UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
OR
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¨☐ | 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: 033-90866
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
CORPORATION
(Exact name of registrant as specified in its charter)
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| | | |
Delaware | 25-1615902 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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1001 Air Brake Avenue | Wilmerding | PA | 15148 |
(Address of principal executive offices) | (Zip code) |
412-825-1000412-825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | WAB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No ¨☐
Indicate 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒ No ¨☐
Indicate 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 Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x☒ | Accelerated filer | ¨☐ | Non-accelerated filer | ¨ | (Do not check if smaller reporting company)☐ |
Emerging growth company | ¨
☐ | Smaller reporting company | ¨
| | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | |
Class | | Outstanding at October 27, 2017 |
Common Stock, $.01 par value per share | | 95,999,248 shares |
As of July 29, 2019, there were 188,155,130 shares of common stock, par value $.01 per share, of the registrant outstanding.
WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
SeptemberJune 30, 20172019
FORM 10-Q
TABLE OF CONTENTS
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| PART I—FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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| PART II—OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 4. | | |
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Item 6. | | |
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PART I—FINANCIAL INFORMATION
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Item 1. | FINANCIAL STATEMENTS |
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | Unaudited | | | Unaudited | | |
In thousands, except shares and par value | September 30, 2017 | | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | $ | 228,080 |
| | $ | 398,484 |
| $ | 461,371 |
| | $ | 580,908 |
|
Restricted cash | | — |
| | 1,761,446 |
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Accounts receivable | 792,726 |
| | 667,596 |
| 1,247,450 |
| | 801,193 |
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Unbilled accounts receivable | 351,613 |
| | 274,912 |
| 459,959 |
| | 345,585 |
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Inventories | 764,781 |
| | 658,510 |
| 1,881,791 |
| | 844,886 |
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Deposit in escrow | — |
| | 744,748 |
| |
Other current assets | 139,925 |
| | 123,381 |
| 178,569 |
| | 115,649 |
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Total current assets | 2,277,125 |
| | 2,867,631 |
| 4,229,140 |
| | 4,449,667 |
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Property, plant and equipment | 988,223 |
| | 912,230 |
| 2,170,618 |
| | 1,036,550 |
|
Accumulated depreciation | (437,856 | ) | | (393,854 | ) | (524,521 | ) | | (472,813 | ) |
Property, plant and equipment, net | 550,367 |
| | 518,376 |
| 1,646,097 |
| | 563,737 |
|
Other Assets | | | | | | |
Goodwill | 2,384,758 |
| | 2,078,765 |
| 8,150,671 |
| | 2,396,544 |
|
Other intangibles, net | 1,140,387 |
| | 1,053,860 |
| 4,364,356 |
| | 1,129,880 |
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Other noncurrent assets | 97,013 |
| | 62,386 |
| 552,329 |
| | 109,406 |
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Total other assets | 3,622,158 |
| | 3,195,011 |
| 13,067,356 |
| | 3,635,830 |
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Total Assets | $ | 6,449,650 |
| | $ | 6,581,018 |
| $ | 18,942,593 |
| | $ | 8,649,234 |
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| | | | | | |
Liabilities and Shareholders’ Equity | | | | | | |
Current Liabilities | | | | | | |
Accounts payable | $ | 512,905 |
| | $ | 530,211 |
| $ | 1,232,597 |
| | $ | 589,449 |
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Customer deposits | 373,815 |
| | 256,591 |
| 648,503 |
| | 373,538 |
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Accrued compensation | 151,952 |
| | 145,324 |
| 287,873 |
| | 173,183 |
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Accrued warranty | 134,964 |
| | 123,190 |
| 223,764 |
| | 135,636 |
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Current portion of long-term debt | 49,748 |
| | 129,809 |
| 104,413 |
| | 64,099 |
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Other accrued liabilities | 242,056 |
| | 261,514 |
| 714,165 |
| | 310,785 |
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Total current liabilities | 1,465,440 |
| | 1,446,639 |
| 3,211,315 |
| | 1,646,690 |
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Long-term debt | 1,824,156 |
| | 1,762,967 |
| 4,528,768 |
| | 3,792,774 |
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Accrued postretirement and pension benefits | 108,182 |
| | 110,597 |
| 95,625 |
| | 95,446 |
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Deferred income taxes | 282,557 |
| | 245,680 |
| 169,861 |
| | 198,269 |
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Accrued warranty | 13,800 |
| | 15,802 |
| 32,252 |
| | 18,066 |
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Other long-term liabilities | 19,146 |
| | 22,508 |
| 1,069,615 |
| | 28,914 |
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Total Liabilities | 3,713,281 |
| | 3,604,193 |
| 9,107,436 |
| | 5,780,159 |
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Commitments and contingent liabilities (Note 14) |
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| |
Commitments and contingencies (Note 16) | |
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|
Equity | | | | | | |
Preferred stock, 1,000,000 shares authorized, no shares issued | — |
| | — |
| |
Common stock, $0.01 par value; 200,000,000 shares authorized: | | | | |
132,349,534 shares issued and 95,999,582 and 95,425,432 outstanding | | | | |
at September 30, 2017 and December 31, 2016, respectively | 1,323 |
| | 1,323 |
| |
Convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, 1,220 and no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | — |
| | — |
|
Common stock, $0.01 par value; 500,000,000 shares authorized: | | | | |
223,431,716 and 132,349,534 shares issued and 188,183,106 and 96,614,946 outstanding | | | | |
at June 30, 2019 and December 31, 2018, respectively | | 1,981 |
| | 1,323 |
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Additional paid-in capital | 900,536 |
| | 869,951 |
| 7,807,109 |
| | 914,568 |
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Treasury stock, at cost, 36,349,952 and 36,924,102 shares, | | | | |
at September 30, 2017 and December 31, 2016, respectively | (828,103 | ) | | (838,950 | ) | |
Treasury stock, at cost, 35,248,610 and 35,734,588 shares, | | | | |
at June 30, 2019 and December 31, 2018, respectively | | (805,618 | ) | | (816,145 | ) |
Retained earnings | 2,735,876 |
| | 2,553,258 |
| 3,087,468 |
| | 3,021,968 |
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Accumulated other comprehensive loss | (91,930 | ) | | (379,605 | ) | (289,180 | ) | | (256,583 | ) |
Total Westinghouse Air Brake Technologies Corporation shareholders' equity | 2,717,702 |
| | 2,205,977 |
| 9,801,760 |
| | 2,865,131 |
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Noncontrolling interest | 18,667 |
| | 770,848 |
| 33,397 |
| | 3,944 |
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Total Equity | 2,736,369 |
| | 2,976,825 |
| 9,835,157 |
| | 2,869,075 |
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Total Liabilities and Equity | $ | 6,449,650 |
| | $ | 6,581,018 |
| $ | 18,942,593 |
| | $ | 8,649,234 |
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| | | Unaudited | | Unaudited | | Unaudited | | Unaudited |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
In thousands, except per share data | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | | |
Net sales | $ | 957,931 |
| | $ | 675,574 |
| | $ | 2,806,218 |
| | $ | 2,171,206 |
| | |
Cost of sales | (704,728 | ) | | (463,093 | ) | | (2,009,345 | ) | | (1,466,156 | ) | | |
Net sales: | | | | | | | | |
Sales of goods | | $ | 1,892,508 |
| | $ | 1,065,893 |
| | $ | 3,327,017 |
| | $ | 2,076,570 |
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Sales of services | | 343,776 |
| | 45,787 |
| | 502,884 |
| | 91,287 |
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Total net sales | | 2,236,284 |
| | 1,111,680 |
| | 3,829,901 |
| | 2,167,857 |
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Cost of sales: | | | | | | | | |
Cost of goods | | (1,377,758 | ) | | (749,097 | ) | | (2,451,329 | ) | | (1,458,375 | ) |
Cost of services | | (243,850 | ) | | (38,616 | ) | | (374,879 | ) | | (74,634 | ) |
Total cost of sales | | (1,621,608 | ) | | (787,713 | ) | | (2,826,208 | ) | | (1,533,009 | ) |
Gross profit | 253,203 |
| | 212,481 |
| | 796,873 |
| | 705,050 |
| | 614,676 |
| | 323,967 |
| | 1,003,693 |
| | 634,848 |
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Operating expenses: | | | | | | | | |
Selling, general and administrative expenses | (117,838 | ) | | (70,757 | ) | | (367,753 | ) | | (241,118 | ) | | (290,959 | ) | | (171,157 | ) | | (550,682 | ) | | (318,358 | ) |
Engineering expenses | (24,709 | ) | | (16,289 | ) | | (71,511 | ) | | (52,271 | ) | | (57,120 | ) | | (19,388 | ) | | (91,665 | ) | | (41,437 | ) |
Amortization expense | (8,645 | ) | | (5,339 | ) | | (27,039 | ) | | (16,100 | ) | | (65,960 | ) | | (9,899 | ) | | (93,402 | ) | | (20,251 | ) |
Total operating expenses | (151,192 | ) | | (92,385 | ) | | (466,303 | ) | | (309,489 | ) | | (414,039 | ) | | (200,444 | ) | | (735,749 | ) | | (380,046 | ) |
Income from operations | 102,011 |
| | 120,096 |
| | 330,570 |
| | 395,561 |
| | 200,637 |
| | 123,523 |
| | 267,944 |
| | 254,802 |
|
Other income and expenses | | | | | | | | | |
Other income and expenses: | | | | | | | | |
Interest expense, net | (17,893 | ) | | (6,057 | ) | | (51,025 | ) | | (15,897 | ) | | (58,560 | ) | | (31,920 | ) | | (103,129 | ) | | (52,204 | ) |
Other income (expense), net | (2,933 | ) | | 1,188 |
| | (2,166 | ) | | 113 |
| | 2,177 |
| | 2,171 |
| | (6,051 | ) | | 4,757 |
|
Income from operations before income taxes | 81,185 |
| | 115,227 |
| | 277,379 |
| | 379,777 |
| | 144,254 |
| | 93,774 |
| | 158,764 |
| | 207,355 |
|
Income tax expense | (12,746 | ) | | (32,799 | ) | | (64,776 | ) | | (112,701 | ) | | (41,400 | ) | | (10,503 | ) | | (59,923 | ) | | (36,627 | ) |
Net income | 68,439 |
| | 82,428 |
| | 212,603 |
| | 267,076 |
| | 102,854 |
| | 83,271 |
| | 98,841 |
| | 170,728 |
|
Less: Net (Gain) Loss attributable to noncontrolling interest | (1,040 | ) | | — |
| | 710 |
| | — |
| | |
Less: Net loss attributable to noncontrolling interest | | 1,381 |
| | 1,145 |
| | 922 |
| | 2,054 |
|
Net income attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| | $ | 213,313 |
| | $ | 267,076 |
| | 104,235 |
| | 84,416 |
| | 99,763 |
| | 172,782 |
|
| | | | | | | | | | | | | | | |
Earnings Per Common Share | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 0.70 |
| | $ | 0.92 |
| | $ | 2.23 |
| | $ | 2.94 |
| | $ | 0.58 |
| | $ | 0.88 |
| | $ | 0.66 |
| | $ | 1.80 |
|
Diluted | | | | | | | | | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 0.70 |
| | $ | 0.91 |
| | $ | 2.22 |
| | $ | 2.92 |
| | $ | 0.54 |
| | $ | 0.87 |
| | $ | 0.61 |
| | $ | 1.79 |
|
| | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | |
Basic | 95,709 |
| | 89,589 |
| | 95,163 |
| | 90,546 |
| | 177,348 |
| | 95,992 |
| | 149,553 |
| | 95,867 |
|
Diluted | 96,316 |
| | 90,293 |
| | 95,808 |
| | 91,316 |
| | 191,453 |
| | 96,575 |
| | 162,155 |
| | 96,471 |
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | Unaudited | | Unaudited | | Unaudited | | Unaudited |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
In thousands | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| | $ | 213,313 |
| | $ | 267,076 |
| | $ | 104,235 |
| | $ | 84,416 |
| | $ | 99,763 |
| | $ | 172,782 |
|
Foreign currency translation gain (loss) | 82,905 |
| | 2,734 |
| | 277,984 |
| | (7,385 | ) | | 18,832 |
| | (192,778 | ) | | (27,721 | ) | | (114,811 | ) |
Unrealized gain (loss) on derivative contracts | 15,021 |
| | 1,169 |
| | 18,400 |
| | (1,740 | ) | | |
Unrealized loss on derivative contracts | | (22 | ) | | (7,567 | ) | | (4,115 | ) | | (5,501 | ) |
Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans | 27 |
| | 982 |
| | (3,017 | ) | | (652 | ) | | 1,328 |
| | 10,665 |
| | (2,294 | ) | | 10,235 |
|
Other comprehensive income (loss) before tax | 97,953 |
| | 4,885 |
| | 293,367 |
| | (9,777 | ) | | 20,138 |
| | (189,680 | ) | | (34,130 | ) | | (110,077 | ) |
Income tax (expense) benefit related to components of | | | | | | | | | |
Income tax (benefit) expense related to components of | | | | | | | | |
other comprehensive income | (5,333 | ) | | (594 | ) | | (5,692 | ) | | 441 |
| | (318 | ) | | (537 | ) | | 1,533 |
| | (1,132 | ) |
Other comprehensive income (loss), net of tax | 92,620 |
| | 4,291 |
| | 287,675 |
| | (9,336 | ) | | 19,820 |
| | (190,217 | ) | | (32,597 | ) | | (111,209 | ) |
Comprehensive income attributable to Wabtec shareholders | $ | 160,019 |
| | $ | 86,719 |
| | $ | 500,988 |
| | $ | 257,740 |
| | |
Comprehensive income (loss) attributable to Wabtec shareholders | | $ | 124,055 |
| | $ | (105,801 | ) | | $ | 67,166 |
| | $ | 61,573 |
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Unaudited | Unaudited |
| Nine Months Ended September 30, | Six Months Ended June 30, |
In thousands, except per share data | 2017 | | 2016 | 2019 | | 2018 |
| | | | | | |
Operating Activities | | | | | | |
Net income | $ | 212,603 |
| | $ | 267,076 |
| $ | 98,841 |
| | $ | 170,728 |
|
Adjustments to reconcile net income to cash provided by operations: | | | | | | |
Depreciation and amortization | 76,970 |
| | 49,375 |
| 165,064 |
| | 53,227 |
|
Stock-based compensation expense | 14,539 |
| | 14,788 |
| 23,932 |
| | 13,983 |
|
Below market intangible amortization | | (9,400 | ) | | — |
|
Loss on disposal of property, plant and equipment | 1,633 |
| | 151 |
| 461 |
| | 1,353 |
|
Excess income tax benefits from exercise of stock options | — |
| | (446 | ) | |
Changes in operating assets and liabilities, net of acquisitions | | | | | | |
Accounts receivable and unbilled accounts receivable | (60,246 | ) | | (38,362 | ) | (35,705 | ) | | (59,979 | ) |
Inventories | (53,365 | ) | | 2,301 |
| 147,424 |
| | (116,131 | ) |
Accounts payable | (121,389 | ) | | (43,777 | ) | (71,935 | ) | | 59,411 |
|
Accrued income taxes | (35,942 | ) | | 5,952 |
| 21,399 |
| | (202 | ) |
Accrued liabilities and customer deposits | 81,270 |
| | (8,353 | ) | 24,188 |
| | 27,545 |
|
Other assets and liabilities | (89,562 | ) | | (1,812 | ) | 79,655 |
| | (82,031 | ) |
Net cash provided by operating activities | 26,511 |
| | 246,893 |
| 443,924 |
| | 67,904 |
|
Investing Activities | | | | | | |
Purchase of property, plant and equipment | (60,263 | ) | | (31,676 | ) | (61,867 | ) | | (39,723 | ) |
Proceeds from disposal of property, plant and equipment | 1,066 |
| | 140 |
| 3,055 |
| | 8,900 |
|
Acquisitions of businesses, net of cash acquired | (114,175 | ) | | (84,355 | ) | (2,981,552 | ) | | (38,277 | ) |
Release of deposit in escrow | 23,548 |
| | — |
| |
Net cash used for investing activities | (149,824 | ) | | (115,891 | ) | (3,040,364 | ) | | (69,100 | ) |
Financing Activities | | | | | | |
Proceeds from debt | 883,473 |
| | 346,000 |
| 2,325,934 |
| | 591,890 |
|
Payments of debt | (918,919 | ) | | (215,850 | ) | (1,552,121 | ) | | (546,394 | ) |
Purchase of treasury stock | — |
| | (212,176 | ) | |
Proceeds from exercise of stock options and other benefit plans | 2,888 |
| | 1,773 |
| 775 |
| | 6,867 |
|
Payment of income tax withholding on share-based compensation | (6,798 | ) | | (9,006 | ) | (4,117 | ) | | (6,503 | ) |
Excess income tax benefits from exercise of equity options | — |
| | 446 |
| |
Cash dividends ($0.32 and $0.26 per share for the nine months | | | | |
ended September 30, 2017 and 2016, respectively) | (30,693 | ) | | (23,523 | ) | |
Net cash used for financing activities | (70,049 | ) | | (112,336 | ) | |
Payment of contingent consideration on acquisitions | | (10,100 | ) | | — |
|
Cash dividends | | (34,263 | ) | | (23,096 | ) |
Net cash provided by financing activities | | 726,108 |
| | 22,764 |
|
Effect of changes in currency exchange rates | 22,958 |
| | 5,525 |
| (10,651 | ) | | (9,395 | ) |
(Decrease) Increase in cash | (170,404 | ) | | 24,191 |
| |
Cash, beginning of period | 398,484 |
| | 226,191 |
| |
Cash, end of period | $ | 228,080 |
| | $ | 250,382 |
| |
(Decrease) increase in cash | | (1,880,983 | ) | | 12,173 |
|
Cash, cash equivalents and restricted cash beginning of period | | 2,342,354 |
| | 233,401 |
|
Cash and cash equivalents end of period | | $ | 461,371 |
| | $ | 245,574 |
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Common Stock | | Additional Paid-in | | Treasury Stock | | Treasury Stock | | Retained | | Accumulated Other | | Non-controlling | | |
In thousands, except share and per share data | | Shares | | Amount | | Capital | | Shares | | Amount | | Earnings | | Comprehensive Loss | | Interest | | Total |
Balance, December 31, 2017 | | 132,349,534 |
| | 1,323 |
| | 906,616 |
| | (36,315,182 | ) | | (827,379 | ) | | 2,773,300 |
| | (44,992 | ) | | 19,664 |
| | 2,828,532 |
|
Cash dividends ($0.12 dividend per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (11,531 | ) | | — |
| | — |
| | (11,531 | ) |
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | | — |
| | — |
| | (4,511 | ) | | 193,013 |
| | 3,222 |
| | — |
| | — |
| | — |
| | (1,289 | ) |
Stock based compensation | | — |
| | — |
| | 5,696 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,696 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 88,366 |
| | — |
| | (909 | ) | | 87,457 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 79,008 |
| | — |
| | 79,008 |
|
Other owner changes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 356 |
| | 356 |
|
Balance, March 31, 2018 | | 132,349,534 |
| | $ | 1,323 |
| | $ | 907,801 |
| | (36,122,169 | ) | | $ | (824,157 | ) | | $ | 2,850,135 |
| | $ | 34,016 |
| | $ | 19,111 |
| | $ | 2,988,229 |
|
| | | | | | | | | | | | | | | | | | |
Cash dividends ($0.12 dividend per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (11,565 | ) | | — |
| | — |
| | (11,565 | ) |
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | | — |
| | — |
| | (5,738 | ) | | 159,014 |
| | 2,979 |
| | — |
| | — |
| | — |
| | (2,759 | ) |
Stock based compensation | | — |
| | — |
| | 8,287 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,287 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 84,416 |
| | — |
| | (1,145 | ) | | 83,271 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (190,217 | ) | | — |
| | (190,217 | ) |
Other owner changes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (618 | ) | | (618 | ) |
Balance, June 30, 2018 | | 132,349,534 |
| | $ | 1,323 |
| | $ | 910,350 |
| | (35,963,155 | ) | | $ | (821,178 | ) | | $ | 2,922,986 |
| | $ | (156,201 | ) | | $ | 17,348 |
| | $ | 2,874,628 |
|
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | 132,349,534 |
| | 1,323 |
| | 914,568 |
| | (35,734,588 | ) | | (816,145 | ) | | 3,021,968 |
| | (256,583 | ) | | 3,944 |
| | 2,869,075 |
|
Cash dividends ($0.12 dividend per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (11,687 | ) | | — |
| | — |
| | (11,687 | ) |
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | | — |
| | — |
| | (14,446 | ) | | 420,472 |
| | 8,931 |
| | — |
| | — |
| | — |
| | (5,515 | ) |
Stock based compensation | | — |
| | — |
| | 8,526 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,526 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,472 | ) | | — |
| | 459 |
| | (4,013 | ) |
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (52,417 | ) | | — |
| | (52,417 | ) |
Acquisitions | | 65,782,182 |
| | 658 |
| | 6,887,622 |
| | — |
| | — |
| | — |
| | — |
| | 86,765 |
| | 6,975,045 |
|
Other owner changes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,432 |
| | 1,432 |
|
Balance, March 31, 2019 | | 198,131,716 |
| | $ | 1,981 |
| | $ | 7,796,270 |
| | (35,314,116 | ) | | $ | (807,214 | ) | | $ | 3,005,809 |
| | $ | (309,000 | ) | | $ | 92,600 |
| | $ | 9,780,446 |
|
| | | | | | | | | | | | | | | | | | |
Cash dividends ($0.12 dividend per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (22,576 | ) | | — |
| | — |
| | (22,576 | ) |
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | | — |
| | — |
| | (4,567 | ) | | 65,506 |
| | 1,596 |
| | — |
| | — |
| | — |
| | (2,971 | ) |
Stock based compensation | | — |
| | — |
| | 15,406 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,406 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 104,235 |
| | — |
| | (1,381 | ) | | 102,854 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,820 |
| | — |
| | 19,820 |
|
Acquisitions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (56,179 | ) | | (56,179 | ) |
Other owner changes | | 25,300,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,643 | ) | | (1,643 | ) |
Balance, June 30, 2019 | | 223,431,716 |
| | $ | 1,981 |
| | $ | 7,807,109 |
| | (35,248,610 | ) | | $ | (805,618 | ) | | $ | 3,087,468 |
| | $ | (289,180 | ) | | $ | 33,397 |
| | $ | 9,835,157 |
|
The accompanying notes are an integral part of these statements
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172019 (UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (“Wabtec” or the "Company") is one of the world’s largest providers of value-added, technology-based productsequipment, systems and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight carsrail and passenger transit vehicles, as well as in more than 100 countries throughout the world.industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers and manycan be found on most locomotives, freight cars, passenger transit cars and buses around the world. Many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 31 countries.over 50 countries and our products can be found in more than 100 countries throughout the world. In the first ninesix months of 2017,2019, approximately 65%59% of the Company’s revenues came from customers outside the United States.
2. ACCOUNTING POLICIES
Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.
The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. The December 31, 20162018 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Revenue Recognition Revenue On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.
Approximately 75% of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition.” Revenue isagreed upon delivery terms.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized whenover time because these products have been shipped to the respective customers, title has passedno alternative use without significant economic loss and the price foragreements contain an enforceable right to payment including a reasonable profit margin from the product has been determined.
