3 million and $21.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recognized associated tax benefits related to the stock-based compensation plans of $1.4 million, $6.3 million and $8.9 million for the respective periods. Included in the stock-based compensation expense for 2019 above is $2.3 million of expense related to stock options, $20.8 million related to non-vested restricted stock, $9.4 million related to restricted stock units, $16.5 million related to incentive stock units and $1.0 million related to units issued for Directors’ fees. At December 31, 2019, unamortized compensation expense related to those stock options, non-vested restricted shares and incentive stock units expected to vest totaled $41.9 million and will be recognized over a weighted period of 1.4 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 three 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 millions) | |||||||||||||||||||||||
| Outstanding at December 31, 2016 | 1,098,823 | $ | 35.39 | 4.3 | $ | 52.3 | ||||||||||||||||||||
| Granted | 65,522 | 86.91 | — | |||||||||||||||||||||||
| Exercised | (166,838) | 21.37 | (10.0) | |||||||||||||||||||||||
| Canceled | (13,995) | 76.89 | (0.1) | |||||||||||||||||||||||
| Outstanding at December 31, 2017 | 983,512 | $ | 32.52 | 4.0 | $ | 40.1 | ||||||||||||||||||||
| Granted | 82,580 | 77.54 | — | |||||||||||||||||||||||
| Exercised | (582,303) | 28.29 | (24.4) | |||||||||||||||||||||||
| Canceled | (17,112) | 69.76 | — | |||||||||||||||||||||||
| Outstanding at December 31, 2018 | 466,677 | $ | 61.04 | 5.7 | $ | 4.3 | ||||||||||||||||||||
| Granted | 134,450 | 70.44 | 1.0 | |||||||||||||||||||||||
| Exercised | (4,868) | 22.45 | (0.3) | |||||||||||||||||||||||
| Canceled | (8,235) | 73.00 | — | |||||||||||||||||||||||
| Outstanding at December 31, 2019 | 588,024 | $ | 63.36 | 5.7 | $ | 8.5 | ||||||||||||||||||||
| Exercisable at December 31, 2019 | 383,150 | $ | 55.25 | 4.7 | $ | 8.6 |
Options outstanding at December 31, 2019 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 | 67,026 | $ | 28.41 | 1.1 | 67,026 | $ | 28.41 | |||||||||||||||||||||||||
| 35.00 - 50.00 | 107,033 | 41.36 | 2.6 | 107,033 | 41.36 | |||||||||||||||||||||||||||
| 50.00 - 65.00 | 64,167 | 61.33 | 6.1 | 48,373 | 61.33 | |||||||||||||||||||||||||||
| 65.00 - 80.00 | 227,639 | 71.20 | 8.1 | 77,731 | 59.39 | |||||||||||||||||||||||||||
| Over 80.00 | 122,159 | 88.27 | 6.5 | 82,987 | 87.45 | |||||||||||||||||||||||||||
| 588,024 | $ | 63.36 | 383,150 | $ | 55.25 |
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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Dividend yield | 0.66 | % | 0.31 | % | 0.23 | % | ||||||||||||||||||||||||||
| Risk-free interest rate | 2.6 | % | 2.8 | % | 2.2 | % | ||||||||||||||||||||||||||
| Stock price volatility | 25.8 | % | 23.9 | % | 23.4 | % | ||||||||||||||||||||||||||
| Expected life (years) | 5.0 | 5.0 | 5.0 | |||||||||||||||||||||||||||||
| Weighted average fair value of options granted during the year | $ | 19.54 | $ | 20.59 | $ | 20.69 |
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 three 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, 2019, the Company estimates that it will achieve 115%, 111% and 108% for the incentive stock units expected to vest based on performance for the three year periods ending December 31, 2019, 2020, and 2021, 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, 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 | ||||||||||||||||
| Granted | 608,813 | 259,950 | 70.61 | |||||||||||||||||
| Vested | (235,406) | (119,835) | 71.65 | |||||||||||||||||
| Adjustment for incentive stock awards expected to vest | — | 80,403 | 78.04 | |||||||||||||||||
| Canceled | (27,465) | (63,758) | 74.04 | |||||||||||||||||
| Outstanding at December 31, 2019 | 791,031 | 572,002 | $ | 73.64 |
14. OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were:
| December 31, | ||||||||||||||||||||
| In millions | 2019 | 2018 | ||||||||||||||||||
| Foreign currency translation gain (loss) | $ | (308.6) | $ | (202.2) | ||||||||||||||||
| Unrealized gain (loss) on interest rate swap contracts, net of tax of $0 and $0 | (3.3) | (0.1) | ||||||||||||||||||
| Unrealized loss on pension and post-retirement benefit plans, net of tax of $24.7 and $23.0 | (70.7) | (54.3) | ||||||||||||||||||
| Total accumulated other comprehensive loss | $ | (382.6) | $ | (256.6) |
The changes in accumulated other comprehensive loss by component, net of tax, for the year-ended December 31, 2019 are as follows:
| Foreign currency | Derivative | Pension and post retirement | ||||||||||||||||||||||||
| In millions | translation | contracts | benefits plans | Total | ||||||||||||||||||||||
| Balance at December 31, 2018 | $ | (202.2) | $ | (0.1) | $ | (54.3) | $ | (256.6) | ||||||||||||||||||
