FORM
10-K/A
(Amendment No. 1)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182019
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
.
Commission file number
1-33332
WABCO Holdings Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 20-8481962 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1 Giacomettistrasse | Bern | Switzerland | 3000-31 | |||
1220 Pacific Drive | Auburn Hills | Michigan | 48326-3511 | |||
(Address of principal executive offices) | (Zip Code) | |||||
Registrant’s telephone number, including area code +32 2 663 98 00+41 315
813-300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, par value $0.01 per share | WBC | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | ||
None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. xo
��
Yes ☐
NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ox
☐
Yes ☒
NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xo
☒
Yes ☐
NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of thischapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xo
☒
Yes ☐
NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule12b-2
of the Exchange Act.Large Accelerated Filer | ☒ | Accelerated Filer | ||||
☐ | ||||||
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||
Emerging Growth Company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
☐
Indicate by check mark whether the registrant is a shell company (as defined in Ruleox☒ No
12b-2
of the Exchange Act). ☐
Yes The aggregate market value of the voting stock (Common Stock) held by2018,2019, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, was approximately $6.2$6.8 billion based on the closing sale price of the common stock on the New York Stock Exchange on that date. The registrant does not have any
non-affiliates
of the registrant as of the close of business on June 30, non-voting
common equity.Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $.01 par value, outstanding at February 12, 2020 | 51,270,513 shares | |||
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment No. 1 to Form
10-K
(this “Amendment”) amends the Annual Report on Form10-K
for the fiscal year ended December 31, 2019 (the “2019 Form10-K”)
originally filed on February 21, 2020 (the “Original Filing”) by WABCO Holdings, Inc., a Delaware corporation (“WABCO,” the “Company,” “we” or “us”). We are filing this Amendment to present the information required by Part III of Form10-K
and tore-file
required updated certifications under Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements are contained within this Form10-K/A,
the Company is not including the individual certification pursuant to Section 302 regarding financial statements, regarding disclosure control procedures, or regarding internal controls over financial reporting. Additionally, because no financial statements are contained within this Form10-K/A,
the Company is not required to file the certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.On March 28, 2019, WABCO entered into an Agreement and Plan of Merger with ZF Friedrichshafen AG, a stock corporation organized and existing under the laws of the Federal Republic of Germany, pursuant to which ZF will acquire 100% of the issued and outstanding shares of WABCO common stock (the Merger). The Merger is expected to close in the first half of 2020, subject to customary closing conditions, including the receipt of required regulatory approvals.
Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing.
2
TABLE OF CONTENTS | ||||||
Page
4 | ||||||
Item 10. | ||||||
4 | ||||||
Item 11. | 7 | |||||
Item 12. | 37 | |||||
Item 13. | 39 | |||||
Item 14. | 40 | |||||
42 | ||||||
Item 15. | 42 | |||||
43 | |||
3
PART III
ITEM 10. | ||
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Our Directors
The global commercial vehicle industry is also trending toward environmental sustainability. WABCO's technology leadership continues to deliver products and systems that increase fuel efficiency, reduce emissions, decrease vehicle weight and optimize energy recovery, among other advancements that enhance environmental compliancecompany has three classes of trucks, buses and trailers over the lifetime of the vehicle. For example, a truck equipped with all of WABCO's green technologies can have significantly improved fuel efficiency. These include advanced transmission automation systems, innovative aerodynamic solutions, sophisticated electronic driver assistance systems, electronic control of air suspension and breakthrough air compression technologies. We reduce vehicle weight and recuperate energy through engineering and lighter materials, resulting in higher fuel efficiency and a reduction in emissions.
| Year to Year Change | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||
| Sales to European T&B OEMs (at a constant FX rate) | (7 | )% | 8 | % | 8 | % | 6 | % | 3 | % | |||||
| European T&B Production | (9 | )% | 6 | % | 1 | % | 8 | % | 2 | % | |||||
qualified. The largest group of our customers, representing approximately 55% of sales (57% in 2017), consists of truck and bus OEMs who are large, increasingly global and few in number due to industry consolidation, as well as a smallertotal number of off-highway (agricultural and construction) OEMs. As truck and bus OEMs grow globally, they expect suppliers to expand with them beyond their traditional markets and become reliable partners, especially in the developmentdirectors established by resolution of new technologies. WABCO has a strong reputation for technological innovation and collaborates closely with major OEM customers to design, develop and deliver technologies used in their products. Our products play an important role in enabling further vehicle safety and efficiency. At the same time, there are few other suppliers who compete across the breadth of products that we supply globally.
| WABCO SALES | ||||||||||
| By Geography | FY 2018 % of Sales | FY 2017 % of Sales | By Major End-Market | FY 2018 % of Sales | FY 2017 % of Sales | |||||
| Europe | 49 | % | 52 | % | Truck & Bus Products (OEMs) | 55 | % | 57 | % | |
| Asia | 23 | % | 26 | % | Aftermarket | 25 | % | 24 | % | |
| North America | 23 | % | 18 | % | Trailer Products | 10 | % | 9 | % | |
| South America | 3 | % | 3 | % | Car Products | 5 | % | 6 | % | |
| Other | 2 | % | 1 | % | Off Highway Products | 5 | % | 4 | % | |
shareholders. Class III directors include Jacques Esculier, Thomas S. Gross and Henry R. Keizer. The terms of the Class III directors are due to expire at the 2022 annual meeting of shareholders.
Jacques Esculier—Age 60
Director since July 2007 and Chairman since May 2009
Jacques Esculier has served as our Chief Executive Officer and directorDirector since July 2007. InSince May 2009, he was appointedhas also served as our Chairman of our Board of Directors.the Board. Prior to July 2007, Mr. Esculier served as Vice President of TraneAmerican Standard Companies Inc. and President of its Vehicle Control Systems business, a position he had held since January 2004. Prior to holding that position, Mr. Esculier served in the capacity of Business Leader for theAmerican Standard’s Trane Commercial Systems'Systems’ Europe, Middle East, Africa, India & Asia Region from 2002 through January 2004. Prior to joining TraneAmerican Standard in 2002, Mr. Esculier spent more than six years in leadership positions at AlliedSignal/Honeywell. He was Vice President and General Manager of Environmental Control and Power Systems Enterprise based in Los Angeles and Vice President of Aftermarket Services-AsiaServices—Asia Pacific based in Singapore. Mr. Esculier is a member of the Board of Directors of Pentair plc.plc and IHS Markit Ltd.
The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Esculier to serve as our Chairman and Chief Executive Officer: significant executive management experience gained as an executive officer at two Fortune 500 companies publicly-traded on the New York Stock Exchange; strong international experience gained as an executive officer of American Standard; and financial expertise acquired as chief executive officer with the chief financial officer as a direct report and by holding several senior management positions. In summary, Mr. Esculier has multi-cultural leadership and outstanding strategic abilities to steward and sustain the company’s performance as it maintains its position as an industry innovation leader while pursuing global expansion and excellence in execution.
Thomas S. Gross—Age 65
Chairman of the Compensation, Nominating and Governance (“CNG”) Committee; Director since March 2016
Mr. Gross served from 2009 to 2015 as Vice Chairman and Chief Operating Officer of the Electrical Sector at Eaton Corporation plc, a global power management company, before retiring in 2015. Prior to that, at Eaton Corporation, he was President, Power Quality and Control Business; President, Power Quality Solutions; and Vice President, Eaton Business System. After joining Eaton in 2003, Mr. Gross gained senior executive experience through businesses that supply technological solutions globally for a range of industrial power systems and controls. Previously, Mr. Gross held senior executive positions at Danaher Corporation, a global science and technology company serving a variety of industries, and at Xycom, a technology company serving the industrial automation and control sector. He began his career at Rockwell Automation in 1977, earning increased responsibilities over two decades, and was ultimately promoted to President, Rockwell Software. Mr. Gross currently serves on the Board of RPM International Inc., a world leader in specialty coatings and sealants. Mr. Gross served as Director of Celestica Inc., a leading manufacturer of electronic and electro- mechanical solutions, until November 2017. Mr. Gross holds a Master of Business Administration degree from the University of Michigan and a Bachelor of Science degree from the University of Wisconsin, both located in the United States.
The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Gross to serve as director of the company: significant executive management experience gained as an executive officer at Eaton Corporation plc, Danaher Corporation and Rockwell Automation; extensive experience in finance, capital allocation, compensation, management development, and acquisitions; and board experience gained as a director of another publicly-held company.
4
Henry R. Keizer—Age 63
Chairman of the Audit Committee; Director since July 2015
Mr. Henry R. Keizer served from 2010 to 2012 as Deputy Chairman and Chief Operating Officer of KPMG LLP, one of the world’s largest accounting and professional services firms, before retiring in 2012. Prior to that, for five years, he was Global Head of Audit at KPMGI, a consortium of more than 100 KPMG firms operating in over 140 countries. During his 35 years at KPMG, Mr. Keizer held a range of senior executive leadership roles of increasing responsibility, advising clients engaged in finance, manufacturing and technology, among other sectors.
Mr. Keizer currently serves as a trustee of BlackRock Funds. He also serves as the
non-executive
chairman and a director of Hertz Global Holdings, Inc., a global rental car company, a director of Sealed Air Corporation (NYSE:SEE) and as a director of Park Indemnity Ltd., a captive insurer affiliated with KPMGI. Previously, Mr. Keizer served on the boards of MUFG Americas Holding Corporation, MUFG Union Bank and Montpelier Re Holdings, Ltd, a global property and casualty reinsurance company and the American Institute of Certified Public Accountants. He holds a bachelor’s degree in accounting, summa cum laude, from Montclair State University, New Jersey, U.S.A.The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Keizer to serve as a director of the company: significant executive management experience gained as Chief Operating Officer at KPMG; financial expertise acquired by holding various financial positions of increasing responsibility; strong international experience gained as Global Head of Audit at KPMGI; and board experience gained as a director of several publicly-held companies.
Jean-Paul L. Montupet—Age 72
Member of the CNG Committee; Director since April 2012
Mr. Montupet serves as an Advisory Director of Emerson Electric Co. He served as President of Emerson Europe SA until December 2012, and had served as an Executive Vice President of Emerson Electric Co. since 1990 where he was responsible for its Industrial Automation Business. From 2002 to March 2016, Mr. Montupet served on the Board of PartnerRe Ltd., a leading global reinsurer; he served as
non-Executive
Chairman from 2010 to March 2016 and was also Chairman of the Nominating and Governance Committee and a member of the Risk and Finance Committee. Mr. Montupet served as a member of the board of directors of Lexmark International Inc., a leading provider of imaging products and services until November 2016. In addition, Mr. Montupet is a director of IHS Markit Ltd. and Assurant, Inc.The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Montupet to serve as director of the company: significant executive management experience gained as an executive officer at a global Fortune 500 company publicly-traded on the New York Stock Exchange; strong international experience gained as an executive officer of Emerson Electric Co., a company with more than 129,000 employees and 250 manufacturing locations worldwide; financial expertise acquired as a president and as a chief financial officer and serving on the audit committees of two publicly-traded companies; strong educational background with an advanced business degree from HEC Paris, one of the top business schools in Europe; and additional experience gained as a director of another publicly-traded company listed on the NYSE and the Paris Stock Exchange.
D. Nick Reilly, CBE—Age 70
Member of the Audit Committee; Director since December 2014
Since 2012 Mr. Reilly has served on the Advisory Board of MSXI Inc., a privately-held company that provides engineering and staffing services to clients mainly in the automotive industry. Prior to his role on the Advisory Board, he served as Chairman, Asia Pacific for MSXI Inc. From 2018, Mr. Reilly has been an Adviser to Nissens Company’s Asian business. Nissens is a supplier of cooling products to the independent automotive aftermarket. From 2012 to 2016, Mr. Reilly has also served as a strategic adviser to UkrAuto Corporation, a Ukrainian importer of cars that owns the largest network of manufacturing and assembling facilities, service stations and auto dealerships in Ukraine. From 2012 until March 2016, Mr. Reilly served as Vice Chairman of erae Automotive (previously Korea Delphi Automotive Components) a privately-held company that develops, manufactures and sells automotive components in South Korea and internationally. Prior to 2012, Mr. Reilly spent 37 years with General Motors Corporation (“General Motors” “GM”), and held several international executive roles , such as President, GM Europe from 2009 to 2012, President, GM International from 2008 to 2009 and President, GM Asia Pacific from 2006 to 2008 and President, GM Daewoo from 2001 to 2006. Prior to General Motors, Mr. Reilly worked for three years in the finance and investment community.
The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Reilly to serve as a director of the company: extensive international executive experience with General Motors, including significant experience in finance, manufacturing, quality control, purchasing, sales and aftermarket sales of automotive equipment and significant experience in evaluating new business opportunities as a strategic adviser to three companies in the international automotive industry.
5
Michael T. Smith—Age 76
Member of the CNG Committee; Director since July 2007
Mr. Smith served as the Chairman of the Board and Chief Executive Officer of Hughes Electronics Corporation from 1997 to 2001, before retiring in 2001. Prior to those positions, Mr. Smith had been Vice Chairman of Hughes Electronics and Chairman of the Hughes Aircraft Company. Mr. Smith joined WABCOHughes Electronics in June 20181985 as Senior Vice President and Chief Financial Officer after spending nearly 20 years with General Motors in a variety of financial management positions. In 1992 he was elected Vice Chairman of Hughes Electronics and President of Hughes Missile Systems Group, and in 1995 he was elected Chairman of Hughes Aircraft Company. Mr. Smith was also a member of the Board of Directors of Alliant Techsystems until 2009 and Ingram Micro, Inc. until 2014. Mr. Smith is a member of the Board of Directors of Teledyne Technologies, Inc., FLIR Systems, Inc. and Zero Gravity Solutions, Inc.
The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. Smith to serve as a director of the company: significant executive management experience gained as an executive officer of a Fortune 500 company that is publicly-traded on the NYSE; strong international experience gained as the Chairman of the Board and Chief Executive Officer of Hughes Electronics Corporation; financial expertise acquired as Chief Financial Officer. PriorOfficer of Hughes Electronics and by holding various financial management positions with General Motors; and board experience gained as a member of the board of directors of three publicly-held companies. In summary, Mr. Smith has leadership and financial management abilities that substantially strengthen the company due to his appointment at WABCO, multinational knowledge of the global automotive sector and his understanding of the strategic needs of major original equipment manufacturers.
G. Peter D’Aloia—Age 75
Member of the Audit Committee; Director since July 2007
Mr. FioroniD’Aloia served as Senior Vice President and Chief Financial Officer of American Standard Companies Inc., a position he held since 2000, before retiring in 2008. Before joining American Standard, Mr. D’Aloia worked for Honeywell where he most recently served as Vice President—Business Development. He spent 27 years with Honeywell’s predecessor company, AlliedSignal, in diverse finance management positions. During his career with AlliedSignal, he served as Vice President—Taxes; Vice President and Treasurer; Vice President and Controller; and Vice President and Chief Financial Officer for the Engineered Materials Sector. Early in his career, he worked as a tax attorney for the accounting firm, Arthur Young and Company. Mr. D’Aloia served as a director of ITT Inc. from March 2014October 2011 until May 2017. Mr. D’Aloia is a director of FMC Corporation. He also serves as Director of Livent Corporation since October 11, 2018.
The Board of Directors concluded that the following experience, qualifications and skills qualified Mr. D’Aloia to serve as a director of the company: significant executive management experience gained as an executive officer of two Fortune 500 companies, both publicly-traded on the New York Stock Exchange; strong international experience gained as Vice President Finance, with The Goodyear Tire & Rubber Company’s Europe, Middle East and Africa (EMEA) business unit. Mr. Fioroni joined Goodyear in 2009 as Finance Director for the Eastern Europe, Middle East and Africa (EEMEA) region before being appointed Vice President, Global Internal Audit, in 2011. Prior to joining Goodyear, Mr. Fioroni was with General Electric for 13 years where he held a number of senior finance positions. He was latterly Chief Financial Officer (EMEA) for American Standard; financial expertise acquired as Chief Financial Officer of American Standard and by holding diverse financial management positions with AlliedSignal and working as a tax attorney for the accounting firm, Arthur Young and Company; and board experience gained as a member of the board of directors of two publicly-held companies. In summary, Mr. D’Aloia has financial management abilities, including multinational legal, tax and banking expertise, that significantly contribute to the company’s success as a globally operating entity while taking full advantage of business opportunities in developed as well as emerging economies.
Juergen W. Gromer—Age 75
Member of the Audit Committee; Director since July 2007
Dr. Gromer is the retired President and CEO of Tyco Electronics, a position that he held from April 1999 until December 31, 2007. Dr. Gromer formerly held senior management positions from 1983 to 1998 at AMP (acquired by Tyco in April 1999) including Senior Vice President of Worldwide Sales and Services, President of the Global Automotive Division, and Vice President of Central and Eastern Europe, and General Electric’s Security Division. Mr. Fioroni holdsManager of AMP Germany. Dr. Gromer has over 20 years of AMP and Tyco Electronics experience, serving in a degree in Business Administration from the Universita Commerciale Luigi Bocconi in Milan, Italy.
The Board of Directors concluded that the following experience, qualifications and skills qualified Dr. Gromer to serve as a tax consultant at Coopers & Lybranddirector of the company: significant executive management experience gained as an executive officer of a Fortune 500 company publicly-traded on the New York Stock Exchange; strong international experience gained as President of Tyco Electronics; financial expertise acquired as a President of Tyco Electronics and Ernst & Young. Specializingthrough various senior management positions and also as a member of the Advisory Board of Commerzbank; and board experience gained as a director of publicly-held companies. In summary, Dr. Gromer has global leadership abilities, as well as deep connections with European corporate culture, and he strongly contributes to the company’s strategy of geographic expansion while maintaining a leading technology and industry position in JournalismEurope.
6
Availability of Corporate Governance Materials
The company’s Code of Conduct and Communication from Brussels University, he holds a Bachelor's degreeEthics and Governance Principles, including our definition of director independence, as well as the charters for the Audit Committee and the CNG Committee are available on our web siteunder the caption “Investor Relations—Corporate Governance.” The foregoing information is available in Business Administration and a Master's degree in Tax Management from Solvay Business School in Brussels.
www.wabco-auto.com
Audit Committee and Audit Committee Financial Expert
The Audit Committee has been established in accordance with Section 3(a)(58)(A) of the largest pet care retailerSecurities Exchange Act of 1934, as amended. Each member of the Audit Committee is independent as defined by the NYSE listing standards and the company’s independence standards. The Audit Committee’s responsibilities, as set forth in its charter, include:
reviewing the United Kingdom. From 2006 to 2011, she held various legal leadership roles for SSL International Plc, onescope of internal and independent audits;
reviewing the world’s leading providerscompany’s quarterly and annual financial statements and Annual Report on Form
10-K;
reviewing the adequacy of consumer healthcare products. Ms. Brown heldmanagement’s implementation of internal controls;
reviewing with management and the position of Group Head of Legalindependent auditors the company’s actions and Intellectual Property and was responsible for creating and driving legal strategyactivities concerning risk assessment and risk management acrossmanagement;
reviewing the global operations, including researchcompany’s accounting policies and development, manufacturing,procedures and sales. Before taking up her in-house roles, Ms. Brown workedsignificant changes in private practice as an Intellectual Property Attorney specializing in brandaccounting policies;
appointing the independent auditors and copyright protection. Ms. Brown is a registered trademark attorney. She holds a Bachelor of Laws degree, as well as a Diploma in Legal Practice from Nottingham Law School in Nottingham, United Kingdom.
reviewing compliance with the United Statescompany’s Code of Conduct and France,Ethics, major litigation, compliance with environmental standards and was a business purchasing leader for Valeo Group. Overall, he has gained more than 20 years of experience in positions of increasing responsibility within sourcing, quality, manufacturing,the investment performance and business management. Mr. Solis holds a Master’s degree in engineering from Technical University in Monterrey (ITESM), Mexico. In addition, he completed educational programs in international marketing at ITESM, as well as executive training in business administration and management at INSEAD.
NYSE.
| Period | Total Number of Shares Purchased | Average price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a) | |||
| Total through December 31, 2017 | 1,033,000 | $116.13 | 1,033,000 | $480,041,067 | |||
| January 1 - January 31 | — | - | — | ||||
| February 1 - February 28 | — | - | — | ||||
| March 1 - March 31 | 221,000 | $138.74 | 221,000 | ||||
| Total first quarter | 221,000 | $138.74 | 221,000 | $449,378,909 | |||
| April 1 - April 30 | 48,000 | $130.30 | 48,000 | ||||
| May 1 - May 31 | 354,000 | $128.58 | 354,000 | ||||
| June 1 - June 30 | 306,000 | $122.26 | 306,000 | ||||
| Total second quarter | 708,000 | $125.96 | 708,000 | $360,196,131 | |||
| July 1 - July 31 | 72,000 | $123.26 | 72,000 | ||||
| August 1 - August 31 | 398,400 | $122.85 | 398,400 | ||||
| September 1 - September 30 | 270,090 | $119.76 | 270,090 | ||||
| Total third quarter | 740,490 | $121.76 | 740,490 | $270,034,351 | |||
| October 1 - October 31 | 324,700 | $109.61 | 324,700 | ||||
| November 1 - November 30 | 282,060 | $115.42 | 282,060 | ||||
| December 1 - December 31 | 202,204 | $108.07 | 202,204 | ||||
| Total fourth quarter | 808,964 | $111.25 | 808,964 | $0 | |||
| Total through December 31, 2018 | 3,511,454 | $119.6 | 3,511,454 | $0 | |||
| 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | ||||||
| WABCO Holdings Inc. | 100 | 112.17 | 109.47 | 113.64 | 153.62 | 114.91 | |||||
| S&P 500 Index | 100 | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | |||||
| S&P 500 Auto Parts & Equipment Index | 100 | 103.68 | 97.82 | 95.66 | 141.11 | 101.70 | |||||
| ITEM 11. | |
Executive Officer Compensation and Other Matters
| (Amounts in millions, except share and per share data) | Year Ended December 31, | |||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||
| Sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | $ | 2,627.5 | $ | 2,851.0 | ||||||||||
| Cost of sales | 2,658.5 | 2,290.4 | 1,931.0 | 1,837.6 | 1,972.6 | |||||||||||||||
| Gross profit | 1,172.5 | 1,013.8 | 879.0 | 789.9 | 878.4 | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Selling and administrative expenses | 476.0 | 411.2 | 356.6 | 346.6 | 372.6 | |||||||||||||||
| Research, development and engineering expenses | 184.4 | 147.0 | 135.2 | 139.5 | 145.0 | |||||||||||||||
| Other operating (income)/expense, net | (0.4 | ) | 20.6 | 5.3 | 6.7 | 8.9 | ||||||||||||||
| Operating income | 512.5 | 435.0 | 381.9 | 297.1 | 351.9 | |||||||||||||||
| Equity income of unconsolidated joint ventures | 1.0 | 23.1 | 24.8 | 32.1 | 23.8 | |||||||||||||||
Gain on remeasurement of equity investments (1) | — | 247.7 | — | — | — | |||||||||||||||
| Other non-operating expense, net | (42.3 | ) | (37.2 | ) | (24.9 | ) | (24.6 | ) | (19.1 | ) | ||||||||||
| Interest (expense)/income, net | (7.5 | ) | (16.0 | ) | (12.7 | ) | (7.1 | ) | 0.2 | |||||||||||
| Income before income taxes | 463.7 | 652.6 | 369.1 | 297.5 | 356.8 | |||||||||||||||
Income tax expense (2) | 49.3 | 229.7 | 121.8 | 11.5 | 55.6 | |||||||||||||||
| Net income including noncontrolling interests | 414.4 | 422.9 | 247.3 | 286.0 | 301.2 | |||||||||||||||
| Less: net income attributable to noncontrolling interests | 20.3 | 16.8 | 24.3 | 10.8 | 9.7 | |||||||||||||||
| Net income | $ | 394.1 | $ | 406.1 | $ | 223.0 | $ | 275.2 | $ | 291.5 | ||||||||||
| Per share: | ||||||||||||||||||||
| Basic | $ | 7.46 | $ | 7.53 | $ | 4.00 | $ | 4.76 | $ | 4.87 | ||||||||||
| Diluted | $ | 7.43 | $ | 7.50 | $ | 3.98 | $ | 4.72 | $ | 4.81 | ||||||||||
| Average number of outstanding common shares: | ||||||||||||||||||||
| Basic | 52,846,962 | 53,903,938 | 55,695,738 | 57,768,018 | 59,907,763 | |||||||||||||||
| Diluted | 53,062,573 | 54,139,815 | 55,981,816 | 58,274,987 | 60,546,454 | |||||||||||||||
Balance Sheet Data (at end of period): | ||||||||||||||||||||
| Total assets | $ | 3,738.6 | $ | 4,323.4 | $ | 2,589.9 | $ | 2,432.7 | $ | 2,392.8 | ||||||||||
| Total debt | $ | 845.2 | $ | 1,409.8 | $ | 503.7 | $ | 315.2 | $ | 87.1 | ||||||||||
| Total shareholders' equity | $ | 1,176.8 | $ | 1,121.4 | $ | 786.7 | $ | 841.6 | $ | 1,152.8 | ||||||||||
| Cash dividends per common share | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Executive Summary
We seek to closely align the interests of Financial Conditionour named executive officers (“NEOs”) with the interests of our shareholders. Our compensation programs are designed to reward our NEOs for achieving short-term and Resultslong- term strategic and operational goals and increasing total shareholder returns, while at the same time avoiding incentives that encourage unnecessary or excessive risk-taking. Our NEOs’ total compensation is comprised of Operations” which follows.a mix of base salary, annual cash incentive awards and long-term incentive awards that include both performance-based cash and equity awards.
For 2019, our NEOs were:
• Jacques Esculier | Chairman of the Board and Chief Executive Officer (“CEO”) | |
• Sean Deason | Chief Financial Officer (“CFO”) & Controller* | |
• Lisa Brown | Chief Legal Officer (“CLO”) and Company Secretary | |
• Nick Rens | President, Europe, Middle East, and Africa | |
• Christian Brenneke | Chief Technology Officer (“CTO”) | |
• Roberto Fioroni | Former Chief Financial Officer* |
| * | Mr. Fioroni resigned from his position as CFO effective April 1, 2019 and left the company April 30, 2019. Sean Deason was appointed to serve as CFO & Controller effective April 1, 2019. |
7
2019 Performance
(1)
Specific results in 2019 included:
Sales
| Year to Year Change | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||
| Sales to European T&B OEMs (at constant FX rates) | (7 | )% | 8 | % | 8 | % | 6 | % | 3 | % | |||||
| European T&B Production | (9 | )% | 6 | % | 1 | % | 8 | % | 2 | % | |||||
Year to Year Change | 2014 | 2015 | 2016 | 2017 | 2018 | Average Change | ||||||
| Aftermarket Sales (at constant FX rates) | 13 | % | 7 | % | 6 | % | 9 | % | 18 | % | 11 | % |
| 2018 | 2017 | 2016 | ||||||
| OE Manufacturers: | ||||||||
| Truck & Bus products | 55 | % | 57 | % | 55 | % | ||
| Trailer products | 10 | % | 9 | % | 10 | % | ||
| Car products | 5 | % | 6 | % | 6 | % | ||
| Off highway | 5 | % | 4 | % | 4 | % | ||
| Aftermarket | 25 | % | 24 | % | 25 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Geography: | ||||||||
| Europe | 49 | % | 52 | % | 54 | % | ||
| North America | 23 | % | 18 | % | 14 | % | ||
| South America | 3 | % | 3 | % | 3 | % | ||
| Asia | 23 | % | 26 | % | 24 | % | ||
| Other | 2 | % | 1 | % | 5 | % | ||
| 100 | % | 100 | % | 100 | % | |||
Year ended December 31, | Excluding Foreign Exchange Translation ** | ||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | % change reported | 2018 adjusted amount | % change adjusted | ||||||||||||
| Sales | $ | 3,831.0 | $ | 3,304.2 | 15.9 | % | $ | 3,763.7 | 13.9 | % | |||||||
| Cost of sales | 2,658.5 | 2,290.4 | 16.1 | % | 2,622.7 | 14.5 | % | ||||||||||
| Gross profit | 1,172.5 | 1,013.8 | 15.7 | % | 1,141.0 | 12.5 | % | ||||||||||
| Operating expenses | 660.0 | 578.8 | 14.0 | % | 644.5 | 11.4 | % | ||||||||||
| Equity in net income of unconsolidated joint ventures | 1.0 | 23.1 | (95.7 | )% | 1.0 | (95.7 | )% | ||||||||||
| Gain on remeasurement of equity investments | — | 247.7 | * | — | * | ||||||||||||
| Other non-operating expense, net | (42.3 | ) | (37.2 | ) | 13.7 | % | (37.5 | ) | 0.8 | % | |||||||
| Interest expense, net | (7.5 | ) | (16.0 | ) | (53.1 | )% | (7.4 | ) | (53.8 | )% | |||||||
| Income tax expense | 49.3 | 229.7 | (78.5 | )% | 48.9 | (78.7 | )% | ||||||||||
| Net income attributable to noncontrolling interests | 20.3 | 16.8 | 20.8 | % | 20.8 | 23.8 | % | ||||||||||
Performance Gross Profit Margin
Performance Operating Income
Performance Earnings Before Taxes (Pre-Tax Income)
Pre-Tax
Income) of (Pre-Tax
Income) was $245.8 million, versus $394.1 million in 2018.Performance Net Income and Performance Earnings Per Share (“EPS”)
In summary, due to the slowdown in global economic growth, as well as strong truck and busincreasing geopolitical uncertainty, the worldwide production growth of 18.1%. Total salesnew vehicles declined in South America increased 16.5% (30.6% excluding foreign currency translation effects), driven primarily by truck and bus production growth of 27.1% combined with increased content per truck, partially offset by a lower growth in other customer groups.
| (Amounts in millions) | Cost of Sales | Gross Profit | |||||
| Cost of sales / gross profit for the year ended December 31, 2017 | $ | 2,290.4 | $ | 1,013.8 | |||
| Increase/(decrease) due to: | |||||||
| Sales price reductions | — | (41.8 | ) | ||||
| Sales price reductions as % of sales | (1.2 | )% | |||||
| Volume, mix and absorption | 227.4 | 51.6 | |||||
Material productivity (1) | (36.4 | ) | 36.4 | ||||
| Conversion productivity | (38.5 | ) | 38.5 | ||||
| U.S. acquisitions | 145.1 | 77.1 | |||||
| Labor inflation | 17.2 | (17.2 | ) | ||||
Foreign exchange effects (2) | 43.5 | 23.9 | |||||
Other (3) | 9.8 | (9.8 | ) | ||||
| Net increase | 368.1 | 158.7 | |||||
| Cost of sales / gross profit for the year ended December 31, 2018 | $ | 2,658.5 | $ | 1,172.5 | |||
| (Amounts in millions) | |||
| Operating expenses for the year ended December 31, 2017 | $ | 578.8 | |
| Increase/(decrease) due to: | |||
| Labor inflation | 15.6 | ||
| Incentive compensation | (5.3 | ) | |
Incremental costs from U.S. acquisitions (1) | 37.8 | ||
| Streamlining | 7.0 | ||
| Pension and post retirement benefit costs | 3.3 | ||
| Foreign exchange translation | 15.5 | ||
Indemnification costs (2) | (14.9 | ) | |
| Research and development investments, net | 15.9 | ||
| Other | 6.3 | ||
| Net increase | 81.2 | ||
| Operating expenses for the year ended December 31, 2018 | $ | 660.0 | |
| (1) | The summary of our 2019 financial performance includes certain non-GAAP financial measures. Performance gross profit margin, performance operating income, performance earnings before taxes, performance net income, and performance earnings per share arenon-GAAP financial measures that exclude items for separation, streamlining and acquisition, discrete andone-time tax items, and other items that may mask the underlying operating results of the company, as appropriate. These measures should be considered in addition to, not as a substitute for, GAAP measures. Management believes that presenting thesenon-GAAP measures is useful to shareholders because it enhances their understanding of how management assesses the operating performance of the company’s business. The definitions for thesenon-GAAP measures are the same as in both 2017 and 2018. See “Reconciliation of Operating Income to Performance Operating Income and Net Income to Performance Net Income (Unaudited)” for reconciliation to the most comparable GAAP measures. |
8
Pay-for-Performance
We believe that the levels of a regulated insurance company. Management is also currently evaluatingexecutive pay based on our financial results are reasonable over the possible impact on its future effective tax rate of the judgment by the General Court of the European Union on February 14, 2019 relating to the Belgium EPR program. See Note 23 of Notes to the Consolidated Financial Statements.
shareholders. The following table is a summarygraph illustrates the trend over the last five completed fiscal years of sales, cost of sales, gross profit, operating expensesour CEO executive compensation and other selected results of operations for the periods indicated.