In general,customer in the event of contract termination. Additionally, the Company recognizeshas customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue from long-term contracts based onto be recognized over time. Generally, the percentageCompany uses an input method for determining the amount of completion methodrevenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measurematerial and labor, both of which give an accurate representation of the progress made toward completioncomplete satisfaction of individual contracts.a particular performance obligation. Contract revenues and cost estimates are reviewed and revised quarterly at a minimumperiodically through the year and adjustments are reflected in the accounting period as such amounts are determined. Provisions
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” while the noncurrent contract assets are classified as other assets under the caption "Other Noncurrent Assets" on the consolidated balance sheet. Noncurrent contract assets were $122.5 million at June 30, 2019 and were not material at December 31, 2018, respectively. Included in noncurrent contract assets are certain costs that are specifically related to a contract, however, do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.
Contract liabilities include customer deposits that are made currentlyprior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract
liabilities are classified as current liabilities under the caption “Customer Deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other Long-Term Liabilities" on the consolidated balance sheet. Noncurrent contract liabilities were $36.9 million at June 30, 2019 and were not material at December 31, 2018. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses onfrom uncompleted contracts. Unbilled accounts receivables were $351.6 million and $274.9 million, customer deposits were $373.8 million and $256.6 million, and provisionsProvisions for loss contracts were $93.8$103.6 million and $60.5$71.2 million at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other Accrued Liabilities” on the consolidated balance sheet.
Pre-Production Costs Certain pre-production costs relatingDue to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term productionprojects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and supply contractsproductivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have been deferreda disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and will beopportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good; however, a single contract may have multiple performance obligations comprising multiple promises to customers. Performance obligations are determined based on customer's intended use of products and services. Less complex products principally result in each completed product being a separate performance obligation recognized at a point in time. More complex products or services principally result in a single performance obligation as a customer is either procuring a bundled offering that is managed or utilized on a combined basis or there are multiple complex goods or services in the contract, which are substantially the same and recognized over time. When there are multiple performance obligations, revenue is allocated based on the liferelative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the contracts. Deferred pre-production costsindividual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.
Remaining performance obligations represent the transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of June 30, 2019, the Company's remaining performance obligations were $28.8 million and $29.4 million at September 30, 2017 and December 31, 2016, respectively.$21.3 billion. The Company expects to recognize revenue of approximately 26% of remaining performance obligation over the next 12 months, with the remainder recognized thereafter.
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Referpresentation, including the reclassification of "Net Sales" to Recently Adopted Accounting Pronouncements below."Sales of Goods" and "Sales of Services".
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Financial Derivatives and Hedging Activities As part of its risk management strategy, the Company utilizes derivative financial instruments to manage its exposure due tomitigate the impact of changes in foreign currenciescurrency exchange rates and interest rates.rates on earnings and cash flow. For further information regarding financial derivatives and hedging activities, refer to Footnotes 1214 and 13.15.
Foreign Currency Translation Certain of our international operations have determined that the local currency is the functional currency whereas others have determined the U.S. dollar is their functional currency. Assets and liabilities of foreign subsidiaries except forwhere the Company’s Mexican operations whose functional currency is the U.S. Dollar,local currency are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings.
Noncontrolling Interests In accordance with ASC 810 "Consolidation", the Company has classified noncontrolling interests as equity on the condensed consolidated balance sheets as of SeptemberJune 30, 20172019 and December 31, 2016.2018. Net incomeloss attributable to noncontrolling interests was $1.4 million and $1.1 million for the three and nine months ended SeptemberJune 30, 2017 was a $1.0 million gain2019 and a $0.7 million2018, respectively. Net loss respectively, and was not material for the three and nine months ended September 30, 2016. Other comprehensive income attributable to noncontrolling interests was $0.9 million and $2.1 million for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016 was not material.2018, respectively.
Recently Issued Accounting Pronouncements In MarchJanuary 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in this update require the service cost component of net benefit costs to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside income from operations. This update also allows the service cost component to be eligible for capitalization when applicable. The ASU is effective for public companies in the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption was permitted as of the beginning of an annual period. The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company does not expect the adoption of this guidance in 2018 to have a material impact on the Company's financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this update eliminate the requirement to perform Step 2 of the goodwill impairment test. Instead, an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value up to the carrying amount of the goodwill. The ASU is effective for public companies in the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The impact of adopting this guidance could result in a change in the overall conclusion as to whether or not a reporting units'unit's goodwill is impaired and the amount of an impairment charge recognized in the event a reporting units' carrying value exceeds its fair value. All of the Company's reporting units had fair values that were substantially greater than the carrying value as of the Company's last quantitative goodwill impairment test, which was performed as of October 1, 2016.2018.
Recently Adopted Accounting PronouncementsIn November 2016, theFebruary 2018, FASB issued ASU No. 2016-18 "Statement2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Cash Flows (Topic 230): Restricted Cash"Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update requireaddress certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Current guidance requires the effect of a statementchange in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of cash flowsenactment, even if the related income tax effects were originally charged or credited directly to explainAOCI. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. The amount of the reclassification would include the effect of the change duringin the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownU.S. federal corporate income tax rate on the statementgross deferred tax amounts and related valuation allowances, if any, at the date of cash flows.the enactment of the Tax Act related to items in AOCI. The ASU isupdated guidance became effective for public companies in the fiscal yearsreporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted.2018. The Company is currently evaluatingadopted this accounting standard at the potentialbeginning of the period and elected to not retrospectively apply the new standard. The impact of adopting this guidance on itsthe new standard was not material to the consolidated financial statements.statement of income or the consolidated balance sheet.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. The ASU isThis guidance became effective for public companies in the fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.Company on January 1, 2019. The Company is currently evaluatingelected the potential impactpractical expedient which does not require the capitalization of adopting this guidance on its consolidated financial statements.
In May 2014,leases with terms of 12 months or less. And the FASB issued ASU No. 2014-09, “Revenue from Contract with Customers.”Company did not elect the practical expedient which allows hindsight to be used to determine the term of a lease. The ASU will supersede mostCompany adopted the standard using the transition alternative, which allowed for the application of the existing revenue recognition requirementsguidance at beginning of the period in U.S. GAAP and will require entities to recognize revenue at an amount that reflectswhich it is adopted, rather than requiring the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosuresadjustment of prior comparative periods. For further information regarding the qualitative and quantitative informationCompany's adoption of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Board voted to propose that the standard would take effect for reporting periods beginning after December 15, 2017 and that early adoption would be allowed as of the original effective date. The impact of adopting the new standard, on net sales and operating income for the three and nine months ended September 30, 2017 and 2016 is not expected to be material. The Company also does not expect a material impact to the consolidated balance sheet. The impact to results is not anticipated to be material because the analysis of the Company's current contracts under the new revenue recognition standard supports how the Company is currently recognizing revenue over time and at a point in time; however, the Company's conclusions may evolve as management completes its contract reviews and evaluation. The Company plans to adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. The Company is in the process of drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance. The Company believes it is following an appropriate timeline to appropriately adopt this new standard on January 1, 2018.see Footnote 7.
Recently Adopted Accounting Pronouncements In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The ASU simplifies several aspects for the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2016. In accordance with this update, the Company began recognizing all excess tax deficiencies and tax benefits from share-based payment awards as a benefit or expense to income tax in the income statement. This update has been adopted prospectively in accordance with the ASU and the impact of adoption on the income statement was not material. Additionally in accordance with this update, the Company began classifying excess income tax benefits from exercise of stock options as an operating activity on the consolidated statement of cash flows. The Company elected to adopt this amendment retrospectively and the impact of the adoption on operating and financing cash flows for the three and nine months ended September 30, 2016 was not material.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company elected to early adopt this ASU as of December 31, 2016; therefore, all deferred income tax assets and liabilities are classified in the noncurrent deferred income taxes line-items on the consolidated balance sheets.
Other Comprehensive Income (Loss) Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from nonowner sources.
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2019 are as follows:
|
| | | | | | | | | | | | | | | |
In thousands | Foreign currency translation | | Derivative contracts | | Pension and post retirement benefit plans | | Total |
Balance at December 31, 2018 | $ | (202,204 | ) | | $ | (53 | ) | | $ | (54,326 | ) | | $ | (256,583 | ) |
Other comprehensive income (loss) before reclassifications | (27,721 | ) | | (3,128 | ) | | (2,849 | ) | | (33,698 | ) |
Amounts reclassified from accumulated other | | | | | | | |
comprehensive income | — |
| | — |
| | 1,101 |
| | 1,101 |
|
Net current period other comprehensive income (loss) | (27,721 | ) | | (3,128 | ) | | (1,748 | ) | | (32,597 | ) |
Balance at June 30, 2019 | $ | (229,925 | ) | | $ | (3,181 | ) | | $ | (56,074 | ) | | $ | (289,180 | ) |
Reclassifications out of accumulated other comprehensive income (loss) for the three months ended June 30, 2019 are as follows:
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Income |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | (366 | ) | | Other income (expense), net |
Amortization of net loss | 1,092 |
| | Other income (expense), net |
| 726 |
| | Other income (expense), net |
| (176 | ) | | Income tax expense |
| $ | 550 |
| | Net income |
Reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 2019 are as follows:
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Income |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | (732 | ) | | Other income (expense), net |
Amortization of net loss | 2,184 |
| | Other income (expense), net |
| 1,452 |
| | Other income (expense), net |
| (351 | ) | | Income tax expense |
| $ | 1,101 |
| | Net income |
The changes in accumulated other comprehensive loss by component, net of tax, for the ninesix months ended SeptemberJune 30, 20172018 are as follows:
|
| | | | | | | | | | | | | | | |
| Foreign currency translation | | Derivative contracts | | Pension and post retirement benefit plans | | Total |
Balance at December 31, 2017 | $ | 5,063 |
| | $ | 4,015 |
| | $ | (54,070 | ) | | $ | (44,992 | ) |
Other comprehensive income (loss) before reclassifications | (114,811 | ) | | (4,760 | ) | | 6,744 |
| | (112,827 | ) |
Amounts reclassified from accumulated other | | | | | | | |
comprehensive income | — |
| | 579 |
| | 1,039 |
| | 1,618 |
|
Net current period other comprehensive income (loss) | (114,811 | ) | | (4,181 | ) | | 7,783 |
| | (111,209 | ) |
Balance at June 30, 2018 | $ | (109,748 | ) | | $ | (166 | ) | | $ | (46,287 | ) | | $ | (156,201 | ) |
|
| | | | | | | | | | | | | | | |
In thousands | Foreign currency translation | | Derivative contracts | | Pension and post retirement benefit plans | | Total |
Balance at December 31, 2016 | $ | (321,033 | ) | | $ | (2,957 | ) | | $ | (55,615 | ) | | $ | (379,605 | ) |
Other comprehensive income (loss) before reclassifications | 277,984 |
| | 11,424 |
| | (4,715 | ) | | 284,693 |
|
Amounts reclassified from accumulated other | | | | | | | |
comprehensive income | — |