| Other comprehensive income before reclassifications | (106.4) | (3.2) | (18.5) | (128.1) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 2.1 | 2.1 | ||||||||||||||||||||||
| Net current period other comprehensive income | (106.4) | (3.2) | (16.4) | (126.0) | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | (308.6) | $ | (3.3) | $ | (70.7) | $ | (382.6) |
Reclassifications out of accumulated other comprehensive loss for the year-ended December 31, 2019 are as follows:
| Amount reclassified from accumulated other | Affected line item in the Condensed Consolidated | |||||||||||||
| In millions | comprehensive income | Statements of Income | ||||||||||||
| Amortization of defined pension and post retirement items | ||||||||||||||
| Amortization of initial net obligation and prior service cost | $ | (1.5) | Other income, net | |||||||||||
| Amortization of net loss (gain) | 4.4 | Other income, net | ||||||||||||
| 2.9 | Other income, net | |||||||||||||
| (0.8) | Income tax expense | |||||||||||||
| $ | 2.1 | Net income |
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 | ||||||||||||||||||||||||
| translation | contracts | benefits plans | Total | |||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 5.1 | $ | 4.0 | $ | (54.1) | $ | (45.0) | ||||||||||||||||||
| Other comprehensive income before reclassifications | (207.3) | (7.8) | (2.3) | (217.4) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 3.7 | 2.1 | 5.8 | ||||||||||||||||||||||
| Net current period other comprehensive income | (207.3) | (4.1) | (0.2) | (211.6) | ||||||||||||||||||||||
| Balance at December 31, 2018 | $ | (202.2) | $ | (0.1) | $ | (54.3) | $ | (256.6) |
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 | |||||||||||||
| comprehensive income | Statements of Income | |||||||||||||
| Amortization of defined pension and post retirement items | ||||||||||||||
| Amortization of initial net obligation and prior service cost | $ | (1.5) | Other income, net | |||||||||||
| Amortization of net loss (gain) | 4.3 | Other income, net | ||||||||||||
| 2.8 | Other income, net | |||||||||||||
| (0.7) | Income tax expense | |||||||||||||
| $ | 2.1 | Net income | ||||||||||||
| Derivative contracts | ||||||||||||||
| Realized loss on derivative contracts | 4.9 | Interest expense, net | ||||||||||||
| (1.2) | Income tax expense | |||||||||||||
| $ | 3.7 | Net income |
15. LEASES
During the first quarter of 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)," which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.
The Company leases property and equipment under finance and operating leases. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of
lease payments when appropriate. The Company does not separate lease and non-lease components. As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate our incremental borrowing rate to discount lease payments. The Company has established discount rates by geographic region ranging from 1.0% to 12.3%.
The components of lease expense are as follows:
| For the year ended Ended December 31, | ||||||||
| In millions | 2019 | |||||||
| Operating lease expense | $ | 54.4 | ||||||
| Finance lease expense amortization of leased assets | 1.1 | |||||||
| Short-term and variable lease expense | 0.6 | |||||||
| Sublease income | (0.5) | |||||||
| Total | $ | 55.6 |
Scheduled payments of lease liabilities are as follows:
| In millions | Operating Leases | Finance Leases | Total | ||||||||||||||
| 2020 | $ | 53.9 | $ | 0.4 | $ | 54.3 | |||||||||||
| 2021 | 45.3 | 0.2 | 45.5 | ||||||||||||||
| 2022 | 38.1 | 0.2 | 38.3 | ||||||||||||||
| 2023 | 33.4 | 0.2 | 33.6 | ||||||||||||||
| 2024 | 29.3 | 0.1 | 29.4 | ||||||||||||||
| Thereafter | 103.2 | 0.2 | 103.4 | ||||||||||||||
| Total lease payments | 303.2 | 1.3 | 304.5 | ||||||||||||||
| Less: Present value discount | (30.1) | — | (30.1) | ||||||||||||||
| Present value lease liabilities | $ | 273.1 | $ | 1.3 | $ | 274.4 |
The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of lease liabilities:
| December 31, | |||||
| 2019 | |||||
| Weighted-average remaining lease term (years) | |||||
| Operating leases | 7.0 | ||||
| Finance leases | 5.2 | ||||
| Weighted-average discount rate | |||||
| Operating leases | 4.6 | % | |||
| Finance leases | 1.4 | % |
16. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
| In millions | 2019 | 2018 | ||||||||||||
| Balance at beginning of year | $ | 153.7 | $ | 153.0 | ||||||||||
| Acquisitions | 127.8 | 3.1 | ||||||||||||
| Warranty expense | 105.5 | 58.0 | ||||||||||||
| Warranty claim payments | (118.0) | (54.1) | ||||||||||||
| Foreign currency impact | (1.3) | (6.3) | ||||||||||||
| Balance at end of year | $ | 267.7 | $ | 153.7 |
17. 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, 2019 and 2018 there was no preferred stock issued or outstanding.
18. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Hedging Activities In the normal course of business, we are exposed to interest rate, commodity price and foreign currency exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as cross-currency swaps, foreign currency forward contracts, interest rate swaps, commodity forwards and futures. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.
Foreign Currency Exchange Risk
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, 2019, 2018 and 2017, the amounts reclassified into income were not material.
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates. We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, Indian rupee, British pound sterling, Australian dollars and several other foreign currencies. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies and net purchases and sales in non-functional currencies. We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross-currency swaps. These forward contracts and cross-currency swaps are generally used to offset the potential income statement effects from intercompany loans denominated in non-functional currencies. In addition, 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. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.
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 twelve months ended December 31, 2019 the amounts reclassified into income were not material.
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 gain related to these contracts was $1.6 million for the three months ended December 31, 2019. 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, 2019:
| Fair Value | Gross Notional Amount | |||||||||||||||||||||||||||||||||||||
| In millions | Designated | Non-Designated | Designated | Non-Designated | ||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||||||
| Other current assets | $ | 11.2 | $ | 1.4 | $ | 2,429.0 | $ | 412.9 | ||||||||||||||||||||||||||||||
| Other current liabilities | (9.8) | — | 1,184.6 | — | ||||||||||||||||||||||||||||||||||
| Cross-currency Swaps | ||||||||||||||||||||||||||||||||||||||
| Other current assets | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other current liabilities | (9.4) | — | 560.8 | — | ||||||||||||||||||||||||||||||||||
| Total | $ | (8.0) | $ | 1.4 | $ | 4,174.4 | $ | 412.9 |
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, 2018:
| Fair Value | Gross Notional Amount | |||||||||||||||||||||||||||||||||||||
| In millions | Designated | Non-Designated | Designated | Non-Designated | ||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||||||
| Other current assets | $ | — | $ | 1.3 | $ | — | $ | 834.0 | ||||||||||||||||||||||||||||||
| Other current liabilities | (2.3) | — | 863.0 | — | ||||||||||||||||||||||||||||||||||
| Cross-currency Swaps | ||||||||||||||||||||||||||||||||||||||
| Other current assets | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other current liabilities | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | (2.3) | $ | 1.3 | $ | 863.0 | $ | 834.0 |
Interest Rate Risk
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk. For the twelve months ended December 31, 2019 the amounts reclassified into income were not material.
Commodity Price Risk
The Company may use commodity forward contracts and futures to manage its exposure to commodity price changes and to reduce its overall cost of manufacturing. For the twelve months ended December 31, 2019 the amounts reclassified into income were not material.
19. 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 assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019, which are included in other current assets and liabilities on the Consolidated Balance sheet:
| Fair Value Measurements at December 31, 2019 Using | ||||||||||||||||||||||||||||||||||||||
| Total Carrying Value at December 31, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||||||||||||||||
| In millions | 2019 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||||||
| Other Current Assets | 12.6 | — | 12.6 | — | ||||||||||||||||||||||||||||||||||
| Other Current Liabilities | 9.8 | — | 9.8 | — | ||||||||||||||||||||||||||||||||||
| Cross-Currency Swap Agreement | ||||||||||||||||||||||||||||||||||||||
| Other Current Liabilities | 9.4 | — | 9.4 | — |
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, 2019 and December 31, 2018. 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.
20. 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 the vast majority of the 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 of 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. A limited number of claims are not covered by insurance, nor are they subject to indemnity from non-affiliated parties. Wabtec has incurred defense, administrative and indemnity costs in connection with these actions, but these costs have not been material, and the Company has no information that would suggest these costs would become material in the foreseeable future. Based on the Company’s history in resolving all asbestos claims over the last twenty years, Management believes that the costs of the Company’s asbestos-related cases will not be material to the Company’s overall financial position, results of operations and cash flows.
On April 21, 2016, Siemens Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company infringed seven patents owned by Siemens related to the Company's Positive Train Control (PTC) technology. On November 2, 2016, Siemens amended its complaint to add six additional patents they also claimed were infringed by the Company's PTC Products or End of Train (EOT) Products (Siemens Patent Case). The Company 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) granted Inter-Parties Review (IPR) proceedings on eight (8) 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. On August 15, 2019, the Court entered a final judgement in the amount of $14.1 million in favor of Siemens, which included post-discovery damages on all Wabtec PTC and EOT sales through July 2019. Both parties appealed the Final Judgement. On September 27, 2019, the parties entered into a global settlement agreement, settling all on-going litigation between them, as part of the patent litigation including antitrust claims Siemens had made against Wabtec initially.