Year ended December 31, | Excluding Foreign Exchange Translation ** | ||||||||||||||||
| (Amounts in millions) | 2017 | 2016 | % change reported | 2017 adjusted amount | % change adjusted | ||||||||||||
| Sales | $ | 3,304.2 | $ | 2,810.0 | 17.6 | % | $ | 3,260.4 | 16.0 | % | |||||||
| Cost of sales | 2,290.4 | 1,931.0 | 18.6 | % | 2,260.1 | 17.0 | % | ||||||||||
| Gross profit | 1,013.8 | 879.0 | 15.3 | % | 1,000.3 | 13.8 | % | ||||||||||
| Operating expenses | 578.8 | 497.1 | 16.4 | % | 570.5 | 14.8 | % | ||||||||||
| Equity in net income of unconsolidated joint ventures | 23.1 | 24.8 | (6.9 | )% | 23.1 | (6.9 | )% | ||||||||||
| Gain on remeasurement of equity investments | 247.7 | — | * | 247.2 | * | ||||||||||||
| Interest expense, net | (16.0 | ) | (12.7 | ) | 26.0 | % | (16.2 | ) | 27.6 | % | |||||||
| Income tax expense | 229.7 | 121.8 | 88.6 | % | 223.4 | 83.4 | % | ||||||||||
| Net income attributable to noncontrolling interests | 16.8 | 24.3 | (30.9 | )% | 16.5 | (32.1 | )% | ||||||||||
| (Amounts in millions) | Cost of Sales | Gross Profit | |||||
| Cost of sales / gross profit for the year ended December 31, 2016 | $ | 1,931.0 | $ | 879.0 | |||
| Increase/(decrease) due to: | |||||||
| Sales price reductions | — | (51.6 | ) | ||||
| Sales price reductions as % of sales | (1.6 | )% | |||||
| Volume, mix and absorption | 391.6 | 110.4 | |||||
| Material productivity | (46.9 | ) | 46.9 | ||||
| Conversion productivity | (36.3 | ) | 36.3 | ||||
| U.S. acquisitions | (24.8 | ) | 24.8 | ||||
| Labor inflation | 14.5 | (14.5 | ) | ||||
| Foreign exchange effects | 45.7 | (1.9 | ) | ||||
| Other | 15.6 | (15.6 | ) | ||||
| Net increase | 359.4 | 134.8 | |||||
| Cost of sales / gross profit for the year ended December 31, 2017 | $ | 2,290.4 | $ | 1,013.8 | |||
| (Amounts in millions) | |||
| Operating expenses for the year ended December 31, 2016 | $ | 497.1 | |
| Increase/(decrease) due to: | |||
| Labor inflation | 13.6 | ||
| Incentive compensation | 10.3 | ||
| Incremental costs from U.S. acquisitions | 13.4 | ||
| Indemnification charges | 15.5 | ||
| Pension and post retirement benefit costs | 3.9 | ||
| Foreign exchange translation | 8.3 | ||
| Extraordinary sell-side M&A activity | 4.5 | ||
| Research and development investments, net | 3.2 | ||
| Other | 9.0 | ||
| Net increase | 81.7 | ||
| Operating expenses for the year ended December 31, 2017 | $ | 578.8 | |
CEO Pay Index Year (1) | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
CEO Pay Measure ($ 000) | ||||||||||||||||||||||||
Reported Pay 1-Year (FX each year) | $ | 6,800 | $ | 7,584 | $ | 8,491 | $ | 8,080 | $ | 7,489 | ||||||||||||||
% Change | 11.5 | % | 12.0 | % | -4.8 | % | -7.3 | % | ||||||||||||||||
TSR Index Year (2) | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||
TSR Index Measure | ||||||||||||||||||||||||
Prior 1-Year TSR Indexed to 2013=100 | 100 | 112 | 109 | 114 | 154 | 115 | ||||||||||||||||||
CEO Pay Index Year (1) | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
1-Year TSR % | 12.2 | % | -2.4 | % | 3.8 | % | 35.2 | % | -25.2 | % | ||||||||||||||
| (1) | CEO Pay (in $000s) includes (i) base salary and annual incentive awards earned during the applicable year, (ii) the cash-based long-term incentive plan (“Cash LTIP”) award with a performance period ending in the applicable year, (iii) the fair value of restricted stock unit (“RSU”) and performance share unit (“PSU”) awards granted during the applicable year as determined under ASC Topic 718 and (iv) all other compensation reported for the applicable year. |
| (2) | TSR = stock price appreciation plus reinvested dividends. TSR is indexed to December 31, 2013, in the graph and table above since equity awards are typically granted during the first calendar quarter when prior- year TSR results are known. |
9
| December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||
| (Amounts in millions) | Repurchase Agreements | Short-term Investments | Total | Repurchase Agreements | Short-term Investments | Total | |||||||||||||||||
| Investments | $ | 161.2 | $ | 526.0 | $ | 687.2 | $ | 312.2 | $ | 223.0 | $ | 535.2 | |||||||||||
| Sales and redemptions | 210.3 | 374.9 | 585.2 | 318.4 | 230.0 | 548.4 | |||||||||||||||||
| Net cash received/(invested) | $ | 49.1 | $ | (151.1 | ) | $ | (102.0 | ) | $ | 6.2 | $ | 7.0 | $ | 13.2 | |||||||||
Overview of R.H. Sheppard, as well as $2.2 million to acquire Asset Trackr, as discussed in Note 22 of Notes to Consolidated Financial Statements,2019 Compensation Decisions and we invested $3.8 million in unconsolidated joint ventures. This is in comparison to 2017 when we paid $382.7 million net of cash acquired for the acquisition of Sheppard, Meritor WABCO and WABCO Automotive South Africa.Actions
| December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
| (Amounts in millions) | Repurchase Agreements | Short-term Investments | Total | Repurchase Agreements | Short-term Investments | Total | |||||||||||||||||
| Investments | $ | 312.2 | $ | 223.0 | $ | 535.2 | $ | 324.6 | $ | — | $ | 324.6 | |||||||||||
| Sales and redemptions | 318.4 | 230.0 | 548.4 | 228.8 | 44.2 | 273.0 | |||||||||||||||||
| Net cash received/(invested) | $ | 6.2 | $ | 7.0 | $ | 13.2 | $ | (95.8 | ) | $ | 44.2 | $ | (51.6 | ) | |||||||||
| (Amounts in millions) | Face value | Coupon | Maturity date | |||
| Fixed rate term loan - Series A | € | 10.0 | 0.85% | March 31, 2021 | ||
| Fixed rate term loan - Series B | 60.0 | 1.15% | March 31, 2022 | |||
| Fixed rate term loan - Series C | 80.0 | 1.43% | March 31, 2023 | |||
| Floating rate term loan - Series A | 50.0 | 6-month EURIBOR plus 80 bps | March 31, 2021 | |||
| Floating rate term loan - Series B | 60.0 | 6-month EURIBOR plus 90 bps | March 31, 2022 | |||
| Floating rate term loan - Series C | 40.0 | 6-month EURIBOR plus 100 bps | March 31, 2023 | |||
| € | 300.0 | |||||
| Payments due by period | ||||||||||||||||||||
| (Amounts in millions) | Total | 2019 | 2020 and 2021 | 2022 and 2023 | Beyond 2023 | |||||||||||||||
Debt obligations (1) | $ | 901.3 | $ | 8.2 | $ | 84.8 | $ | 459.9 | $ | 348.4 | ||||||||||
Lease obligations (2) | 121.1 | 30.1 | 43.3 | 24.5 | 23.2 | |||||||||||||||
Purchase obligations (3) | 270.0 | 270.0 | — | — | — | |||||||||||||||
Pension and post-retirement contributions (4) | 295.8 | 26.5 | 55.5 | 57.5 | 156.3 | |||||||||||||||
Transition tax payable (5) | 169.9 | 16.2 | 32.4 | 70.7 | 50.6 | |||||||||||||||
| Total | $ | 1,758.1 | $ | 351.0 | $ | 216.0 | $ | 612.6 | $ | 578.5 | ||||||||||
Base Salary
Annual Incentives
pre-established
financial and quantitative,non-financial
goals. See “Components of 2019 Executive Compensation— Fiscal Year 2019 Annual Incentive Plan.”Long-Term Incentives
Cash LTIP:
Performance Share Units (“PSUs”)
Equity-Based Grants:
These compensation actions reflect the Committee’s review of market data as well as individual factors as discussed in the period ended December 31, 2018,“Components of 2019 Executive Compensation—Base Salary.”
| * | ROIC is defined as performance operating income adjusted for certain costs related to pension, equity investments and non-controlling interests, divided by net assets adjusted for certain tax, pension andnon-operational assets or liabilities. |
Executive Compensation Policy and the related notes and the financial statement schedule listed in the Index at Item 15(a) (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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.Governance Highlights
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 15, 2019 expressed an unqualified opinion thereon.
Balanced Performance Metrics
at-risk
incentive pay that is earned based on successful achievement of multiple complementary performance metrics.Strong Risk Management
No Excise Tax Gross-Ups
| Year Ended December 31, | |||||||||||
| (Amounts in millions, except share and per share data) | 2018 | 2017 | 2016 | ||||||||
| Sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | |||||
| Cost of sales | 2,658.5 | 2,290.4 | 1,931.0 | ||||||||
| Gross profit | 1,172.5 | 1,013.8 | 879.0 | ||||||||
| Costs and expenses: | |||||||||||
| Selling and administrative expenses | 476.0 | 411.2 | 356.6 | ||||||||
| Research, development and engineering expenses | 184.4 | 147.0 | 135.2 | ||||||||
| Other operating (income)/expense, net | (0.4 | ) | 20.6 | 5.3 | |||||||
| Operating income | 512.5 | 435.0 | 381.9 | ||||||||
| Equity income of unconsolidated joint ventures, net | 1.0 | 23.1 | 24.8 | ||||||||
| Gain on remeasurement of equity investments | — | 247.7 | — | ||||||||
| Other non-operating expense, net | (42.3 | ) | (37.2 | ) | (24.9 | ) | |||||
| Interest expense, net | (7.5 | ) | (16.0 | ) | (12.7 | ) | |||||
| Income before income taxes | 463.7 | 652.6 | 369.1 | ||||||||
| Income tax expense | 49.3 | 229.7 | 121.8 | ||||||||
| Net income including noncontrolling interests | 414.4 | 422.9 | 247.3 | ||||||||
| Less: net income attributable to noncontrolling interests | 20.3 | 16.8 | 24.3 | ||||||||
| Net income attributable to Company | $ | 394.1 | $ | 406.1 | $ | 223.0 | |||||
| Net income attributable to Company per common share | |||||||||||
| Basic | $ | 7.46 | $ | 7.53 | $ | 4.00 | |||||
| Diluted | $ | 7.43 | $ | 7.50 | $ | 3.98 | |||||
| Cash dividends per share of common stock | $ | — | $ | — | $ | — | |||||
| Weighted average common shares outstanding | |||||||||||
| Basic | 52,846,962 | 53,903,938 | 55,695,738 | ||||||||
| Diluted | 53,062,573 | 54,139,815 | 55,981,816 | ||||||||
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Net income including noncontrolling interests | $ | 414.4 | $ | 422.9 | $ | 247.3 | |||||
| Other comprehensive (loss)/income: | |||||||||||
| Currency translation adjustments | (71.2 | ) | 154.2 | (55.0 | ) | ||||||
| Pensions and post-retirement benefit plan adjustments, net | 5.0 | (38.0 | ) | (15.9 | ) | ||||||
| Unrealized gains on hedges, net | 0.8 | 0.2 | 0.2 | ||||||||
| Unrealized losses on investments, net | — | (0.1 | ) | — | |||||||
| Total other comprehensive (loss)/income | $ | (65.4 | ) | $ | 116.3 | $ | (70.7 | ) | |||
| Comprehensive income | $ | 349.0 | $ | 539.2 | $ | 176.6 | |||||
| Less: Comprehensive income attributable to noncontrolling interests | 14.4 | 20.3 | 23.0 | ||||||||
| Comprehensive income attributable to Company | $ | 334.6 | $ | 518.9 | $ | 153.6 | |||||
| December 31, 2018 | December 31, 2017 | ||||||
| (Amounts in millions, except share data) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 503.8 | $ | 1,141.5 | |||
| Short-term investments | 135.8 | 0.6 | |||||
| Accounts receivable, net | 611.5 | 669.2 | |||||
| Inventories, net | 319.1 | 321.4 | |||||
| Guaranteed notes receivable | 44.1 | 39.7 | |||||
| Investments in repurchase agreements | 85.8 | 137.5 | |||||
| Other current assets | 96.8 | 84.3 | |||||
| Total current assets | 1,796.9 | 2,394.2 | |||||
| Property, plant and equipment, net | 553.6 | 522.3 | |||||
| Goodwill | 809.4 | 834.7 | |||||
| Deferred tax assets | 236.7 | 211.1 | |||||
| Investments in unconsolidated joint ventures | 10.4 | 6.5 | |||||
| Intangible assets, net | 246.6 | 266.6 | |||||
| Other assets | 85.0 | 88.0 | |||||
| TOTAL ASSETS | $ | 3,738.6 | $ | 4,323.4 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Loans payable to banks | $ | — | $ | 386.5 | |||
| Accounts payable | 232.5 | 258.1 | |||||
| Accrued payroll | 111.2 | 130.4 | |||||
| Current portion of warranties | 23.3 | 29.5 | |||||
| VAT payable | 15.7 | 18.2 | |||||
| Accrued expenses | 73.8 | 81.6 | |||||
| Promotion and customer incentives | 26.6 | 24.3 | |||||
| Accrued income tax | 28.2 | 56.2 | |||||
| Other accrued liabilities | 84.7 | 88.5 | |||||
| Total current liabilities | 596.0 | 1,073.3 | |||||
| Long-term debt | 845.2 | 1,023.3 | |||||
| Pension and post-retirement benefits | 716.0 | 700.7 | |||||
| Deferred tax liabilities | 75.4 | 75.3 | |||||
| Long-term income tax liabilities | 156.8 | 166.8 | |||||
| Other liabilities | 84.0 | 82.9 | |||||
| Total liabilities | 2,473.4 | 3,122.3 | |||||
| Shareholders’ equity: | |||||||
| Preferred stock, 4,000,000 shares authorized; none issued and outstanding | — | — | |||||
| Common stock, $.01 par value, 400,000,000 shares authorized; shares issued: 79,018,266 in 2018; 78,937,828 in 2017; and shares outstanding: 51,364,925 in 2018; 53,735,486 in 2017 | 0.8 | 0.8 | |||||
| Capital surplus | 898.5 | 883.2 | |||||
| Treasury stock, at cost: 27,653,341 shares in 2018; 25,202,342 shares in 2017 | (2,159.3 | ) | (1,861.3 | ) | |||
| Retained earnings | 2,960.8 | 2,563.2 | |||||
| Accumulated other comprehensive loss | (524.0 | ) | (464.5 | ) | |||
| Total shareholders’ equity | 1,176.8 | 1,121.4 | |||||
| Noncontrolling interests | 88.4 | 79.7 | |||||
| Total equity | 1,265.2 | 1,201.1 | |||||
| TOTAL LIABILITIES AND EQUITY | $ | 3,738.6 | $ | 4,323.4 | |||
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Operating activities: | |||||||||||
| Net income including noncontrolling interests | $ | 414.4 | $ | 422.9 | $ | 247.3 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 95.8 | 84.8 | 76.0 | ||||||||
| Impairment of non-marketable equity securities | 5.5 | — | — | ||||||||
| Amortization of intangibles | 28.9 | 22.3 | 22.0 | ||||||||
| Equity in earnings of unconsolidated joint ventures, net of dividends received | (1.0 | ) | 0.8 | 3.9 | |||||||
| Non-cash stock compensation | 20.0 | 16.4 | 13.1 | ||||||||
| Non-cash interest expense and debt issuance cost amortization | 15.4 | 23.1 | 17.7 | ||||||||
| Deferred income tax (benefit)/expense | (23.6 | ) | (48.2 | ) | 68.3 | ||||||
| Pensions and post-retirement benefit expense | 62.2 | 57.5 | 44.2 | ||||||||
Gain on remeasurement of equity investments | — | (247.7 | ) | — | |||||||
| Foreign currency effects on changes in monetary assets/liabilities | (2.3 | ) | (6.8 | ) | (5.5 | ) | |||||
| Unrealized loss/(gain) on revaluation of foreign currency forward contracts | 2.5 | (1.7 | ) | 1.1 | |||||||
| Loss on debt extinguishment | 2.3 | — | — | ||||||||
| Other | 2.8 | 0.6 | 0.8 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | 27.5 | (64.3 | ) | (61.5 | ) | ||||||
| Inventories, net | (13.4 | ) | (16.0 | ) | (3.9 | ) | |||||
| Accounts payable | (23.8 | ) | 5.4 | 21.7 | |||||||
| Other accrued liabilities and taxes | (66.8 | ) | 12.6 | 66.4 | |||||||
| Other current and long-term assets | (40.5 | ) | 27.4 | (38.8 | ) | ||||||
| Other long-term liabilities | (11.5 | ) | 157.1 | (45.8 | ) | ||||||
| Pension and post-retirement benefit contributions | (25.9 | ) | (24.7 | ) | (21.6 | ) | |||||
| Net cash provided by operating activities | 468.5 | 421.5 | 405.4 | ||||||||
| Investing activities: | |||||||||||
| Purchases of property, plant and equipment | (118.2 | ) | (104.7 | ) | (104.0 | ) | |||||
| Investments in capitalized software | (13.9 | ) | (5.8 | ) | (10.0 | ) | |||||
| Proceeds from disposal of property, plant and equipment | — | — | 7.0 | ||||||||
| Purchases of short-term investments and repurchase agreements | (687.2 | ) | (535.2 | ) | (324.6 | ) | |||||
| Sales and maturities of short-term investments and repurchase agreements | 585.2 | 548.4 | 273.0 | ||||||||
| Cost of preferred stock investment | — | (10.0 | ) | (0.9 | ) | ||||||
| Return of investment in unconsolidated joint venture | — | 1.8 | — | ||||||||
| Investment in unconsolidated joint ventures | (3.8 | ) | — | — | |||||||
| Acquisitions of businesses, net | (8.6 | ) | (382.7 | ) | (92.3 | ) | |||||
| Net cash used by investing activities | (246.5 | ) | (488.2 | ) | (251.8 | ) | |||||
| Financing activities: | |||||||||||
| Borrowings of long-term debt | 368.5 | 25.3 | 730.1 | ||||||||
| Repayments of long-term debt | (500.0 | ) | (25.0 | ) | (261.0 | ) | |||||
| Net (repayments)/borrowings of short-term debt | (385.4 | ) | 382.5 | (4.9 | ) | ||||||
| Settlement of forward contract | — | (0.3 | ) | 15.2 | |||||||
| Taxes withheld and paid on employee stock award vestings | (5.1 | ) | (4.9 | ) | (6.0 | ) | |||||
| Purchases of treasury stock | (300.0 | ) | (120.0 | ) | (250.0 | ) | |||||
| Proceeds from noncontrolling interest shareholders | — | 0.6 | — | ||||||||
| Dividends to noncontrolling interest holders | (5.7 | ) | (7.1 | ) | (6.7 | ) | |||||
| Proceeds from exercise of stock options | 0.6 | 9.5 | 3.9 | ||||||||
| Net cash (used)/provided by financing activities | (827.1 | ) | 260.6 | 220.6 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (32.2 | ) | 85.1 | (26.9 | ) | ||||||
| Net (decrease)/increase in cash and cash equivalents | (637.3 | ) | 279.0 | 347.3 | |||||||
| Cash and cash equivalents at beginning of period | 1,141.5 | 862.5 | 515.2 | ||||||||
| Cash and cash equivalents at end of period | $ | 504.2 | $ | 1,141.5 | $ | 862.5 | |||||
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Supplemental cash flow disclosures | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 20.0 | $ | 20.0 | $ | 16.5 | |||||
| Income taxes | $ | 109.0 | $ | 64.1 | $ | 50.8 | |||||
| Non cash activity: | |||||||||||
| Increase/(decrease) in capital expenditures included in accounts payable and other accrued liabilities | $ | 13.8 | $ | 1.8 | $ | (14.9 | ) | ||||
| Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: | |||||||||||
| Cash and cash equivalents | $ | 503.8 | $ | 1,141.5 | $ | 862.5 | |||||
| Restricted cash, included in other assets | 0.4 | — | — | ||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 504.2 | $ | 1,141.5 | $ | 862.5 | |||||
| (Amounts in millions) | Common Stock | Capital Surplus | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Non Controlling Interests | Total | ||||||||||||||||||||
| Balance at December 31, 2015 | $ | 0.8 | $ | 852.6 | $ | (1,497.3 | ) | $ | 1,938.5 | $ | (507.9 | ) | $ | 49.6 | $ | 836.3 | |||||||||||
| Net income | — | — | — | 223.0 | — | 24.3 | 247.3 | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (69.4 | ) | (1.3 | ) | (70.7 | ) | |||||||||||||||||
| Treasury stock purchased | — | — | (250.0 | ) | — | — | — | (250.0 | ) | ||||||||||||||||||
| Stock options exercised | — | 3.9 | — | — | — | — | 3.9 | ||||||||||||||||||||
| Treasury stock reissued | — | (2.9 | ) | 2.9 | — | — | — | — | |||||||||||||||||||
| Stock-based compensation | — | 7.6 | — | (0.4 | ) | — | — | 7.2 | |||||||||||||||||||
| Dividends paid | — | — | — | — | — | (6.7 | ) | (6.7 | ) | ||||||||||||||||||
| Balance at December 31, 2016 | $ | 0.8 | $ | 861.2 | $ | (1,744.4 | ) | $ | 2,161.1 | $ | (577.3 | ) | $ | 65.9 | $ | 767.3 | |||||||||||
| Net income | — | — | 406.1 | — | 16.8 | 422.9 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 112.8 | 3.5 | 116.3 | ||||||||||||||||||||
| Treasury stock purchased | — | — | (120.0 | ) | — | — | — | (120.0 | ) | ||||||||||||||||||
| Stock options exercised | — | 9.5 | — | — | — | — | 9.5 | ||||||||||||||||||||
| Treasury stock reissued | — | 0.9 | 3.1 | (4.0 | ) | — | — | — | |||||||||||||||||||
| Stock-based compensation | — | 11.6 | — | — | — | — | 11.6 | ||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (7.1 | ) | (7.1 | ) | ||||||||||||||||||
| Proceeds from minority interest shareholders | — | — | — | — | — | 0.6 | 0.6 | ||||||||||||||||||||
| Balance at December 31, 2017 | $ | 0.8 | $ | 883.2 | $ | (1,861.3 | ) | $ | 2,563.2 | $ | (464.5 | ) | $ | 79.7 | $ | 1,201.1 | |||||||||||
| Adoption of ASU 2016–16 - See Note 3 | — | — | — | 5.3 | — | — | 5.3 | ||||||||||||||||||||
| Net income | — | — | — | 394.1 | — | 20.3 | 414.4 | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (59.5 | ) | (5.9 | ) | (65.4 | ) | |||||||||||||||||
| Treasury stock purchased | — | — | (300.0 | ) | — | — | — | (300.0 | ) | ||||||||||||||||||
| Stock options exercised | — | 0.6 | — | — | — | — | 0.6 | ||||||||||||||||||||
| Treasury stock reissued | — | (0.2 | ) | 2.0 | (1.8 | ) | — | — | — | ||||||||||||||||||
| Stock-based compensation | — | 14.9 | — | — | — | — | 14.9 | ||||||||||||||||||||
| Dividends paid | — | — | — | — | — | (5.7 | ) | (5.7 | ) | ||||||||||||||||||
| Balance at December 31, 2018 | $ | 0.8 | $ | 898.5 | $ | (2,159.3 | ) | $ | 2,960.8 | $ | (524.0 | ) | $ | 88.4 | $ | 1,265.2 | |||||||||||
gross-up
payments under our Change of Control Severance Plan, nor do we maintain any other agreements or arrangements which would provide similar benefits.10
Recoupment Policy
No Pledging or Hedging of sales at the later of the date of the saleCompany Stock
Strong Stock Ownership Guidelines
Independent Compensation Consultant
Change of Control Benefits
| Year Ended December 31, | ||||||||
| 2018 | 2017 | 2016 | ||||||
| Weighted average incremental shares included in diluted EPS | 215,611 | 235,877 | 286,078 | |||||
| Shares excluded due to anti-dilutive effect on earnings per share | 70 | 1,626 | 472 | |||||
| Year Ended December 31, | ||||||||||||
| (Amount in millions) | 2018 | 2017 | 2016 | |||||||||
OEM (1) | $ | 2,886.9 | $ | 2,511.8 | $ | 2,101.0 | ||||||
| Aftermarket | 944.1 | 792.4 | 709.0 | |||||||||
| Total sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | ||||||
| Year Ended December 31, | ||||||||||||
| (Amount in millions) | 2018 | 2017 | 2016 | |||||||||
| United States | $ | 859.0 | $ | 579.6 | $ | 399.9 | ||||||
| Europe | 1,860.7 | 1,705.3 | 1,509.2 | |||||||||
Other (1) | 1,111.3 | 1,019.3 | 900.9 | |||||||||
| Total sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | ||||||
| Year Ended December 31, | |||||||||||
| (Amount in millions) | 2018 | 2017 | 2016 | ||||||||
| Foreign currency translation adjustments : | |||||||||||
| Balance at beginning of period | $ | (177.6 | ) | $ | (328.7 | ) | $ | (271.2 | ) | ||
| Comprehensive (loss)/income before reclassification, net | (65.4 | ) | 152.9 | (57.5 | ) | ||||||
Remeasurement of equity investments (1) | — | (1.8 | ) | — | |||||||
Balance at end of period (2) | (243.0 | ) | (177.6 | ) | (328.7 | ) | |||||
| Loss on intra-entity transactions : | |||||||||||
| Balance at beginning of period | (11.8 | ) | (11.4 | ) | (15.2 | ) | |||||
| Comprehensive (loss)/income before reclassification, net | (0.1 | ) | (0.4 | ) | 3.8 | ||||||
Balance at end of period (3) | (11.9 | ) | (11.8 | ) | (11.4 | ) | |||||
| Unrealized gains on investments: | |||||||||||
| Balance at beginning of period | 0.1 | 0.2 | 0.2 | ||||||||
| Adjustments for the period | (0.1 | ) | (0.1 | ) | — | ||||||
| Balance at end of period | — | 0.1 | 0.2 | ||||||||
| Unrealized losses on hedges: | |||||||||||
| Balance at beginning of period | (0.8 | ) | (1.0 | ) | (1.2 | ) | |||||
| Comprehensive income before reclassification, net | — | 0.2 | — | ||||||||
| Amounts reclassified to earnings, net | 0.8 | — | 0.2 | ||||||||
| Balance at end of period | — | (0.8 | ) | (1.0 | ) | ||||||
| Pension and post-retirement plans: | |||||||||||
| Balance at beginning of period | (274.4 | ) | (236.4 | ) | (220.5 | ) | |||||
| Comprehensive loss before reclassification, net | (12.2 | ) | (56.2 | ) | (26.5 | ) | |||||
Amounts reclassified to earnings, net (4) | 17.5 | 18.2 | 10.6 | ||||||||
| Balance at end of period | (269.1 | ) | (274.4 | ) | (236.4 | ) | |||||
| Accumulated other comprehensive loss at end of period | $ | (524.0 | ) | $ | (464.5 | ) | $ | (577.3 | ) | ||
| Year Ended December 31, | |||||||
| (Amounts in millions) | 2018 | 2017 | |||||
| 2014 / 2015 Program | |||||||
| Balance at beginning of period | $ | 16.8 | $ | 27.8 | |||
| Charges | 2.2 | 1.7 | |||||
| Payments | (12.5 | ) | (15.6 | ) | |||
| Foreign exchange effects | (0.1 | ) | 2.9 | ||||
| Balance at end of period | $ | 6.4 | $ | 16.8 | |||
| Other Programs | |||||||
| Balance at beginning of period | $ | 26.9 | $ | 23.4 | |||
| Charges | 11.8 | 10.3 | |||||
| Payments | (17.8 | ) | (10.0 | ) | |||
| Foreign exchange effects | (0.9 | ) | 3.2 | ||||
| Balance at end of period | $ | 20.0 | $ | 26.9 | |||
| Total streamlining liability | $ | 26.4 | $ | 43.7 | |||
| Charges for Year Ended December 31, 2018 | Charges for Year Ended December 31, 2017 | Charges for Year Ended December 31, 2016 | |||||||||||||||||||||
| (Amounts in millions) | 2014/2015 Program | Other Programs | 2014/2015 Program | Other Programs | 2014/2015 Program | Other Programs | |||||||||||||||||
| Employee-related charges – cost of sales | $ | 0.1 | $ | 3.1 | $ | (1.0 | ) | $ | 8.1 | $ | 4.0 | $ | 6.9 | ||||||||||
| Employee-related charges – selling and administrative | 0.7 | 6.8 | 2.3 | 2.2 | (0.2 | ) | 3.2 | ||||||||||||||||
| Asset write-offs | — | — | — | — | 0.6 | — | |||||||||||||||||
| Other streamlining charges | 1.4 | 1.9 | 0.4 | — | 1.7 | 0.2 | |||||||||||||||||
| Total program costs | $ | 2.2 | $ | 11.8 | $ | 1.7 | $ | 10.3 | $ | 6.1 | $ | 10.3 | |||||||||||
| Number of Shares of Common Stock | ||||||||
| Issued | Treasury Stock | Outstanding | ||||||
| Balance, December 31, 2015 | 78,500,084 | (21,740,518 | ) | 56,759,566 | ||||
| Shares issued upon exercise of stock options | 87,047 | 16,400 | 103,447 | |||||
| Shares issued upon vesting of RSUs | 38,723 | 9,288 | 48,011 | |||||
| Shares issued upon vesting of PSUs | 67,219 | 17,675 | 84,894 | |||||
| Shares issued for DSUs | 7,100 | — | 7,100 | |||||
| Shares issued for stock awards | 1,100 | — | 1,100 | |||||
| Shares purchased for treasury | — | (2,512,200 | ) | (2,512,200 | ) | |||
| Balance, December 31, 2016 | 78,701,273 | (24,209,355 | ) | 54,491,918 | ||||
| Shares issued upon exercise of stock options | 161,687 | 28,840 | 190,527 | |||||
| Shares issued upon vesting of RSUs | 44,419 | 3,998 | 48,417 | |||||
| Shares issued upon vesting of PSUs | 24,525 | 7,175 | 31,700 | |||||
| Shares issued for DSUs | 5,924 | — | 5,924 | |||||
| Shares purchased for treasury | — | (1,033,000 | ) | (1,033,000 | ) | |||
| Balance, December 31, 2017 | 78,937,828 | (25,202,342 | ) | 53,735,486 | ||||
| Shares issued upon exercise of stock options | 14,964 | 12,999 | 27,963 | |||||
| Shares issued upon vesting of RSUs | 36,126 | 8,447 | 44,573 | |||||
| Shares issued upon vesting of PSUs | 21,515 | 6,009 | 27,524 | |||||
| Shares issued for DSUs | 7,833 | — | 7,833 | |||||
| Shares purchased for treasury | — | (2,478,454 | ) | (2,478,454 | ) | |||
| Balance, December 31, 2018 | 79,018,266 | (27,653,341 | ) | 51,364,925 | ||||
We encourage you to read this Compensation Discussion and Analysis for a detailed discussion and analysis of our executive compensation program, including information about the 2019 compensation of our NEOs.