| | 1,206 |
| | 1,776 |
| | 2,982 |
|
Net current period other comprehensive income (loss) | 277,984 |
| | 12,630 |
| | (2,939 | ) | | 287,675 |
|
Balance at September 30, 2017 | $ | (43,049 | ) | | $ | 9,673 |
| | $ | (58,554 | ) | | $ | (91,930 | ) |
Reclassifications out of accumulated other comprehensive loss for the three months ended SeptemberJune 30, 20172018 are as follows:
| | In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Income | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Operations |
Amortization of defined pension and post retirement items | | | | |
Amortization of initial net obligation and prior service cost | $ | (422 | ) | | Cost of sales | $ | (375 | ) | | Other income (expense), net |
Amortization of net loss | 1,240 |
| | Cost of sales | 1,093 |
| | Other income (expense), net |
| 818 |
| | Income from Operations | 718 |
| | Other income (expense), net |
| (226 | ) | | Income tax expense | (198 | ) | | Income tax expense |
| $ | 592 |
| | Net income | $ | 520 |
| | Net income |
| | | | |
Derivative contracts | | | | |
Realized loss on derivative contracts | $ | 497 |
| | Interest expense, net | $ | 176 |
| | Interest expense, net |
| (131 | ) | | Income tax expense | (42 | ) | | Income tax expense |
| $ | 366 |
| | Net income | $ | 134 |
| | Net income |
Reclassifications out of accumulated other comprehensive loss for the ninesix months ended SeptemberJune 30, 20172018 are as follows:
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Operations |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | (751 | ) | | Other income (expense), net |
Amortization of net loss | 2,186 |
| | Other income (expense), net |
| 1,435 |
| | Other income (expense), net |
| (396 | ) | | Income tax expense |
| $ | 1,039 |
| | Net income |
| | | |
| | | |
Derivative contracts | $ | 855 |
| | Interest expense, net |
Realized loss on derivative contracts | (276 | ) | | Income tax expense |
| $ | 579 |
| | Net income |
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Income |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | (1,266 | ) | | Cost of sales |
Amortization of net loss | 3,720 |
| | Cost of sales |
| 2,454 |
| | Income from Operations |
| (678 | ) | | Income tax expense |
| $ | 1,776 |
| | Net income |
| | | |
Derivative contracts | | | |
Realized loss on derivative contracts | $ | 1,653 |
| | Interest expense, net |
| (447 | ) | | Income tax expense |
| $ | 1,206 |
| | Net income |
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2016 are as follows:
|
| | | | | | | | | | | | | | | |
| Foreign currency translation | | Derivative contracts | | Pension and post retirement benefit plans | | Total |
Balance at December 31, 2015 | $ | (227,349 | ) | | $ | (2,987 | ) | | $ | (46,383 | ) | | $ | (276,719 | ) |
Other comprehensive income (loss) before reclassifications | (7,385 | ) | | (2,192 | ) | | (1,969 | ) | | (11,546 | ) |
Amounts reclassified from accumulated other | | | | | | | |
comprehensive income | — |
| | 883 |
| | 1,327 |
| | 2,210 |
|
Net current period other comprehensive (loss) | (7,385 | ) | | (1,309 | ) | | (642 | ) | | (9,336 | ) |
Balance at September 30, 2016 | $ | (234,734 | ) | | $ | (4,296 | ) | | $ | (47,025 | ) | | $ | (286,055 | ) |
Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2016 are as follows:
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Operations |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | 6 |
| | Cost of sales |
Amortization of net loss | 611 |
| | Cost of sales |
| 617 |
| | Income from Operations |
| (175 | ) | | Income tax expense |
| $ | 442 |
| | Net income |
| | | |
Derivative contracts | | | |
Realized loss on derivative contracts | $ | 338 |
| | Interest expense, net |
| (96 | ) | | Income tax expense |
| $ | 242 |
| | Net income |
Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2016 are as follows:
|
| | | | | |
In thousands | Amount reclassified from accumulated other comprehensive income | | Affected line item in the Condensed Consolidated Statements of Operations |
Amortization of defined pension and post retirement items | | | |
Amortization of initial net obligation and prior service cost | $ | (801 | ) | | Cost of sales |
Amortization of net loss | 2,702 |
| | Cost of sales |
| 1,901 |
| | Income from Operations |
| (574 | ) | | Income tax expense |
| $ | 1,327 |
| | Net income |
| | | |
Derivative contracts | | | |
Realized loss on derivative contracts | $ | 1,265 |
| | Interest expense, net |
| (382 | ) | | Income tax expense |
| $ | 883 |
| | Net income |
3. ACQUISITIONS
Faiveley TransportGeneral Electric Transportation
On November 30, 2016,Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec Company formerly known as Transportation System Holdings Inc. ("SpinCo"), which was a newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc. ("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company, acquired majority ownership of Faiveley Transport S.A. (“Faiveley Transport”entered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo, Wabtec and Wabtec US Rail, Inc. ("Direct Sale Purchaser") underentered into the terms of a Share PurchaseOriginal Separation Agreement (“Share Purchase Agreement”). Faiveley Transport is a leading global provider of value-added, integrated systems and serviceson May 20, 2018, which together provided for the railway industry with annual salescombination of about $1.2Wabtec and GE Transportation. The Original Merger Agreement and Original Separation Agreement were subsequently amended on January 25, 2019 and the Merger was completed on February 25, 2019.
As part of the Merger, certain assets of GE Transportation ("GET"), including the equity interests of certain pre-Transaction subsidiaries of GE that compose part of GE Transportation, were sold to Direct Sale Purchaser for a cash payment of $2.875 billion, and more than 5,700 employeesDirect Sale Purchaser assumed certain liabilities of GE Transportation in 24 countries. Faiveley Transport supplies railway manufacturers, operatorsconnection with this purchase (the "Direct Sale"). Thereafter, GE transferred the SpinCo business to SpinCo and maintenance providers with a range of value-added, technology-based systemsits subsidiaries (to the extent not already held
by SpinCo and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors)its subsidiaries), and BrakesSpinCo issued to GE shares of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class C preferred stock and Safety (braking systemsadditional shares of SpinCo common stock in the SpinCo Transfer. Following this issuance of additional SpinCo common stock to GE, and couplers). The transaction was structured as a step acquisition as follows:
On November 30, 2016,immediately prior to the Company acquired majority ownershipDistribution (as defined below), GE owned 8,700,000,000 shares of Faiveley Transport, after completing the purchaseSpinCo common stock, 15,000 shares of the Faiveley family’s ownership interest under the termsSpinCo Class A preferred stock, 10,000 shares of the Share Purchase Agreement, which directed the Company to pay €100 perSpinCo Class B preferred stock and one share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately
49%SpinCo Class C preferred stock, which constituted all of the outstanding votingstock of SpinCo.
Following the Direct Sale, GE distributed the distribution shares of Faiveley Transport. Upon completionSpinCo in a spin-off transaction to its stockholder (the "Distribution"). Immediately after the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), whereby the separate corporate existence of Merger Sub ceased and SpinCo continued as the surviving company and a wholly owned subsidiary of Wabtec (except with respect to shares of SpinCo Class A preferred stock held by GE). In the Merger, subject to adjustment in accordance with the Merger Agreement, each share purchase underof SpinCo common stock converted into the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to electright to receive €100 per share in cash or 1.1538a number of shares of Wabtec common stock perbased on the common stock exchange ratio set forth in the Merger Agreement and the share of Faiveley Transport. TheSpinCo Class C preferred stock was converted into the right to receive (a) 10,000 shares of Wabtec convertible preferred stock and (b) a number of shares of Wabtec common stock portionequal to 9.9% of the fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec paid $10.0 million in cash to GE in exchange for all of the shares of SpinCo Class B preferred stock.
Upon consummation of the Merger, Wabtec issued 46,763,975 shares of common stock to the holders of GE common stock, 19,018,207 shares of common stock to GE and 10,000 shares of preferred stock to GE and made a cash payment to GE of $2.885 billion. As a result and calculated based on Wabtec’s outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as of December 31, 2018, approximately 49.2% of the outstanding shares of Wabtec common stock was held collectively by GE and holders of GE common stock (with 9.9% to be held by GE directly in shares of Wabtec common stock and 15% underlying the shares of Wabtec convertible preferred stock to be held by GE) and approximately 50.8% of the outstanding shares of Wabtec common stock would be held by pre-Merger Wabtec stockholders, in each case calculated on a fully-diluted, as-converted and as-exercised basis. Following the Merger, GE also retained 15,000 shares of SpinCo Class A non-voting preferred stock, and Wabtec held 10,000 shares of SpinCo Class B non-voting preferred stock. The shares of Wabtec common stock and Wabtec convertible preferred stock held by GE are subject to GE’s obligations under the shareholders agreement, including, among other things, and in each case subject to certain exceptions, (i) restrictions on the ability to sell, transfer or otherwise divest such shares for a period of 30 days and (ii) an obligation to sell, transfer or otherwise divest (A) by no later than 120 days following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not less than 14.9% and not more than 19.9% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, (B) by no later than one year following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not more than 18.5% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, in each case of clauses (A) and (B) treating the Wabtec convertible preferred stock as the Wabtec common stock into which it is convertible both for purposes of determining the number of shares of Wabtec common stock owned and for purposes of determining the number of shares of Wabtec common stock outstanding and (C) by no later than the third anniversary of the closing date of the Merger, all of the subject shares that GE (together with its affiliates) beneficially owns, and (iii) an obligation to vote all of such shares of Wabtec common stock in the proportion required under the Shareholders Agreement.
After the Merger, SpinCo, which is Wabtec’s wholly owned subsidiary (except with respect to shares of SpinCo Class A preferred stock held by GE), holds the SpinCo business and Direct Sale Purchaser, which also is Wabtec’s wholly owned subsidiary, holds the assets purchased and the liabilities assumed in connection with the Direct Sale. Together, SpinCo and Direct Sale Purchaser own and operate the post-transaction GE Transportation. All shares of the Company’s common stock, including those issued in the Merger, are listed on the NYSE under the Company’s current trading symbol “WAB.” On the date of the Distribution, GE or its subsidiaries and SpinCo or the SpinCo Transferred Subsidiaries entered into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development and transition services.
On May 6, 2019, GE completed the sale of approximately 8,780 shares of Wabtec's Series A Preferred stock which converted upon the sale to 25,300,000 shares of Wabtec's common stock. After the sale Wabtec had approximately 1,220 shares of Series A Preferred Stock outstanding convertible to approximately 3,515,500 shares of common stock and GE's aggregate beneficial ownership percentage of the Company was reduced from approximately 24.9% to approximately 11.7% on a fully-diluted, as-converted and as-exercised basis. In conjunction with this secondary offering the Company waived the requirement under the shareholders agreement for GE to maintain ownership of at least 14.9% of Wabtec's stock for 120 days following the closing date of the Merger. The Company did not receive any proceeds from the sale of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment of $470.0 million, which is directly related to the timing of tax benefits expected to be realized by Wabtec as a result of the merger. This payment is considered
contingent consideration because the timing of cash payments to GE is directly related to the future timing of tax benefits received by the Company as a result of the merger. The estimated total value of the consideration was subject to a cap on issuance ofbe paid by Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiringTransactions is approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in$10.3 billion, including the cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport.
The aggregate value of consideration paid for 100% ownershipthe Direct Sales Assets, equity transferred for SpinCo, contingent consideration, assumed debt and net of Faiveley Transport was $1,736.1 million including $944.3 million in cash, $560.2 million in stock or approximately 6.6 million shares, $409.9 million in debt assumed, less $178.3 million in cash acquired. The $744.7 million included as deposits in escrowestimated consideration is based on the consolidated balance sheet at December 31, 2016 was cash designated for use asCompany’s closing share price of $73.36 on February 22, 2019 and the preliminary fair value of the contingent consideration. The value of the preliminary purchase price consideration forcould change when the tender offers.Company has completed the detailed valuation of the contingent consideration and other necessary calculations.
The fair values of the assets acquired and liabilities assumed are preliminarilywere determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The December 31, 2016June 30, 2019 consolidated balance sheet includes the assets and liabilities of Faiveley Transport,GET, which have been initially measured at fair value. The fair valuenoncontrolling interest includes equity interests in GET's Brazil operations held by third parties on the date of acquisition. At the time of acquisition, quotable market prices of the noncontrolling interest was preliminarily determined using the market price of Faiveley Transport’s publicly traded common stock multiplied by the number of publicly traded common shares outstanding at the acquisition date and is considered Level 1. The acquisition ofexisted; therefore, the noncontrolling interest in the three months ended March 31, 2017 resulted inGET Brazil operations were measured using a $8.9 million increase to additional paid-in capital onLevel 1 input. In April 2019, the consolidated balance sheet which represents the difference in consideration paid to acquireCompany acquired the noncontrolling interest andin GET's Brazil operations for $56.2 million which approximated the carryingfair value ofassigned to the noncontrolling interest aton the date of acquisition.