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 has successfully completed a remediation 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 and 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 eliminated 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; a jury trial is scheduled to begin in May 2020. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail; DTC has not updated its notices against Xorail, nor have they filed any formal claim against Xorail.
On April 3, 2018, the Company and Knorr-Bremse AG entered into a consent decree with the United States Department of Justice 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. No monetary fines or penalties were 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 thereafter were filed in several different federal district courts naming the Company and Knorr as defendants in connection with the allegations contained in the 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 consolidated 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. On August 13, 2019, the Company was notified that co-defendant Knorr-Bremse settled with plaintiffs. On January 21, 2020, following Court-sponsored early mediation, the Company entered into a Memorandum of Understanding with plaintiffs, agreeing to settle all claims in the case. The parties intend to seek Court approval of the agreed settlement terms and amount.
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.
21. SEGMENT INFORMATION
The Company 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. Initiatives to integrate GE Transportation operations into Wabtec including recent restructuring programs announced in late 2019 resulted in changes to the Company's organizational structure and the financial reporting utilized by the Company's chief operating decision maker to assess performance and allocate resources; as a result, certain asset groups were reorganized from the Freight Segment to the Transit Segment and vice versa. The change in the Company’s reportable segments was effective in the fourth quarter of 2019 and is reflected below in 2019 and through the retrospective revision of 2018 and 2017 segment information. The Company believes these changes better present Management's new view of the business. The Company’s business segments are:
Freight Segment primarily builds new locomotives, manufactures and services components for new and existing freight cars and 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, 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. The changes to the asset groups comprising the Freight and Transit segments have been reflected through retrospective revision of prior period segment information.
| Segment financial information for 2019 is as follows: | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||||||||||||
| In million | Segment | Segment | Elimination | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 5,441.4 | $ | 2,758.6 | $ | — | $ | 8,200.0 | ||||||||||||||||||
| Intersegment sales/(elimination) | 59.6 | 23.4 | (83.0) | — | ||||||||||||||||||||||
| Total sales | $ | 5,501.0 | $ | 2,782.0 | $ | (83.0) | $ | 8,200.0 | ||||||||||||||||||
| Income (loss) from operations | $ | 642.9 | $ | 214.4 | $ | (194.2) | $ | 663.1 | ||||||||||||||||||
| Interest expense and other, net | — | — | (216.3) | (216.3) | ||||||||||||||||||||||
| Income (loss) from operations before income taxes | $ | 642.9 | $ | 214.4 | $ | (410.5) | $ | 446.8 | ||||||||||||||||||
| Depreciation and amortization | $ | 330.4 | $ | 62.2 | $ | 8.8 | $ | 401.4 | ||||||||||||||||||
| Capital expenditures | 105.1 | 63.7 | 16.5 | 185.3 | ||||||||||||||||||||||
| Segment assets | 14,450.9 | 6,026.0 | (1,532.7) | 18,944.2 |
| Segment financial information for 2018 is as follows: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Segment | Segment | Elimination | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Sales to external customers | $ | 1,766.4 | $ | 2,597.1 | $ | — | $ | 4,363.5 | ||||||||||||||||||||||||||||||||||||||||||