2019
“Say-on-Pay”
Advisory Vote on Executive CompensationWe provided shareholders a28, 2009, was further amended30, 2019, pursuant to the Dodd-Frank Wall Street Reform and restatedConsumer Protect Act 2010 (“Dodd-Frank Act”) and was approved by the shareholders at theSEC rules. At our 2019 Annual Meeting of Shareholders. Shareholders, shareholders expressed strong support for the compensation of our NEOs, with approximately 96% of the votes cast (disregarding abstentions) for approval of the
“say-on-pay”
advisory vote on our executive compensation in May “say-on-
pay” advisory vote. We received similar strong support at our two prior annual meetings.The CNG Committee carefully evaluated the results of the 2019 annual advisory
“say-on-pay”
vote, and although the“say-on-pay”
vote is advisory and is not binding on our Board of Directors, the CNG Committee took the strong level of approval into consideration in determining that our current compensation philosophy and objectives remain appropriate for use in determining the compensation of our NEOs.11
Executive Compensation Philosophy; Compensation Program Objectives
Our executive compensation program is intended to deliver competitive total compensation upon achievement of performance objectives and has been developed consistent with our strategy to attract, motivate and develop leaders who will drive the creation of shareholder value. We generally seek to compensate our executives at approximately the median level of total compensation among similarly-situated executives in our peer group when we set target compensation levels. See the section entitled “Peer Group” below for more information about our peer group.
Our compensation program generally involves a mixture of fixed and variable, and cash and equity compensation elements. Variable compensation is balanced between short- and long-term objectives, placing a significant amount of the executive’s compensation at risk based on company and individual performance.
Each of the program elements is generally designed to drive a complementary set of behaviors and outcomes.
Pay Element | Type of Pay | Key Objectives | ||
Base Salary | Fixed | Attract and retain executives over time by providing regular and continued payment in line with the executive’s position, experience and responsibilities | ||
Annual Cash Incentives | Variable At-Risk | Focus our executives on short-term objectives to foster short-term growth and profitability | ||
Long-Term Cash and Equity-Based Incentives | Variable At-Risk | Create a clear line of sight and linkage to our long-term strategy, as well as to attract and retain our executives and employees. Long-term incentives consist of a mix of equity awards and cash awards. The equity awards, in the form of PSUs and RSUs, comprise the majority of long-term incentive value and are used to align our executive officers’ interests with those of our shareholders. The Cash LTIP awards complement the annual equity awards by focusing executives on specific long-term financial performance goals and also provide an opportunity for liquidity that does not require an executive to sell shares | ||
Benefits and Perquisites | Fixed | Offer competitive benefits and perquisites in light of evolving market practice, the law of the executive’s country of citizenship and European Union law |
Each of these elements is described in more detail below.
The CNG Committee evaluates all compensation and benefit programs and decisions in light of the total compensation package awarded to each NEO (including the impact of how these programs and decisions impact other elements of compensation). To that end, the CNG Committee annually reviews all of the components of each NEO’s compensation, including base salary, target annual incentive awards, target long-term incentive awards, the value of all vested and unvested options, RSUs and PSUs, proceeds from exercised options, and other benefits and perquisites. The CNG Committee’s review focuses on both the value of each NEO’s total compensation assuming continuing employment, as well as the additional compensation, if any, that the NEO could be entitled to earn upon a separation from the company for voluntary reasons, involuntary reasons, or pursuant to a change of control of the company.
12
Compensation Mix
We believe that a significant portion of an executive’s compensation should be directly linked to our performance and the creation of shareholder value. To that end, our CNG Committee has structured our executive compensation program so that a high percentage of our NEOs’ total direct compensation (which includes base salary, cash incentives and equity incentives) is at risk. In 2019, 82.9% of our Chief Executive Officer’s total direct compensation, and, on average, 65% of our other NEOs’ total direct compensation, is based on attaining performance goals or paid in the form of equity incentives.
We believe that our compensation program reinforces our
pay-for-performance
philosophy, has the flexibility to adapt to market conditions and has resulted in pay outcomes that are well-aligned with our business performance.Role of the CNG Committee in the Compensation Process
As required by its charter, our CNG Committee is responsible for developing our total compensation philosophy, recommending to our Board of Directors our executive compensation programs, including base salary levels, cash incentives, equity incentives, benefits and perquisites, and reviewing our compensation philosophy and compensation and benefits programs to determine whether they are properly coordinated and achieving their intended purposes. The CNG Committee reviews and approves the compensation of our executive officers and recommends for approval to the independent members of our Board the compensation of our Chairman and Chief Executive Officer. The CNG Committee also sets performance goals for all performance-based compensation, and reviews and certifies payouts of awards based on its evaluation of the company’s performance and the executive officers’ performance against such goals.
To assist the CNG Committee in meeting its responsibilities, the CNG Committee engaged Pearl Meyer & Partners, LLC (“PM”) as its independent outside compensation consultant to regularly provide executive compensation market analysis and insight, with respect to our executive officers, including our NEOs. PM only provides services to the CNG Committee with respect to executive and director compensation and does not provide any other services to the company. The CNG Committee has reviewed its relationship with PM in light of the independence factors set forth in applicable NYSE rules and concluded that its retention of PM as its compensation consultant does not raise any conflict.
Role of Management in the Compensation Process
Our Chairman and Chief Executive Officer works with our Chief Human Resources Officer to make recommendations to the CNG Committee with respect to the compensation of other executive officers, including base salary levels, target annual incentive awards, target long-term incentive awards, benefits and perquisites. At the CNG Committee’s request, our Chairman and Chief Executive Officer attends meetings of the CNG Committee to present his views with respect to the appropriate levels of compensation for his executive team, but is not present when his own compensation is discussed. All decisions regarding NEO compensation are ultimately made by the CNG Committee.
In addition, under our governance documents, our independent Board members are required to approve all compensatory programs, awards or payouts relating to our Chairman and Chief Executive Officer, following consideration of recommendations from the CNG Committee.
At the direction of the CNG Committee, our human resources department provides compensation-related information to PM relating to our executive officers that PM uses as part of its development of market competitiveness analyses and recommendations for executive compensation program design.
Peer Group and Benchmarking
Our peer group comprises 14 companies reflecting predominantly U.S.-based, publicly-traded companies that operate in the same industry sector, compete with us for executive talent and have executive positions similar in breadth, complexity and global responsibility. Our peer group is reviewed annually by the CNG Committee to ensure its ongoing relevance. Companies within our peer group generally have
one-third
to three times our revenue, market value and enterprise value.The following companies were WABCO’s peers for compensation benchmarking purposes in 2019:
Allison Transmission Holdings Inc. | Oshkosh Corporation | |
American Axle & Manufacturing Holdings Inc. | Polaris Industries Inc. | |
BorgWarner Inc. | Sensata Technologies Holding plc | |
Donaldson Company Inc. | Snap-On Incorporated | |
ITT Inc. | Tenneco Inc. | |
Kennametal Inc. | Visteon Corporation | |
Meritor, Inc. | Westinghouse Air Brake Technologies Corporation |
13
Our CNG Committee monitors our peer group and may adjust it as appropriate. We generally seek to compensate our executives at approximately the median level of total compensation among similarly-situated executives in our peer group when we set compensation levels for targeted levels of performance. Our compensation philosophy emphasizes
at-risk
incentive pay, including long-term cash incentives and equity-based incentives.Components of 2019 Executive Compensation
The main features of each NEO’s total compensation as of
year-end
2019 are summarized in the following table(1)
:Base Salary | AIP target (% of base salary) | Cash LTIP target (% of base salary) | Equity LTIP target | |||||||||||||
Jacques Esculier | $ | 1,197,000 | 110 | % | 100 | % | $ | 3,300,000 | ||||||||
Sean Deason | $ | 420,000 | 60 | % | 40 | % | $ | 400,000 | ||||||||
Lisa Brown | $ | 418,200 | 60 | % | 40 | % | $ | 400,000 | ||||||||
Nick Rens | $ | 425,571 | 70 | % | 45 | % | $ | 500,000 | ||||||||
Christian Brenneke | $ | 432,600 | 40 | % | 40 | % | $ | 300,000 | ||||||||
Roberto Fioroni (2) | $ | 440,000 | 70 | % | 45 | % | $ | 500,000 | ||||||||
| (1) | Based on exchange rates of 1.0 euro to 1.1 U.S. dollars and 1.0 Swiss franc to 1.0 U.S. dollar, which are the rates used for our 2019 Operating Plan. |
| (2) | Mr. Fioroni resigned from his role of CFO effective April 1, 2019 and did not receive any 2019 related incentive pay elements. |
The company executives, including the NEOs, are also eligible for benefits similar to those provided to other employees. They also receive certain additional perquisites—see footnote 5 to Summary Compensation Table.
Base Salary
We develop base salary guidelines for our NEOs generally at the median of our peer group companies, employing analyses developed by PM. Company management and PM may also maintainsreview compensation data from various survey providers to provide additional general benchmarking context. The CNG Committee does not provide any direction on specific surveys or survey participants. However, the 2007CNG Committee’s salary decisions are based upon market data as well as the individual’s responsibilities and more subjective factors, such as the CNG Committee’s assessment of the officer’s individual performance and expected future contributions and leadership. The CNG Committee reviews base salaries for our officers every year, but may decide not to make adjustments every year.
Pursuant to its annual review of base salary levels, in May 2019, the CNG Committee recommended and the Board approved the following increases for our NEOs, as shown in the following table which shows our NEOs’ base salary evolution from 2018 to 2019
(1)
. The base salary of each of our NEOs was increased [from the salary in effect at the time of the increase] as follows: 5% for Messrs. Esculier, Deason and Rens, 3% for Mr. Brenneke, and 2% for Ms. Brown. Mr. Deason also received a salary increase upon his promotion to CFO & Controller and Mr. Brenneke received a market adjustment upon his relocation to Switzerland.2018 (Local Currency) | 2019 (Local Currency) | 2018 (USD) 1 | 2019 (USD) 1 | |||||||||||||
Jacques Esculier | € | 1,000,000 | CHF 1,197,000 | 2 | $ | 1,100,000 | $ | 1,197,000 | ||||||||
Sean Deason | $ | 309,000 | $ | 420,000 | 3 | $ | 309,000 | $ | 420,000 | |||||||
Lisa Brown | € | 372,727 | € | 380,181 | $ | 410,000 | $ | 418,200 | ||||||||
Nick Rens | € | 368,460 | € | 386,883 | $ | 405,306 | $ | 425,571 | ||||||||
Christian Brenneke | € | 275,000 | CHF 432,600 | 4 | $ | 302,500 | $ | 432,600 | ||||||||
Roberto Fioroni5 | € | 400,000 | CHF 456,000 | $ | 440,000 | $ | 456,000 | |||||||||
| (1) | Based on exchange rates of 1.0 euro to 1.1 U.S. dollars and 1.0 Swiss franc to 1.0 U.S. dollar, which are the rates used for our 2019 Operating Plan. |
| (2) | Mr. Esculier’s Base Salary was converted to Swiss franc upon his relocation to Bern, Switzerland on March 1, 2019 at 1.0 euro to 1.14 Swiss franc. |
| (3) | Mr. Deason received a salary increase in April 2019 in connection with his promotion to CFO & Controller. |
| (4) | Mr. Brenneke’s Base Salary was converted to Swiss franc upon his relocation to Bern, Switzerland on January 1, 2019 at 1.0 euro to 1.14 Swiss franc, and adjusted to local Swiss market salary level. |
| (5) | Mr. Fioroni’s Base Salary was converted to Swiss franc upon his relocation to Bern, Switzerland on March 1, 2019 at 1.0 euro to 1.14 Swiss franc. |
14
Variable Cash Compensation
Traditionally, we offer an annual incentive plan (“AIP”) and a three-year Cash LTIP for our NEOs. Awards under both the AIP and the Cash LTIP are issued each year under the company’s Omnibus Incentive Plan. The CNG Committee seeks to establish performance goals for the new AIP and Cash LTIP performance periods at its first or second meeting each year. Target awards under both the AIP and the Cash LTIP are fixed as a percentage of the executive’s base salary. Each NEO’s employment or business manager agreement or offer letter —see “Employment Matters” below—provides for specific target AIP and Cash LTIP award percentages.
As discussed above under “Executive Overview,” we measure and report our results on both a GAAP and a
non-GAAP
“performance” basis where we exclude unusual, extraordinary andnon-recurring
items that may mask the underlying operating results of the company. Similarly, when setting, and measuring achievement against, our financial goals, the CNG Committee uses “performance” measures that exclude such items which include, but may not be limited to, expenses associated with separation, streamlining, acquisition, discrete andone-time
tax items and adjustments for foreign exchange rate fluctuations. While some of these costs can be anticipated generally when targets are set at the beginning of the applicable performance period and may be reflected in our annual Operating Plans, others cannot.Annual Incentive Plan
Our AIP is based upon achievement of financial and quantitative,
non-financial
performance goals that are primarily derived from our annual Operating Plan. AIP award opportunities are typically set so that achieving the target level of performance results in a cash payment that is approximately at the median or 50th percentile of annual incentives paid by our peer group. The actual payment under an AIP award may be above the 50th percentile in years of strong performance against objectives or below the 50th percentile or zero, depending on the actual level of performance achieved. The CNG Committee and the Board of Directors review and approve our annual Operating Plan to ensure that the AIP goals are sufficiently challenging and set at levels consistent with internal and external market performance expectations.Fiscal Year 2019 Annual Incentive Plan
In March 2019, our CNG Committee determined the maximum amounts payable to our executive officers for AIP awards for the 2019 performance year by establishing a pool equal to 10% of company earnings before interest and taxes with 35% of the pool allocated to our Chief Executive Officer at maximum, subject to any applicable limits under the Omnibus Incentive Plan, and the remainder allocated evenly among the other executive officers at maximum. The AIP pool established by the formula described above represented the maximum amount that the CNG Committee could approve for awards grantedpayment – not the expected amount. Our CNG Committee generally exercises its discretion to pay less than the maximum amount after considering the financial and quantitative,
non-financial
performance goals described below.The 2019 AIP was designed so that the achievement of financial goals received 80% weighting and the achievement of quantitative,
non-financial
goals received 20% weighting, which is the same weighting as in all prior AIPs since 2008. AIP payouts equal the percentage of the performance goal achieved multiplied by the participant’s annual target AIP percentage. Annual target AIP percentages under this program are established for each participant as a percentage of base salary. Each financial and quantitative,non-financial
goal may be overachieved and funded up to 200%. The resulting award amounts are then adjusted by an individual performance score ranging from0-200%.
Thus, while the maximum possible overachievement is 400% of target, the highest award we have ever paid to an NEO was 222% of target. In between threshold and maximum performance, achievement levels and payouts are interpolated using apre-defined
performance curve. Below threshold performance results in a zero payout for the specific metric.CASH AWARD PAYOUT (range from 0% to 400%) | = | BASE SALARY | X | TARGET AIP AWARD OPPORTUNITY (% of Base Salary) | X | COMPANY PERFORMANCE 80% FINANCIAL GOALS 20% NON-FINANCIAL GOALS(range from 0% to 200%) | X | INDIVIDUAL PERFORMANCE SCORE (range from 0% to 200%) | ||||||||||||||||||||||||
AIP financial goals
Sales Growth | The total increase in company sales over prior year. | |
Performance Gross Profit Margin | The ratio of our gross profit as a percentage of sales using performance measures. | |
Performance Net Income | GAAP net income, adjusted by excluding the costs associated with separation, streamlining and acquisition, discrete and one-time tax items, and other items that may mask the underlying operating results of the company, as applicable. | |
Free Cash Flow | Our net cash provided by operating activities less any amounts attributable to the purchase of property, plant, equipment and computer software and the proceeds from the disposal of property. |
15
The CNG Committee believes that this mix of financial goals is complementary and well-balanced so that business tradeoffs are appropriately reflected,, sales growth vs. profitability, profit margin vs. additional investment, earnings before taxes vs. cash flow, etc. The 80% weighting on financial goals also ensures that these key drivers of value for shareholders are the primary focus for management. Each year, the target financial goals are set based on our annual Operating Plan, which is designed to represent challenging – but attainable – performance levels. In setting AIP goals, the CNG Committee also considers internal and external performance expectations, the potential impact of global economic conditions on the variability of performance outcomes, the degree to which prior year results were atypical, changes in corporate tax rates and other legislation that may impact the company’s business prospects and other factors that may be relevant in a specific year.
e.g.
AIP quantitative, non-financial goals
non-financial
goals, each weighted at 10% of target:Technical Quality | Measured based on the number of product defects found on a “parts per million” (“ppm”) basis. | |
Inventory Turns Improvement | Average of June and December inventory turns calculated as the gross inventory at the end of the period versus the retroactive six months standard cost of sales extrapolated to twelve months at constant exchange rates. |
These performance goals are intended to be consistent with driving cross-functional collaboration to improve the industrialization of WABCO products and ensure that the development roadmaps and processes we have defined will be used to develop high quality products.
2019 AIP Results
non-financial
performance goals in February 2019 and certified the following achievement levels and scores in February 2020:Threshold | Target | Maximum | Achievement | Score | ||||||||||||||||
Sales Growth | $ | 3,700 million | $ | 3,900 million | $ | 4,100 million | $ | 3,492 million | 0.0 | % | ||||||||||
Performance Gross Profit Margin | 29.2 | % | 30.7 | % | 32.2 | % | 30.0 | % | 51.5 | % | ||||||||||
Performance Net Income | $ | 373 million | $ | 390 million | $ | 408 million | $ | 337 million | 0.0 | % | ||||||||||
Free Cash Flow | 75 | % | 85 | % | 95 | % | 100 | % | 200.0 | % | ||||||||||
Aggregate Score For Financial Goals (1) | 62.9 | % | ||||||||||||||||||
Quality PPM | 45 | 30 | 15 | 19 | 173.3 | % | ||||||||||||||
Inventory Turns Improvement | 0 | 0.30 | 0.60 | 0.20 | 67.1 | % | ||||||||||||||
Aggregate Score For Quantitative, Non-Financial Goals | 120.2 | % | ||||||||||||||||||
Total Aggregate Score (2) | 74.35 | % | ||||||||||||||||||
| (1) | The achievement dollar amounts shown in this table differ from our actual achievements as shown in our executive summary, as they are based on the exchange rate prevailing when the performance targets of our AIP were established, while our reported numbers are based on the actual exchange rates for 2019. |
| (2) | The CNG Committee’s certification of the achievement of the financial and quantitative, non-financial goals included in the 2019 AIP is based on measuring quantitative results againstpre-established goals. These goals have been designed to be challenging, but attainable, and over the past seven years prior to 2019, i.e., 2012-2018, the total aggregate performance score has ranged from 90.8% to 159.0% of target. |
As a result, the company’s aggregate performance score for the 2019 AIP (applying an 80% weighting for the financial performance goals and 20% for the quantitative,
non-financial
performance goals) was 74.35%. The CNG Committee exercised its discretion to increase payout to 85.0% to recognize the impact on our employees and executives of the announced merger with ZF Friedrichshafen AG and the exceptional additional work that was required of everyone in the company, especially the company’s senior leadership, in executing the potential merger and plan for the future potential integration of the two companies. The 85.0% aggregate performance score was applied to each NEO’s target award.16
Lastly, the CNG Committee considered discretionary adjustments to each executive’s calculated award to reflect such executive’s individual performance. The CNG Committee considered individual performance adjustments for each of the other NEOs based on the recommendations of Mr. Esculier. Mr. Esculier’s performance adjustment was determined by the CNG Committee and the independent directors as a group. The CNG Committee approved an individual performance adjustment of an additional 7.22% for Mr. Esculier to recognize his leadership and greater contribution to delivering shareholder value, including the potential merger with ZF Friedrichshafen AG. The CNG Committee approved the individual performance adjustments for the other NEOs based on Mr. Esculier’s assessment of their performance during 2019. The table below shows each target annual incentive award, as adjusted by the company’s achievement of the financial and quantitative
non-financial
corporate goals, adjusted up to 85.0%, and as further adjusted to reflect the individual performance evaluation for each NEO who received an AIP payment for fiscal 2019.AIP Target | Corporate Score | Individual Score | Payment | |||||||||||||
Jacques Esculier | $ | 1,316,700 | 85.0 | % | 107.22 | % 1 | $ | 1,200,000 | ||||||||
Sean Deason | $ | 225,750 | 2 | 85.0 | % | 100.00 | % | $ | 191,888 | |||||||
Lisa Brown | $ | 250,920 | 85.0 | % | 100.00 | % | $ | 213,282 | ||||||||
Nick Rens | $ | 297,900 | 85.0 | % | 105.00 | % | $ | 265,876 | ||||||||
Christian Brenneke | $ | 173,040 | 85.0 | % | 105.00 | % | $ | 154,438 | ||||||||
| (1) | This figure is rounded to two decimals |
| (2) | This number includes a proration factor to reflect that Mr. Deason was appointed to serve as CFO & Controller effective April 1, 2019. |
Fiscal Year 2020 Annual Incentive Plan
In February 2020, our CNG Committee approved a cash AIP award opportunity based on the achievement of certain defined financial and quantitative,
non-financial
performance goals. The financial performance goals established by our CNG Committee are related to sales/sales growth, performance gross profit margin, and performance Earnings Before Interests & Taxes. One quantitative,non-financial
performance goal, technical quality ppm was also selected to promote quality production. Each of the financial goals is equally weighted and together they comprise 90% of the plan funding. The quantitative,non-financial
goal comprises 10% of the plan funding. Each financial and quantitative,non-financial
goal may be overachieved and funded up to 200%, and resulting award amounts will be further adjusted by an individual performance score ranging from0-200%.
Long-Term Incentive Plan
Pursuant to the establishmentOmnibus Incentive Plan, the CNG Committee has authority to establish both equity and cash-based long-term incentive plans for our executive officers, including our NEOs. Our long-term incentive plans are designed to promote both the achievement of long-term performance goals as well as retention by linking our executive officers’ wealth more closely to the performance of our stock price. Our long-term programs have been designed so that approximately 70% of the 2009 Restated Omnibus Plan.value of any executive officer’s long-term incentive compensation would be comprised of annual equity awards split evenly between PSUs, as discussed below, and RSUs, which vest ratably over a three-year period. The termremaining 30% of the 2009 Restated Omnibus Plan extends through May 2028.value of an executive officer’s long-term incentive compensation would be comprised of the executive’s target Cash LTIP award, the attainment of which is typically tied to the achievement of certain financial goals over a three-year performance period. The 2009 Restated Omnibus Plan further places restrictionsCash LTIP complements the annual equity awards by focusing executives on vestingspecific long-term financial performance goals and also provides an opportunity for time–basedliquidity that does not require an executive to sell shares.
The performance goals for the Cash LTIP are established on a rolling basis and generally include three to four of the following measures: sales, revenues, earnings (before or after tax), internal rate of return, return on equity, incentive awards and places annual limits on incentive awards granted to any single participant. DuringROIC, income, assets or earnings, earnings per share (on a calendar year, no participant may receive annual and long-termfully diluted or undiluted basis), profit margin, incremental operating margin, operating expense ratios, income, cash awards that,flow, free cash flow, working capital targets, funds from operations or similar measures, capital expenditures, market share, share price, total shareholder return, appreciation in the aggregate, exceed $10,000,000. In addition, no participant shall be grantedfair market value or book value of our common stock, options, stock appreciation rights,economic value added (net operating profit after tax minus the sum of capital multiplied by the cost of the capital), debt to equity ratios, debt levels, management of accounts andboth with respectstrategic transactions, budget achievement, expense reduction or cost savings and inventory control / efficiency and costs. As discussed above, we also usemore than 750,000 shares during any calendar year. No individual shall be granted restricted sharesabove which exclude separation and streamlining costs, discrete,
non-performing
debt, acquisitions or non-GAAP
“performance” versions of the financial measures referred to one-time
tax and other items and other items that may mask the underlying operating results of the company, as appropriate, such as foreign exchange fluctuations.Total long-term incentive award opportunities are typically set so that achieving the target level of performance results in award values approximately at the median or restricted stock units, with respect to more than 200,000 shares or units as the case50th percentile of long-term incentives offered by our U.S. peer companies. The actual realized award value may be above the 50th percentile in years of strong financial and stock performance or below the 50th percentile, depending on the actual level of performance achieved. The long-term award value for an individual executive may also vary above or below the 50th percentile based on the CNG Committee’s consideration of an executive’s strategic impact, performance history or retention risk.
17
2017-2019 Cash LTIP
All of our NEOs participated in the 2017-2019 Cash LTIP. Due to his departure during 2019, Mr. Fioroni did not receive any calendar year. If an award granted underpayouts for the 2009 Restated Omnibus Plan expires2017-2019 Cash LTIP.
Our CNG Committee awarded the 2017-2019 Cash LTIP using long-term financial performance goals relating to sales/sales growth, performance earnings per share and ROIC that excluded the impact of certain significant
off-budget
events (e.g., plant closings, streamlining costs, acquisitions and other major investments, separation- related expenses), and the impact of foreign exchange rates.For the 2017-2019 performance cycle, our CNG Committee set the following equally-weighted financial goals and certified, in February 2020, the following achievement levels and scores:
Threshold | Target | Maximum | Achievement | Score | ||||||||||||||||
3-Year Cumulative Sales Growth (excluding the impact of foreign exchange) | $ | 8,550 million | $ | 9,250 million | $ | 9,950 million | $ | 9,421 million | 124.44 | % | ||||||||||
3-Year Cumulative Performance Earnings Per Diluted Share (“EPS”)1 | $ | 17.0 | $ | 18.50 | $ | 21.50 | $ | 20.30 | 159.94 | % | ||||||||||
3-Year Average ROIC | 33 | % | 40 | % | 47 | % | 41.9 | % | 127.26 | % | ||||||||||
Aggregate Score | 137.21 | % | ||||||||||||||||||
| (1) | Performance Earnings Per Diluted Share refers to earnings per diluted share, excluding separation and streamlining items, acquisition-related costs, the impact of foreign exchange rates, and discrete, one-time tax items. |
Our CNG Committee awarded the 2017-2019 Cash LTIP based on the aggregate score of 137.21%.
2020-2022 Cash LTIP
In February 2020, our CNG Committee approved a Cash LTIP for the 2020-2022 performance cycle based on the achievement of certain defined financial performance goals consistent with its prior practice. The financial performance goals established by our CNG Committee are related to sales/sales growth, and performance Earnings Before Interests & Taxes. Each of the financial goals is equally weighted. Our CNG Committee has discretion to upgrade or becomes unexercisable without having been exercised in full, or, with respectdowngrade the Cash LTIP results by 25%. The CNG Committee has generally not applied upward discretion to full-value incentive awards, is forfeited to or repurchased by the Company, these shares will become available for future grant or sale under the 2009 Restated Omnibus Plan. Shares withheld by the Company to satisfy tax withholding obligations on any equity incentive award would be fully counted against the share authorization.Cash LTIP awards.
2019 Annual Equity Awards
As of December 31, 2018, a total of 407,911 stock options, RSUs, PSUs and DSUs were outstanding and there were 2,669,703 shares remaining available for grant under the 2009 Restated Omnibus Plan.
We believe PSUs:
provide more direct linkage with long-term business goals;
strengthen retention due to three-year cliff vesting; and
are preferable to options because dilution overhang from stock options can last up to 10 years, while dilution overhang from PSUs is typically three years.