The remaining noncontrolling interest value was determined based on inputs that are not observable in the market and are considered Level 3.
The following table summarizes the preliminary estimated fair values of the Faiveley TransportGET assets acquired and liabilities assumed:
|
| | | | |
In thousands | | |
Assets acquired | | |
Cash and cash equivalents | | $ | 174,334 |
|
Accounts receivable | | 525,966 |
|
Inventories | | 1,185,574 |
|
Other current assets | | 64,115 |
|
Property, plant, and equipment | | 1,086,245 |
|
Goodwill | | 5,758,264 |
|
Trade names | | 50,000 |
|
Customer relationships | | 550,000 |
|
Intellectual property | | 1,210,000 |
|
Backlog | | 1,530,000 |
|
Other noncurrent assets | | 211,081 |
|
Total assets acquired | | 12,345,579 |
|
Liabilities assumed | | |
Current liabilities | | 1,514,189 |
|
Contingent consideration | | 440,000 |
|
Other noncurrent liabilities | | 522,465 |
|
Total liabilities assumed | | 2,476,654 |
|
Net assets acquired | | 9,868,925 |
|
Noncontrolling interest | | $ | 86,765 |
|
|
| | | | |
In thousands | | |
Assets acquired | | |
Cash and cash equivalents | | $ | 178,318 |
|
Accounts receivable | | 444,741 |
|
Inventories | | 205,649 |
|
Other current assets | | 70,930 |
|
Property, plant, and equipment | | 148,746 |
|
Goodwill | | 1,257,360 |
|
Trade names | | 346,328 |
|
Customer relationships | | 233,529 |
|
Patents | | 1,201 |
|
Other noncurrent assets | | 183,252 |
|
Total assets acquired | | 3,070,054 |
|
Liabilities assumed | | |
Current liabilities | | 805,992 |
|
Debt | | 409,899 |
|
Other noncurrent liabilities | | 347,348 |
|
Total liabilities assumed | | 1,563,239 |
|
Net assets acquired | | $ | 1,506,815 |
|
These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. During the ninethree months ended SeptemberJune 30, 2017,2019, the estimated fair values for acquired backlog and customer relationships and current liabilities were adjusted by $21.8increased $50.0 million and $51.8$20.0 million, respectively,respectively. Additionally, the estimated fair value for other noncurrent assets decreased by $23.7 million primarily due to estimate revisions for long-term contract assets. These changes to initial estimates were based on information that existed at the date of acquisition. Additionally, the estimated fair values for accounts receivable and current liabilities were adjusted by $2.8 million and $36.2 million, respectively, to correct errors in the preliminary estimated fair values of the Faiveley Transport assets acquired and liabilities assumed. Other noncurrent assets were adjusted by $29.0 millionto record the deferred tax impact of these adjustments. As a result of these adjustments and other immaterial adjustments related to changes to initial estimates based on information that existed at the date of acquisition, goodwill increased by $69.1 million. Accounts receivable and current liabilities were adjusted by $64.3 million to correct an error in the preliminary estimated fair values of Faiveley Transport assets and liabilities assumed related to a factoring arrangement with recourse.
Substantially all of the accounts receivable acquired are expected to be collectible. Included in current liabilities is $25.9 million of accrued compensation for acquired share-based stock plans thatTrade names, customer relationships, patents and backlog intangible assets are obligatedall subject to be settled in cash.amortization. Contingent liabilities assumed as part of the transaction were not material. TheseThe contingent liabilities are related to contract disputes, environmental, legal and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which isare an exception to the fair value basis of accounting. Included in other noncurrent liabilities are customer contracts whose terms are unfavorable compared to market terms at the date of acquisition.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits, including synergies, and assembled workforce, the Company expectsthat are expected to achievebe achieved as a result of the acquisition. PurchasedSubstantially all of the purchased goodwill is not expected to be deductible for tax purposes. The goodwill has been preliminarily allocated to the TransitFreight segment.
ForIncluded in the three and nine months ended September 30, 2017, the Company’sCompany's consolidated statement of income included $294.4 million and $851.8for the six months ended June 30, 2019 is $1,617.1 million of revenues respectively,and $88.2 million of operating income from Faiveley Transport.GET. Acquisition related costs were approximately $55.3 million for the six months ended June 30, 2019 and are included in selling, general and administrative expenses on the consolidated statements of income.
Other Acquisitions
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment:
On April 5, 2017, the Company acquired Thermal Transfer Corporation ("TTC"), a leading provider of heat transfer solutions for industrial applications, for a purchase price of approximately $32.5 million, net of cash acquired, resulting in preliminary goodwill of $16.3 million, all of which will be deductible for tax purposes.
On March 14, 2017, the Company acquired Aero Transportation Products ("ATP"), a manufacturer of engineered covering systems for hopper freight cars, for a purchase price of approximately $65.3 million, net of cash acquired, resulting in preliminary goodwill of $31.9 million, all of which will be deductible for tax purposes.
On December 14, 2016, the Company acquired Workhorse Rail LLC ("Workhorse"), a supplier of engineered freight car components mainly for the aftermarket, for a purchase price of approximately $43.8 million, net of cash acquired, resulting in preliminary goodwill of $24.4 million, 37.8% of which will be deductible for tax purposes.
On November 17, 2016, the Company acquired the assets of Precision Turbo & Engine ("Precision Turbo"), a designer and manufacturer of high-performance, aftermarket turbochargers, wastegates, and heat exchangers for the automotive performance market, for a purchase price of approximately $13.8 million, net of cash acquired, resulting in preliminary goodwill of $4.0 million, all of which will be deductible for tax purposes.
On May 5, 2016, the Company acquired Unitrac Railroad Materials ("Unitrac"), a leading designer and manufacturer of railroad products and track work services, for a purchase price of approximately $14.8 million, net of cash acquired, resulting in goodwill of $2.4 million, all of which will be deductible for tax purposes.
The Company has made the following acquisitionsacquisition operating as a business unit or component of a business unit in the Transit Segment:
On October 2, 2017, subsequent to the close of our accounting quarter,March 22, 2018, the Company acquired AM General ContractorAnnax GmbH ("AM"Annax"), a manufacturerleading supplier of safetypublic address and passenger information systems mainly for transit rail cars with annual sales of about $25.0 million.
On August 1, 2016, the Company acquired Gerken Group SA ("Gerken"), a manufacturer of specialty carbon and graphite products for rail and other industrial applications,vehicles, for a purchase price of approximately $62.8$45.2 million, net of cash acquired and including contingent consideration, resulting in final goodwill of $17.5$38.5 million, none of which will be deductible for tax purposes.
The acquisitions listed above include escrow deposits A payment of $38.4$10.1 million which act as security for indemnity and other claimswas made in accordancethe three months ended June 30, 2019 related to contingent consideration associated with the purchase and related escrow agreements.of Annax.
The following table summarizes the preliminary estimatedfinal fair values of the assets acquired and liabilities assumed at the date of the acquisition for TTC, ATP, Workhorse, and Precision Turbo. For the Unitrac and Gerken acquisitions, the following table summarizes the final fair value of the assets acquired and liabilities assumed at the date of acquisition.Annax.
| | | TTC | | ATP | | Workhorse | | Precision Turbo | | Gerken | | Unitrac | Annax |
In thousands | April 5, 2017 | | March 14, 2017 | | December 14, 2016 | | November 17, 2016 | | August 1, 2016 | | May 5, 2016 | March 22, 2018 |
Current assets | $ | 3,746 |
| | $ | 11,666 |
| | $ | 9,137 |
| | $ | 4,145 |
| | $ | 32,706 |
| | $ | 11,476 |
| $ | 32,827 |
|
Property, plant & equipment | 5,909 |
| | 5,354 |
| | — |
| | 1,346 |
| | 7,667 |
| | 1,768 |
| 674 |
|
Goodwill | 16,309 |
| | 31,934 |
| | 24,373 |
| | 4,019 |
| | 17,470 |
| | 2,442 |
| 38,511 |
|
Other intangible assets | 12,300 |
| | 22,100 |
| | 19,400 |
| | 5,200 |
| | 30,560 |
| | 1,230 |
| 11,715 |
|
Other assets | — |
| | — |
| | — |
| | — |
| | 1,706 |
| | — |
| |
Total assets acquired | 38,264 |
| | 71,054 |
| | 52,910 |
| | 14,710 |
| | 90,109 |
| | 16,916 |
| 83,727 |
|
Total liabilities assumed | (5,753 | ) | | (5,800 | ) | | (9,083 | ) | | (884 | ) | | (27,262 | ) | | (2,145 | ) | (55,064 | ) |
Net assets acquired | $ | 32,511 |
| | $ | 65,254 |
| | $ | 43,827 |
| | $ | 13,826 |
| | $ | 62,847 |
| | $ | 14,771 |
| $ | 28,663 |
|
Of the $671.8The allocation of $11.7 million of total acquired other intangible assets $367.6includes $3.8 million was assigned to trade names $296.7and $7.5 million was assigned to customer relationships, and $5.0 million was assigned to intellectual property.relationships. The trade names were determined to have indefinite useful lives, while the intellectual property and customer relationships’ average useful lives are 20 years, and the non-compete agreements' useful life is five years.
The Company also made smaller acquisitions not listed above which are individually and collectively immaterial.
The following unaudited pro forma consolidated financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2016:2018:
|
| | | | | | | | | | | | | | | |
In thousands | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
Net sales | $ | 2,236,284 |
| | $ | 2,023,848 |
| | $ | 4,316,055 |
| | $ | 3,905,572 |
|
Gross profit | 703,676 |
| | 634,868 |
| | 1,247,156 |
| | 1,019,549 |
|
Net income attributable to Wabtec shareholders | 171,875 |
| | 151,475 |
| | 255,152 |
| | 99,206 |
|
Diluted earnings per share | | | | | | | |
As Reported | $ | 0.54 |
| | $ | 0.87 |
| | $ | 0.61 |
| | $ | 1.79 |
|
Pro forma | $ | 0.90 |
| | $ | 0.79 |
| | $ | 1.34 |
| | $ | 0.52 |
|
|
| | | | | | | | | | | | | | | |
In thousands | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
Net sales | $ | 957,931 |
| | $ | 995,869 |
| | $ | 2,817,550 |
| | $ | 3,168,195 |
|
Gross profit | 253,203 |
| | 301,554 |
| | 799,695 |
| | 977,743 |
|
Net income attributable to Wabtec shareholders | 67,399 |
| | 99,085 |
| | 214,370 |
| | 323,878 |
|
Diluted earnings per share | | | | | | | |
As Reported | $ | 0.70 |
| | $ | 0.91 |
| | $ | 2.22 |
| | $ | 2.92 |
|
Pro forma | $ | 0.70 |
| | $ | 1.02 |
| | $ | 2.23 |
| | $ | 3.30 |
|
4. INVENTORIES
The components of inventory, net of reserves, were:
|
| | | | | | | |
In thousands | June 30, 2019 | | December 31, 2018 |
Raw materials | $ | 786,281 |
| | $ | 465,873 |
|
Work-in-progress | 434,731 |
| | 154,485 |
|
Finished goods | 660,779 |
| | 224,528 |
|
Total inventories | $ | 1,881,791 |
| | $ | 844,886 |
|
|
| | | | | | | |
In thousands | September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 391,207 |
| | $ | 331,465 |
|
Work-in-progress | 196,319 |
| | 145,462 |
|
Finished goods | 177,255 |
| | 181,583 |
|
Total inventories | $ | 764,781 |
| | $ | 658,510 |
|
5. INTANGIBLES
The change in the carrying amount of goodwill by segment for the ninesix months ended SeptemberJune 30, 20172019 is as follows:
|
| | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Total |
Balance at December 31, 2018 | $ | 713,391 |
| | $ | 1,683,153 |
| | $ | 2,396,544 |
|
Additions | 5,754,115 |
| | 15,420 |
| | 5,769,535 |
|
Foreign currency impact | (11,687 | ) | | (3,721 | ) | | (15,408 | ) |
Balance at June 30, 2019 | $ | 6,455,819 |
| | $ | 1,694,852 |
| | $ | 8,150,671 |
|
|
| | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Total |
Balance at December 31, 2016 | $ | 550,902 |
| | $ | 1,527,863 |
| | $ | 2,078,765 |
|
Adjustment to preliminary purchase allocation | (13,395 | ) | | 77,302 |
| | 63,907 |
|
Acquisitions | 62,158 |
| | 4,999 |
| | 67,157 |
|
Foreign currency impact | 9,407 |
| | 165,522 |
| | 174,929 |
|
Balance at September 30, 2017 | $ | 609,072 |
| | $ | 1,775,686 |
| | $ | 2,384,758 |
|
As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company’s trade names had a net carrying amount of $583.7$626.6 million and $510.5$582.8 million, respectively, and therespectively. The Company believes these intangibles have indefinite lives.lives, with the exception of the GE Transportation trade name, to which the company has assigned a useful life of 5 years.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
|
| | | | | | | |
In thousands | June 30, 2019 | | December 31, 2018 |
Backlog, intellectual property, patents, and other intangibles, net of accumulated | | | |
amortization of $76,059 and $42,446 | $ | 2,689,022 |
| | $ | 15,328 |
|
Customer relationships, net of accumulated amortization | | | |
of $183,933 and $158,533 | 1,048,774 |
| | 531,761 |
|
Total | $ | 3,737,796 |
| | $ | 547,089 |
|
|
| | | | | | | |
In thousands | September 30, 2017 | | December 31, 2016 |
Patents, non-compete and other intangibles, net of accumulated | | | |
amortization of $42,237 and $42,538 | $ | 15,001 |
| | $ | 15,360 |
|
Customer relationships, net of accumulated amortization | | | |
of $117,676 and $87,334 | 541,705 |
| | 528,068 |
|
Total | $ | 556,706 |
| | $ | 543,428 |
|
The weighted average remaining useful life of patents,backlog, intellectual property, customer relationships and other intangibles were 18 years, 10 years, 1718 years and 1513 years, respectively. Amortization expense for intangible assets was $8.6$66.0 million and $27.0$93.4 million for the three and ninesix months ended SeptemberJune 30, 2017,2019, and $5.3$9.9 million and $16.1$20.3 million for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.