| Intersegment sales/(elimination) | 52.8 | 11.3 | (64.1) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Total sales | $ | 1,819.2 | $ | 2,608.4 | $ | (64.1) | $ | 4,363.5 | ||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | 334.3 | $ | 192.5 | $ | (53.4) | $ | 473.4 | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense and other, net | — | — | (105.8) | (105.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations before income taxes | $ | 334.3 | $ | 192.5 | $ | (159.2) | $ | 367.6 | ||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 41.6 | $ | 62.7 | $ | 5.0 | $ | 109.3 | ||||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | 24.6 | 61.6 | 7.1 | 93.3 | ||||||||||||||||||||||||||||||||||||||||||||||
| Segment assets | 3,329.6 | 9,478.6 | (4,159.0) | 8,649.2 |
| Segment financial information for 2017 is as follows: | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Freight | Transit | Activities and | ||||||||||||||||||||||||
| In millions | Segment | Segment | Elimination | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 1,538.6 | $ | 2,343.1 | $ | — | $ | 3,881.7 | ||||||||||||||||||
| Intersegment sales/(elimination) | 39.0 | 5.5 | (44.5) | — | ||||||||||||||||||||||
| Total sales | $ | 1,577.6 | $ | 2,348.6 | $ | (44.5) | $ | 3,881.7 | ||||||||||||||||||
| Income (loss) from operations | $ | 271.7 | $ | 177.2 | $ | (27.8) | $ | 421.1 | ||||||||||||||||||
| Interest expense and other, net | — | — | (69.0) | (69.0) | ||||||||||||||||||||||
| Income (loss) from operations before income taxes | $ | 271.7 | $ | 177.2 | $ | (96.8) | $ | 352.1 | ||||||||||||||||||
| Depreciation and amortization | $ | 43.1 | $ | 58.0 | $ | 2.1 | $ | 103.2 | ||||||||||||||||||
| Capital expenditures | 32.2 | 52.5 | 4.8 | 89.5 | ||||||||||||||||||||||
| Segment assets | 3,104.9 | 7,885.3 | (4,410.2) | 6,580.0 |
The following geographic area data as of and for the years ended December 31, 2019, 2018 and 2017, 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 millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 3,381.0 | $ | 1,460.3 | $ | 1,323.8 | $ | 1,089.8 | $ | 204.3 | $ | 211.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Canada | 733.3 | 279.0 | 279.0 | 13.2 | 5.3 | 5.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| India | 504.2 | 178.5 | 137.8 | 159.2 | 12.8 | 12.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United Kingdom | 376.2 | 395.8 | 356.5 | 55.5 | 54.8 | 57.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mexico | 356.6 | 200.6 | 160.0 | 23.7 | 9.2 | 9.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Germany | 340.0 | 314.7 | 208.8 | 77.7 | 75.5 | 71.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Australia | 296.4 | 173.5 | 136.1 | 12.1 | 9.6 | 10.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| France | 294.3 | 247.8 | 237.5 | 58.9 | 56.7 | 57.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| China | 290.4 | 170.3 | 178.1 | 34.5 | 33.4 | 36.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other international | 1,627.6 | 943.0 | 864.1 | 131.2 | 102.2 | 100.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 8,200.0 | $ | 4,363.5 | $ | 3,881.7 | $ | 1,655.8 | $ | 563.8 | $ | 574.0 |
Export sales from the Company’s United States operations were $905.2 million, $512.5 million and $448.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Net sales by product line are as follows:
| In millions | 2019 | 2018 | 2017 | |||||||||||||||||
| Freight Segment: | ||||||||||||||||||||
| Equipment | $ | 1,699.7 | $ | — | $ | — | ||||||||||||||
| Components | 1,073.5 | 1,169.1 | 1,004.6 | |||||||||||||||||
| Digital Electronics | 677.1 | 474.1 | 400.8 | |||||||||||||||||
| Services | 1,991.1 | 123.2 | 133.2 | |||||||||||||||||
| Total Freight Segment sales | $ | 5,441.4 | $ | 1,766.4 | $ | 1,538.6 | ||||||||||||||
| Transit Segment: | ||||||||||||||||||||
| Original Equipment Manufacturer | 1,286.6 | 1,194.0 | 1,050.0 | |||||||||||||||||
| Aftermarket | 1,472.0 | 1,403.1 | 1,293.1 | |||||||||||||||||
| Total Transit Segment sales | $ | 2,758.6 | $ | 2,597.1 | $ | 2,343.1 |
22. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's Senior Notes and Senior Credit Facility are fully and unconditionally guaranteed by certain of the Company's U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, a Wabtec company, which has 15,000 shares outstanding of Class A non-voting preferred stock held by General Electric 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, 2019:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 24.0 | $ | 14.7 | $ | 565.5 | $ | — | $ | 604.2 | |||||||||||||||||||
| Receivables, net | 103.5 | 298.2 | 1,262.2 | — | 1,663.9 | ||||||||||||||||||||||||