On February 22, 2019, each of our NEOs was granted an equity award opportunity in an equal combination of RSUs and PSUs. The value an executive ultimately realizes is directly aligned with long-term value creation for shareholders and may differ from the target opportunity. See the “Grants of Plan-Based Awards” table for a breakout of the annual equity awards granted to our NEOs in 2019.
18
2017-2019 Performance Share Units
The 2017-2019 PSU performance target was identical to the three-year cumulative performance EPS target that was used for the 2017-2019 Cash LTIP. In February 2020, our CNG Committee certified the achievement of the 2017-2019 PSU performance target at 159.94%. See the “2017-2019 Cash LTIP” section above for a description of this determination. In setting the PSU performance target, the CNG Committee considered that, taken together, the Cash LTIP and PSUs provide an appropriate balance of cash and equity rewards tied to performance EPS, which is the most common focus point for our investors.
All of our outstanding equity award agreements permit the company to recoup equity compensation in the event a recipient breaches certain confidentiality,
non-competition
and other contractual arrangements during employment or within twelve months after termination of employment.Executive Stock Ownership
Our stock ownership guidelines for our executive officers, including our NEOs, are designed to reinforce the goal of increasing WABCO equity ownership among our executive officers and other key managers and more closely align their interests with those of our shareholders. Our executive officer stock ownership guidelines are as follows:
for the Chief Executive Officer: 6x base salary; and
for all other NEOs: 3x base salary.
Equity ownership that counts towards this ownership goal includes shares owned outright, shares beneficially owned by direct family members (spouse, dependent children), shares underlying vested and unvested time-based RSU awards, vested PSU awards, net shares acquired through stock option exercise and shares acquired on the open market. Vested and unvested stock options and unvested PSU awards do not count towards satisfying the guideline goals.
Participants, including our NEOs, have until five years from the date of becoming an executive officer, to meet the stock ownership guidelines. All of our NEOs are in compliance with these guidelines, taking into consideration the five-year period from appointment as an executive officer.
The minimum number of shares to be held by each officer is calculated annually on the first business day of March using the average of the stock prices of the company’s common stock on the NYSE for the past month. The stock price for each trading day within the
one-month
time period will be the average of the high and low sales prices on the NYSE on that date. In the event of a base salary change or a promotion to a higher executive level, the executive will have five years from the date the change was implemented to acquire additional shares needed to fulfill the stock ownership guidelines. During the first five years, the CNG Committee will review annually each executive’s company stock ownership. After the initial five-year period, the CNG Committee may review these guidelines to include specific penalties for failing to adhere to the recommendations. There may be instances in which the stock ownership guidelines would place a substantial hardship on an executive or unusual circumstances may prevent the executive from complying with the guidelines. These circumstances may apply to all executives in the company, such as a financial crisis impacting the entire stock market or circumstances generating unusual volatility of the company’s share price, or be particular to an individual, such as a court order in the case of a divorce settlement or estate planning transactions. In such circumstances, the guidelines may be waived or modified in the sole discretion of the CNG Committee.The CNG Committee discussed and agreed that the five-year period to meet their Stock Ownership Guidelines is reset (for the incremental annual base salary piece) for the Officers and Executive Officers as of their move to the new corporate headquarters in Switzerland.
19
Retirement Benefits
During 2019, Messrs. Esculier and Fioroni participated in our Belgian benefit plans until their relocation to Switzerland where they started to participate in our local Swiss benefit plans. Mr. Deason participated in our US benefit plans, Ms. Brown and Mr. Rens participated in our Belgian benefit plans, and Mr. Brenneke participated in our Swiss benefit plans.
All these plans include retirement, death, disability and medical coverage.
With regard to Belgian retirement contributions, we have agreed to contribute to such plan, on an annual basis, an amount equal to 9% of Mr. Esculier’s base salary and target annual incentive award, and for Messrs. Fioroni, Rens and Ms. Brown amounts equal to 9% of their base salary and 4.5% of their target annual incentive award.
With regard to Swiss retirement contributions, we have agreed to contribute to such plan, on an annual basis, an amount equal to 15% of their base salary from CHF 127,980 up to an upper limit of CHF 846,000.
With regard to US retirement contributions, we have established a tax qualified 401(k) plan, in which all of our U.S. employees are participating, including Mr. Deason. In addition, all employees whose eligible compensation exceeds limits imposed by the U.S. Internal Revenue Code participate in the Supplemental Savings Plan. Under the Supplemental Savings Plan, the company credits a matching contribution of up to 6% on all eligible compensation in excess of the tax code limits, based upon the employee’s contribution election to the tax qualified 401(k) plan.
Perquisites
Perquisites are not a significant portion of our overall compensation program. We provide perquisites that we believe are reasonable, competitive with our peer group and consistent with our overall compensation philosophy. We currently offer to our executive officers, including our NEOs, financial planning, an executive health exam and an executive life insurance policy as well as tax return preparation assistance. In addition, our NEOs working outside of their home country are eligible to receive certain other perquisites, including a housing allowance, home leave, a company car and tuition reimbursement for dependent children.
Payments upon Severance or Change of Control
Under the business manager agreements that we have entered into with our NEOs (discussed below), certain severance benefits will be provided if their service is terminated by us without cause or if they terminate their service for good reason. We believe that severance payments to these officers are appropriate in these specified circumstances and that the amount of the severance benefits is reasonable and necessary to attract and retain superior executive talent. An estimate of the amount of severance benefits that each NEO would receive upon a termination of service as of December 31, 2019, is included in “Executive Compensation—Severance Benefits as of December 31, 2019” below.
Under our Change of Control Severance Plan, we also provide certain payments or other benefits to our executive officers, including our NEOs, in the event of a change of control in order to allow them to act in the best interests of shareholders without the distraction of potential negative repercussions of a change of control on their own position with the company. Severance benefits payable in connection with a change of control are triggered only in the event of both (i) a change of control and (ii) an NEO’s loss of job or resignation on account of material diminution in terms and conditions of employment. This is sometimes referred to as a “double trigger” change of control provision. Our Omnibus Incentive Plan includes similar double trigger default vesting provisions for equity awards granted after January 1, 2017. We do not provide for excise tax
gross-up
payments under our Change of Control Severance Plan. An estimate of the amount of change of control benefits that each NEO would receive upon a termination of service in connection with a change of control event as of December 31, 2019, is included under “Change of Control Severance Plan and Omnibus Incentive Plan” below.20
Employment Matters
Each of our NEOs has an employment, business manager agreement or offer letter with the company or one of its subsidiaries. Messrs. Esculier and Brenneke relocated to Switzerland. Their Belgium “business manager” agreements were terminated and they moved onto a local Swiss employment contract. Ms. Brown and Mr. Rens continued their employment under a “business manager” agreement. Mr. Deason operates under an offer letter with one of our U.S. subsidiaries and continued to do so after his appointment as CFO & Controller.
Departure of Mr. Roberto Fioroni and appointment of Mr. Sean Deason
On March 28, 2019, Roberto Fioroni provided notice of his voluntary resignation from the company, effective April 1, 2019. As a result, Mr. Fioroni was not entitled to any severance or change in control benefits, and in connection with his departure, Mr. Fioroni forfeited his 2019 AIP award, his cash LTIP award for the 2017-2019, 2018-2020 and 2019-2021 performance periods, as well as all unvested RSUs and PSUs.
On April 1, 2019, the Board of Directors appointed Sean Deason, the Company’s Vice President Controller and Investor Relations, to serve as CFO & Controller of the Company, effective April 1, 2019.
Payment of Special Retention Award to Ms. Lisa Brown
In July 2019, pursuant to the terms of the special retention award granted to her in July 2018, the Company paid Lisa Brown $2,000,000.
21
Equity Replacement Program with ZF
For twenty-four months after the effective time of the Merger, ZF has agreed to provide WABCO employees, including the NEOs, who continue employment with ZF after the effective time, with (i) at least the same base salary and wage rate as provided immediately prior to the effective time, (ii) incentive compensation opportunities (excluding equity awards) that are no less favorable in the aggregate than those provided immediately prior to the effective time and (iii) employee benefits which are no less favorable in the aggregate than those provided immediately prior to the effective time. In place of the equity-based component of compensation provided by WABCO immediately prior to the effective time, ZF has agreed to establish, promptly after the effective time, a cash-based retention program for the benefit of certain WABCO employees, including WABCO executive officers. Awards under the equity replacement program will consist of cash-based grants equal to two times the value of the target equity compensation award for the applicable employee for 2019, and if the effective time has not occurred as of January 1, 2020, for 2020. Awards will vest in full on the second anniversary of the effective time, subject to continued service through that date, or if earlier, upon a termination of employment by ZF, the surviving corporation or their respective subsidiaries without cause, resignation by the employee for good reason, or upon death or disability. 2019 target equity compensation for NEOs is as follows: $3,300,000 for Mr. Esculier; $500,000 for Mr. Rens; $400,000 for Mr. Deason; $400,000 for Ms. Brown; and $300,000 for Mr. Brenneke.
Clawback
We have adopted a clawback policy that requires the company to recover from any current or former executive officer any compensation received under our AIP for 2012 and subsequent years if such compensation was received by the executive officer during the three-year period preceding the date on which the company files a restatement of any annual audited or unaudited interim financial statements due to material
non-compliance
with the financial reporting rules under the federal securities laws. The amount to be recovered is the difference, if any, between what such executive officer received and what such executive officer would have received had the financial measures against which payments were calculated been impacted by the accounting restatement. Under the clawback policy, our Board of Directors, based upon recommendations from the CNG Committee, will have the discretion to determine the amounts to be recouped from such executive officer. The company’s clawback policy will continue to be reviewed for possible changes in order to conform with implementation of the required clawback provisions under the Dodd-Frank Act.Impact of New Corporate Headquarters Location
As part of our corporate headquarters relocation from Brussels, Belgium to Bern, Switzerland, which is intended to globalize WABCO’s advanced technology strategy, the company has conducted extensive research on the local market cost of living and competitive compensation levels. Based on this study, the CNG Committee approved adjustments to 2019 base salaries and cash incentive targets for certain executives, including Mr. Brenneke, subject to their relocation to Switzerland. These adjustments are aligned with our philosophy of offering target compensation at approximately the median or 50th percentile for similarly-situated executives. Mr. Esculier received no compensation adjustment further to his relocation to Switzerland.
Compensation Committee Interlocks and Insider Participation
None of Messrs. Gross, Montupet or Smith, each of the members of the CNG Committee, has ever been an officer or employee of WABCO or any of its subsidiaries or affiliates. None of our Executive Officers has served on the board of directors or on the compensation committee of any other entity where any officer of such entity served either on the Company’s Board or on its CNG Committee.
22
Reconciliation of Operating Income to Performance Operating Income and Net Income to Performance Net Income
(Unaudited)
Year ended December 31, 2019 | ||||||||||||||||||||||||
(Amounts in millions, except per share data) | 2019 | Sales/ Adj Sales | 2018 | Sales/ Adj Sales | Chg vs. 2018 | % Chg vs. 2018 | ||||||||||||||||||
Operating Income | ||||||||||||||||||||||||
Reported | $ | 337.1 | 9.9 | % | $ | 512.5 | 13.4 | % | $ | (175.4 | ) | (34.2 | )% | |||||||||||
Streamlining costs | 27.2 | 14.3 | 12.9 | |||||||||||||||||||||
Separation costs | 0.7 | 0.9 | (0.2 | ) | ||||||||||||||||||||
HQ implementation costs | 3.7 | 0 | 3.7 | |||||||||||||||||||||
Acquisition related costs | 41.1 | 18.0 | 23.1 | |||||||||||||||||||||
Performance Operating Income | $ | 409.8 | 12.0 | % | $ | 545.7 | 14.2 | % | $ | (135.9 | ) | (24.9 | )% | |||||||||||
Foreign exchange translational effects | 18.4 | — | 18.4 | |||||||||||||||||||||
Adjusted Operating Income | $ | 428.2 | 12.0 | % | $ | 545.7 | 14.2 | % | $ | (117.5 | ) | (21.5 | )% | |||||||||||
Pre -Tax Income Attributable to Company | ||||||||||||||||||||||||
Reported Pre-Tax Income Attributable to Company | $ | 299.2 | $ | 443.4 | $ | (144.2 | ) | |||||||||||||||||
Streamlining costs | 27.2 | 14.3 | 12.9 | |||||||||||||||||||||
Separation costs | 4.3 | 4.5 | (0.2 | ) | ||||||||||||||||||||
HQ implementation costs | 3.7 | 0 | 3.7 | |||||||||||||||||||||
Acquisition related costs | 39.1 | 23.5 | 15.6 | |||||||||||||||||||||
Performance Pre -Tax Income Attributable to Company | $ | 373.5 | $ | 485.7 | $ | (112.2 | ) | |||||||||||||||||
Net Income Attributable to Company | ||||||||||||||||||||||||
Reported Net Income Attributable to Company | $ | 245.8 | $ | 394.1 | $ | (148.3 | ) | |||||||||||||||||
Streamlining costs | 27.2 | 14.3 | 12.9 | |||||||||||||||||||||
Separation costs | 4.3 | 4.5 | (0.2 | ) | ||||||||||||||||||||
HQ implementation costs | 3.7 | 0 | 3.7 | |||||||||||||||||||||
Acquisition related costs | 39.1 | 23.5 | 15.6 | |||||||||||||||||||||
Tax items | (16.4 | ) | (18.6 | ) | 2.2 | |||||||||||||||||||
Performance Net Income Attributable to Company | $ | 303.7 | $ | 417.8 | $ | (114.1 | ) | |||||||||||||||||
Performance Net Income per Diluted Common Share | $ | 5.91 | $ | 7.87 | ||||||||||||||||||||
Common Shares Outstanding – Diluted | 51.4 | 53.1 | ||||||||||||||||||||||
23
Report of the Compensation, Nominating and Governance Committee
The Compensation, Nominating and Governance Committee of the Board of Directors.Directors has reviewed and discussed with management the Compensation Discussion and Analysis included in this Annual Report on Form
10-K
for the fiscal year ended December 31, 2019. Based on that review and discussion, the members of the Compensation, Nominating and Governance Committee identified below recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form10-K
for the fiscal year ended December 31, 2019.Members of the Compensation, Nominating and Governance Committee: |
Thomas S. Gross, Chairman |
Jean-Paul L. Montupet |
Michael T. Smith |
24
Summary Compensation Table
Set forth below is information concerning the compensation earned by or paid to our NEOs for 2019, 2018 and 2017.
Name and Principal Position (1) | Year | Salary (USD) | Bonus (USD) (2) | Stock Awards (USD) (3) | Non-Equity Incentive Plan Compensation (USD) (4) | All Other Compensation (USD) (5) | Total (USD) | |||||||||||||||||||||
Jacques Esculier | 2019 | $ | 1,161,833 | $ | 150,352 | $ | 3,300,059 | $ | 2,626,877 | $ | 249,382 | $ | 7,488,503 | |||||||||||||||
Chairman and Chief | 2018 | $ | 1,100,000 | $ | 3,300,212 | $ | 3,316,500 | $ | 364,008 | $ | 8,080,720 | |||||||||||||||||
Executive Officer | 2017 | $ | 1,100,000 | $ | 3,300,155 | $ | 3,669,049 | $ | 421,838 | $ | 8,491,042 | |||||||||||||||||
Sean Deason | 2019 | $ | 385,115 | $ | 24,043 | $ | 180,230 | $ | 347,058 | $ | 203,477 | $ | 1,139,923 | |||||||||||||||
Chief Financial Officer & Controller | ||||||||||||||||||||||||||||
Lisa Brown | 2019 | $ | 414,099 | $ | 2,026,723 | $ | 400,171 | $ | 400,442 | $ | 81,330 | $ | 3,322,765 | |||||||||||||||
Chief Legal Officer & Company Secretary | 2018 | $ | 405,000 | $ | 400,179 | $ | 516,551 | $ | 76,598 | $ | 1,398,328 | |||||||||||||||||
Nick Rens | 2019 | $ | 415,439 | $ | 33,313 | $ | 600,139 | $ | 480,781 | $ | 142,493 | $ | 1,672,165 | |||||||||||||||
President EMEA Region | 2018 | $ | 400,363 | $ | 400,179 | $ | 623,787 | $ | 127,835 | $ | 1,552,164 | |||||||||||||||||
2017 | $ | 390,287 | $ | 500,212 | $ | 688,703 | $ | 119,588 | $ | 1,698,790 | ||||||||||||||||||
Christian Brenneke | 2019 | $ | 426,300 | $ | 19,350 | $ | 300,069 | $ | 317,055 | $ | 242,964 | $ | 1,305,738 | |||||||||||||||
Chief Technology Officer | 2018 | $ | 288,750 | $ | 600,334 | $ | 322,921 | $ | 124,986 | $ | 1,336,991 | |||||||||||||||||
Roberto Fioroni | 2019 | $ | 149,333 | $ | 0 | $ | 500,037 | $ | 0 | $ | 63,309 | $ | 712,679 | |||||||||||||||
Former Chief Financial Officer | 2018 | $ | 256,667 | $ | 1,600,288 | $ | 478,665 | $ | 211,048 | $ | 2,546,668 | |||||||||||||||||
| (1) | Certain amounts shown in the “Summary Compensation Table,” including salary, were paid in Euros or in Swiss Francs and converted into U.S. dollars at the conversion rate of one euro to 1.1 U.S. dollars and one Swiss Franc to one U.S. dollars which is the rate used for our 2019 Operating Plan. |
| (2) | Represents the discretionary increase of the AIP payout from 74.35% to 85.0%, as well as the payment of Ms. Brown’s retention award ($2,000,000) in July 2019. |
Discretionary Bonus Payment for 2019 | % of Total 2019 Compensation | |||||||
Jacques Esculier | $ | 150,352 | 2.01 | % | ||||
Sean Deason | $ | 24,043 | 2.11 | % | ||||
Lisa Brown | $ | 26,723 | 0.80 | % | ||||
Nick Rens | $ | 33,313 | 1.99 | % | ||||
Christian Brenneke | $ | 19,350 | 1.48 | % | ||||
Roberto Fioroni | $ | 0 | NA | |||||
| (3) | Amounts set forth in this column represent the aggregate grant date fair value of RSUs and PSUs in accordance with FASB ASC Topic 718 and are based on the probable outcome of the applicable performance conditions and excluding the impact of forfeitures related to service vesting conditions. For these purposes, PSUs are assumed to have been settled in amounts of common stock that would occur if the company meets its performance criteria at 100% of target. Assuming the highest level of performance conditions will be achieved, the number of performance shares would be 200% of the values reported for PSUs in the Grant of Plan-Based Awards table that immediately follows the Summary Compensation Table. Reported amounts are based on our FASB ASC Topic 718 assumptions and valuation methodology described in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal years ended December 31, 2019, 2018 and 2017 (Note 8 (“Stock-Based Compensation”) for fiscal years 2019, 2018 and 2017). |
| (4) | Amounts included in this column represent the cash amounts earned in respect of (a) annual performance-based cash awards made under the 2019 AIP annual performance period and (b) long-term performance-based cash awards earned under the long-term incentive plan for the performance period beginning on January 1, 2017, and ending on December 31, 2019. |
Annual Incentive Payment for 2019 | Long-Term IncentivePayment for 2017-2019 Performance Period | |||||||
Jacques Esculier | $ | 1, 049,648 | $ | 1,577,229 | ||||
Sean Deason | $ | 167,845 | $ | 179,213 | ||||
Lisa Brown | $ | 186,559 | $ | 213,883 | ||||
Nick Rens | $ | 232,563 | $ | 248,218 | ||||
Christian Brenneke | $ | 135,088 | $ | 181,967 | ||||
Roberto Fioroni | $ | 0 | $ | 0 | ||||
25
| (5) | The following table provides information regarding the compensation disclosed in the All Other Compensation column. This information includes identification and quantification of each perquisite and personal benefit received by each NEO, regardless of amount. |
Premium for Life Insurance (1) | Defined Contribution Plan Contributions (2) | Health Care Reimbursements (3) | Perquisites and Other Personal Benefits (4) | Total | ||||||||||||||||
Jacques Esculier | $ | 55,702 | $ | 153,760 | $ | 21,875 | $ | 18,045 | $ | 249,382 | ||||||||||
Sean Deason | $ | 953 | $ | 19,000 | $ | 21,230 | $ | 162,294 | $ | 203,477 | ||||||||||
Lisa Brown | $ | 14,709 | $ | 48,929 | $ | 1,728 | $ | 15,964 | $ | 81,330 | ||||||||||
Nick Rens | $ | 41,795 | $ | 51,707 | $ | 4,249 | $ | 44,742 | $ | 142,493 | ||||||||||
Christian Brenneke | $ | 8,326 | $ | 116,810 | $ | 12,740 | $ | 105,088 | $ | 242,964 | ||||||||||
Roberto Fioroni | $ | 6,202 | $ | 22,214 | $ | 4,778 | $ | 30,115 | $ | 63,309 | ||||||||||
| (1) | Includes total amount of premiums paid by us for Group Life Insurance and long-term disability coverage that are not generally available to salaried employees. |
| (2) | Includes employer contributions to the Belgian, Swiss and U.S. group insurance plan. For Messrs. Esculier and Fioroni, their contributions reflect two months in 2019 on the Belgian group insurance and respectively 10 months and 2 months on the Swiss group insurance since they moved to Switzerland on March 1, 2019. |
| (3) | Includes health care reimbursements to private schemes in Belgium, in Switzerland and in the U.S. for Messrs. Esculier, Deason, Rens, Brenneke, Fioroni and Ms. Brown. For Messrs. Esculier and Fioroni, their contributions reflect two months in 2019 on the Belgian private scheme and respectively 10 months and 2 months on the Swiss private scheme since they moved to Switzerland on March 1, 2019. |
| (4) | The following table includes the costs to the company of our executive perquisites as well as benefits payable under our international mobility policy. The business manager agreements for our NEOs based outside the U.S. provide for reimbursement of certain costs and expenses associated with the NEO relocating to, and living in, another country, similar to the benefits we provided under our expatriate policy for employees who are asked to relocate from their home country in connection with their work assignments. We believe that these types of benefits are appropriate for employees who accept long-term foreign assignments for the company’s convenience. The level of benefits that we provide, such as the goods and services (cost-of-living) adjustment and the housing differentials, are determined based upon the advice provided to the company by outside consultants. We do not provide any special benefits to our NEOs under this policy that our other expatriate employees are not eligible to receive: |
Financial Planning | Company Car | Housing and Utilities | School Fees | Tax Allowance | Other Allowance | Total | ||||||||||||||||||||||
Jacques Esculier | $ | 5,406 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 12,639 | $ | 18,045 | ||||||||||||||
Sean Deason | $ | 0 | $ | 24,278 | $ | 35,746 | $ | 85,723 | $ | 15,539 | $ | 1,008 | $ | 162,294 | ||||||||||||||
Lisa Brown | $ | 0 | $ | 15,964 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 15,964 | ||||||||||||||
Nick Rens | $ | 17,799 | $ | 26,943 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 44,742 | ||||||||||||||
Christian Brenneke | $ | 15,650 | $ | 22,788 | $ | 34,350 | $ | 0 | $ | 0 | $ | 32,300 | $ | 105,088 | ||||||||||||||
Roberto Fioroni | $ | 0 | $ | 7,051 | $ | 23,064 | $ | 0 | $ | 0 | $ | 0 | $ | 30,115 | ||||||||||||||
Grants of Plan-Based Awards
In 2019, the NEOs were granted annual and long-term cash incentive award opportunities, PSUs and RSUs. The Company assessescolumns under the expected achievement levels“Estimated Future Payouts underendmaximum level. The “All Other Stock Awards” column shows the amount of RSUs granted to each reporting period. AsNEO. We did not grant stock options during 2019.
Non-Equity
Incentive Plan Awards” heading show the target and maximum amounts that were established for cash-based awards on the grant date. Actual payouts for the 2019 annual incentive are reflected in the“Non-equity
Incentive Compensation Plan” column of the Summary Compensation Table. The columns under the “Estimated Future Payouts under Equity Incentive Plan Awards” heading show the number of PSUs that would be earned upon achieving performance at target and at the 26
Estimated Future Payouts Under Non-Equity IncentivePlan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | Market Price on Grant Date ($/Sh) (5) | Grant Date Fair Value of Stock and Option Awards ($/Sh) (6) | ||||||||||||||||||||||||||||||||
Type of Award | Grant Date | Target ($) | Maximum ($) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||||
Jacques Esculier | Cash LTIP (1) | 3/27/2019 | $ | 1,197,000 | $ | 2,394,000 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 1,316,700 | $ | 5,266,800 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 14,044 | 28,088 | $ | 117.49 | $ | 1,650,030 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 14,044 | $ | 117.49 | $ | 1,650,030 | ||||||||||||||||||||||||||||||
Sean Deason | Cash LTIP (1) | 3/27/2019 | $ | 168,000 | $ | 336,000 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 252,000 | $ | 1,008,000 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 767 | 1,534 | $ | 117.49 | $ | 90,115 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 767 | $ | 117.49 | $ | 90,115 | ||||||||||||||||||||||||||||||
Lisa Brown | Cash LTIP (1) | 3/27/2019 | $ | 167,280 | $ | 334,560 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 250,920 | $ | 1,003,680 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 1,703 | 3,406 | $ | 117.49 | $ | 200,085 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 1,703 | $ | 117.49 | $ | 200,085 | ||||||||||||||||||||||||||||||
Nick Rens | Cash LTIP (1) | 3/27/2019 | $ | 191,507 | $ | 383,014 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 297,900 | $ | 1,191,599 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 2,554 | 5,108 | $ | 117.49 | $ | 300,069 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 2,554 | $ | 117.49 | $ | 300,069 | ||||||||||||||||||||||||||||||
Christian Brenneke | Cash LTIP (1) | 3/27/2019 | $ | 173,040 | $ | 346,080 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 173,040 | $ | 692,160 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 1,277 | 2,554 | $ | 117.49 | $ | 150,035 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 1,277 | $ | 117.49 | $ | 150,035 | ||||||||||||||||||||||||||||||
Roberto Fioroni (7) | Cash LTIP (1) | 3/27/2019 | $ | 198,000 | $ | 396,000 | ||||||||||||||||||||||||||||||
AIP (2) | 2/04/2019 | $ | 308,000 | $ | 1,232,000 | |||||||||||||||||||||||||||||||
PSU (3) | 2/22/2019 | 2,128 | 4,256 | $ | 117.49 | $ | 250,019 | |||||||||||||||||||||||||||||
RSU (4) | 2/22/2019 | 2,128 | $ | 117.49 | $ | 250,019 | ||||||||||||||||||||||||||||||
| (1) | These cash-based awards relate to a three-year performance period, beginning on January 1, 2019, and ending on December 31, 2021. Each award was granted under the long-term incentive plan for officers and key employees of WABCO and becomes payable, if at all, subject to each NEO’s continued employment during such period (except in the case of death or disability) and the achievement of pre-established performance objectives established by our CNG Committee. The maximum level of award listed above is the maximum amount permitted to be paid in respect of such award under the terms of such award, which is 200% of the target award. The amounts mentioned under the target and maximum columns, respectively, are based on the base salary and LTIP targeted percentage applicable after the CNG Committee review in May 2019. There are no threshold performance levels set for these awards, but awards may fall below target or to zero, depending on performance. |
| (2) | These cash-based annual incentive awards are granted to our NEOs under our Omnibus Incentive Plan. Under the terms of our annual incentive program, each NEO could earn up to a maximum of 400% of his target award, if the performance goals for the period are exceeded and the individual performance score is also rated at maximum. While technically possible, we do not believe that such an award level would ever be achieved. The maximum level of award listed above is the maximum amount permitted to be paid in respect of that particular award under the terms of such award, subject to further limitations included in our Omnibus Incentive Plan. The amounts mentioned under the target and maximum columns, respectively, are based on the base salary and AIP targeted percentage applicable after the CNG Committee review in May 2019. Awards may fall below target or to zero, depending on performance. The actual amounts that were earned in respect of these awards for 2019 are listed in the Summary Compensation Table above under the columns entitled “Bonus” and “Non-Equity Incentive Plan Compensation.” |
| (3) | Grants of PSUs made to the NEOs as part of our annual equity awards under our long-term incentive plan under the Omnibus Incentive Plan. Each grant has three-year cliff vesting subject to the NEO’s continued employment with the company or subsidiary; however, the number of units distributed will depend on the three-year cumulative performance EPS achievement. The number of PSUs which can be earned in our plan can vary between 0—200% of the target units based on actual performance. Dividends are paid only on shares of common stock issued in settlement of vested PSUs. Additionally, our Omnibus Incentive Plan prohibits the payment of dividend equivalents on unvested PSUs. |
| (4) | These grants of RSUs were made to the NEOs as part of our annual equity awards under our long-term incentive plan under the Omnibus Incentive Plan. These grants will become vested, generally subject to the NEOs’ continued employment with the company or a subsidiary, in three equal installments on the first three anniversaries of the grant date. Holders of unvested RSUs may be entitled to dividend equivalents under our Omnibus Incentive Plan. |
| (5) | Fair market value is defined as the closing price reported on the principal national exchange on which WABCO’s common stock is listed for trading on the immediately preceding business day. This is a common method to determine fair market value for the purposes of these awards, and is an accepted method of establishing such value for federal income tax purposes. |
| (6) | Represents the grant date fair value of PSUs and RSUs, determined in accordance with ASC Topic 718, with payout at target. |
| (7) | Mr. Fioroni separated from the company on April 30, 2019, and all grants made to him in 2019 were forfeited. |
27
Outstanding Equity Awards at Fiscal
Year-End
The following table sets forth information on outstanding equity awards held by our NEOs on December 31, 2019.