Amortization expense for the five succeeding years is estimated to be as follows:
|
| | | |
Remainder of 2019 | $ | 130,967 |
|
2020 | 259,206 |
|
2021 | 259,117 |
|
2022 | 258,805 |
|
2023 | 258,174 |
|
|
| | | |
Remainder of 2017 | $ | 8,873 |
|
2018 | 34,794 |
|
2019 | 33,537 |
|
2020 | 32,014 |
|
2021 | 31,827 |
|
6. CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract, advanced customer payments that are in excess of revenue recognized, and provisions for estimated losses from uncompleted contracts.
The change in the carrying amount of contract assets and contract liabilities for the six months ended June 30, 2019 is as follows:
|
| | | | |
In thousands | | Contract Assets |
Balance at beginning of year | | $ | 345,585 |
|
Acquisitions | | 213,605 |
|
Recognized in current year | | 324,940 |
|
Reclassified to accounts receivable | | (300,714 | ) |
Foreign currency impact | | (925 | ) |
Balance at June 30, 2019 | | $ | 582,491 |
|
| | |
In thousands | | Contract Liabilities |
Balance at beginning of year | | $ | 444,805 |
|
Acquisitions | | 282,054 |
|
Recognized in current year | | 572,644 |
|
Amounts in beginning balance reclassified to revenue | | (251,980 | ) |
Current year amounts reclassified to revenue | | (257,640 | ) |
Foreign currency impact | | (867 | ) |
Balance at June 30, 2019 | | $ | 789,016 |
|
7. LEASES
During the first quarter of 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)," which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.
The Company leases property and equipment under finance and operating leases. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of lease payments when appropriate. The Company does not separate lease and non-lease components contracts.
As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate our incremental borrowing rate to discount lease payments. The Company has established discount rates by geographic region ranging from 1.2% to 12.3%.
The components of lease expense are as follows:
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2019 | | 2019 |
Operating lease expense | $ | 13,387 |
| | $ | 26,784 |
|
Finance lease expense | | | |
Amortization of leased assets | 272 |
| | 543 |
|
Interest on lease liabilities | 4 |
| | 8 |
|
Short-term and variable lease expense | 172 |
| | 277 |
|
Sublease income | (138 | ) | | (276 | ) |
Total | $ | 13,697 |
| | $ | 27,336 |
|
Scheduled payments of lease liabilities are as follows: |
| | | | | | | | | | | |
(in thousands) | Operating Leases | | Finance Leases | | Total |
Remaining 2019 | $ | 25,598 |
| | $ | 188 |
| | $ | 25,786 |
|
2020 | 45,910 |
| | 383 |
| | 46,293 |
|
2021 | 37,570 |
| | 185 |
| | 37,755 |
|
2022 | 30,788 |
| | 121 |
| | 30,909 |
|
2023 | 26,252 |
| | 121 |
| | 26,373 |
|
Thereafter | 107,810 |
| | 349 |
| | 108,159 |
|
Total lease payments | 273,928 |
| | 1,347 |
| | 275,275 |
|
Less: Present value discount | (29,311 | ) | | (2 | ) | | (29,313 | ) |
Present value lease liabilities | $ | 244,617 |
| | $ | 1,345 |
| | $ | 245,962 |
|
The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of lease liabilities: |
| | |
| June 30, |
| 2019 |
Weighted-average remaining lease term (years) | |
Operating leases | 8.3 |
|
Finance leases | 5.5 |
|
Weighted-average discount rate | |
Operating leases | 3.0 | % |
Finance leases | 1.2 | % |
8. LONG-TERM DEBT
Long-term debt consisted of the following:
|
| | | | | | | |
In thousands | June 30, 2019 | | December 31, 2018 |
Floating Senior Notes, due 2021, net of unamortized debt issuance costs of $2,604 and $3,204 | $ | 497,396 |
| | $ | 496,796 |
|
4.15% Senior Notes, due 2024, net of unamortized debt issuance costs of $6,362 and $7,043 | 743,638 |
| | 742,957 |
|
4.70% Senior Notes, due 2028, net of unamortized debt issuance costs of $9,809 and $10,343 | 1,240,191 |
| | 1,239,657 |
|
3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $1,604 and $1,718 | 748,396 |
| | 748,282 |
|
4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $1,048 and $1,177 | 248,952 |
| | 248,823 |
|
Revolving Credit Facility, net of unamortized debt issuance costs of $2,592 and $3,138 | 1,113,269 |
| | 338,112 |
|
Other Borrowings | 41,339 |
| | 42,246 |
|
Total | 4,633,181 |
| | 3,856,873 |
|
Less: current portion | 104,413 |
| | 64,099 |
|
Long-term portion | $ | 4,528,768 |
| | $ | 3,792,774 |
|
|
| | | | | | | |
In thousands | September 30, 2017 | | December 31, 2016 |
3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $2,410 and $2,526 | $ | 747,590 |
| | $ | 747,474 |
|
4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $1,498 and $1,690 | 248,502 |
| | 248,310 |
|
Revolving Credit Facility, net of unamortized debt issuance costs of $2,801 and $3,850 | 855,321 |
| | 796,150 |
|
Schuldschein Loan | 11,812 |
| | 98,671 |
|
Other Borrowings | 9,150 |
| | 1,153 |
|
Capital Leases | 1,529 |
| | 1,018 |
|
Total | 1,873,904 |
| | 1,892,776 |
|
Less - current portion | 49,748 |
| | 129,809 |
|
Long-term portion | $ | 1,824,156 |
| | $ | 1,762,967 |
|
On September 14, 2018, the Company issued $2.5 billion of senior notes with three different maturities. | |
• | Floating Rate Senior Notes due 2021 - The Company issued $500.0 million of Floating Rate Senior Notes due 2021 (the "Floating Rate Notes"). The Floating Rate Notes, which are non-callable for one year, were issued at 100% of face value. Interest on the Floating Rate Notes accrues at a floating rate per annum equal to three-month Libor plus 105 basis points. The interest rate for the Floating Rate Notes for the initial interest period was the three-month Libor plus 105 basis points determined on September 12, 2018 and is payable quarterly on December 15, March 15, June 15, and September 15 of each year. The Company incurred $3.5 million of deferred financing costs related to the issuance of the Floating Rate Notes. |
| |
• | 4.15% Senior Notes due 2024 - The Company issued $750.0 million of 4.15%Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were issued at 99.805% of face value. Interest on the 2024 Notes accrues at a rate of 4.15% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $7.4 million of deferred financing costs related to the issuance of the 2024 Notes. |
| |
• | 4.70% Senior Notes Due 2028 - The Company issued $1,250.0 million of 4.70% Senior Notes due 2028 (the "2028 Notes" and together with the Floating Rate Notes and 2024 Notes, the "Senior Notes"). The 2028 Notes were issued at 99.889% of face value. Interest on the 2028 Notes accrues at a rate of 4.70% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $10.6 million of deferred financing costs related to the issuance of the 2028 Notes. |
Wabtec's acquisitionThe net proceeds from the issuance and sale of the controlling stakeSenior Notes were used to finance the cash portion of Faiveley Transport triggered the early repaymentGE Transportation acquisition. The principal balances are due in full at maturity. The Senior Notes are senior unsecured obligations of a syndicated loanthe Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Senior Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sales of assets, change in control, mergers and consolidations and the mandatory offerincurrence of liens.
On February 12, 2019, the rating assigned by Moody's was decreased to investorsBa1. Accordingly, pursuant to repay the U.S.respective terms of the Senior Notes issued on September 14, 2018, the interest rate increased by 0.25%. The interest rate increase took effect during the interest period following February 12, 2019.
The Company is in compliance with the restrictions and Schuldschein private placements. Bothcovenants in the syndicated loanindenture under which the Senior Notes were issued and U.S. private placements were repaidexpects that these restrictions and covenants will not be any type of limiting factor in full in December 2016.executing our operating activities.
3.45% Senior Notes Due November 2026
On November 3, 2016, the Company issued $750.0 million of 3.45% Senior Notes due in 2026 (the "2016 Notes"). The 2016 Notes were issued at 99.965% of face value. Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.7 million of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing ourits operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of 4.375% Senior Notes due in 2023 (the “2013 Notes”). The 2013 Notes were issued at 99.879% of face value. Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness,
payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2018 Refinancing Credit Agreement
On June 8, 2018, the Company entered into a credit agreement (the “2018 Refinancing Credit Agreement”), which replaced the Company’s then-existing 2016 Refinancing Credit Agreement. As part of the 2018 Refinancing Credit Agreement, the Company entered into (i) a $1.2 billion revolving credit facility (the “Revolving Credit Facility”), which replaced the Company’s revolving credit facility under the 2016 Refinancing Credit Agreement, and includes a letter of credit sub-facility of up to $450.0 million and a swing line sub-facility of $75.0 million, (ii) a $350.0 million term loan (the “Refinancing Term Loan”), which refinanced the term loan under the 2016 Refinancing Credit Agreement, and (iii) a new $400.0 million delayed draw term loan (the “Delayed Draw Term Loan”). The 2018 Refinancing Credit Agreement also provided for a bridge loan facility (the “Bridge Loan Facility”) in an amount not to exceed $2.5 billion, which would only become effective at the Company’s request. Commitments in respect of the Bridge Loan Facility were terminated upon the issuance and sale of the Senior Notes on September 14, 2018. In addition, the 2018 Refinancing Credit Agreement contains an uncommitted accordion feature allowing the Company to request, in an aggregate amount not to exceed $600.0 million, increases to the borrowing commitments under the Revolving Credit Facility or a new incremental term loan commitment. At June 30, 2019, the Company had approximately $780.3 million of available bank borrowing capacity subject to certain financial covenant restrictions, net of $27.6 million of letters of credit.