| Inventories | 135.3 | 763.1 | 874.7 | — | 1,773.1 | ||||||||||||||||||||||||
| Current assets - other | (0.8) | 22.0 | 129.7 | — | 150.9 | ||||||||||||||||||||||||
| Total current assets | 262.0 | 1,098.0 | 2,832.1 | — | 4,192.1 | ||||||||||||||||||||||||
| Property, plant and equipment | 73.2 | 65.0 | 1,517.6 | — | 1,655.8 | ||||||||||||||||||||||||
| Goodwill | 564.1 | 283.2 | 7,513.3 | — | 8,360.6 | ||||||||||||||||||||||||
| Investment in subsidiaries | 15,566.2 | 6,583.9 | — | (22,150.1) | — | ||||||||||||||||||||||||
| Other intangibles, net | 35.8 | 731.2 | 3,337.0 | — | 4,104.0 | ||||||||||||||||||||||||
| Other long term assets | 105.6 | 116.2 | 409.9 | — | 631.7 | ||||||||||||||||||||||||
| Total assets | $ | 16,606.9 | $ | 8,877.5 | $ | 15,609.9 | $ | (22,150.1) | $ | 18,944.2 | |||||||||||||||||||
| Current liabilities | $ | 586.0 | $ | 1,109.6 | $ | 1,562.4 | $ | — | $ | 3,258.0 | |||||||||||||||||||
| Inter-company | 1,357.6 | (2,546.3) | 1,188.7 | — | — | ||||||||||||||||||||||||
| Long-term debt | 4,321.8 | — | 11.8 | — | 4,333.6 | ||||||||||||||||||||||||
| Long-term liabilities - other | 385.0 | 154.1 | 819.9 | — | 1,359.0 | ||||||||||||||||||||||||
| Total liabilities | 6,650.4 | (1,282.6) | 3,582.8 | — | 8,950.6 | ||||||||||||||||||||||||
| Shareholders' equity | 9,941.5 | 10,160.1 | 12,005.0 | (22,150.1) | 9,956.5 | ||||||||||||||||||||||||
| Non-controlling interest | 15.0 | — | 22.1 | — | 37.1 | ||||||||||||||||||||||||
| Total shareholders' equity | $ | 9,956.5 | $ | 10,160.1 | $ | 12,027.1 | $ | (22,150.1) | $ | 9,993.6 | |||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 16,606.9 | $ | 8,877.5 | $ | 15,609.9 | $ | (22,150.1) | $ | 18,944.2 |
Balance Sheet for December 31, 2018:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,782.6 | $ | (0.1) | $ | 559.8 | $ | — | $ | 2,342.3 | |||||||||||||||||||
| Receivables, net | 106.8 | 61.5 | 978.5 | — | 1,146.8 | ||||||||||||||||||||||||
| Inventories | 149.7 | 69.1 | 626.1 | — | 844.9 | ||||||||||||||||||||||||
| Current assets - other | 11.9 | 0.7 | 103.0 | — | 115.6 | ||||||||||||||||||||||||
| Total current assets | 2,051.0 | 131.2 | 2,267.4 | — | 4,449.6 | ||||||||||||||||||||||||
| Property, plant and equipment | 51.6 | 24.8 | 487.4 | — | 563.8 | ||||||||||||||||||||||||
| Goodwill | 25.3 | 283.2 | 2,088.0 | — | 2,396.5 | ||||||||||||||||||||||||
| Investment in subsidiaries | 6,708.0 | 4,022.1 | — | (10,730.1) | — | ||||||||||||||||||||||||
| Other intangibles, net | 29.3 | 78.5 | 1,022.1 | — | 1,129.9 | ||||||||||||||||||||||||
| Other long term assets | 8.8 | 0.1 | 100.5 | — | 109.4 | ||||||||||||||||||||||||
| Total assets | $ | 8,874.0 | $ | 4,539.9 | $ | 5,965.4 | $ | (10,730.1) | $ | 8,649.2 | |||||||||||||||||||
| Current liabilities | $ | 264.5 | $ | 91.0 | $ | 1,291.1 | $ | — | $ | 1,646.6 | |||||||||||||||||||
| Inter-company | 1,947.5 | (1,436.2) | (511.3) | — | — | ||||||||||||||||||||||||
| Long-term debt | 3,779.7 | — | 13.1 | — | 3,792.8 | ||||||||||||||||||||||||
| Long-term liabilities - other | 17.1 | 48.6 | 275.0 | — | 340.7 | ||||||||||||||||||||||||
| Total liabilities | 6,008.8 | (1,296.6) | 1,067.9 | — | 5,780.1 | ||||||||||||||||||||||||
| Shareholders' equity | 2,865.2 | 5,836.5 | 4,893.6 | (10,730.1) | 2,865.2 | ||||||||||||||||||||||||
| Non-controlling interest | — | — | 3.9 | — | 3.9 | ||||||||||||||||||||||||
| Total shareholders' equity | $ | 2,865.2 | $ | 5,836.5 | $ | 4,897.5 | $ | (10,730.1) | $ | 2,869.1 | |||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 8,874.0 | $ | 4,539.9 | $ | 5,965.4 | $ | (10,730.1) | $ | 8,649.2 |
Income Statement for the Year Ended December 31, 2019:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net sales | $ | 723.4 | $ | 3,245.3 | $ | 5,766.3 | $ | (1,535.0) | $ | 8,200.0 | |||||||||||||||||||
| Cost of sales | (562.1) | (2,429.2) | (4,129.4) | 1,198.7 | (5,922.0) | ||||||||||||||||||||||||
| Gross profit (loss) | 161.3 | 816.1 | 1,636.9 | (336.3) | 2,278.0 | ||||||||||||||||||||||||
| Total operating expenses | (321.6) | (311.5) | (981.8) | — | (1,614.9) | ||||||||||||||||||||||||
| Income (loss) from operations | (160.3) | 504.6 | 655.1 | (336.3) | 663.1 | ||||||||||||||||||||||||
| Interest (expense) income, net | (214.8) | 12.5 | (16.8) | — | (219.1) | ||||||||||||||||||||||||
| Other (expense) income, net | (131.5) | (11.1) | 145.4 | — | 2.8 | ||||||||||||||||||||||||