Number of Shares or Units of Stock - Unvested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) (9) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Yet Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (9) | |||||||||||||
Jacques Esculier | 14,044 | (1) | $ | 1,902,962 | ||||||||||||
7,818 | (2) | $ | 1,059,339 | |||||||||||||
4,792 | (3) | $ | 649,316 | |||||||||||||
14,044 | (6) | $ | 1,902,962 | |||||||||||||
11,727 | (7) | $ | 1,589,009 | |||||||||||||
14,376 | (8) | $ | 1,947,948 | |||||||||||||
Sean Deason | 767 | (1) | $ | 103,929 | ||||||||||||
427 | (2) | $ | 57,859 | |||||||||||||
1,674 | (4) | $ | 226,827 | |||||||||||||
262 | (3) | $ | 35,501 | |||||||||||||
767 | (6) | $ | 103,929 | |||||||||||||
640 | (7) | $ | 86,720 | |||||||||||||
785 | (8) | $ | 106,368 | |||||||||||||
Lisa Brown | 1,703 | (1) | $ | 230,757 | ||||||||||||
948 | (2) | $ | 128,454 | |||||||||||||
509 | (3) | $ | 68,970 | |||||||||||||
1,703 | (6) | $ | 230,757 | |||||||||||||
1,422 | (7) | $ | 192,681 | |||||||||||||
1,525 | (8) | $ | 206,638 | |||||||||||||
Nick Rens | 2,554 | (1) | $ | 346,067 | ||||||||||||
948 | (2) | $ | 128,454 | |||||||||||||
727 | (3) | $ | 98,509 | |||||||||||||
2,554 | (6) | $ | 346,067 | |||||||||||||
1,422 | (7) | $ | 192,681 | |||||||||||||
2,179 | (8) | $ | 295,255 | |||||||||||||
Christian Brenneke | 1,277 | (1) | $ | 173,034 | ||||||||||||
712 | (2) | $ | 96,476 | |||||||||||||
2,091 | (5) | $ | 283,331 | |||||||||||||
436 | (3) | $ | 59,078 | |||||||||||||
1,277 | (6) | $ | 173,034 | |||||||||||||
1,067 | (7) | $ | 144,579 | |||||||||||||
1,307 | (8) | $ | 177,099 | |||||||||||||
Roberto Fioroni(10) | ||||||||||||||||
| (1) | Reflects RSUs related to WABCO common stock. These units vest at the rate of 33.3% per year with vesting dates of 2/22/20, 2/22/21 and 2/22/22, subject to the NEO’s continued employment with the company. |
| (2) | Reflects RSUs related to WABCO common stock. These units vest at the rate of 50% per year with vesting dates of 2/21/20 and 2/21/21, subject to the NEO’s continued employment with the company. |
| (3) | Reflects RSUs related to WABCO common stock. These units vested on 2/22/20. |
| (4) | Reflects RSUs related to WABCO common stock. These units will fully vest on 10/25/2020 subject to the NEO’s continued employment with the company. |
| (5) | Reflects RSUs related to WABCO common stock. These units will fully vest on 1/1/2021 subject to the NEO’s continued employment with the company. |
| (6) | Reflects unvested PSUs related to WABCO common stock. These units vest, if at all, on 2/22/2022, subject to the NEO’s continued employment and only if the company achieves certain goals related to cumulative performance earnings per share over the three-year period ending on 12/31/2021. |
| (7) | Reflects unvested PSUs related to WABCO common stock. These units vest, if at all, on 2/21/2021, subject to the NEO’s continued employment and only if the company achieves certain goals related to cumulative performance earnings per share over the three-year period ending on 12/31/2020. |
28
| (8) | Reflects PSUs related to WABCO common stock. The performance target for these PSUs was related to our three-year cumulative performance EPS for the 2017-2019 performance cycle. In February 2020, our CNG Committee certified the achievement of the PSU performance target at 159.94%. Accordingly, on February 22, 2020, our NEOs received shares of our common stock as follows: Mr. Esculier, 22,993 shares; Mr. Rens, 3,486 shares; Ms. Brown, 2,440 shares; Mr. Brenneke, 2,091 shares; and Mr. Deason, 1,256 shares. |
| (9) | Values in this column are based on the closing price of a share of our common stock on December 31, 2019, the last trading day in 2019, i.e., $135.50. |
| (10) | Mr. Fioroni held no equity awards at the end of fiscal year 2019. |
Option Exercises and Stock Vested
The following table sets forth information about RSUs that vested in 2019.
Stock Awards | ||||||||
Number of shares acquired on vesting (#) (1) | Value realized on vesting ($) (2) | |||||||
Jacques Esculier | 40,769 | $ | 4,791,240 | |||||
Sean Deason | 2,226 | $ | 261,203 | |||||
Lisa Brown | 2,926 | $ | 343,932 | |||||
Nick Rens | 6,060 | $ | 712,146 | |||||
Christian Brenneke | 2,251 | $ | 264,587 | |||||
Roberto Fioroni | — | $ | — | |||||
During 2019, the NEOs did not exercise any options to purchase WABCO common stock.
| (1) | Represents the gross number of shares acquired upon vesting of RSUs without deduction of any shares withheld to satisfy applicable tax obligations. The number reported in this column includes shares acquired upon vesting of RSUs and PSUs. |
| (2) | Represents the value of vested RSUs and PSUs calculated by multiplying the gross number of vested RSUs and PSUs by the closing trading price of a share of WABCO’s stock on the trading day immediately before the vesting date. |
Nonqualified Deferred Compensation
The following table sets forth information about deferred compensation benefits accrued by our NEOs in 2019:
Executive Contributions in Last FY ($) | Registrant Contributions in Last FY ($) (2) | Aggregate Earnings in Last FY ($) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last FYE ($) | ||||||||||||||||
Jacques Esculier | — | — | $ | 10,551 | — | $ | 582,566 | |||||||||||||
Sean Deason | — | — | — | — | — | |||||||||||||||
Lisa Brown | — | — | — | — | — | |||||||||||||||
Nick Rens(1) | $ | 226,106— | $ | 7,359— | — | — | $ | 1,517,348 | ||||||||||||
Christian Brenneke | — | — | — | — | — | |||||||||||||||
Roberto Fioroni | — | — | — | — | — | |||||||||||||||
| (1) | Mr. Rens, who was employed in our Belgian subsidiary, elected to participate in a nonqualified deferred compensation plan where he contributed in 2019 for half of his AIP award earned for the year 2018. The nonqualified deferred compensation plan was implemented in 2008 and is available to all senior executives in Belgium. Participants may contribute up to half of their annual bonus and the balance in the plan is distributed to participants upon reaching retirement age. |
29
Other Retirement Plans
Messrs. Esculier, Deason, Rens, Brenneke, Fioroni and Ms. Brown participated in our Belgian, Swiss and U.S. group insurance plans which include retirement in the form of a defined contribution plan.
Potential Post-Employment Payments
Severance Arrangements
Messrs. Esculier, Rens, Brenneke and Ms. Brown would have been entitled to severance payments in the event their employment was involuntarily terminated by us without cause or they terminated their employment with us for good reason (as defined below) on December 31, 2019. Mr. Esculier would be paid a lump sum amount equal to two times 225% of his annual base salary at the time of termination. Ms. Brown and Mr. Rens would be paid a lump sum amount equal to one and
one-half
times their annual base salary at the time of termination, plus one andone-half
times their then-current annual incentive target award. In addition, Ms. Brown’s and Mr. Rens’ group insurance and group medical coverage would be continued for up to 18 months following termination and reimbursement of financial planning services of up to $5,000 would be provided if such expenses are submitted within one year of termination of employment. Mr. Brenneke would be paid a lump sum amount equal toone-half
times 155% of his annual base salary at the time of termination. Mr. Deason would not have been entitled to severance payments.Payment of some or all of these amounts to an executive subject to U.S. taxation on compensation income may be delayed for six months following a participant’s termination, or the period over which welfare benefits are provided may be shortened, to the extent required to avoid subjecting the participant to additional taxes or accelerated income recognition under Section 409A of the Internal Revenue Code. These contractual severance benefits would be offset by any statutory entitlements to which any of the NEOs may become entitled under applicable law. The terms “good reason” and “cause” as referenced herein have the same meaning as in the Change of Control Severance Plan described below. These severance payments and benefits would not be payable in the event Messrs. Esculier, Deason, Rens, Brenneke and Ms. Brown are entitled to benefits under the Change of Control Severance Plan in connection with their termination of employment.
Severance Benefits as of December 31, 2018,2019
The table below illustrates the Company believesestimated amount of severance benefits and the value of continued welfare benefits that would have been payable to each of Messrs. Esculier, Deason, Rens, Brenneke and Ms. Brown if his or her employment had been terminated by the company without cause or if such officer had terminated his employment for good reason under the agreements described above on December 31, 2019, and assuming that such terminations occurred prior to the occurrence of a change of control. The actual amounts payable in the event that any of the NEOs below incurred a qualifying termination would likely be different from the amounts shown below, depending on such NEO’s then-current compensation at the date of termination.
Cash Severance Benefits (1) | Value of Continued Welfare Benefits and Financial Planning Reimbursement (2) | Total Value of Termination Benefits Payable | ||||||||||
Jacques Esculier | $ | 8,386,500 | — | $ | 8,386,500 | |||||||
Sean Deason | — | — | — | |||||||||
Lisa Brown | $ | 1,003,679 | $ | 103,049 | $ | 1,106,728 | ||||||
Nick Rens | $ | 1,085,206 | $ | 151,627 | $ | 1,236,833 | ||||||
Christian Brenneke | $ | 991,148 | — | $ | 991,148 | |||||||
| (1) | Column (1) reflects, for Mr. Esculier, two times 225% annual base salary as of December 31, 2019, plus the target amount ($3 million) under the special cash LTIP award; for Ms. Brown and Mr. Rens, one and one-half times annual base salary as of December 31, 2019, plus one andone-half times the AIP target as of December 31, 2019 and, for Mr Brennekeone-half times 155% annual base salary as of December 31, 2019. |
| (2) | Column (2) reflects, for Ms. Brown and Mr. Rens, the estimated value of company-provided group insurance plan and group medical coverage for 18 months and reimbursement of financial planning services of up to $5,000 for one year. |
30
Change of Control Severance Plan and Omnibus Incentive Plan
A group of approximately twenty key executives of the company, including our current NEOs, participate in the WABCO Change of Control Severance Plan. Under the Change of Control Severance Plan, participants are entitled to severance benefits and company-paid outplacement services in the event their service with the company is involuntarily terminated by us (or any successor to us) without cause or they terminate their service with the company for good reason, in each case, within twenty-four months after the occurrence of a change of control of the company. Under these circumstances, Messrs. Esculier, Deason and Ms. Brown would be paid a lump sum amount equal to three times their annual base salary at the time of termination, plus three times their then-current annual incentive target award. Messrs. Rens and Brenneke would be paid a lump sum amount equal to two times their respective annual base salary at the time of termination or departure, plus two times their then-current annual incentive target award. In addition, group insurance and group medical coverage will be continued for up to
thirty-six
months for Messrs. Esculier and Deason and Ms. Brown, and twenty-four months for Messrs. Rens and Brenneke. All our active NEOs are also eligible to receive reimbursement of financial planning services of up to $5,000 if such expenses are submitted within one year of the executive’s termination of service with the company. Payment of some or all of these amounts may be delayed for six months following the termination of an officer’s service with the company, or the period over which welfare benefits are provided to the executives may be shortened, to the extent required to avoid subjecting the executive to additional taxes or accelerated income recognition under Section 409A of the Internal Revenue Code. These contractual severance benefits will be offset by any statutory entitlements to which any of the executives, including the NEOs, may become entitled under applicable law. We do not provide for excise taxgross-up
payments under our Change of Control Severance Plan.For purposes of the entitlement to severance benefits under the Change of Control Severance Plan, “cause” means a participant’s (1) willful and continued failure to substantially perform his or her duties with the company or any subsidiary after a demand for substantial performance is made identifying the manner in which it is probablebelieved that such participant has not substantially performed his or her duties and such participant is provided a period of thirty (30) days to cure such failure, (2) conviction of, or plea of nolo contendere to, a felony, or (3) the willful engaging by such participant in gross misconduct materially and demonstrably injurious to the company or any subsidiary or to the trustworthiness or effectiveness of the participant in the performance of his or her duties. Under the Change of Control Severance Plan, “good reason” is defined to mean the occurrence of any of the following events, without the written consent of the participant, so long as the participant actually terminates service with the company within 90 days of the occurrence of such event:
| 1. | an adverse change in the participant’s position or status as an executive or a material diminution in the participant’s duties, authority, responsibilities or status; |
| 2. | relocation of the participant’s principal place of service with the company to a location more than 30 miles away from the participant’s prior principal place of service with the company; |
| 3. | a reduction in the participant’s base salary; |
| 4. | the taking of any action by the company or a subsidiary that would substantially diminish the aggregate projected value of such participant’s award opportunities under the incentive plans in which he or she was participating; or |
| 5. | the taking of any action that would substantially diminish the aggregate value of the benefits provided to the participant under the medical, health, accident, disability, life insurance, thrift and retirement plans in which he or she was participating (unless resulting from a general change in benefits applicable to all similarly-situated employees). |
However, a participant may not terminate his or her service with the company for good reason on account of any of the events or actions described in items 3, 4 and 5 above, if such event or action is part of a cost savings program and any adverse consequences for the executive of such events or action applies proportionately to all similarly-situated executives.
Our annual incentive and long-term cash-based incentive awards vest upon a change in control based on calculation of actual performance during the performance period until the change in control. PSUs are earned and vest at the “target” level of performance upon a change of control. Our Omnibus Incentive Plan includes double trigger default vesting provisions for all equity awards granted on or after January 1, 2017.
For purposes of the Change of Control Severance Plan and the Omnibus Incentive Plan, a “change of control” is defined to include the occurrence of any of the following events:
(i) a person (other than WABCO, any of its subsidiaries or any employee benefit plan maintained by WABCO or any of its subsidiaries) is or becomes the beneficial owner, directly or indirectly, of securities of the company representing 20% or more of the combined voting power of WABCO’s then-outstanding securities (or 25% to the extent that, prior to meeting the 20% threshold, the
non-management
members of our Board unanimously adopt a resolution consenting to such acquisition by such beneficial owners);31
(ii) during any consecutive
24-month
period, individuals who at the beginning of such period constitute our Board, together with those individuals who first become directors during such period (other than by reason of an agreement with WABCO or our Board in settlement of a proxy contest for the election of directors) and whose election or nomination for election to our Board was approved by a vote of at leasttwo-thirds
of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board;(iii) the consummation of any merger, consolidation, recapitalization or reorganization involving WABCO, other than any such transaction immediately following which the persons who were the beneficial owners of the outstanding voting securities of WABCO immediately prior to such transaction are the beneficial owners of at least 55% of the total voting power represented by the voting securities of the entity surviving such transaction or the ultimate parent of such entity in substantially the same relative proportions as their ownership of WABCO’s voting securities immediately prior to such transaction; provided that, such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such threshold (or to preserve such relative voting power) is due solely to the acquisition of voting securities by an employee benefit plan of WABCO, such surviving entity, any subsidiary or any subsidiary of such surviving entity;
(iv) the sale of substantially all of the assets of WABCO to any person other than any subsidiary or any entity in which the beneficial owners of the outstanding voting securities of WABCO immediately prior to such sale are the beneficial owners of at least 55% of the total voting power represented by the voting securities of such entity or the ultimate parent of such entity in substantially the same relative proportions as their ownership of WABCO’s voting securities immediately prior to such transaction; or
(v) the shareholders of WABCO approve a plan of complete liquidation or dissolution of WABCO.
Pending Merger with ZF Friedrichshafen AG
On March 28, 2019, we entered into an Agreement (the “Merger Agreement”) and Plan of Merger with ZF Friedrichshafen AG (ZF), a stock corporation organized and existing under the laws of the Federal Republic of Germany, and Verona Merger Sub Corp., a Delaware corporation and indirect wholly owned subsidiary of ZF, pursuant to which ZF will acquire 100% of the issued and outstanding shares of WABCO common stock (the Merger). The Merger Agreement was adopted by WABCO’s shareholders at the June 27, 2019 special meeting of shareholders, whereby holders representing 68.4% of the Company’s outstanding shares voted in favor of adopting the Merger Agreement. Consummation of the Merger is subject to customary closing conditions and remaining regulatory approvals
The proxy statement that was filed with the SEC on May 20, 2019 in connection with the merger (the “Merger Proxy”) identified potential change in control payments to our named executive officers in connection with the merger. These identified payments in the Merger Proxy differ from the information set forth below due to different disclosure requirements, time periods and assumptions. The actual payments named executive officers will receive, if any, will differ from the information set forth in the Merger Proxy and from what is set forth below.
Change of Control Benefits as of December 31, 2019
The table set forth below illustrates the amount that would be payable to each of our current NEOs under the Change of Control Severance Plan and the Omnibus Incentive Plan in the event that a change of control occurred on December 31, 2019, a qualifying termination occurred on or within twenty-four months after such change of control, all then outstanding stock options and restricted stock units became fully vested and the performance stock units vested based on achieving the target level of performance. The amounts listed in the table below are only estimates of the amounts that would have been payable in the event that a change of control had occurred on December 31, 2019, based on the assumptions described in this section. The actual amounts payable in the event that a change of control does occur will be more or less than the amounts shown below, depending on the actual terms and conditions of any such event and the facts and circumstances actually prevailing at the time of such event. Thus, the actual amount payable in the event of a change of control could be significantly greater or less than the estimated amounts shown in the table below.
Total Value of Termination Benefits Payable (b) (1) | Total Value of Equity Acceleration (c) (2) | Total Value of Incentive Award Acceleration (d) (3) | Total Value of Benefits Payable Due to a Change of Control (e) (4)(5) | |||||||||||||
Jacques Esculier | $ | 8,240,112 | $ | 9,051,536 | $ | 6,219,877 | $ | 23,511,525 | ||||||||
Sean Deason | $ | 2,144,547 | $ | 721,131 | $ | 424,196 | $ | 3,289,874 | ||||||||
Lisa Brown | $ | 2,208,456 | $ | 1,058,255 | $ | 484,026 | $ | 3,750,737 | ||||||||
Nick Rens | $ | 1,647,444 | $ | 1,407,032 | $ | 575,387 | $ | 3,629,863 | ||||||||
Christian Brenneke | $ | 1,492,032 | $ | 1,106,629 | $ | 397,665 | $ | 2,996,326 | ||||||||
Roberto Fioroni | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| (1) | For the purposes of this table, base salary as of December 31, 2019, was used for all the NEOs. |
32
For Messrs. Esculier and Deason and Ms. Brown, these amounts reflect three times annual base salary as of December 31, 2019, plus three times the annual incentive plan target as of December 31, 2019, and the estimated value of company-provided group insurance plan and group medical coverage for three years and reimbursement of financial planning services up to $5,000 for one year.
For Messrs. Rens, Brenneke, this amount reflects two times annual base salary as of December 31, 2019, plus two times the annual incentive plan target as of December 31, 2019, and the estimated value of company-provided group insurance plan and group medical coverage for two years and reimbursement of financial planning services up to $5,000 for one year.
All participants in the Change of Control Severance Plan are eligible for company-paid outplacement services. The value of such benefits is not currently known and therefore not included in these estimates.
| (2) | These estimates include, (i) in the case of stock options, the difference between the change in control stock price and the applicable exercise price multiplied by the total number of outstanding stock options, (ii) in the case of RSUs, the change in control stock price multiplied by the total number of RSUs and (iii) in the case of PSUs, the change in control stock price multiplied by the target number of PSUs, except that the PSUs granted before the amendment and restatement of the Omnibus Incentive Plan are included at 95% because only a pro-rated portion of those awards vests. The number of unvested stock options, the number of outstanding RSUs, and the number of outstanding PSUs at target are represented in the “Number of Securities Underlying Unexercised Options—Unexercisable (#),” the “Number of Shares or Units of Stock—Unvested (#)”, and the “Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Yet Vested” columns, respectively, of the Outstanding Equity Awards at FiscalYear-End table. The estimates in this column were calculated assuming that the price paid for the company’s common stock in connection with the assumed change of control was $135.50, which was the closing price of a share of company stock on December 31, 2019, the last trading day of 2019. |
| (3) | Column (d) represents the actual AIP and LTIP cash awards for performance cycles concluding on December 31, 2019, and the pro-rata cash awards for LTIP performance cyclesin-progress as of December 31, 2019. |
For Mr. Esculier, these amounts represent $1,049,648 , $1,577,229, $418,319 and $174,681 for the 2019 AIP, 2017-2019, 2018-2020 and 2019-2021 long-term incentive plan performance cycles, respectively. For Mr. Esculier column (d) also represents the target amount ($3 million) under the special cash LTIP award.
For Mr. Deason, these amounts represent $167,845 , $179,213, $53,068 and $24,070 for the 2019 AIP, 2017-2019, 2018-2020 and 2019-2021 long-term incentive plan performance cycles, respectively.
For Ms. Brown, these amounts represent $186,559 , $213,883, $59,060 and $24,524 for the 2019 AIP, 2017-2019, 2018-2020 and 2019-2021 long-term incentive plan performance cycles, respectively.
For Mr. Rens, these amounts represent $232,563 , $248,218, $66,662 and $27,944 for the 2019 AIP, 2017-2019, 2018-2020 and 2019-2021 long-term incentive plan performance cycles, respectively.
For Mr. Brenneke, these amounts represent $135,088 , $181,967, $55,282 and $25,328 for the 2019 AIP, 2017-2019, 2018-2020 and 2019-2021 long-term incentive plan performance cycles, respectively.
| (4) | Sum of (b) through (d). |
| (5) | These amounts may be subject to reduction in order to maximize the net after-tax benefit to an executive who is subject to U.S. taxes on his WABCO compensation and benefits. As mentioned under “Payments upon Severance or Change of Control” in the Compensation Discussion and Analysis section of this Annual Report on Form10-K, the company removed the excise taxgross-up payment provisions included in the Change of Control Severance Plan, effective as of January 1, 2012. |
| (6) | Mr. Fioroni resigned from his position as CFO effective April 1, 2019 and, as of that date, he is no longer entitled to any payments under our Change of Control Severance Plan. |
33
CEO Pay Ratio
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are required to disclose the median of the annual total compensation of our employees (excluding our CEO), the annual total compensation of our principal executive officer, Mr. Esculier, and the ratio of these two amounts. Because the SEC rules for identifying the median employee and calculating the pay ratio permit companies to use various methodologies and assumptions, to apply certain exclusions and to make reasonable estimates that reflect their employee populations and compensation practices, the pay ratio reported by other companies may not be comparable with the pay ratio that we have reported.
Background
WABCO is a global company with presence in various regions of 40 countries. When identifying the median employee, we took into account employees from all our locations employed by us or our subsidiaries active at the company on November 21, 2017. As of November 21, 2017, our employee population consisted of approximately 13,700 individuals, of which approximately 1,300 or 10% were working in the United States, 12,400 or 90% were working outside of the United States. More than 8,000 or 60% of our employees located outside the US are employed in locations where the cost of living is significantly below the United States including emerging markets such as Brazil, China, India, Poland and Russia.
Methodology
Our company did not have any material changes in 2019 to our population or compensation programs that would materially impact our CEO pay ratio disclosure. As per SEC rules, we will therefore keep the same median employee identified in 2017 for our 2019 pay ratio disclosure.
As permitted under SEC rules, we used the following compensation elements to determine our median employee:
Base Salary: Annualized salary rates for full-time salaried employees and hourly pay rates and scheduled annual hours for hourly employees as reasonable estimates of base pay earned in 2017.
Annual Incentives paid in 2017 such as: Corporate Bonus (AIP), Local Bonuses and Commissions.
Long-Term Incentives such as: long-term cash incentives paid in 2017 and equity grants made during 2017 based on the grant date value.
The compensation elements reported above have been converted from local currency into USD with the WABCO exchange rates available on the cut date (November 21, 2017).
Pay Ratio
The median employee’s 2019 compensation was calculated consistent with the way Mr. Esculier’s total compensation has been determined in the Summary Compensation Table. We determined that the performance conditions will be metmedian employee has a compensation of $51,176 and has accrued forwe compared it to Mr. Esculier’s 2019 compensation to determine the CEO pay ratio as follows:
CEO Annual Compensation | $ | 7,488,503 | ||
Median Employee Annual Compensation | $ | 51,176 | ||
CEO to Median Employee Pay Ratio | 146.3 |
We note that, due to our permitted use of reasonable estimates and assumptions in preparing this pay ratio disclosure, the disclosure may involve a degree of imprecision, and thus this pay ratio disclosure is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation
S-K
using the data and assumptions described above.34
Director Compensation
The CNG Committee recommends to the full Board of Directors the compensation expense accordingly.of the company’s
non-managementdirectors, whether in the form of cash or equity awards. The Board of Directors has responsibility for administering the Omnibus Incentive Plan in respect of the company’s
non-management
directors, including the amount of equity awards that should be granted annually to such directors. The Board of Directors must approve any change to the compensation payable to the company’snon-management
non-management
directors. Neither the CNG Committee nor the Board of Directors has delegated any of its responsibilities regarding the compensation of the company’snon-management
directors.The DSUs are grantedCNG Committee periodically reviews the aggregate compensation payable to the company’snon-management directors asLead Director continue to be appropriate and consistent with the practices generally applicable at public companies of comparable size and in similar industries. As part of this review, the CNG Committee considers whether the allocation between cash and equity-based compensation continues to be appropriate. In connection with its review, the CNG Committee may request from time to time that the independent executive compensation consultant retained by the CNG Committee, PM, review the pertinent data and advise on the competitiveness and appropriateness of the company’s compensation arrangements for its
non-management
directors to determine that the level of equity awards made under the Omnibus Incentive Plan and the amount of cash compensation payable in respect of the annual retainer fee, the meeting attendance fees, the fees for service as a chair of the standing committees of the Board and the fees for our non-management
directors. The CNG Committee also seeks input from the current Chairman and Chief Executive Officer and Chief Human Resources Officer of the company with respect to any recommendations that it may make regarding changes to the compensation program fornon-management
directors, but no other executive officer has any substantive role in the setting of such compensation.2019 Director Compensation Program
Under the 2019 director compensation program, each
non-management
director, except Mr. Montupet, was paid an annual retainer of $195,000, of which $80,000 was paid in cash on a quarterly basis. The remaining $115,000 was paid in the form of deferred stock units (“DSUs”). Our Lead Director is usually entitled to receive an annual retainer of $215,000, of which $100,000 is paid in cash on a quarterly basis and the remaining $115,000 is paid in the form of DSUs. The Chairs of the Audit and CNG Committees received additional annual retainers of $15,000.All
non-management
directors received $1,500 per day for attendance atin-person
Board or committee meetings and $750 for attendance at telephonic Board or committee meetings (or for attendingin-person
meetings by telephone). Directors were also reimbursed for reasonable expenses incurred to attend meetings.Equity Retainer—Deferred Stock Units
All ourand areduring 2019 in the form of fully vested DSUs. The DSUs were granted at grant.the Board of Directors meeting coinciding with the 2019 Annual Meeting of Shareholders (“2019 May Board Meeting”) and were based on the closing price of the company’s stock on the trading day preceding the 2019 May Board Meeting. Each DSU provides adirector'sdirector’s death or disability, thedirector'sdirector’s separation from service. Each directorOuralso elect within a month after the grant datechoose to defer the receipt of shares for five or more years. No election can be madeA
The Company records stock-based compensation based ondirectors for the estimated fair value of the award at the grant date and is recognized as an expense2020 fiscal year will be granted in the consolidated statements of operations over the requisite service period. The estimated fair value of the award is based on the closing market price of the Company’s common stock on the date of grant. For PSUs, the grant date fair value of the number of awards expected to vest based on the Company’s best estimate of ultimate performance against the respective targets is recognizedsame manner as compensation expense on a straight-line basis over the requisite vesting period of the awards.
Total stock-based compensation cost recognized in selling and administrative expenses during the years ended December 31, 2018, 2017 and 2016 was as follows:
The following tables summarize the stock options, RSUs, PSUs, DSUs and stock awards activity for each of the periods presented:
The table below shows the vesting schedule of the RSUs granted for each of the periods presented:
As discussed above, the PSUs granted in each of the years ended December 31, 2018, 2017 and 2016 vest, if at all, and at levels depending upon, the achievement of certain three-year cumulative earnings per share goals. To the extent that the PSUs
vest at a level greater (or lesser) than 100% as a result of the final performance achievement, the Company considers the increment (or reduction) in shares vested as additional grants (or forfeitures) in the year of vesting.
The DSUs granted in each of the years ended December 31, 2018, 2017 and 2016 vest immediately upon grant.
As of December 31, 2018, all outstanding stock option awards were fully vested and had a total aggregate intrinsic value of $4.5 million. Aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company's common stock on December 31, 2018, multiplied by the number of shares per each option.
The total intrinsic value of options exercised was $3.1 million, $13.2 million and $6.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. Total fair value of shares vested was $15.9 million, $15.1 million and $19.3 million for the years ended December 31, 2018, 2017 and 2016 respectively. The 326,033 of unvested RSUs and PSUs as of December 31, 2018 will result in the recognition of $21.8 million of compensation cost to be recognized over a weighted average period of 2.0 years.
The contractual life of all options is 10.0 years. The weighted average remaining contractual life of options outstanding as of December 31, 2018 was 1.3 years. The tax benefit from stock options exercised during the period amounted to $1.0 million and $2.2 million for the year ended December 31, 2018 and 2017, respectively. It was immaterial for the year ended December 31, 2016.
The components of other operating and non-operating (income) and expense, net, are as follow:
NOTE 10. Inventories, Net
The components of inventories are as follows:
Inventory costs are primarily comprised of direct material and labor costs, as well as material overhead such as inbound freight and custom and excise duties. Prior year balances have been reclassified to conform to the current year presentation, primarily by separately disclosing the inventory reserve. For inventories valued using the LIFO method, the current replacement cost approximated the LIFO carrying cost for 2018 and 2017. Reserves for LIFO amounted to $1.3 million for the years ended December 31, 2018 and 2017.
Inventory reserves amounted to $18.5 million and $19.8 million for the years ended December 31, 2018 and 2017, respectively. The decrease in the reserve balance for 2018 was primarily attributable to foreign exchange impacts ($0.8 million), while the increase in the reserve balance for 2017 was mainly driven by acquisitions and foreign exchange impacts ($2.3 million and $1.8 million, respectively).
NOTE 11. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, are as follows:
Depreciation expense, including expense related to assets under capital leases, for the years ended December 31, 2018, 2017 and 2016 was $95.8 million, $84.8 million and $76.0 million, respectively.
Property, plant and equipment, net includes tooling investments of $80.0 million and $70.2 million for the years ended December 31, 2018 and 2017, respectively.
NOTE 12. Guaranteed Notes Receivable
The Company's receivables available for financing include sales to reputable state owned and public enterprises in China that are settled through bankers acceptance drafts which are registered and endorsed to the Company. These notes receivable are fully guaranteed by banks and generally have contractual maturities of six months or less, but the ultimate recourse remains against the original trade debtor. These guaranteed notes are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the years ended December 31, 2018, 2017 and 2016 was $281.6 million, $261.8 million and $114.3 million, respectively. Expenses related to discounting these notes amounted to $2.2 million, $2.3 million and $0.4 million for the years ended December 31, 2018, 2017 and 2016, respectively, which are included in other non-operating expense, net. The fair value of these guaranteed notes receivable is determined based
on Level 2 inputs including credit ratings and other criteria observable in the market. The fair value of these notes equal their carrying amounts of $44.1 million and 39.7 million as of December 31, 2018 and 2017, respectively.