The Revolving Credit Facility matures on June 8, 2023 and is unsecured. The Refinancing Term Loan matures on June 8, 2021 and is unsecured. The Delayed Draw Term Loan matures on the third anniversary of the date on which it is borrowed and is unsecured. The applicable interest rate for borrowings under the 2018 Refinancing Credit Agreement includes interest rate spreads based on the lower of the pricing corresponding to (i) the Company’s ratio of total debt (less unrestricted cash up to $300.0 million) to EBITDA (“Leverage Ratio”) or (ii) the Company’s public rating, in each case that range between 1.000% and 1.875% for LIBOR/CDOR-based borrowings and 0.0% and 0.875% for Alternate Base Rate based borrowings. The obligations of the Company under the 2018 Refinancing Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
The Delayed Draw Term Loan was initially drawn on February 25, 2019. The Company incurred a 17.5 basis point commitment fee from June 8, 2018 until the initial draw.
The 2018 Refinancing Credit Agreement contains customary representations and warranties by the Company and its subsidiaries, including customary use of materiality, material adverse effect, and knowledge qualifiers. The Company and its subsidiaries are also subject to (i) customary affirmative covenants that impose certain reporting obligations on the Company and its subsidiaries and (ii) customary negative covenants, including limitations on: indebtedness; liens; restricted payments; fundamental changes; business activities; transactions with affiliates; restrictive agreements; changes in fiscal year; and use of proceeds. In addition, the Company is required to maintain (i) an Interest Coverage ratio at least 3.00 to 1.00 over each period of four consecutive fiscal quarters ending on the last day of a fiscal quarter and (ii) a Leverage Ratio, calculated as of the last day of a fiscal quarter for a period of four consecutive fiscal quarters, of 3.25 to 1.00 or less; provided that, in the event the Company completes the Direct Sale and the Merger or any other material acquisition in which the cash consideration paid exceeds $500.0 million, the maximum Leverage Ratio permitted will be 3.75 to 1.00 at the end of the fiscal quarter in which such acquisition is consummated and each of the three fiscal quarters immediately following such fiscal quarter and 3.50 to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of such acquisition. The Company is in compliance with the restrictions and covenants of the 2018 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
At June 30, 2019, the weighted average interest rate on the Company’s variable rate debt was 3.28%. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was November 7, 2016, and the termination date was December 19, 2018.
2016 Refinancing Credit Agreement
On June 22, 2016, the Company amended and restated its existing revolving credit facility with a consortium of commercial banks. The “2016This 2016 Refinancing Credit Agreement” providesAgreement provided the Company with a $1.2 billion, five years5 year revolving credit facility and a $400.0$400 million delayed draw term loan (the “Term Loan”). The Company incurred approximately $3.3$3 million of deferred financing costscost related to the 2016 Refinancing Credit Agreement. The facility expires on June 22, 2021. The 2016 Refinancing Credit Agreement borrowings bearbore variable interest rates indexed as described below. At September 30, 2017, the Company had available bank borrowing capacity, net of $35.4 million of letters of credit, of approximately $686.7 million, subject to certain financial covenant restrictions.
The Term Loan was initially drawn on November 25, 2016. The Company incurred 10 basis point commitment fee from June 22, 2016 until the initial draw.
Under the 2016 Refinancing Credit Agreement, the Company maycould elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 175 basis points.
At September 30, 2017, the weighted average interest rate on the Company’s variable rate debt was 2.89%. On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was July 31, 2013, and the termination date was November 7, 2016. The impact of the interest rate swap agreement converted a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value was fixed at 1.415% plus the Alternate Rate margin. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was November 7, 2016, and the termination date is December 19, 2018. The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 2.56% plus the Alternate Rate margin. As for these agreements, the Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions with excellent credit ratings and history of performance. The Company currently believes the risk of nonperformance is negligible.
The 2016 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2016 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to EBITDA ratio of 3.25. The Company is in compliance with the restrictions and covenants of the 2016 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
2013 Refinancing Credit Agreement
On December 19, 2013, the Company amended its then existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provided the Company with an $800.0 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The 2013 Refinancing Credit Agreement was replaced by the 2016 Refinancing Credit Agreement.
Under the 2013 Refinancing Credit Agreement, the Company could have elected a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the LIBOR of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds
Effective Rate plus 0.5%0.50% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on the quoted rates specific to the applicable currency, plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin was 0 basis points and the Alternate Rate margin is 175 basis points.
Schuldschein Loan, Due 2024
In conjunction with the acquisition of Faiveley Transport, Wabtec acquired $137.2 million of a Schuldschein private placement loan which was originally issued by Faiveley Transport on March 5, 2014 in Germany, in which approximately 20 international investors participated. This loan is denominated in euros. Subsequent to the acquisition of Faiveley Transport, the Company repaid $125.8 million of the outstanding Schuldshein loan. The remaining balance of $11.8 million as of September 30, 2017 has a maturity of seven years and bears a fixed rate of 4.00%.The Schuldschein loan is senior unsecured and ranks pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The Schuldshein loan agreement contains covenants and undertakings which limit, among other things, the following: factoring of receivables, the incurrence of indebtedness, sale of assets, change of control, mergers and consolidations and incurrence of liens. At September 30, 2017, the Company is in compliance with the undertakings and covenants contained in the loan agreement.
7.9. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.
The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.
| | | U.S. | | International | U.S. | | International |
| Three Months Ended September 30, | | Three Months Ended September 30, | Three Months Ended June 30, | | Three Months Ended June 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 | |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 |
Net periodic benefit cost | | | | | | | | | | | | | | |
Service cost | $ | 86 |
| | $ | 84 |
| | $ | 614 |
| | $ | 258 |
| $ | 71 |
| | $ | 87 |
| | $ | 611 |
| | $ | 691 |
|
Interest cost | 356 |
| | 369 |
| | 1,677 |
| | 1,257 |
| 372 |
| | 333 |
| | 1,711 |
| | 1,834 |
|
Expected return on plan assets | (433 | ) | | (519 | ) | | (2,910 | ) | | (2,437 | ) | (433 | ) | | (445 | ) | | (2,927 | ) | | (3,466 | ) |
Net amortization/deferrals | 248 |
| | 229 |
| | 685 |
| | 397 |
| 207 |
| | 243 |
| | 641 |
| | 554 |
|
Net periodic benefit cost | $ | 257 |
| | $ | 163 |
| | $ | 66 |
| | $ | (525 | ) | |
Net periodic benefit cost (credit) | | $ | 217 |
| | $ | 218 |
| | $ | 36 |
| | $ | (387 | ) |
| | | U.S. | | International | U.S. | | International |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, | | Six Months Ended June 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 | |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 |
Net periodic benefit cost | | | | | | | | | | | | | | |
Service cost | $ | 258 |
| | $ | 252 |
| | $ | 1,842 |
| | $ | 986 |
| $ | 142 |
| | $ | 174 |
| | $ | 1,222 |
| | $ | 1,382 |
|
Interest cost | 1,068 |
| | 1,107 |
| | 5,031 |
| | 4,193 |
| 744 |
| | 666 |
| | 3,422 |
| | 3,668 |
|
Expected return on plan assets | (1,299 | ) | | (1,557 | ) | | (8,730 | ) | | (7,723 | ) | (866 | ) | | (890 | ) | | (5,854 | ) | | (6,932 | ) |
Net amortization/deferrals | 744 |
| | 687 |
| | 2,055 |
| | 1,452 |
| 414 |
| | 486 |
| | 1,282 |
| | 1,108 |
|
Curtailment loss recognized | — |
| | — |
| | — |
| | 240 |
| |
Net periodic benefit (credit) cost | $ | 771 |
| | $ | 489 |
| | $ | 198 |
| | $ | (852 | ) | |
Net periodic benefit cost (credit) | | $ | 434 |
| | $ | 436 |
| | $ | 72 |
| | $ | (774 | ) |
|
| | | | | | | | | | | |
Assumptions | | | | | | | |
Discount Rate | 4.3 | % | | 3.6 | % | | 2.5 | % | | 2.4 | % |
Expected long-term rate of return | 5.4 | % | | 5.2 | % | | 5.0 | % | | 5.1 | % |
Rate of compensation increase | 3.0 | % | | 3.0 | % | | 2.6 | % | | 2.6 | % |
|
| | | | | | | | | | | |
Assumptions | | | | | | | |
Discount Rate | 3.95 | % | | 4.21 | % | | 2.51 | % | | 3.56 | % |
Expected long-term rate of return | 4.95 | % | | 5.70 | % | | 4.93 | % | | 5.81 | % |
Rate of compensation increase | 3.00 | % | | 3.00 | % | | 2.54 | % | | 3.10 | % |
The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $7.1 million and $0.5$6.4 million to the international andplans during 2019. The Company does not expect to make contributions to the U.S. plans respectively, during 2017.2019.
Post Retirement Benefit Plans
In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.
The Company uses a December 31 measurement date for all post retirement plans.
The following tables provide information regarding the Company’s postretirement benefit plans summarized by U.S. and international components.
| | | U.S. | | International | U.S. | | International |
| Three Months Ended September 30, | | Three Months Ended September 30, | Three Months Ended June 30, | | Three Months Ended June 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 | |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 |
Net periodic benefit cost | | | | | | | | | | | | | | |
Service cost | $ | 1 |
| | $ | 1 |
| | $ | 7 |
| | $ | 7 |
| $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 8 |
|
Interest cost | 88 |
| | 97 |
| | 24 |
| | 25 |
| 89 |
| | 81 |
| | 20 |
| | 26 |
|
Net amortization/deferrals | (73 | ) | | (105 | ) | | (7 | ) | | (9 | ) | (101 | ) | | (76 | ) | | (22 | ) | | (4 | ) |
Net periodic benefit (credit) cost | $ | 16 |
| | $ | (7 | ) | | $ | 24 |
| | $ | 23 |
| |
Net periodic benefit cost | | $ | (11 | ) | | $ | 6 |
| | $ | — |
| | $ | 30 |
|
| | | U.S. | | International | U.S. | | International |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, | | Six Months Ended June 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 | |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 |
Net periodic benefit cost | | | | | | | | | | | | | | |
Service cost | $ | 3 |
| | $ | 3 |
| | $ | 21 |
| | $ | 21 |
| $ | 2 |
| | $ | 2 |
| | $ | 4 |
| | $ | 16 |
|
Interest cost | 264 |
| | 291 |
| | 72 |
| | 75 |
| 178 |
| | 162 |
| | 40 |
| | 52 |
|
Net amortization/deferrals | (219 | ) | | (315 | ) | | (21 | ) | | (27 | ) | (202 | ) | | (152 | ) | | (44 | ) | | (8 | ) |
Net periodic (credit) benefit cost | $ | 48 |
| | $ | (21 | ) | | $ | 72 |
| | $ | 69 |
| |
Net periodic benefit cost | | $ | (22 | ) | | $ | 12 |
| | $ | — |
| | $ | 60 |
|
|
| | | | | | | | | | | |
Assumptions | | | | | | | |
Discount Rate | 4.17 | % | | 3.43 | % | | 3.49 | % | | 3.21 | % |
|
| | | | | | | | | | | |
Assumptions | | | | | | | |
Discount Rate | 3.76 | % | | 3.95 | % | | 3.46 | % | | 3.90 | % |
8.10. STOCK-BASED COMPENSATION
As of SeptemberJune 30, 2017,2019, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027 and provides a maximum of 3,800,000 shares for grants or awards, plus any shares which remain available under the 2000 Plan. The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011, and an amendment and restatement of the 2011 Plan was approved by the Stockholdersstockholders of Wabtec on May 10, 2017. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).