| Equity earnings (loss) | 809.5 | 613.4 | — | (1,422.9) | — | ||||||||||||||||||||||||
| Pretax income (loss) | 302.9 | 1,119.4 | 783.7 | (1,759.2) | 446.8 | ||||||||||||||||||||||||
| Income tax expense | 23.8 | (97.0) | (47.1) | — | (120.3) | ||||||||||||||||||||||||
| Net income (loss) | 326.7 | 1,022.4 | 736.6 | (1,759.2) | 326.5 | ||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 326.7 | $ | 1,022.4 | $ | 736.8 | $ | (1,759.2) | $ | 326.7 | |||||||||||||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 326.7 | $ | 1,022.4 | $ | 610.8 | $ | (1,759.2) | $ | 200.7 |
Income Statement for the Year Ended December 31, 2018:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net sales | $ | 671.0 | $ | 483.1 | $ | 3,442.2 | $ | (232.8) | $ | 4,363.5 | |||||||||||||||||||
| Cost of sales | (495.1) | (304.3) | (2,462.5) | 132.3 | (3,129.6) | ||||||||||||||||||||||||
| Gross profit (loss) | 175.9 | 178.8 | 979.7 | (100.5) | 1,233.9 | ||||||||||||||||||||||||
| Total operating expenses | (173.0) | (57.3) | (530.2) | — | (760.5) | ||||||||||||||||||||||||
| Income (loss) from operations | 2.9 | 121.5 | 449.5 | (100.5) | 473.4 | ||||||||||||||||||||||||
| Interest (expense) income, net | (110.8) | 12.8 | (14.2) | — | (112.2) | ||||||||||||||||||||||||
| Other income (expense), net | 13.5 | — | (7.1) | — | 6.4 | ||||||||||||||||||||||||
| Equity earnings (loss) | 396.9 | 369.4 | — | (766.3) | — | ||||||||||||||||||||||||
| Pretax income (loss) | 302.5 | 503.7 | 428.2 | (866.8) | 367.6 | ||||||||||||||||||||||||
| Income tax expense | (7.6) | (3.3) | (65.0) | — | (75.9) | ||||||||||||||||||||||||
| Net income (loss) | 294.9 | 500.4 | 363.2 | (866.8) | 291.7 | ||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | — | — | 3.2 | — | 3.2 | ||||||||||||||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 294.9 | $ | 500.4 | $ | 366.4 | $ | (866.8) | $ | 294.9 | |||||||||||||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 295.8 | $ | 500.4 | $ | 153.9 | $ | (866.8) | $ | 83.3 |
Income Statement for the Year Ended December 31, 2017:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net sales | $ | 577.4 | $ | 398.2 | $ | 3,035.4 | $ | (129.3) | $ | 3,881.7 | |||||||||||||||||||
| Cost of sales | (440.9) | (255.8) | (2,218.4) | 98.7 | (2,816.4) | ||||||||||||||||||||||||
| Gross profit (loss) | 136.5 | 142.4 | 817.0 | (30.6) | 1,065.3 | ||||||||||||||||||||||||
| Total operating expenses | (114.2) | (50.9) | (479.1) | — | (644.2) | ||||||||||||||||||||||||
| Income (loss) from operations | 22.3 | 91.5 | 337.9 | (30.6) | 421.1 | ||||||||||||||||||||||||
| Interest (expense) income, net | (76.8) | 10.9 | (12.0) | — | (77.9) | ||||||||||||||||||||||||
| Other income (expense), net | 10.0 | 0.3 | (1.4) | — | 8.9 | ||||||||||||||||||||||||
| Equity earnings (loss) | 416.1 | 317.6 | — | (733.7) | — | ||||||||||||||||||||||||
| Pretax income (loss) | 371.6 | 420.3 | 324.5 | (764.3) | 352.1 | ||||||||||||||||||||||||
| Income tax (expense) benefit | (109.3) | 18.8 | 0.7 | — | (89.8) | ||||||||||||||||||||||||
| Net income (loss) | 262.3 | 439.1 | 325.2 | (764.3) | 262.3 | ||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | — | — | — | — | — | ||||||||||||||||||||||||
| Net income (loss) attributable to Wabtec shareholders | $ | 262.3 | $ | 439.1 | $ | 325.2 | $ | (764.3) | $ | 262.3 | |||||||||||||||||||
| Comprehensive income (loss) attributable to Wabtec shareholders | $ | 263.9 | $ | 439.1 | $ | 658.2 | $ | (764.3) | $ | 596.9 |
Condensed Statement of Cash Flows for the year ended December 31, 2019:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (321.2) | $ | 419.4 | $ | 1,253.6 | $ | (336.3) | $ | 1,015.5 | |||||||||||||||||||
| Net cash provided by (used for) investing activities | 6,849.3 | (1,140.5) | (8,886.6) | — | (3,177.8) | ||||||||||||||||||||||||
| Net cash (used in) provided by financing activities | (8,286.7) | 735.9 | 7,676.0 | 336.3 | 461.5 | ||||||||||||||||||||||||
| Effect of changes in currency exchange rates | — | — | (37.3) | — | (37.3) | ||||||||||||||||||||||||
| (Decrease) increase in cash | (1,758.6) | 14.8 | 5.7 | — | (1,738.1) | ||||||||||||||||||||||||
| Cash and cash equivalents, beginning of year | 1,782.6 | (0.1) | 559.8 | — | 2,342.3 | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 24.0 | $ | 14.7 | $ | 565.5 | $ | — | $ | 604.2 |