The Company monitors the credit quality of both the drawers of the draft and guarantors on a monthly basis by reviewing various factors such as payment history, level of state involvement in the institution, size, national importance as well as current economic conditions in China. Since the Company has not experienced any historical losses nor is the Company expecting future credit losses based on a review of the various credit quality indicators described above, we have not established a loss provision against these receivables as of December 31, 2018 or 2017.
NOTE 13. Goodwill and Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017.
(1) Includes measurement period adjustments in connection with the 2017 acquisitions. See Note 22 for further discussion.
Intangible assets for the years ended December 31, 2018 and 2017 are as follow:
Amortization expense for intangible assets was $28.9 million, $22.3 million and $22.0 million for the years ended December 31, 2018, 2017 and 2016. The Company expects to incur approximately $30.0 million of amortization expense for each of the next five fiscal years excluding any amortization that may arise from future acquisitions.
NOTE 14. Pension and Post-retirement Benefits
WABCO employees participate in a number of benefit plans. The plans include a 401(k) savings plan for the Company's U.S. salaried and hourly employees, which is an individual-account defined contribution plan. WABCO employees in certain countries including Germany, the United Kingdom and Switzerland, participate in defined benefit plans or retiree medical plans sponsored by local WABCO legal entities. WABCO has also assumed responsibility for certain retiree medical plans in the United States and a pension plan in Germany relating to former employees of Trane's Bath & Kitchen division. In addition, in 2016, certain legislative changes in Belgium to employee benefit plans required that these plans be accounted for as defined benefit plans.
Benefits under defined benefit pension plans on a worldwide basis are generally based on years of service and either employee compensation during the last years of employment or negotiated benefit levels. WABCO recognizes in its consolidated balance sheets an asset for a defined benefit post-retirement plan's overfunded status or a liability for a plan's underfunded status. The long-term liability of $716.0 million on the consolidated balance sheet as of December 31, 2018 is primarily due to the underfunded plan in Germany, where the majority of the Company's prior and current employees are based.
The following table provides a reconciliation of the changes in pension and retirement health and life insurance benefit obligations and fair value of assets for the years ending December 31, 2018 and 2017, and a statement of the funded status as of December 31, 2018 and 2017.
(1) Plan amendments relate to the UK court ruling in 2018 relating to the Guaranteed Minimum Pension (GMP) equalization.
(2) Actual loss on assets for the year ended December 31, 2017was primarily driven by a revaluation of assets managed under insurance contracts as a result of updated census data.
$25.0 million of the amount in other comprehensive income as of December 31, 2018 is expected to be recognized as pension and post-retirement costs in 2019.
All equity granted to our
non-management
directors received the equity portion of their annual retainer non-management
director the right to the issuance of a share of our common stock, within ten days after the earlier of the 13-month
anniversary of the grant date or the non-management
directors may non-management
director may not elect to accelerate the issuance of stock from a DSU. DSUs that will be provided to ournon-management
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Stock-based compensation | $ | 20.0 | $ | 16.4 | $ | 13.1 | |||||
| Underlying Shares | Weighted - Average Exercise Price | |||||||||||
| WABCO employees | Trane employees | Total | ||||||||||
| Options Outstanding December 31, 2015 | 296,032 | 95,587 | 391,619 | $ | 43.37 | |||||||
| Options Granted | — | — | — | $ | — | |||||||
| Options Exercised | (49,466 | ) | (54,494 | ) | (103,960 | ) | $ | 38.70 | ||||
| Options Forfeited | — | (128 | ) | (128 | ) | $ | 32.38 | |||||
| Options Outstanding December 31, 2016 | 246,566 | 40,965 | 287,531 | $ | 45.07 | |||||||
| Options Granted | — | — | — | $ | — | |||||||
| Options Exercised | (152,419 | ) | (40,882 | ) | (193,301 | ) | $ | 50.90 | ||||
| Options Forfeited | (394 | ) | (83 | ) | (477 | ) | $ | 44.15 | ||||
| Options Outstanding December 31, 2017 | 93,753 | — | 93,753 | $ | 33.04 | |||||||
| Options Granted | — | — | — | $ | — | |||||||
| Options Exercised | (29,081 | ) | — | (29,081 | ) | $ | 25.50 | |||||
| Options Forfeited | (1,080 | ) | — | (1,080 | ) | $ | 58.85 | |||||
| Options Outstanding December 31, 2018 | 63,592 | — | 63,592 | $ | 36.05 | |||||||
| Exercisable at December 31, 2018 | 63,592 | — | 63,592 | $ | 36.05 | |||||||
| Underlying Shares | Weighted - Average Grant Date Fair Value | |||||
| RSUs Outstanding December 31, 2015 | 153,087 | $ | 101.91 | |||
| RSUs Granted | 94,033 | $ | 92.59 | |||
| RSUs Vested | (73,358 | ) | $ | 91.60 | ||
| RSUs Forfeited | (13,452 | ) | $ | 100.55 | ||
| RSUs Outstanding December 31, 2016 | 160,310 | $ | 101.27 | |||
| RSUs Granted | 81,116 | $ | 118.72 | |||
| RSUs Vested | (75,887 | ) | $ | 102.67 | ||
| RSUs Forfeited | (13,358 | ) | $ | 106.32 | ||
| RSUs Outstanding December 31, 2017 | 152,181 | $ | 109.43 | |||
| RSUs Granted | 68,908 | $ | 137.04 | |||
| RSUs Vested | (66,979 | ) | $ | 107.40 | ||
| RSUs Forfeited | (7,892 | ) | $ | 120.99 | ||
| RSUs Outstanding December 31, 2018 | 146,218 | $ | 122.74 | |||
| Underlying Shares | Weighted - Average Grant Date Fair Value | |||||
| PSUs Outstanding December 31, 2015 | 172,712 | $ | 93.31 | |||
| PSUs Granted | 152,010 | $ | 82.76 | |||
| PSUs Vested | (126,840 | ) | $ | 68.10 | ||
| PSUs Forfeited | (22,192 | ) | $ | 102.46 | ||
| PSUs Outstanding December 31, 2016 | 175,690 | $ | 101.31 | |||
| PSUs Granted | 72,163 | $ | 115.85 | |||
| PSUs Vested | (48,357 | ) | $ | 103.41 | ||
| PSUs Forfeited | (25,589 | ) | $ | 103.14 | ||
| PSUs Outstanding December 31, 2017 | 173,907 | $ | 106.48 | |||
| PSUs Granted | 57,110 | $ | 139.93 | |||
| PSUs Vested | (41,436 | ) | $ | 115.88 | ||
| PSUs Forfeited | (9,766 | ) | $ | 110.74 | ||
| PSUs Outstanding December 31, 2018 | 179,815 | $ | 114.70 | |||
| Underlying Shares | Weighted - Average Grant Date Fair Value | |||||
| DSUs Outstanding December 31, 2015 | 14,989 | $ | 86.35 | |||
| DSUs Granted | 9,194 | $ | 105.52 | |||
| DSUs Issued | (7,100 | ) | $ | 88.10 | ||
| DSUs Outstanding December 31, 2016 | 17,083 | $ | 95.93 | |||
| DSUs Granted | 7,752 | $ | 118.75 | |||
| DSUs Issued | (5,924 | ) | $ | 105.51 | ||
| DSUs Outstanding December 31, 2017 | 18,911 | $ | 102.28 | |||
| DSUs Granted | 7,208 | $ | 127.77 | |||
| DSUs Issued | (7,833 | ) | $ | 109.85 | ||
| DSUs Outstanding December 31, 2018 | 18,286 | $ | 109.09 | |||
| Shares | Weighted - Average Grant Date Fair Value | |||||
| Stock Awards granted: | ||||||
| Year ended December 31, 2016 | 1,100 | $ | 107.47 | |||
| Year ended December 31, 2017 | — | $ | — | |||
| Year ended December 31, 2018 | — | $ | — | |||
| Vesting Schedule | |||||||
| Equal installments over 3 years | After 3 years | Total | |||||
| RSUs granted in 2016 | 86,123 | 7,910 | 94,033 | ||||
| RSUs granted in 2017 | 69,253 | 11,863 | 81,116 | ||||
| RSUs granted in 2018 | 65,190 | 3,718 | 68,908 | ||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Other operating (income)/expense, net | |||||||||||
Indemnification costs (1) | $ | 0.7 | $ | 16.1 | $ | — | |||||
| Bank charges | 1.3 | 1.1 | 1.6 | ||||||||
| Miscellaneous taxes | 5.0 | 6.1 | 4.2 | ||||||||
Release of contingent consideration (2) | (3.1 | ) | — | — | |||||||
| Government subsidy | (2.8 | ) | (1.6 | ) | — | ||||||
| Other income | (1.5 | ) | (1.1 | ) | (0.5 | ) | |||||
| $ | (0.4 | ) | $ | 20.6 | $ | 5.3 | |||||
| Other non-operating expense, net | |||||||||||
| Pension and post-retirement benefit costs | $ | 36.1 | $ | 36.0 | $ | 26.0 | |||||
| Guaranteed notes receivable discount fees | 2.2 | 2.3 | 0.4 | ||||||||
| Foreign exchange gains, net | (1.8 | ) | (1.2 | ) | (1.5 | ) | |||||
Impairment of non-marketable equity securities (3) | 5.5 | — | — | ||||||||
Loss on debt extinguishment (4) | 2.6 | — | — | ||||||||
| Other (income)/expense, net | (2.3 | ) | 0.1 | — | |||||||
| $ | 42.3 | $ | 37.2 | $ | 24.9 | ||||||
| Year Ended December 31, | |||||||||
(Amounts in millions) | 2018 | 2017 | |||||||
| Finished products | $ | 185.2 | $ | 177.8 | |||||
| Products in process | 15.3 | 20.8 | |||||||
| Raw materials | 137.1 | 142.6 | |||||||
| Inventories, gross | 337.6 | 341.2 | |||||||
Less: inventory reserve | 18.5 | 19.8 | |||||||
Inventories, net | $ | 319.1 | $ | 321.4 | |||||
| Year Ended December 31, | |||||||
(Amounts in millions) | 2018 | 2017 | |||||
| Land | $ | 26.8 | $ | 26.4 | |||
| Buildings | 222.9 | 187.0 | |||||
| Machinery and equipment | 1,088.4 | 1,057.0 | |||||
| Improvements in progress | 38.7 | 47.9 | |||||
| Gross property, plant and equipment | 1,376.8 | 1,318.3 | |||||
| Less: accumulated depreciation | 823.2 | 796.0 | |||||
| Property, plant and equipment, net | $ | 553.6 | $ | 522.3 | |||
| Year Ended December 31, | |||||||
| (Amounts in millions) | 2018 | 2017 | |||||
| Balance of goodwill, beginning of year | $ | 834.7 | $ | 399.2 | |||
Acquisitions (1) | (3.2 | ) | 385.9 | ||||
| Foreign exchange translation | (22.1 | ) | 49.6 | ||||
| Balance of goodwill, end of year | $ | 809.4 | $ | 834.7 | |||
| Year ended December 31, | |||||||||||||||||||
| 2018 | 2017 | ||||||||||||||||||
(Amounts in millions) | Gross carrying amount | Accumulated amortization | Net Book Value | Gross carrying amount | Accumulated amortization | Net Book Value | |||||||||||||
| Capitalized software | $ | 120.5 | $ | (92.0 | ) | $ | 28.5 | $ | 120.3 | $ | (87.6 | ) | $ | 32.7 | |||||
| Customer relationships | 161.9 | (38.0 | ) | 123.9 | 164.7 | (27.6 | ) | 137.1 | |||||||||||
| Trade names | 81.2 | (4.8 | ) | 76.4 | 81.4 | (2.7 | ) | 78.7 | |||||||||||
| Other intangible assets | 58.7 | (40.9 | ) | 17.8 | 69.0 | (50.9 | ) | 18.1 | |||||||||||
| Intangible assets, net | $ | 422.3 | $ | (175.7 | ) | $ | 246.6 | $ | 435.4 | $ | (168.8 | ) | $ | 266.6 | |||||
| 2018 | 2017 | ||||||||||||||
| (Amounts in millions) | Health & Life Ins. Benefits | Pension Benefits | Health & Life Ins. Benefits | Pension Benefits | |||||||||||
| Reconciliation of benefit obligation: | |||||||||||||||
| Obligation at beginning of year | $ | 12.4 | $ | 889.7 | $ | 11.8 | $ | 762.0 | |||||||
| Service cost | 0.8 | 25.3 | 0.7 | 20.8 | |||||||||||
| Interest cost | 0.5 | 16.4 | 0.5 | 14.5 | |||||||||||
| Participant contributions | — | 0.4 | — | 0.3 | |||||||||||
| Actuarial (gain)/loss | (0.7 | ) | 24.4 | 0.7 | 20.9 | ||||||||||
Plan amendments (1) | — | 3.6 | — | — | |||||||||||
| Benefit payments | (1.1 | ) | (28.6 | ) | (1.3 | ) | (29.6 | ) | |||||||
| Foreign exchange effects | (0.1 | ) | (40.1 | ) | — | 99.2 | |||||||||
Other | — | (1.5 | ) | — | 1.6 | ||||||||||
| Obligation at end of year | $ | 11.8 | $ | 889.6 | $ | 12.4 | $ | 889.7 | |||||||
| 2018 | 2017 | ||||||||||||||
(Amounts in millions) | Health & Life Ins. Benefits | Pension Benefits | Health & Life Ins. Benefits | Pension Benefits | |||||||||||
| Reconciliation of fair value of plan assets: | |||||||||||||||
| Fair value of plan assets at beginning of year | $ | — | $ | 180.4 | $ | — | $ | 177.0 | |||||||
Actual loss on assets (2) | — | (2.2 | ) | — | (8.5 | ) | |||||||||
| Employer contributions | 1.1 | 24.8 | 1.3 | 23.4 | |||||||||||
| Participant contributions | — | 0.4 | — | 0.3 | |||||||||||
| Benefit payments | (1.1 | ) | (28.4 | ) | (1.3 | ) | (29.6 | ) | |||||||
| Foreign exchange effects | — | (8.6 | ) | — | 15.9 | ||||||||||
Other | — | (1.7 | ) | — | 1.9 | ||||||||||
| Fair value of plan assets at end of year | $ | — | $ | 164.7 | $ | — | $ | 180.4 | |||||||
| Funded status at December 31 | $ | (11.8 | ) | $ | (724.9 | ) | $ | (12.4 | ) | $ | (709.3 | ) | |||
| Amounts recognized in the balance sheet: | |||||||||||||||
| Noncurrent assets (included in other assets) | $ | — | $ | — | $ | — | $ | — | |||||||
| Current liabilities (included in accrued payroll) | (0.9 | ) | (19.5 | ) | (0.9 | ) | (20.1 | ) | |||||||
| Noncurrent liabilities | (10.9 | ) | (705.4 | ) | (11.5 | ) | (689.2 | ) | |||||||
| Net amounts recognized in balance sheet: | $ | (11.8 | ) | $ | (724.9 | ) | $ | (12.4 | ) | $ | (709.3 | ) | |||
| Cumulative amounts recognized in other comprehensive income consist of: | |||||||||||||||
| Prior service cost | $ | — | $ | 4.4 | $ | 0.1 | $ | 1.1 | |||||||
| Net actuarial loss | 8.3 | 369.4 | 9.5 | 378.0 | |||||||||||
| Total (before tax effects) | $ | 8.3 | $ | 373.8 | $ | 9.6 | $ | 379.1 | |||||||
All equity granted to our
non-management
directors is issued under the company’s Omnibus Incentive Plan.Deferred Compensation Plan
The following table provides a summaryBoard of pension plans with projected benefit obligationsDirectors adopted the WABCO Holdings Inc. Deferred Compensation Plan in December 2007. While the Deferred Compensation Plan is by its terms open to allaccumulated benefit obligations in excess of plan assets as of December 31: executive officers, the Board has determined that only
Total pension and post-retirement costs are shown below:
The components of pension and post-retirement costs are broken outdirectors will currently be entitled to participate in the tables below:
Pension Benefit Costs
Other Post-Retirement Benefit Costs
For plans where the total unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess is amortized on a straight-line basis over the average expected future working lifetime of the active participants of that plan. For plans without active participants, the amortization period is the average life expectancy of plan participants.
Major assumptions used in determining the benefit obligation and net cost for post-retirement plans are presented below as weighted averages:
The assumed rate of return is a long-term investment return that takes into account the classes of assets held by the defined benefit plans and expected returns for each class of assets. Return expectations reflect forward-looking analysis as well as historical experience.
WABCO's asset management strategy focuses on maintaining a diversified portfolio using various classes of assets to generate attractive returns while managing risk. The Company periodically reviews its target asset allocations for a given plan to ensure it aligns with the asset management strategy. In determining the target asset allocation for a given plan, consideration is given to the nature of its liabilities, and portfolios are periodically rebalanced with reference to the target level.
All assets are measured at the current fair value. The fair value of the Company's plan assets as of December 31, 2018 and 2017, for each class of assets, is as follows:
The reconciliation of the fair value of the plan assets measured using significant unobservable (Level 3) inputs for the years ended December 31, 2018 and 2017 was as follows:
(1) Actual loss on assets for the year ended December 31, 2017 was primarily driven by a revaluation of assets managed under insurance contracts as a result of updated census data.
WABCO makes contributions to funded pension plans that at a minimum, meet all statutory funding requirements. Contributions, including payment of benefits incurred by unfunded plans and health and life insurance benefits, totaled $25.9 million in 2018 compared to $24.7 million in 2017. Contributions in 2019 are expected to be in line with the contributions made during 2018.Expected future benefit payments from our pension and retirement health and life insurance benefit plans are shown in the table below:
The weighted average annual assumed rate of increase in the health care cost trend rate was 7.0% for 2017, 6.8% for 2018 and is assumed to reach 6.5% in 2019 and then gradually decline to 4.75% by 2027. The health care cost trend rate assumption has the following effect:
NOTE 15. Debt
Schuldschein Loans
On March 22, 2018 the Company, through a European subsidiary, entered into a series of six individual senior unsecured loan agreements with an aggregate principal amount of €300.0 million (collectively, the Schuldschein Loans), as follows :
The Company paid approximately €1.1 million of debt issuance costs in connection with the Schuldschein Loans, which has been presented in the consolidated balance sheets as a direct reduction of the related debt liability. Interest under the fixed rate tranches will be paid annually on March 31 of each year, commencing March 31, 2019. Interest under the floating rate tranches are paid semi-annually on March 31 and September 30 of each year, and commenced on September 30, 2018.
As of December 31, 2018, the outstanding debt balance net of unamortized debt issuance costs was €299.1 million ($342.3 million at December 31, 2018 exchange rates). The proceeds from the Schuldschein Loans will be utilized to meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or any part of the Schuldschein Loans in an amount equal to the higher of the outstanding nominal amount of such loans (or the part of it) and the discounted value.
The Schuldschein Loans contain customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio of not more than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months. The Company was in compliance with all of the covenants as of December 31, 2018.
Senior EUR Notes
On November 15, 2016, the Company issued an aggregate amount of €440.0 million of senior unsecured notes (collectively, the Senior EUR Notes).
The Company paid approximately $1.4 million of debt issuance costs in connection with the Senior EUR Notes, which has been presented in the consolidated balance sheets as a direct reduction of the related debt liability. Interest on the Senior EUR Notes is payable semi-annually on January 1 and July 1 of each year, and commenced July 1, 2017. As of December 31, 2018, the outstanding debt balance, net of unamortized debt issuance costs, was €439.0 million ($502.4 million at December 31, 2018 exchange rates).This debt balance included a revaluation loss of $16.5 million, net of taxes of $15.3 million, related to these notes that has been recognized in cumulative translation adjustment within accumulated other comprehensive income. See Note 20 for further discussion.
The proceeds from the Senior EUR Notes were partially utilized to repay outstanding balances on our revolving credit facilities. The remaining proceeds are intended to fund our share repurchase program, finance acquisitions and meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or part of the Senior EUR Notes pluscash portion of their retainer, meeting fees and any accrued and unpaidother amounts specified under the plan into either an interest-bearing account or notional shares of WABCO common stock, as elected by the participant at the time he or she makes the election to defer the compensation. Once allocated to the interest account or the stock account, a participant may not change the manner in which the amounts deferred are deemed invested. The Deferred Compensation Plan provides that the company may also make discretionary contributions (including discretionary matching contributions) in addition to the amounts electively deferred by a participating
non-management
directors and non-management
(Amounts in millions) | 2018 | 2017 | ||||
| For plans with projected benefit obligations in excess of plan assets: | ||||||
| Projected benefit obligation | $ | 823.3 | $ | 880.8 | ||
| Fair value of plan assets | 101.3 | 177.1 | ||||
| For plans with accumulated benefit obligations in excess of plan assets: | ||||||
| Accumulated benefit obligation | $ | 633.1 | $ | 628.2 | ||
| Fair value of plan assets | 35.6 | 38.1 | ||||
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Foreign pensions | $ | 60.4 | $ | 55.8 | $ | 42.3 | |||||
| Health & Life insurance benefits | 1.8 | 1.7 | 1.9 | ||||||||
| Total pension and post-retirement benefit costs | $ | 62.2 | $ | 57.5 | $ | 44.2 | |||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Service cost - benefits earned during period | $ | 25.3 | $ | 20.8 | $ | 17.1 | |||||
| Interest cost on projected benefit obligation | 16.4 | 14.5 | 17.4 | ||||||||
| Less: assumed return on plan assets | (5.4 | ) | (5.2 | ) | (6.7 | ) | |||||
| Amortization of prior service cost | 0.1 | 0.1 | 0.1 | ||||||||
| Amortization of net loss | 24.7 | 26.1 | 14.4 | ||||||||
| Gain on curtailment | (0.7 | ) | (0.5 | ) | — | ||||||
| Pension benefit costs | $ | 60.4 | $ | 55.8 | $ | 42.3 | |||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Service cost - benefits earned during period | $ | 0.8 | $ | 0.7 | $ | 1.0 | |||||
| Interest cost on projected benefit obligation | 0.5 | 0.5 | 0.4 | ||||||||
| Amortization of net loss | 0.5 | 0.5 | 0.5 | ||||||||
| Other post-retirement benefit costs | $ | 1.8 | $ | 1.7 | $ | 1.9 | |||||
| Benefit Obligation at December 31 | 2018 Health & Life Ins. Benefits | 2018 Foreign Pension Plans | 2017 Health & Life Ins. Benefits | 2017 Foreign Pension Plans | |||||||
| Discount rate | 4.30 | % | 1.90 | % | 3.55 | % | 1.87 | % | |||
| Salary growth | N/A | 3.71 | % | N/A | 2.85 | % | |||||
| Net Periodic Pension Cost for the year | |||||||||||
| Discount rate | 3.55 | % | 1.87 | % | 4.00 | % | 1.79 | % | |||
| Salary growth | N/A | 2.85 | % | N/A | 3.03 | % | |||||
| Expected return on plan assets | N/A | 2.40 | % | N/A | 2.75 | % | |||||
Deferred Compensation Plan. The discount rate assumption in this chart changed from 2017Deferred Compensation Plan permits the2018, resulting in a change in the pension benefit obligation. In the chart above that reconciles the change in benefit obligations for the year, the impactdefer receipt of the discount rate change is included in the actuarial loss/(gain) line item. The discount rate noted for foreign pension plans is a weighted average rate based on each of the applicable country's rates.
non-management
directors to Asset Allocation | 2018 | 2017 | 2018 Target | 2017 Target | |||||||
| Debt securities (issued by non-U.S. government agencies) | 6 | % | 9 | % | 12 | % | 12 | % | |||
| Mutual funds | 32 | % | 29 | % | 27 | % | 27 | % | |||
| Insurance contracts | 47 | % | 47 | % | 47 | % | 47 | % | |||
| Investments in collective foundations | 14 | % | 15 | % | 14 | % | 14 | % | |||
| Cash | 1 | % | 1 | % | — | % | — | % | |||
(Amounts in millions) | December 31, 2018 | Fair Value Hierarchy | |||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||
| Debt securities (issued by non-U.S. government agencies) | $ | 8.9 | 8.9 | $ | — | $ | — | ||||||||
| Mutual funds | 53.4 | — | 53.4 | — | |||||||||||
| Insurance contracts | 77.3 | — | — | 77.3 | |||||||||||
| Investments in collective foundations | 23.8 | — | — | 23.8 | |||||||||||
| Cash | 1.3 | 1.3 | — | — | |||||||||||
| Total plan assets | $ | 164.7 | $ | 10.2 | $ | 53.4 | $ | 101.1 | |||||||
(Amounts in millions) | December 31, 2017 | Fair Value Hierarchy | |||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||
| Debt securities (issued by non-U.S. government agencies) | $ | 15.5 | $ | 15.5 | $ | — | $ | — | |||||||
| Mutual funds | 52.3 | — | 52.3 | — | |||||||||||
| Insurance contracts | 84.4 | — | — | 84.4 | |||||||||||
| Investments in collective foundations | 27.1 | — | — | 27.1 | |||||||||||
| Cash | 1.1 | 1.1 | — | — | |||||||||||
| Total plan assets | $ | 180.4 | $ | 16.6 | $ | 52.3 | $ | 111.5 | |||||||
(Amounts in millions) | 2018 | 2017 | |||||
| Beginning balance | $ | 111.5 | $ | 115.0 | |||
Actual loss on assets (1) | (0.4 | ) | (9.4 | ) | |||
| Contributions to assets | 3.4 | 2.7 | |||||
| Benefit payments from assets | (7.4 | ) | (9.0 | ) | |||
| Transfers | (1.2 | ) | 1.9 | ||||
| Foreign exchange effects | (4.8 | ) | 10.3 | ||||
| Ending balance | $ | 101.1 | $ | 111.5 | |||
(Amounts in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | 2024-2028 | ||||||||||||
| Domestic plans without subsidy | $ | 0.9 | $ | 0.9 | $ | 0.8 | $ | 0.8 | $ | 0.8 | $ | 4.5 | ||||||
| Foreign pension plans | $ | 25.6 | $ | 26.7 | $ | 27.1 | $ | 27.8 | $ | 28.1 | $ | 151.8 | ||||||
(Amounts in millions) | 1% Increase | 1% Decrease | ||||
| Effect on the health care component of accumulated post-retirement obligation | $ | 1.6 | $ | (1.4 | ) | |
| Effect on total of service and interest cost components of net periodic post-retirement health care benefit costs | $ | 0.3 | $ | (0.2 | ) | |
| (Amounts in millions) | Face value | Coupon | Maturity date | |||
| Fixed rate term loan - Series A | € | 10.0 | 0.85% | March 31, 2021 | ||
| Fixed rate term loan - Series B | 60.0 | 1.15% | March 31, 2022 | |||
| Fixed rate term loan - Series C | 80.0 | 1.43% | March 31, 2023 | |||
| Floating rate term loan - Series A | 50.0 | 6-month EURIBOR plus 80 bps | March 31, 2021 | |||
| Floating rate term loan - Series B | 60.0 | 6-month EURIBOR plus 90 bps | March 31, 2022 | |||
| Floating rate term loan - Series C | 40.0 | 6-month EURIBOR plus 100 bps | March 31, 2023 | |||
| € | 300.0 | |||||
| (Amounts in EUR millions) | Face value | Coupon | Maturity Date | |||||
| Series D Notes | € | 190.0 | 0.84 | % | November 15, 2023 | |||
| Series E Notes | 80.0 | 1.20 | % | November 15, 2026 | ||||
| Series F Notes | 170.0 | 1.36 | % | November 15, 2028 | ||||
| € | 440.0 | |||||||
non-management
director. No discretionary matching contributions have been made on behalf ofnon-management
directors since theSpin-off.
None of ournon-management
directors elected to participate in 2019.35
Director Stock Ownership Guidelines
Under our stock ownership guidelines, ourprepayment and certain penalties as defined in the EUR Note Purchase Agreement. The Companybecoming a
may also be required, subjectdirector, whichever is later, to certain events and conditions, to make an offer to prepayattain such ownership levels. As of March 1, 2020, all of the Senior EUR Notes including any accrued and unpaid interest to the date of prepayment. Each holder has the option to accept or reject such offer to prepay.
The EUR Note Purchase Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio of not more than three times at the end of fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of fiscal quarter based upon the preceding twelve consecutive months. The EUR Note Purchase Agreement also provides for customary events of default, the occurrence of which could result in an acceleration of the Company's obligations under the EUR Note Purchase Agreement. Wedirectors were in compliance with allthe stock ownership guidelines based on 2019 compensation levels. See “Compensation Discussion and Analysis—Executive Stock Ownership” for a description of the covenants as of December 31, 2018.
The Company also agreed to indemnify the note purchasers holding Senior EUR Notes that are subject to a swap agreementour stock ownership guidelines for certain losses associated with swap breakage resulting from a prepayment of the Senior EUR Notes or from an acceleration of the Senior EUR Notes as a result of an event of default.
Senior USD Notes
On June 25, 2015, the Company issued an aggregate amount of $500.0 million of senior unsecured notes (collectively, the Senior USD Notes) as follows:our executives.
The proceeds from the Senior USD Notes were used to repay loans outstanding loans under revolving credit facilities, fund share repurchasesdirectors are reimbursed for travel and acquisitions, refinance existing indebtedness and meet general financing requirements. The Company paid approximately $2.1 million of debt issuance costs in connection with the Senior USD Notes, which has been presentedother expenses incurred in the consolidated balance sheets as a direct reductionperformance of the related debt liability.
On April 30, 2018, the Company prepaid the outstanding principal amount of $500.0 million on the Senior USD Notes,their duties and recognized a loss on debt extinguishment of $2.3 million net of taxes, of which the pretax amount, $2.6 million, was recorded in other non-operating expenses in the consolidated statement of operations.
Revolving Credit Facilities
Effective June 28, 2018, the Company amended its existing multi–currency unsecured revolving credit facility, increasing the maximum principal amount of borrowings under the facility from $400 million (the 2015 Facility) to $600 million (the 2018 Facility), with an option to increase up to additional $250.0 million. The 2018 Facility also extended the previously scheduled maturity date of September 30, 2022 for the 2015 Facility to June 28, 2023, subject to two one–year extension options. Concurrent with entering into the 2018 Facility, the Company also terminated the $100 million multi-currency five-year unsecured revolving credit facility (the 2014 Facility) that was due to expire on December 17, 2019.
On the effective date of the 2018 Facility, the Company repaid the outstanding balance of €104 million and €52 million under the 2015 Facility and 2014 Facility, respectively, and commenced borrowing under the 2018 Facility. As of December 31, 2018, there were no outstanding borrowings on the revolving credit facility.
Under the 2018 Facility, the Company may borrow, on a revolving basis, outstanding loans in an aggregate principal amount at any one time not in excess of $600 million. The proceeds from borrowings under the 2018 Facility will be made available to fund the share repurchase program, finance acquisitions, provide working capital and for other general corporate purposes. Up to $50 million under the 2018 Facility may be used for issuing letters of credit, which was fully unused as of December 31, 2018, and up to $50 million is available in the form of swing line loans, all $50 million of which was available for use as of December 31, 2018.
The following table summarizes the balance of outstanding borrowings on these facilities:
Interest on loans under the 2018 Facility will be calculated at a rate per annum equal to an applicable margin which can vary from 0.30% to 0.85% based on the Company's leverage ratio plus LIBOR for loans denominated in U.S. Dollars and EURIBOR for loans denominated in Euros (SIBOR for loans denominated in Singapore Dollars and HIBOR for loans denominated in Hong Kong Dollars).
The 2018 Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Financial covenants include a leverage test (consolidated net indebtedness not to exceed three times adjusted four quarter trailing consolidated EBITDA) and a maximum subsidiary indebtedness test. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of the Company's subsidiaries, excluding indebtedness under the 2018 Facility, to 20 percent of consolidated total assets as at the end of the most recently ended financial year, of which not more than $150 million may be secured, provided however that the Company may incur additional subsidiary indebtedness subject to, inter alia, providing additional corporate guarantees. Other undertakings and covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, the Employee Retirement Income Security Act (ERISA) and U.S. regulations, the Foreign Account Tax Compliance Act (FATCA), sanctions-related obligations, negative pledge, limitations on mergers and sales of assets, change of business and use of proceeds. We were in compliance with all of the covenants as of December 31, 2018.
Other Debt
As of December 31, 2018, the Company's various subsidiaries had borrowings from banks totaling $0.5 million which was fully classified as long-term debt. This is in comparison to $0.7 million as of December 31, 2017, of which $0.3 million was classified as long-term debt.
The following table summarizes maturities of long-term debt outstanding as of December 31, 2018.
NOTE 16. Warranties, Guarantees, Commitments and Contingencies
Warranties
Products sold by WABCO are covered by a basic limited warranty with terms and conditions that vary depending upon the product and country in which it was sold. The limited warranty covers the equipment, parts and labor (in certain cases) necessary to satisfy the warranty obligation generally for a period of two years. Estimated product warranty expenses are accrued in cost of goods sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on warranty claims experience and specific customer contracts. Warranty expenses include accruals for basic warranties for product sold, as well as
accruals for product recalls, service campaigns and other related events when they are known and estimable. To the extent WABCO experiences changes in warranty claim activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly. Warranty accrual estimates and the allocation of warranty between short and long term are updated based upon the most current warranty claims information available.
The following is a summary of changes in the Company’s product warranty liability for the years ended December 31, 2018, 2017 and 2016.
Guarantees and CommitmentsFuture minimum rental commitments under all non-cancelable operating leases with original terms in excess of one year in effect as of December 31, 2018, are: $30.1 million in 2019; $26.0 million in 2020; $17.3 million in 2021; $13.9 million in 2022; $10.6 million in 2023 and $23.2 million thereafter, amounting to a total of $121.1 million. Rental expense for all operating leases was $23.8 million, $18.2 million and $17.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company has uncollateralized bank guarantees totaling $37.3 million of which $25.8 million is related to statutorily-required guarantees for tax and other litigation, $3.0 million is related to letters of credit, and $8.5 million is related to other individually immaterial items.
Right of Recourse
As discussed in Note 12, the Company may receive guaranteed notes receivable in the form of bankers acceptance drafts from its customers in China as payment of outstanding accounts receivable. These banker's acceptance drafts are non-interest bearing obligations of the issuing bank andgenerally have contractual maturities of six months or less. The Company may use these banker's acceptance drafts priorindemnified to the scheduled maturity datefullest extent allowed under applicable law. We do not provide perquisites to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date against the original debtor. As of December 31, 2018 and 2017, the Company had approximately $28.2 million and $39.5 million, respectively, of banker's acceptance drafts subject to customary right of recourse provisions, which were transferred to vendors and had not reached their scheduled maturity date. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.our directors.
Contingencies
We are subject to proceedings, lawsuits and other claims related to products and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable and reasonably possible losses. A determination of the amount of liability to be recorded, if any, for these contingencies is made after careful analysis of each individual issue.
Under an indemnification agreement, WABCO Brazil is responsible for certain claims related to Trane's (formerly called American Standard) business for periods prior to the Company's spin-off from Trane in 2007. In particular, there are tax claims pending in various stages of the Brazilian legal process related to income, social contribution and/or value added taxes for which a contingency exists and which may or may not ultimately be incurred by the Company.
As previously disclosed, this includes one particular case for which an accrual of BRL 38.2 million including interest ($9.9 million based on December 31, 2018 exchange rates) was recorded based on management's assessment after considering advice of external legal counsel with respect to the likelihood of loss in this case. A corresponding deposit was made in the first quarter of 2017 into an escrow account with the Brazilian government, representing substantially all of the potential liability for the case. In March 2018, our appeal to have this case heard at the Brazilian Superior Court of Justice (the Court) was accepted. The Court subsequently heard the case and rejected our position ultimately ruling in favor of the tax authorities during the first quarter of 2018. There will be no further appeals. Accordingly, management expects this case to be closed by the Brazilian authorities within the next twelve months and has classified the accrual and deposit within other current liabilities and other current assets, respectively, as of December 31, 2018.
The estimated total amount of other remaining contingencies for tax claims under the indemnification agreement as of December 31, 2018 was $20.9 million including interest. However, based on management’s assessment following advice of our external legal counsel, the Company believes that it has valid arguments in all of these cases and thus no accrual is required at this time.
NOTE 17. Income Taxes
Income before income taxes and the applicable provision for income taxes were:
Our effective tax rate (ETR) of 10.6% for the year ended December 31, 2018 included the following non-recurring items which resulted in our ETR being significantly lower than our statutory rate of 21%:
During the fourth quarter of 2018, we recorded a $33.3 million income tax benefit as a result of effectively settling the Belgium Patent Income Deduction (PID) claim for 2013-14, reducing the ETR by 7.2%;
During the fourth quarter of 2018, we recorded an $11.4 million income tax benefit related to the settlement of a transfer pricing arbitration claim between Germany and Belgium, reducing the ETR by 2.5%.
In addition, during 2018, our ETR continues to benefit from the availability of various tax incentives and programs in foreign jurisdictions including the Belgium PID, China High & New Technology Enterprise (HNTE) and a Dutch hybrid group financing structure. We recorded a current year tax benefit of $22.9 million, reducing the ETR by 4.9% for the Belgium PID, which is due to expire in June 2021.
Belgium Excess Profit Ruling
The Belgian Tax Code contained provisions to reduce the taxable base of companies, through rulings granted by the Belgian Government under the excess profit ruling (EPR) program. WABCO qualified for the EPR program in 2012. On January 11, 2016, the European Commission ruled that the EPR program permitted under Belgian law is illegal and incompatible with European State Aid law (hereinafter referred to as the "Decision"). As a result, the European Commission required Belgium to stop applying the EPR program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). The Company recorded an income tax provision of $69.3 million during 2016 with respect to the clawback of all the tax benefits obtained under the EPR program for tax years 2012 to 2014. This income tax provision did not have any cash impact because the Company had net operating losses (NOLs) available to deduct against the incremental taxable profit. The Company together with the Belgian State and a number of other impacted Belgian taxpayers appealed the Decision before the General Court of the European Union (the General Court). As a result of the Decision, the Company previously sought and obtained an alternative tax relief for 2015 and future years under the Belgium PID program and requested approval to apply the PID for years 2013-14.
In the fourth quarter of 2018, we received confirmation from the Belgian Tax authorities that our request for PID benefits, applicable for years 2013-14, was approved by the Recovery Team of the European Commission and as a result we recorded a tax benefit of $33.3 million. The remaining unrecognized tax benefit related to the EPR program is $32.9 million and includes cumulative translation adjustments of $3.0 million and a cumulative decrease of $6.1 million for revaluation resulting from 2017 Belgium tax reform.
On February 14, 2019, the General Court issued a judgment to annul the Decision. See Note 23 for discussion.
The Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (The Tax Act). The Tax Act includes a reduction in the corporate tax rate to 21%, from 35%, implementing a territorial tax system, a one-time transition tax on unrepatriated earnings of foreign subsidiaries at reduced tax rates regardless of whether the earnings are repatriated and the modification or repeal of many business deductions and credits. The reduction in corporate tax rate from 35% to 21% significantly impacts the reconciliation of effective income tax rate as most foreign jurisdictions in which we have significant operations have a statutory tax rate higher than 21% but less than 35%.
While the Tax Act provides for a territorial tax system, beginning in 2018, it includes the global intangible low-taxed income (GILTI) provision. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on foreign subsidiary's tangible assets. The GILTI tax expense is primarily caused by a U.S. foreign tax credit limitation which requires an allocation of interest expense to the GILTI income, effectively rendering the allocated interest expense non-deductible. The GILTI provision has resulted in a $1.5 million increase in income tax expense for 2018.
The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. During 2017, the Company recognized provisional income tax expense of $100.0 million. The provisional U.S. tax is comprised of the estimated transition tax payable with the Company's U.S. tax filings of $196.4 million offset by the reversal of previously recorded deferred tax liabilities on outside basis differences in foreign subsidiaries of $96.4 million. During 2018, the Company recognized $5.8 million of income tax expense related to the final transition tax payable of $202.2 million included on the Company's 2017 U.S. tax filing. In addition, we recognized $2.0 million of income tax expense related to changes in the revaluation of deferred tax assets and liabilities, which was primarily due to finalization of R.H. Sheppard Co., Inc. purchase accounting. The Company recognized a deferred tax benefit of $32.4 million to reflect the reduced U.S. tax rate and other effects of the Tax Act as of December 31, 2017. The accounting for the tax effects of the Tax Act has been completed in 2018.
Belgium Tax Reform
On December 25, 2017, Belgium enacted tax legislation including a reduction in the corporate tax rate, decreasing from 33.99% to 29.58% in 2018 and then to 25.00% beginning in 2020. During 2018 and 2017, the Company recognized income tax expense of $5.2 million and $13.8 million, respectively, related to the remeasurement of our net deferred tax assets at the tax rate the underlying items are expected to be realized.
Reconciliation of Effective Income Tax Rate
A reconciliation between the actual income tax expense provided and the income taxes computed by applying the statutory federal income tax rate of 21.0% in 2018 and 35.0% in 2017 and 2016 to the income before income taxes is as follows:
The effective income tax rates for 2018, 2017 and 2016 were 10.6%, 35.2% and 33.0%, respectively.
The Company has operations and a taxable presence in countries outside the United States and all of these countries have a tax rate that is different than the rate in the U.S. The countries in which the Company has a material presence and where the foreign earnings are taxed at a rate significantly other than 21% include Belgium, Brazil, China, Germany, India and the Netherlands. The tax effect of foreign earnings taxed at other than the statutory rate is an increase of $33.2 million and a decrease of $21.6 million and $28.5 million in 2018, 2017 and 2016, respectively. The increase in 2018 is largely due to the change in the U.S. statutory rate from 35% to 21% beginning from January 1, 2018.
Deferred Tax Assets and Liabilities
The following table details the gross deferred tax liabilities and assets and the related valuation allowances:
As at December 31, 2018, Management considered new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.
At December 31, 2017 the Company had a valuation allowance recorded against Belgian deferred tax assets related to a transfer pricing arbitration claim between Germany and Belgium. During the fourth quarter of 2018, the Company successfully settled the arbitration claim and Belgium accepted an additional tax deduction of $38.6 million. As a result, the Company reversed the associated valuation allowance of $11.4 million. The amount was offset by other valuation allowance changes of $0.8 million resulting in a net benefit of $10.6 million.
Management has determined that $1.8 million of its deferred tax assets in certain jurisdictions will not be realized since evidence such as historical operating profits resulted in a lack of taxable earnings during the most recent three-year period ended December 31, 2018, and the lack of projected earnings provided sufficient negative evidence to record a valuation allowance against such deferred tax assets related to carryforwards for net operating losses.
Tax Loss Carryforwards
As of December 31, 2018, the Company has $151.8 million of net operating loss carry forwards (NOLs) available for utilization in future years. Approximately $139.7 million of such NOLs have an unlimited life and the remainder of $12.1 million is available for periods of up to 20 years. The net operating loss carryforwards include $125.0 million for which unrecognized tax benefits of $34.8 million have been recorded at December 31, 2018.
Unrecognized Tax BenefitsThe Company conducts business globally and, as a result, it files income tax returns in the U.S. federal, state and local, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world and has significant presence in the following jurisdictions: Belgium, Brazil, China, Germany, India, the Netherlands, Poland and the U.S. With no material exceptions, the Company is no longer subject to examinations by tax authorities for years before 2008. However, the Belgium and U.S. federal income tax returns are no longer subject to examination through years 2012 and 2014, respectively.
Unrecognized tax benefits as of December 31, 2018 amounted to $40.2 million of which $34.8 million has been offset against deferred tax assets as stated above. The Company believes that $2.2 million of the remaining unrecognized tax benefits will be settled during 2019. The Company is currently unable to estimate the timing of payment of the remaining unrecognized tax benefits of $3.2 million. Total accrued interest as of December 31, 2018, 2017 and 2016 was approximately $0.6 million, $0.4 million and
$0.8 million, respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.
A reconciliation of the beginning and ending balances of unrecognized tax benefits (exclusive of interest) is as follows:
During 2018, the Company reduced its unrecognized tax benefit by a net $32.0 million, which is primarily related to the EPR/PID clawback of $33.3 million, as a result of receiving PID benefits for years 2013-14. The remaining difference includes a net increase in other unrecognized tax positions of $3.6 million, which was slightly offset by a decrease of $2.3 million as a result of foreign currency translation adjustments.
During 2017, the Company reduced its unrecognized tax benefit related to the EPR/PID clawback by $8.0 million as the result of Belgian tax rate changes; however, the unrecognized tax benefit increased by $9.0 million as the result of foreign currency translation. During 2016, the Company recorded an unrecognized tax benefit related to the EPR/PID clawback of $69.3 million net of $4.1 million of foreign currency translation adjustments. Further, during 2016, the Company reversed unrecognized tax benefits due primarily to the expiration of the applicable statute of limitation of $11.9 million net of $0.6 million of foreign currency translation adjustments.
In February 2018, the Company received a final tax and interest assessment in India for the 2013 tax year related to a capital gain on an intercompany transfer of an Indian subsidiary. The assessment was for INR 3.5 billion ($50.7 million at December 31, 2018 exchange rates). In addition, a penalty assessment was issued in March for INR 2.1 billion ($30.7 million at December 31, 2018 exchange rates). The Company believes that no tax is due under the relevant double tax treaty between the Netherlands and India and therefore no unrecognized tax benefit has been recorded. The Company appealed both the tax and penalty assessments during March 2018. In May 2018, the Commissioner of Income Tax granted a partial stay of demand requiring the Company to pay 15% of the assessment (INR 531.4 million, equivalent to $7.6 million at December 31, 2018 exchange rates) during the next twelve months. The assessed penalty has been held in abeyance pending the appeal. As of December 31, 2018, the Company has deposited installments totaling INR 400.0 million ($5.7 million at December 31, 2018 exchange rates) which are recorded in other assets on the consolidated balance sheet.
As of December 31, 2018 and 2017, there were $39.6 million and $71.6 million of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate.
Indefinite Reinvestment of Foreign Earnings
Non-U.S. income taxes are provided for the reversal of basis differences on investments in foreign subsidiaries not deemed to be indefinitely reinvested in the local countries. Non-U.S. income taxes have not been provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested of $29.0 million as of December 31, 2018. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation related to how income basis differences would be repatriated.
NOTE 18. Related Party Transactions
Equity Method Investments
Transactions with equity method investees are considered to be related-party transactions. During the year ended December 31, 2017, the Company acquired its remaining interests in WABCO Automotive South Africa and Meritor WABCO Vehicle Control Systems, both of which were previously accounted for under the equity method. Transactions occurring between the Company and these entities prior to their acquisition dates are identified as related party transactions.
The equity method investments held by the Company and its respective ownership interests at December 31, 2018 include the following:
WABCO received no dividends from its equity method investees during the year ended December 31, 2018, versus $22.6 million and $29.8 million for the years ended December 31, 2017 and 2016, respectively.
The following table summarizes the Company's sales and purchases with related parties:
The following table summarizes receivables and payables with related parties:
Consolidated Joint Ventures
WABCO has four fully consolidated joint ventures as of December 31, 2018. The first of these joint ventures is in Japan with Sanwa-Seiki where the joint venture distributes WABCO's products in the local market. WABCO's ownership interest in the joint venture with Sanwa-Seiki is 90%.The second joint venture is in the United States with Cummins Engine Co. (Cummins), a manufacturing partnership formed to produce air compressors designed by WABCO. WABCO's ownership interest in the joint venture with Cummins is 70%.The third joint venture is with Guangdong FUWA Heavy Industry Co., Ltd., (FUWA) to produce air disc brakes for commercial trailers in China. FUWA is the largest manufacturer of commercial trailer axles in China and in the world. WABCO's ownership interest in the joint venture with FUWA is 70%.
The fourth joint venture is with FAW Jiefang (FAW), to accelerate WABCO's single-piston air disc brake technology in China. WABCO's ownership interest in the joint venture with FAW is 60%. This joint venture was created during the fourth quarter of 2018 and will commence its manufacturing activity in 2019.
NOTE 19. Geographic Information
WABCO is a fully integrated global business with management structures established in a variety of ways, including around products, distribution channels and key customers. WABCO's plants, engineering, technical support, distribution centers and other support functions are shared among various product families and serve all distribution channels with many customers. Our largest customer is Daimler, which accounted for 14% of our sales in 2018, 11% in 2017 and 10% in 2016. Volvo, our next largest customer, accounted for 11% of our sales in 2018, and 8% in 2017 and 2016.
North American sales for the years ended December 31, 2018, 2017 and 2016 accounted for 23%, 18% and 14% of total sales, respectively. European sales for the years ended December 31, 2018, 2017 and 2016 accounted for 49%, 52% and 54% of total sales, respectively. Asian sales for the years ended December 31, 2018, 2017 and 2016 accounted for 23%, 26% and 24% of total sales, respectively. We are strongly rooted in China and India and have achieved a leading position in the marketplace through increasingly close connectivity to customers. The Company continues to be strengthened in Asia through an extensive network of suppliers, manufacturing sites and engineering hubs.
During the fourth quarter of 2018, the Company disclosed a new organizational structure managed by business regions. The Company is currently in the implementation phase of this new structure including defining its revised internal reporting to the chief operating decision maker. The financial reporting to the Company's chief operating decision maker has remained unchanged as of December 31, 2018 and as of the filing date of February 15, 2019.
Geographic Data
NOTE 20. Derivative Instruments and Hedging Activities
ASC 815, Derivatives and Hedging, requires a company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies and has been designated as a hedge for accounting purpose. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The Company recognizes all derivative financial instruments in the consolidated balance sheet at fair value using Level 2 inputs and these are classified as “other current assets,” “other assets,” “other accrued liabilities” or “other liabilities” on the consolidated balance sheets. The impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income (AOCI) for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.
Net Investment Hedges
The Company designated borrowings under its revolving credit facilities and Senior EUR Notes to partially hedge the foreign currency exposure of its net investment in certain Euro-denominated wholly-owned subsidiaries. As of December 31, 2018 and 2017, the Company designated Euro-denominated loans of €440.0 million (approximately $503.6 million at December 31, 2018 exchange rate) and €763.0 million (approximately $912.0 million at December 31, 2017 exchange rate) as hedges of its net investment in these subsidiaries. For the twelve-month periods ended December 31, 2018 and 2017, the Company recorded a gain of $16.8 million, net of taxes of $4.7 million, and a loss of $43.2 million, net of taxes of $25.1 million, respectively, in cumulative translation adjustment within AOCI.
Derivatives Not Designated as Hedges
Foreign exchange contracts are also used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of December 31, 2018 and 2017, the Company had the following net outstanding notional amounts related to foreign currency forward contracts:
* No significant outstanding foreign currency forward contracts
The Company had additional foreign currency forward contracts with notional amounts that individually amounted to less than $10 million. As of December 31, 2018 and 2017, respectively, the aggregate notional amount of forward contracts outstanding was €170.2 million ($194.8 million at December 31, 2018 exchange rates) and €416.4 million ($497.7 million at December 31, 2017 exchange rates) with an average duration of 1 month. The fair value of the derivatives amounts amounted to $0.6 million and $2.0 million as of December 31, 2018 and 2017, respectively.
For the years ended December 31, 2018 and 2017, the Company recognized net losses on its derivative instruments of $1.1 million and $6.0 million, respectively. When combined with the revaluation of assets and liabilities, these foreign exchange contracts resulted in net non-operating gains of $2.9 million and $1.9 million in 2018 and 2017, respectfully.
NOTE 21. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 were as follow:
(a) Short-term and other investments consist of mutual funds or deposit funds holding primarily term deposits, certificates of deposit and short-term bonds.The Company considers highly liquid investments with maturities of three months or less when purchased to be cash and cash equivalents. The fair value of short-term and other investments is determined based on pricing sources for identical instruments in less active markets. The unrealized loss on short–term and other investments still held at the reporting date was immaterial for the years ended December 31, 2018 and 2017.
(b) Fair value of derivative instruments determined based on Level 2 inputs including credit ratings and other criteria observablein the market.
Other Fair Value Disclosures
During the third quarter of 2018, the Company determined that the carrying value of one of its non-marketable investments exceeded its estimated fair value and recognized an impairment of $5.5 million in other non-operating expense, net. The impairment loss recognized considers updated financial information received from the investee indicating that the estimated fair value of the business had declined below the amount previously estimated by the Company determined using discounted cash flow and multiple exit assumptions. There were no observable price changes for identical or similar instruments that would require the Company to further adjust its non–marketable equity investments to their fair value. The carrying value determined using the measurement alternative of the non-marketable investments was $25.4 million and $30.9 million at December 31, 2018 and 2017, respectively.
NOTE 22. Business Combinations
Acquisition of WABCO Automotive South Africa
On December 1, 2017, the Company acquired the remaining 51% interest in its South African partnership with Sturrock and Robson Industries, Pty Ltd. for total consideration of $7.9 million, of which $7.4 million was paid in cash and $0.5 million related to non-cash consideration for payables from the partnership assumed in acquisition accounting. This acquisition extends the Company's global product portfolio, including its recently acquired product lines, to the Sub-Saharan region and further improves the Company's proximity to customers in this region.
The acquisition of the remaining interests was accounted for as a step-acquisition, resulting in a net gain on remeasurement of equity method investment of $4.2 million. This included a $6.0 million gain related to the remeasurement of the Company's existing equity method investment to the acquisitionReflects the grant date fair value of $7.1 million, offset by the release of foreign currency translation of $1.8 million associated with the equity method investment prior to the acquisition. As part of the transaction, the consolidated interest in the South African partnership was integrated into the newly formed WABCO South Africa Pty Ltd. (WABCO South Africa).
The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date is final as of December 31, 2018. During the year ended December 31, 2018, the Company made adjustments to the purchase price allocation, to increase intangible assets, accrued liabilities, inventories, other current receivables and property, plant and equipment by $7.3 million, $2.4 million, $0.7 million, $0.3 million and $0.3 million, respectively. This resulted in a total net decrease of $6.2 million to goodwill. The following table summarizes the final allocation of the purchase consideration:
The intangible assets include amounts recognized for the fair value of distribution rights. The fair value of intangible assetswas determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately 10 years. The goodwill generated is primarily attributable to expected synergies and is not deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Acquisition of Meritor WABCO Vehicle Control Systems (now known as WABCO USA LLC)
On October 1, 2017, the Company acquired the remaining interest in its Meritor WABCO joint venture from Meritor Inc. for $250.0 million, less cash acquired of $16.4 million, resulting in net cash consideration of $233.6 million. A final closing partnership distribution was received by Meritor immediately prior to acquisition, which effectively reduced their ownership interest from 50% to 49.21%. This acquisition of the remaining 49.21% interest in Meritor WABCO unifies the Company's operations in North America and allows customers to access an integrated WABCO product portfolio and benefit from an integrated supply chain.
In connection with the acquisition, the Company entered into a new ten-year distribution agreement with a Meritor affiliate to serve as the exclusive distributor for a certain range of WABCO’s Aftermarket products in the U.S. and Canada and its non-exclusive distributor in Mexico. The Company has the option to reacquire the distribution rights, and Meritor has the option to put these distribution rights to the Company, at certain points until April 2021 for an exercise price between $225 million and $265 million, based on the earnings of the distribution business.
The acquisition of Meritor WABCO was accounted for as a step-acquisition. The equity investment held by the Company immediately prior to acquisition was remeasured to an acquisition-date fair value of $258.0 million based on the pro rata value of the new equity interest acquired given that prior to the final closing partnership distribution, both partners had equal proportions of equity interest in the prior joint venture with the same rights and preferences, and that the acquired equity interest was consummated on an arm’s length basis by knowledgeable, unrelated parties. This valuation was corroborated by applying an income approach that utilized discounted future estimated cash flows based on projections of revenues and expenses and our weighted-average cost of capital. The resulting gain on remeasurement of equity method investment amounted to $243.5 million.
During the year ended December 31, 2018, adjustments to the purchase price allocation were not material. The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date has been final as of September 30, 2018. The following table summarizes the final allocation of the net purchase consideration:
The intangible assets include amounts recognized for the fair value of trade name and customer-based assets. The fair value of intangible assets was determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately 42 years. The goodwill generated is primarily attributable to expected synergies and its portion relating to the step-acquisition is deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Acquisition of R.H. Sheppard Co., Inc.
On September 18, 2017, the Company acquired R.H. Sheppard Co., Inc. (Sheppard) for cash consideration of $165.2 million, excluding cash acquired of $17.1 million, resulting in net cash paid of $148.1 million. During the first quarter of 2018, the purchase price was adjusted under the purchase agreement for an additional cash payment of $6.4 million, bringing the total purchase price to $165.2 million. Sheppard is a supplier of steering technologies, precision-engineered engine pumps and remanufacturing services for commercial vehicles.
The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date has been final as of September 30, 2018. During the year ended December 31, 2018, the Company made adjustments to the purchase price allocation, to increase property, plant and equipments and other liabilities by $17.4 million and $8.0 million, respectively, and to decrease inventories, intangible assets, accrued expenses and deferred tax liabilities by $3.3 million, $2.8 million, $0.5 million and $3.2 million, respectively. This resulted in a total net decrease of $0.6 million to goodwill, considering the increase to the purchase price of $6.4 million mentioned above. The following table summarizes the allocation of the net purchase consideration:
The intangible assets include amounts recognized for the fair value of customer-based assets and developed technology. The fair value of intangible assets was determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately 14 years. The goodwill generated is primarily attributable to expected synergies and is not deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Other Acquisitions
On June 6, 2018, the Company acquired Asset Trackr Private Limited (Asset Trackr) for total purchase consideration of $2.9 million, primarily for goodwill and intangible assets. Of the total purchase consideration, $2.2 million has been paid and the remaining cash consideration is expected to be paid in the next 18 months, in accordance with the terms of the acquisition agreement. Asset Trackr is an India-based start-up company that helps commercial vehicle fleets track, analyze and optimize their transportation resources and assets in real time.
NOTE 23. Subsequent Events
Subsequent to December 31, 2018, the General Court issued a judgment to annul the Decision of the European Commission, which had previously declared the Belgium EPR regime as illegal and incompatible with European State Aid law. As of December 31, 2018, the Company had recorded an unrecognized tax benefit of $32.9 million for the remaining EPR deductions. The Company anticipates the European Commission to announce its intention whether to appeal the judgment during 2019, at which time we will reassess this unrecognized tax benefit.
NOTE 24. Quarterly Data (Unaudited)
The sum of each value line for the four quarters does not necessarily equal the amount reported for the full year because of rounding.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
ITEM 9A.CONTROLS AND PROCEDURES
The Company has established a Disclosure Controls Committee that assists the Chief Executive Officer and Chief Financial Officer in their evaluation of the Company's disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, Rule 13a-15(e), are effective to ensure that the information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Management's Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:
Due to 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 and procedures included in such controls may deteriorate.
The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon such evaluation, our management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018.
The Company's effectiveness of its internal control over financial reporting as of December 31, 2018, has been audited by Ernst & Young Bedrijfsrevisoren BCVBA/Reviseurs d'Entreprises SCCRL, an independent registered public accounting firm, as stated in their attestation report which is included immediately below.
WABCO Holdings Inc.
February 15, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of WABCO Holdings Inc.
Opinion on Internal Control over Financial Reporting
We have audited WABCO Holdings Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). In our opinion, WABCO Holdings Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of WABCO Holdings Inc. and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule included in the Index at Item 15(a) and our report dated February 15, 2019 expressed an unqualified opinion thereon.
Basis for opinionThe 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 of 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 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 effective internal control over financial reporting was maintained in all material aspects.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 ReportingA 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.
Ernst & Young Bedrijfsrevisoren BCVBA/Réviseurs d’Entreprises SCCRL
Diegem, BelgiumFebruary 15, 2019
ITEM 9B.OTHER INFORMATIONNone.
PART III
Pursuant to instruction G(3) to Form 10-K, the information required by Item 10 with respect to the Directors of the Company set forth under the heading “Proposal 1 - Election of Directors” and “Directors” in the Company's definitive proxy statement to be filed within 120 days following the end of the fiscal year covered by this report is incorporated herein by reference.
The information required by Item 10 with respect to the executive officers of the Company has been included in Part I of this Form 10-K (as Item 4A) under the heading “Executive Officers of the Registrant” in reliance on Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
Pursuant to instruction G(3) to Form 10-K, information concerning the Audit Committee and audit committee financial expert disclosure set forth under the headings “Governance - Board Matters and Committee Membership” and “- Committees of the Board - Audit Committee” in the Company's definitive proxy statement to be filed within 120 days following the end of the fiscal year covered by this report is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 by officers and directors of the Company set forth under the heading “Certain Relationships or Related Person Transactions and Section 16 Reporting Compliance - Section 16(a) Beneficial Ownership Reporting Compliance” in the Company's definitive proxy statement to be filed within 120 days following the end of the fiscal year covered by this report is incorporated herein by reference.