Condensed Statement of Cash Flows for the year ended December 31, 2018:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (87.2) | $ | 130.1 | $ | 372.3 | $ | (100.5) | $ | 314.7 | |||||||||||||||||||
| Net cash used in investing activities | (16.8) | (2.0) | (128.5) | — | (147.3) | ||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 1,885.7 | (128.8) | 120.7 | 100.5 | 1,978.1 | ||||||||||||||||||||||||
| Effect of changes in currency exchange rates | — | — | (36.6) | — | (36.6) | ||||||||||||||||||||||||
| Increase (decrease) in cash | 1,781.7 | (0.7) | 327.9 | — | 2,108.9 | ||||||||||||||||||||||||
| Cash and cash equivalents, beginning of year | 0.9 | 0.6 | 231.9 | — | 233.4 | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 1,782.6 | $ | (0.1) | $ | 559.8 | $ | — | $ | 2,342.3 |
Condensed Statement of Cash Flows for the year ended December 31, 2017:
| In millions | Parent | Guarantors | Non-Guarantors | Elimination | Consolidated | ||||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (49.2) | $ | 130.3 | $ | 138.3 | $ | (30.6) | $ | 188.8 | |||||||||||||||||||
| Net cash used in investing activities | (11.2) | (3.4) | (1,018.9) | — | (1,033.5) | ||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 58.8 | (127.5) | (59.3) | 30.6 | (97.4) | ||||||||||||||||||||||||
| Effect of changes in currency exchange rates | — | — | 32.3 | — | 32.3 | ||||||||||||||||||||||||
| (Decrease) increase in cash | (1.6) | (0.6) | (907.6) | — | (909.8) | ||||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of year | 2.5 | 1.2 | 1,139.5 | — | 1,143.2 | ||||||||||||||||||||||||
| Cash and cash equivalents, end of year | $ | 0.9 | $ | 0.6 | $ | 231.9 | $ | — | $ | 233.4 |
23. OTHER INCOME, NET
The components of other income, net are as follows:
| For the year ended December 31, | ||||||||||||||||||||||||||||||||
| In millions | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Foreign currency loss | $ | (13.5) | $ | (5.7) | $ | (6.6) | ||||||||||||||||||||||||||
| Equity income | 8.1 | 1.9 | 2.6 | |||||||||||||||||||||||||||||
| Expected return on pension assets/amortization | 9.9 | 9.0 | 9.8 | |||||||||||||||||||||||||||||
| Other miscellaneous (expense) income | (1.7) | 1.2 | 3.1 | |||||||||||||||||||||||||||||
| Total other income, net | $ | 2.8 | $ | 6.4 | $ | 8.9 |
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
| First | Second | Third | Fourth | |||||||||||||||||||||||
| In millions, except per share data | Quarter | Quarter | Quarter | Quarter | ||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||
| Net sales | $ | 1,593.6 | $ | 2,236.3 | $ | 2,001.7 | $ | 2,368.4 | ||||||||||||||||||
| Gross profit | 389.0 | 614.7 | 599.4 | 674.9 | ||||||||||||||||||||||
| Income from operations | 67.3 | 200.6 | 169.1 | 226.1 | ||||||||||||||||||||||
| Net (loss) income attributable to Wabtec shareholders | (4.2) | 104.1 | 91.1 | 135.7 | ||||||||||||||||||||||
| Basic (loss) earnings from operations per common share | $ | (0.04) | $ | 0.58 | $ | 0.48 | $ | 0.71 | ||||||||||||||||||
| Diluted (loss) earnings from operations per common share | $ | (0.04) | $ | 0.54 | $ | 0.48 | $ | 0.71 | ||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||
| Net sales | $ | 1,056.2 | $ | 1,111.7 | $ | 1,077.8 | $ | 1,117.8 | ||||||||||||||||||
| Gross profit | 310.9 | 324.0 | 302.0 | 297.0 | ||||||||||||||||||||||
| Income from operations | 131.3 | 123.5 | 125.2 | 93.4 | ||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | 88.4 | 84.4 | 87.7 | 34.4 | ||||||||||||||||||||||
| 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 |
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 millions | Balance at beginning of period | Charged/ (credited) to expense | Charged/ (credited) to other accounts (1) | Deductions from reserves (2) | Balance at end of period | |||||||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 16.9 | $ | 7.1 | $ | 0.2 | $ | 4.5 | $ | 19.9 | ||||||||||||||||||||||
| Valuation allowance-taxes | 41.8 | 16.2 | — | — | 58.0 | |||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 12.3 | $ | 9.5 | $ | (0.4) | $ | 4.5 | $ | 16.9 | ||||||||||||||||||||||
| Valuation allowance-taxes | 25.7 | 27.4 | — | 11.3 | 41.8 | |||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 7.3 | $ | 2.6 | $ | 5.0 | $ | 2.6 | $ | 12.3 | ||||||||||||||||||||||
| Valuation allowance-taxes | 21.4 | 4.3 | — | — | 25.7 |
(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