Information regarding our Code of Conduct and Ethics set forth under the caption “Code of Conduct and Ethics” in Item 1 of Part I of this Form 10-K is incorporated herein by reference.
Pursuant to Instruction G(3) to Form 10-K, information concerning director and officer executive compensation and related matters set forth under the headings “Report of the Compensation, Nominating and Governance Committee,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Director Compensation” in the Company's definitive proxy statement to be filed within 120 days following the end of the fiscal year covered by this report is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compensation committee interlocks and insider participation set forth under the headings “Governance - Compensation Committee Interlocks and Insider Participation” in the Company's definitive proxy statement to be filed within 120 days following the end of the fiscal year covered by this report is incorporated herein by reference.
Pursuant to Instruction G(3) to Form 10-K, information concerning shares of common stock of the Company beneficially owned by management and significant shareholders set forth under the heading “Common Stock
non-management
directors are required to own shares of our common stock with a value equal to five times their annual cash retainer fees. The chair retainers are not counted towards the required ownership targets, except for the Lead Director’s premium. The guidelines provide that ournon-management
directors have until January 1, 2016, or five years from the date of non-management
non-management
Other Benefits
| (Amounts in millions) | Face value | Coupon | Maturity Date | |||||
| Series A Notes | $ | 150.0 | 2.83 | % | June 25, 2022 | |||
| Series B Notes | 200.0 | 3.08 | % | June 25, 2025 | ||||
| Series C Notes | 150.0 | 3.18 | % | June 25, 2027 | ||||
| $ | 500.0 | |||||||
non-management
| (Amounts in millions) | December 31, 2018 | December 31, 2017 | |||||
| 2014 Facility | N/A | $ | 82.5 | ||||
| 2015 Facility | N/A | 303.6 | |||||
| 2018 Facility | — | N/A | |||||
| $ | — | $ | 386.1 | ||||
| Incremental ability to borrow | $ | 600.0 | $ | 113.9 | |||
| (Amounts in millions) | |||
| 2019 | — | ||
| 2020 | 0.3 | ||
| 2021 | 68.7 | ||
| 2022 | 137.3 | ||
| 2023 | 354.8 | ||
| Thereafter | 286.2 | ||
| Less: unamortized debt issuance fees | (2.1 | ) | |
| Total long-term debt | $ | 845.2 | |
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Balance of warranty costs accrued, beginning of period | $ | 50.9 | $ | 49.3 | $ | 40.9 | |||||
| Warranty costs accrued | 31.3 | 32.5 | 48.9 | ||||||||
| Warranty claims settled | (36.4 | ) | (36.0 | ) | (38.1 | ) | |||||
| Foreign exchange translation effects | (2.1 | ) | 5.1 | (2.4 | ) | ||||||
| Balance of warranty costs accrued, end of period | $ | 43.7 | $ | 50.9 | $ | 49.3 | |||||
| Current liability, included in current portion of warranties | 23.3 | 29.5 | 32.2 | ||||||||
| Long-term liability, included in other liabilities | 20.4 | 21.4 | 17.1 | ||||||||
| Warranty costs accrued | 31.3 | 32.5 | 48.9 | ||||||||
| Less: received and anticipated recoveries from suppliers | (0.5 | ) | (2.0 | ) | (27.4 | ) | |||||
| Warranty costs net of received and anticipated recoveries | $ | 30.8 | $ | 30.5 | $ | 21.5 | |||||
Director Compensation Table
Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Total ($) | ||||||||||
G. Peter D’Aloia | $ | 102,066 | $ | 115,000 | $ | 217,066 | ||||||
Juergen W. Gromer | $ | 162,024 | $ | 115,000 | $ | 277,024 | ||||||
Henry R. Keizer | $ | 116,000 | $ | 115,000 | $ | 231,000 | ||||||
Jean-Paul Montupet | $ | 124,966 | $ | 115,000 | $ | 239,966 | ||||||
D. Nick Reilly | $ | 136,856 | $ | 115,000 | $ | 251,856 | ||||||
Michael T. Smith | $ | 92,391 | $ | 115,000 | $ | 207,391 | ||||||
Thomas S. Gross | $ | 116,304 | $ | 115,000 | $ | 231,304 | ||||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Income before income taxes: | |||||||||||
| Domestic | $ | 36.2 | $ | 227.3 | $ | 14.0 | |||||
| Foreign | 427.5 | 425.3 | 355.1 | ||||||||
| $ | 463.7 | $ | 652.6 | $ | 369.1 | ||||||
| Provision/(benefit) for income taxes: | |||||||||||
| Current: | |||||||||||
| Domestic | $ | 1.5 | $ | (9.8 | ) | $ | 1.5 | ||||
| Domestic Transition Tax | 5.9 | 196.4 | — | ||||||||
| Foreign | 65.5 | 91.3 | 52.0 | ||||||||
| $ | 72.9 | $ | 277.9 | $ | 53.5 | ||||||
| Deferred: | |||||||||||
| Domestic | $ | 4.6 | $ | (30.0 | ) | $ | (16.0 | ) | |||
| Foreign | (28.2 | ) | (18.2 | ) | 84.3 | ||||||
| $ | (23.6 | ) | $ | (48.2 | ) | $ | 68.3 | ||||
| Total provision | $ | 49.3 | $ | 229.7 | $ | 121.8 | |||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Tax provision at statutory rate | $ | 97.4 | $ | 228.3 | $ | 129.2 | |||||
| State income taxes, net | (2.6 | ) | 8.9 | 0.2 | |||||||
| Foreign earnings taxed at other than statutory rate | 33.2 | (21.6 | ) | (28.5 | ) | ||||||
| Decrease in valuation allowance | (10.6 | ) | (1.8 | ) | (0.4 | ) | |||||
| Unremitted foreign earnings | — | — | (0.5 | ) | |||||||
| 2013-14 PID claim (2018) / EPR Clawback (2016) | (33.3 | ) | — | 69.3 | |||||||
| Patent Income Deduction | (22.9 | ) | (21.7 | ) | (20.8 | ) | |||||
| High & New Technology Enterprise (HNTE) | (8.7 | ) | (10.5 | ) | (7.6 | ) | |||||
| Hybrid financing structure | (11.4 | ) | (11.5 | ) | (11.1 | ) | |||||
| Notional Interest Deduction (NID) | (1.0 | ) | (1.7 | ) | (2.9 | ) | |||||
| Change in other uncertain tax positions | 2.1 | 0.6 | (10.6 | ) | |||||||
| Equity compensation | 2.0 | (2.4 | ) | 4.6 | |||||||
| Belgium tax rate change | 5.2 | 13.8 | — | ||||||||
| U.S. tax rate change | 2.0 | (32.4 | ) | — | |||||||
| Net U.S. transition tax | 5.8 | 100.0 | — | ||||||||
| Other, net | (7.9 | ) | (18.3 | ) | 0.9 | ||||||
| Total provision | $ | 49.3 | $ | 229.7 | $ | 121.8 | |||||
| Year Ended December 31, | |||||||
(Amounts in millions) | 2018 | 2017 | |||||
| Deferred tax liabilities: | |||||||
| Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) | $ | 17.6 | $ | 22.0 | |||
| Basis difference in subsidiaries | 65.0 | 66.8 | |||||
| Intangibles | 12.5 | 15.9 | |||||
| $ | 95.1 | $ | 104.7 | ||||
| Deferred tax assets: | |||||||
| Net operating losses and tax credits | $ | 8.5 | $ | 28.3 | |||
| Post-retirement and other employee benefits | 149.3 | 143.3 | |||||
| Capitalized assets | 69.2 | 50.2 | |||||
| Inventory | 1.6 | 1.6 | |||||
| Warranties | 2.1 | 3.0 | |||||
| Unrealized foreign exchange losses | 10.0 | 13.2 | |||||
| Other | 17.5 | 13.3 | |||||
| $ | 258.2 | $ | 252.9 | ||||
| Valuation allowances | (1.8 | ) | (12.4 | ) | |||
| Net deferred tax assets | $ | 161.3 | $ | 135.8 | |||
| Year Ended December 31, | |||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Beginning balance, January 1 | $ | 71.6 | $ | 69.4 | $ | 14.6 | |||||
| Additions for tax positions related to current year | — | 1.7 | 66.7 | ||||||||
| Additions for tax positions related to prior years | 3.4 | 4.2 | — | ||||||||
| Reductions for tax positions related to prior years | (35.4 | ) | (3.4 | ) | (1.1 | ) | |||||
| Cash settlements | — | (0.2 | ) | — | |||||||
| Expirations of statute of limitations | — | (0.1 | ) | (10.8 | ) | ||||||
| Ending balance, December 31 | $ | 39.6 | $ | 71.6 | $ | 69.4 | |||||
| WABCO Sales to | WABCO Purchases from | ||||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||||||
| WABCOWURTH | $ | 0.2 | $ | 0.2 | $ | 0.2 | $ | 0.5 | $ | 0.2 | $ | 0.3 | |||||||||||
| Sheppard Hubei | — | 1.2 | — | — | 0.1 | — | |||||||||||||||||
| SSCS | — | — | — | — | 0.5 | — | |||||||||||||||||
| G7 | — | — | — | 0.2 | — | — | |||||||||||||||||
| Meritor WABCO | — | 156.8 | 167.6 | — | 0.1 | 0.1 | |||||||||||||||||
| WABCO Automotive South Africa | — | 4.7 | 3.6 | — | — | — | |||||||||||||||||
| WABCO Receivables from | WABCO Payables to | ||||||||||||||
| (Amounts in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
| Sheppard Hubei | $ | 0.4 | $ | 1.6 | $ | — | $ | — | |||||||
| SSCS | — | — | — | 0.1 | |||||||||||
| (Amounts in millions) | WABCO Sales to | WABCO Purchases from | |||||||||||||||||||||
| Joint Venture partners | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||||||
| Sanwa-Seiki | $ | — | $ | — | $ | — | $ | 22.1 | $ | 25.6 | $ | 22.8 | |||||||||||
| Cummins | 96.4 | 83.4 | 75.7 | — | — | 0.1 | |||||||||||||||||
| FUWA | 9.3 | 6.9 | 7.1 | — | — | — | |||||||||||||||||
| Year Ended December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Product Sales: | |||||||||||
| OEM | $ | 2,886.9 | $ | 2,511.8 | $ | 2,101.0 | |||||
| Aftermarket | 944.1 | 792.4 | 709.0 | ||||||||
| Total sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | |||||
| Sales - Geographic distribution (a): | |||||||||||
| United States | $ | 859.0 | $ | 579.6 | $ | 399.9 | |||||
Europe (countries below are included in this total) | 1,860.7 | 1,705.3 | 1,509.2 | ||||||||
| Germany | 700.9 | 676.3 | 618.9 | ||||||||
| France | 109.8 | 93.5 | 83.6 | ||||||||
| Netherlands | 131.8 | 115.2 | 108.8 | ||||||||
| Sweden | 222.3 | 214.2 | 185.9 | ||||||||
Other (countries below are included in this total) | 1,111.3 | 1,019.3 | 900.9 | ||||||||
| Japan | 118.4 | 115.4 | 107.7 | ||||||||
| China | 387.8 | 411.9 | 290.4 | ||||||||
| Brazil | 115.2 | 88.9 | 71.4 | ||||||||
| India | 283.7 | 231.3 | 202.1 | ||||||||
| Total sales | $ | 3,831.0 | $ | 3,304.2 | $ | 2,810.0 | |||||
| (1) | |
| As of December 31, | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2016 | ||||||||
| Long-lived Assets (b) | |||||||||||
| Geographic distribution: | |||||||||||
| United States | $ | 711.9 | $ | 715.3 | $ | 92.6 | |||||
Europe (countries below are included in this total) | 710.3 | 706.1 | 623.6 | ||||||||
| Germany | 353.3 | 315.2 | 262.0 | ||||||||
| Poland | 152.8 | 153.6 | 126.0 | ||||||||
Other (countries below are included in this total) | 272.4 | 290.2 | 236.2 | ||||||||
| India | 113.0 | 106.6 | 94.6 | ||||||||
| China | 58.1 | 56.5 | 54.6 | ||||||||
| Total long-lived assets | $ | 1,694.6 | $ | 1,711.6 | $ | 952.4 | |||||
| (Amount in millions) | As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||
| Foreign Currency | Unit of Measure | Hedged against | Quantity Hedged | Notional Amount (USD Equivalent) | Quantity Hedged | Notional Amount (USD Equivalent) | ||||||||||
| Chinese Yuan | CNY | EUR | 849.0 | 123.4 | 550.0 | 84.2 | ||||||||||
| Hong Kong Dollar | HKD | EUR | 285.0 | 36.4 | 250.0 | 32.0 | ||||||||||
| British Pound | GBP | EUR | 11.7 | 14.9 | 9.5 | 12.8 | ||||||||||
| US Dollar | USD | EUR | * | * | 294.2 | 294.2 | ||||||||||
| Polish Zloty | PLN | EUR | * | * | 64.0 | 18.3 | ||||||||||
| As of December 31, 2018 | |||||||||||||||
| (Amounts in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Short-term and other investments(a) | $ | — | $ | 209.4 | $ | — | $ | 209.4 | |||||||
Foreign currency derivative assets(b) | — | 0.6 | — | 0.6 | |||||||||||
| As of December 31, 2017 | |||||||||||||||
| (Amounts in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Short-term and other investments(a) | $ | — | $ | 83.0 | $ | — | $ | 83.0 | |||||||
Foreign currency derivative assets(b) | — | 2.0 | — | 2.0 | |||||||||||
| (Amounts in millions) | |||
| Accounts receivable | $ | 1.8 | |
| Inventories | 2.1 | ||
| Other current assets | 0.3 | ||
| Property, plant and equipment | 1.1 | ||
| Intangible assets | 7.3 | ||
| Accrued liabilities | (3.5 | ) | |
| Identifiable net assets | $ | 9.1 | |
| Goodwill | 5.9 | ||
| Total estimated fair value of net assets | $ | 15.0 | |
| Less: fair value of equity method investment | (7.1 | ) | |
| Net purchase consideration | $ | 7.9 | |
| (Amounts in millions) | |||
| Cash & cash equivalents | $ | 16.4 | |
| Accounts receivable | 38.6 | ||
| Inventories | 43.5 | ||
| Other current assets | 0.3 | ||
| Property, plant & equipment | 2.1 | ||
| Intangible assets | 165.0 | ||
| Accounts payable | (56.2 | ) | |
| Accrued liabilities | (17.4 | ) | |
| Identifiable net assets acquired | $ | 192.3 | |
| Goodwill | 321.0 | ||
| Total fair value of net assets | $ | 513.3 | |
| Less: fair value of equity method investment | (258.0 | ) | |
| Less: elimination of unrealized profits on inventory | (5.3 | ) | |
| Net purchase consideration | $ | 250.0 | |
| (Amounts in millions) | |||
| Cash & cash equivalents | $ | 17.1 | |
| Accounts receivable | 17.5 | ||
| Inventories | 21.4 | ||
| Other current assets | 1.1 | ||
| Property, plant & equipment | 66.4 | ||
| Intangible assets | 23.1 | ||
| Other assets acquired | 4.8 | ||
| Trade payables | (4.3 | ) | |
| Accrued expenses | (4.2 | ) | |
| Deferred tax liabilities | (22.6 | ) | |
| Other Liabilities | (8.0 | ) | |
| Identifiable net assets acquired | $ | 112.3 | |
| Goodwill | 52.9 | ||
| Net purchase consideration | $ | 165.2 | |
| Year 2018 | |||||||||||||||
| (Amounts in millions) | First | Second | Third | Fourth | |||||||||||
| Sales | $ | 1,003.3 | $ | 1,001.2 | $ | 914.8 | $ | 911.6 | |||||||
| Cost of sales | 694.3 | 690.9 | 639.7 | 633.5 | |||||||||||
| Gross profit | 309.0 | 310.3 | 275.1 | 278.1 | |||||||||||
| Income before income taxes | 133.0 | 132.8 | 93.3 | 104.6 | |||||||||||
| Income tax expense/(benefit) | 26.3 | 23.5 | 13.5 | (14.0 | ) | ||||||||||
| Net income attributable to Company | $ | 100.7 | $ | 104.4 | $ | 74.5 | $ | 114.5 | |||||||
| Net income per common share | |||||||||||||||
| Basic | $ | 1.87 | $ | 1.96 | $ | 1.42 | $ | 2.21 | |||||||
| Diluted | $ | 1.87 | $ | 1.95 | $ | 1.41 | $ | 2.20 | |||||||
| Year 2017 | |||||||||||||||
| (Amounts in millions) | First | Second | Third | Fourth | |||||||||||
| Sales | $ | 747.3 | $ | 795.0 | $ | 827.8 | $ | 934.1 | |||||||
| Cost of sales | 507.1 | 547.5 | 578.2 | 657.5 | |||||||||||
| Gross profit | 240.2 | 247.5 | 249.6 | 276.6 | |||||||||||
| Income before income taxes | 99.6 | 105.5 | 88.7 | 358.8 | |||||||||||
| Income tax expense | 15.3 | 14.0 | 14.4 | 186.1 | |||||||||||
| Net income attributable to Company | $ | 80.7 | $ | 87.2 | $ | 69.8 | $ | 168.3 | |||||||
| Net income per common share | |||||||||||||||
| Basic | $ | 1.49 | $ | 1.62 | $ | 1.30 | $ | 3.13 | |||||||
| Diluted | $ | 1.48 | $ | 1.61 | $ | 1.30 | $ | 3.12 | |||||||
36
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Ownership of Officers,Common Stock by Directors and Significant Shareholders”Executive Officers
The following table sets forth, as of March 1, 2020, beneficial ownership of WABCO common shares by each executive officer named in the Company's definitive proxy statement to be filed within 120 days following the end ofSummary Compensation Table in this Annual Report on Formcoveredended December 31, 2019, each director or director nominee, and by this report is incorporated hereinall directors and executive officers as a group. Unless otherwise indicated, each beneficial owner had sole voting and investment power with respect to the common stock held.
10-K
for the fiscal year Name of Beneficial Owner | Shares Beneficially Owned | Shares that May be Acquired Within 60 Days | Total | Percent of Class (1) | ||||||||||||
G. Peter D’Aloia | 18,647 | (2)(3) | 5,737 | (4) | 24,384 | * | ||||||||||
Christian Brenneke | 7,363 | — | 7,363 | * | ||||||||||||
Lisa Brown | 7,281 | — | 7,281 | * | ||||||||||||
Sean Deason | 3,510 | — | 3,510 | * | ||||||||||||
Jacques Esculier | 240,330 | — | 240,330 | * | ||||||||||||
Roberto Fioroni | — | — | — | * | ||||||||||||
Juergen W. Gromer | 7,272 | (2) | 882 | 8,154 | * | |||||||||||
Thomas S. Gross | 3,449 | 882 | 4,331 | * | ||||||||||||
Henry R. Keizer | 3,765 | 882 | 4,647 | * | ||||||||||||
Jean-Paul Montupet | 1,050 | 6,926 | 7,976 | * | ||||||||||||
D. Nick Reilly | 4,125 | 882 | 5,007 | * | ||||||||||||
Nick Rens | 9,300 | — | 9,300 | * | ||||||||||||
Michael T. Smith | 16,399 | (2) | 882 | 17,281 | * | |||||||||||
All current directors and executive officers of the company as a group (14 persons)(5) | 330,207 | 17,073 | 347,280 | * | ||||||||||||
| * | Less than 1%. |
| (1) | As of March 1, 2020, we had 51,270,513 shares of our common stock outstanding. |
| (2) | The number of shares shown for certain directors in the table above includes shares allocated to their accounts in the outside directors’ trust established by the company for the non-management directors. Under the outside directors’ trust, a trust account holds shares of common stock for each participatingnon-management director. The shares are voted by the trustee of the trust on behalf of each participating director in accordance with the director’s instructions. The trust shares do not vest to direct ownership while the director is in office. Shares held in this trust are as follows: Mr. D’Aloia, 5,405; Mr. Gromer, 5,402; and Mr. Smith, 5,402. In July 2009, the company’s Board of Directors voted to discontinue the use of the outside directors’ trust. |
| (3) | The number of shares shown for Mr. D’Aloia in the table above includes 13,242 shares held by a charitable foundation controlled by Mr. D’Aloia. |
| (4) | Includes 1,508 deferred shares allocated under the company’s Deferred Compensation Plan. |
| (5) | The numbers of shares shown on this line do not include shares held by Mr. Fioroni, who is no longer an executive officer of the company. |
37
Ownership of Common Stock by reference.Certain Significant Shareholders
As of March 1, 2020, unless otherwise indicated below, the following are beneficial owners of more than 5% of our outstanding common stock:
Name and Address of Beneficial Owner | Shares Beneficially Owned | Percent of Class (1) | ||||||
The Vanguard Group (2) -100 Vanguard Blvd., Malvern, PA 19355 | 4,724,929 | 9.22% | ||||||
BlackRock, Inc. (3) -55 East 52nd Street, New York, NY 10055 | 3,691,478 | 7.20% | ||||||
The Goldman Sachs Group, Inc. (4) -200 West Street, New York, NY 10282 | 2,930,089 | 7.20% | ||||||
| (1) | As of March 1, 2020, we had 51,270,513 shares of our common stock outstanding. |
| (2) | In an amended Schedule 13G filed on February 12, 2020, The Vanguard Group reported that, as of December 31, 2019, it was deemed, pursuant to Rule 13d-1 of the Securities Exchange Act of 1934, as amended, to hold sole voting power with respect to 38,609 of the shares reported in the table above, shared voting power with respect to 24,510 of the shares reported in the table above, sole dispositive power with respect to 4,665,593 of the shares reported in the table above and shared dispositive power with respect to 59,336 of the shares reported in the table above, by virtue of the fact that it is the parent company of a group of investment companies |
| (3) | In an amended Schedule 13G filed on February 10, 2020, BlackRock, Inc. reported that, as of December 31, 2019, it was deemed, pursuant to Rule 13d-1 of the Securities Exchange Act of 1934, as amended, to hold sole voting power with respect to 3,310,397 of the shares reported in the table above and sole dispositive power with respect to 3,691,478 of the shares reported in the table above. |
| (4) | In a Schedule 13G filed on January 27, 2020, The Goldman Sachs Group, Inc. reported on behalf of itself and Goldman Sachs $ Co. LLC that, as of December 31, 2019, it was deemed, pursuant to Rule 13d-1 of the Securities Exchange Act of 1934, as amended, to hold shared voting power with respect to 2,929,723 of the shares reported in the table above and shared dispositive power with respect to 2,930,089 of the shares reported in the table above. |
Equity Compensation Plans
The following table sets forth certain information concerning securities authorized for issuance underregarding WABCO’s equity compensation plans set forth under the heading “Equity Compensation Plans” in the Company's definitive proxy statement to be filed within 120 days following the endas of the fiscal year covered by this report is incorporated herein by reference.December 31, 2019:
Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants, Rights and RSUs | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) | |||||||||
Equity compensation plans approved by security holders | 332,470 | (1) | $ | 55.49 | (2) | 2,692,070 | ||||||
Equity compensation plans not approved by security holders | — | 88,762 | (3) | |||||||||
Total | 332,470 | 2,780,832 | ||||||||||
| (1) | Includes options to purchase 18,729 shares of common stock, 128,917 RSUs, 166,671 PSUs and 18,153 DSUs granted under our Omnibus Incentive Plan. The options have a weighted average remaining term of 1.4 years. |
| (2) | Represents the weighted average exercise price of outstanding options and does not take into account RSUs or PSUs. |
| (3) | Represents shares remaining available for issuance under the Deferred Compensation Plan. For information regarding the material terms of the Deferred Compensation Plan, please see “Director Compensation—Deferred Compensation Plan.” |
38
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Person Transactions”
The Audit Committee of the Board of Directors has adopted a written policy governing the review and “Governance - Independence Standardsapproval or ratification of related person transactions. Under the policy, a related person transaction is any transaction exceeding $120,000 in which the company or a subsidiary, on the one hand, and an executive officer, director, holder of 5% or more of the company’s voting securities or an immediate family member of such person, on the other hand, had or will have a direct or indirect material interest.
No related person transaction shall be approved or ratified if such transaction is contrary to the best interest of the company. Unless determined otherwise by the Audit Committee, any related person transaction must be on terms that are no less favorable to the company than would be obtained in a similar transaction with an unaffiliated third party under the same or similar circumstances.
Unless the Audit Committee determines otherwise, any proposed related person transaction directly between the company and an executive officer, director or immediate family member should be reviewed prior to the time the transaction is entered into. In addition, the policy provides that ordinary course transactions are not considered related person transactions, and therefore do not require approval under the company’s related person transaction policy. An ordinary course transaction means a transaction that occurs between the company or any of its subsidiaries and any entity (i) for Board
S-K
are incorporated into the policy, and accordingly, all such immaterial relationships or transactions are not related person transactions and do not require approval under the policy.The Chief Legal Officer and Company Secretary is responsible for making the initial determination as to whether any transaction constitutes a related person or ordinary course of business transaction and for taking all reasonable steps to ensure that all related person transactions required to be filed within 120 daysdisclosed pursuant to Item 404(a) of Regulation
S-K
are presented to the Audit Committee forpre-approval
or ratification. If a related person transaction involves the Chief Legal Officer and Company Secretary, the Chief Financial Officer shall perform the responsibilities under the policy.The Audit Committee reviews and assesses the adequacy of the policy annually.
Director Independence
The Board of Directors has adopted a definition of director independence for, by following the endlinks “Investor Relations—Corporate Governance—Definition of Director Independence.” In addition, none of the fiscal year coveredcompany’s directors and executive officers participated in any related person transactions nor were any other transactions considered by this report is incorporated herein by reference.the Board in determining directors’ independence.
non-management
directors that serve on the company’s Board of Directors which meet and, in some areas, exceed the NYSE listing standards. Each director, other than Jacques Esculier, the company’s Chairman and Chief Executive Officer, satisfies the definition of director independence adopted and accordingly has no material relationship with the company (either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with the company) other than serving as a director of, and owning stock in, the company. A copy of our definition of director independence is available on our web sitewww.wabco-auto.com
39
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Audit Committee Matters - Audit Committee's Procedures”Procedures
Pre-Approval
Policies and The Audit Committee is directly responsible for the appointment, compensation, retention and “Auditoversight of the work of EY Réviseurs d’Entreprises / Bedrijfsrevisoren SRL / BV, our independent registered public accounting firm (“independent auditor”). The independent auditor reports directly to the Audit Committee. As part of its responsibility, the Audit Committee established a policy to
pre-approve
all Audit Services and permissibleNon-Audit
Services performed by the independent auditor. Inpre-approving
services, the Audit Committee considers whether such services are consistent with the SEC’s rules on auditor independence.The Audit Committee also considers whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as its understanding and knowledge of the company’s business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the company’s ability to manage or control risk or improve audit quality.
The Audit Committee is mindful of the relationship between fees for Audit and permissible
Non-Audit
Services in deciding whether topre-approve
any such services and may determine, for each fiscal year, the appropriate relationship between the total amount of fees for Audit and Audit-Related Services and the total amount of fees for Tax Services and certain permissibleNon-Audit
Services classified as “All Other Services.” Prior to the engagement of the independent auditor for an upcomingaudit/non-audit
service period, defined as a twelve-month timeframe, EY Réviseurs d’Entreprises / Bedrijfsrevisoren SRL / BV submits to the Audit Committee for approval a detailed list of services expected to be rendered during that period as well as an estimate of the associated fees for each of the following four categories of services:Audit Services
10-Qs.
Audit Services includes services that generally only an external auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.Audit-Related Services
e.g.
Tax Services
Other Non-Audit Fees”Services
non-audit-related
litigation advisory services and administrative assistance related to expatriate services.For each type of service, details of the service as well as estimated fees are reviewed and
pre-approved
by the Audit Committee as either an annual amount or specified stand-alone activity.Pre-approval
of such services is used as the basis for establishing the spend level, and the Audit Committee requires the independent auditor to report detailed actual/projected fees versus the budget periodically throughout the year by category of service and by specific project.Circumstances may arise during the twelve-month period when it may become necessary to engage the independent auditor for additional services or additional effort not contemplated in the Company's definitive proxy statementoriginal
pre-approval.
In those instances, the Audit Committee requires specificpre-approval
before engaging the independent auditor.This review is typically done in formal Audit Committee meetings; however, the Audit Committee may delegatebe filed within 120 days followingone or more of its members. The member to whom such authority is delegated must report anyend ofAudit Committee at its next scheduled meeting.
pre-approval
authority to pre-approval
decisions to the 40
Audit and
Non-Audit
FeesFees billed to the fiscal year coveredcompany by this report is incorporated herein by reference.EY Réviseurs d’Entreprises / Bedrijfsrevisoren SRL / BV for services rendered in 2019 and 2018 were as follows:
Type of Service (1) | 2019 | 2018 | ||||||
(in thousands) | ||||||||
Audit | $ | 5,060 | $ | 5,307 | ||||
Audit-Related | $ | 491 | $ | 52 | ||||
Tax | $ | 392 | $ | 375 | ||||
All Other | — | — | ||||||
Total | $ | 5,943 | $ | 5,735 | ||||
| (1) | For a description of the types of services, see “Principal Accounting Fees and Services —Audit Committee Pre-Approval Policies and Procedures,” above. |
41
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The financial statements and financial statement scheduleexhibits listed in the Indexexhibit index to Financial Statementsthe Original Report and Financial Statement Schedule on the following page are incorporated herein by reference.
10-K.
EXHIBIT INDEX
31.1 | ||
| Description | Balance Beginning of Period | Additions Charged to Expense | Deductions | Foreign Currency Translation Effects | Balance End of Period | ||||||||||
| 2018: | |||||||||||||||
| Reserve deducted from assets: | |||||||||||||||
| Allowance for doubtful accounts receivable | 9,358 | 2,205 | (390 | ) | (438 | ) | 10,735 | ||||||||
| 2017: | |||||||||||||||
| Reserve deducted from assets: | |||||||||||||||
| Allowance for doubtful accounts receivable | 6,479 | 2,460 | (445 | ) | 864 | 9,358 | |||||||||
| 2016: | |||||||||||||||
| Reserve deducted from assets: | |||||||||||||||
| Allowance for doubtful accounts receivable | 5,895 | 1,591 | (830 | ) | (177 | ) | 6,479 | ||||||||
31.2 | ||||
XBRL Instance Document - the | ||||
XBRL Taxonomy Extension Schema Document | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||
104 | Cover Page Interactive Data File - the | |||
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WABCO HOLDINGS INC. | ||||
By: | ||||
| /s/ Lisa J. Brown | ||
Lisa J. Brown | ||
Chief Legal Officer and Secretary |
43