Stock-based compensation expense was $14.5$15.8 million and $14.8$8.3 million for the ninethree months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Included in stock-based compensation expense for the ninethree months ended SeptemberJune 30, 20172019 is $1.2$1.0 million of expense related to stock options, $5.3$8.1 million related to restricted stock, $3.2$2.9 million related to restricted stock units, $3.7$3.5 million related to incentive stock units and $1.1$0.3 million related to units issued for Directors’ fees.
Stock-based compensation expense was $24.3 million and $14.0 million for the six months ended June 30, 2019 and 2018, respectively. Included in stock-based compensation expense for the six months ended June 30, 2019 is $1.3 million of expense related to stock options, $10.8 million related to restricted stock, $3.7 million related to restricted stock units, $7.9 million related to incentive stock units and $0.6 million related to units issued for Directors’ fees. At SeptemberJune 30, 2017,2019, unamortized compensation expense related to stock options, non-vested restricted shares units and incentive stock units expected to vest totaled $29.7 million and will be recognized over a weighted average period of 1.4 years.$61.7 million.
Stock Options Stock options are granted to eligible employees and directors at an exercise price equivalent to the stock's fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options granted prior to 2019 become exercisable over a four-year vesting period, andwhile options granted in 2019 become exercisable over a three-year vesting period. Both vesting periods expire 10 years from the date of grant.
The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the ninesix months ended SeptemberJune 30, 2017:2019:
|
| | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic value (in thousands) |
Outstanding at December 31, 2018 | 466,677 |
| | $ | 61.04 |
| | 5.7 | | $ | 5,003 |
|
Granted | 132,155 |
| | 70.46 |
| | | | 172 |
|
Exercised | (468 | ) | | 64.54 |
| | | | (19 | ) |
Canceled | (3,148 | ) | | 73.34 |
| | | | — |
|
Outstanding at June 30, 2019 | 595,216 |
| | 63.08 |
| | 6.2 | | 5,168 |
|
Exercisable at June 30, 2019 | 388,634 |
| | 54.89 |
| | 5.2 | | 6,558 |
|
|
| | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic value (in thousands) |
Outstanding at December 31, 2016 | 1,098,823 |
| | $ | 35.39 |
| | 4.3 | | $ | 52,332 |
|
Granted | 65,522 |
| | 87.09 |
| | | | 0 |
|
Exercised | (133,927 | ) | | 21.84 |
| | | | 7,220 |
|
Canceled | (4,266 | ) | | 72.91 |
| | | | 13 |
|
Outstanding at September 30, 2017 | 1,026,152 |
| | 40.30 |
| | 4.1 | | 36,377 |
|
Exercisable at September 30, 2017 | 838,004 |
| | 32.15 |
| | 3.4 | | 36,537 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
| | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Dividend yield | 0.66 | % | | 0.31 | % |
Risk-free interest rate | 2.61 | % | | 2.78 | % |
Stock price volatility | 25.8 | % | | 23.9 | % |
Expected life (years) | 5.0 |
| | 5.0 |
|
|
| | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Dividend yield | 0.23 | % | | 0.26 | % |
Risk-free interest rate | 2.17 | % | | 1.47 | % |
Stock price volatility | 23.4 | % | | 26.9 | % |
Expected life (years) | 5.0 |
| | 5.0 |
|
The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.
Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006, the Company adopted a restricted stock program. As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over four years from the date of grant. Under the Directors Plan, restricted stock units vest one year from the date of grant.
In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three-year period then ended, the incentive stock units can vest, with underlying shares of common stock being awarded in an amount ranging from 0% to 200% of the amount of initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of SeptemberJune 30, 2017,2019, the Company estimates that it will achieve 73%107%, 68%105% and 80%103% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2017, 2018,2019, 2020, and 2019,2021, respectively, and has recorded incentive compensation expense accordingly. If ourthe estimate of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.
Compensation expense for the non-vested restricted stock and incentive stock units is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.
The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock units activity for the 2011 Plan and the 2000 Plan with related information for the ninesix months ended SeptemberJune 30, 2017:2019:
|
| | | | | | | | | |
| Restricted Stock and Units | | Incentive Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2018 | 445,089 |
| | 415,243 |
| | $ | 75.51 |
|
Granted | 568,052 |
| | 258,100 |
| | 70.48 |
|
Vested | (207,656 | ) | | (119,835 | ) | | 71.59 |
|
Adjustment for incentive stock awards expected to vest | — |
| | 43,257 |
| | 78.82 |
|
Canceled | (11,041 | ) | | (38,116 | ) | | 74.38 |
|
Outstanding at June 30, 2019 | 794,444 |
| | 558,649 |
| | 73.53 |
|
|
| | | | | | | | | |
| Restricted Stock and Units | | Incentive Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2016 | 396,295 |
| | 424,750 |
| | $ | 72.18 |
|
Granted | 153,571 |
| | 157,025 |
| | 86.11 |
|
Vested | (131,553 | ) | | (153,271 | ) | | 70.02 |
|
Adjustment for incentive stock awards expected to vest | — |
| | (100,424 | ) | | 75.43 |
|
Canceled | (6,590 | ) | | (5,158 | ) | | 74.99 |
|
Outstanding at September 30, 2017 | 411,723 |
| | 322,922 |
| |
|
9.11. INCOME TAXES
The overall effective income tax rate was 15.7%28.7% and 23.4%38.3% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively and 28.5%11.2% and 29.7%17.7% for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. For the three and nine months ended September 30, 2017, the decreaseThe increase in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of non-deductible transaction related expenses incurred as a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related toresult of the adjustmentacquisition of deferred taxGE Transportation as well as increased estimated liabilities which had originally been established in prior periods in several foreign jurisdictions. These adjustments were not material toresulting from provisions of the current year-to-date financial statements or prior years annual financial statements.Tax Cuts and Jobs Act.
As of SeptemberJune 30, 2017 and December 31, 2016,2019, the liability for income taxes associated with uncertain tax positions was $5.7$12.1 million, of which $3.2$11.0 million, if recognized, would favorably affect the Company’s effective income tax rate. As of December 31, 2018, the liability for income taxes associated with unrecognized tax benefits was $9.5 million, of which $8.4 million, if recognized, would favorably affect the Company's effective tax rate.
The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of SeptemberJune 30, 2017,2019, the total accrued interest and penalties were $0.6 million and $0.3 million, respectively.accrued was approximately $1.1 million. As of December 31, 2016,2018, the total accrued interest and penalties were $0.8 million and $0.3 million, respectively.accrued was approximately was $0.9 million.
At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately $3.6$6.2 million may change within the next 12 months due to the expiration of statutory review periods and current examinations. With limited exceptions, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2013.
10.
12. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:
| | | Three Months Ended September 30, | Three Months Ended June 30, |
In thousands, except per share data | 2017 | | 2016 | 2019 | | 2018 |
Numerator | | | | | | |
Numerator for basic and diluted earnings per common share - net income attributable | | | | | | |
to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| $ | 104,235 |
| | $ | 84,416 |
|
Less: dividends declared - common shares and non-vested restricted stock | (11,518 | ) | | (8,958 | ) | (22,576 | ) | | (11,565 | ) |
Undistributed earnings | 55,881 |
| | 73,470 |
| 81,659 |
| | 72,851 |
|
Percentage allocated to common shareholders (1) | 99.7 | % | | 99.7 | % | 99.7 | % | | 99.7 | % |
| 55,713 |
| | 73,250 |
| 81,414 |
| | 72,632 |
|
Add: dividends declared - common shares | 11,485 |
| | 8,933 |
| 22,508 |
| | 11,531 |
|
Numerator for basic and diluted earnings per common share | $ | 67,198 |
| | $ | 82,183 |
| |
Less: dividends declared - preferred shares | | (422 | ) | | — |
|
Numerator for basic earnings per common share | | $ | 103,500 |
| | $ | 84,163 |
|
Add: dividends declared - preferred shares | | 422 |
| | — |
|
Numerator for diluted earnings per common share | | 103,922 |
| | 84,163 |
|
Denominator | | | |
| |
|
Denominator for basic earnings per common share - weighted average shares | 95,709 |
| | 89,589 |
| 177,348 |
| | 95,992 |
|
Effect of dilutive securities: | | | |
| |
|
Assumed conversion of preferred shares | | 13,743 |
| | — |
|
Assumed conversion of dilutive stock-based compensation plans | 607 |
| | 704 |
| 362 |
| | 583 |
|
Denominator for diluted earnings per common share - | | | |
| |
|
adjusted weighted average shares and assumed conversion | 96,316 |
| | 90,293 |
| 191,453 |
| | 96,575 |
|
Net income attributable to Wabtec shareholders per common share | | | |
| |
|
Basic | $ | 0.70 |
| | $ | 0.92 |
| $ | 0.58 |
| | $ | 0.88 |
|
Diluted | $ | 0.70 |
| | $ | 0.91 |
| $ | 0.54 |
| | $ | 0.87 |
|
| | (1) Basic weighted-average common shares outstanding | 95,709 |
| | 89,589 |
| 177,348 |
| | 95,992 |
|
Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 95,983 |
| | 89,838 |
| 177,922 |
| | 96,276 |
|
Percentage allocated to common shareholders | 99.7 | % | | 99.7 | % | 99.7 | % | | 99.7 | % |
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
In thousands, except per share data | 2017 | | 2016 | 2019 | | 2018 |
Numerator | | | | | | |
Numerator for basic and diluted earnings per common share - net income attributable | | | | | | |
to Wabtec shareholders | $ | 213,313 |
| | $ | 267,076 |
| $ | 99,763 |
| | $ | 172,782 |
|
Less: dividends declared - common shares and non-vested restricted stock | (30,693 | ) | | (23,523 | ) | (34,264 | ) | | (23,096 | ) |
Undistributed earnings | 182,620 |
| | 243,553 |
| 65,499 |
| | 149,686 |
|
Percentage allocated to common shareholders (1) | 99.4 | % | | 99.7 | % | 99.7 | % | | 99.7 | % |
| 181,524 |
| | 242,822 |
| 65,303 |
| | 149,237 |
|
Add: dividends declared - common shares | 30,508 |
| | 23,452 |
| 34,154 |
| | 23,027 |
|
Numerator for basic and diluted earnings per common share | $ | 212,032 |
| | $ | 266,274 |
| |
Less: dividends declared - preferred shares | | (422 | ) | | — |
|
Numerator for basic earnings per common share | | $ | 99,035 |
| | $ | 172,264 |
|
Add: dividends declared - preferred shares | | 422 |
| | — |
|
Numerator for diluted earnings per common share | | 99,457 |
| | 172,264 |
|
Denominator | | | |
| |
|
Denominator for basic earnings per common share - weighted average shares | 95,163 |
| | 90,546 |
| 149,553 |
| | 95,867 |
|
Effect of dilutive securities: | | | |
| |
|
Assumed conversion of preferred shares | | 12,213 |
| | — |
|
Assumed conversion of dilutive stock-based compensation plans | 645 |
| | 770 |
| 389 |
| | 604 |
|
Denominator for diluted earnings per common share - | | | |
| |
|
adjusted weighted average shares and assumed conversion | 95,808 |
| | 91,316 |
| 162,155 |
| | 96,471 |
|
Net income attributable to Wabtec shareholders per common share | | | |
| |
|
Basic | $ | 2.23 |
| | $ | 2.94 |
| $ | 0.66 |
| | $ | 1.80 |
|
Diluted | $ | 2.22 |
| | $ | 2.92 |
| $ | 0.61 |
| | $ | 1.79 |
|
|
| | | | | |
(1) Basic weighted-average common shares outstanding | 149,553 |
| | 95,867 |
|
Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 150,013 |
| | 96,153 |
|
Percentage allocated to common shareholders | 99.7 | % | | 99.7 | % |
|
| | | | | |
(1) Basic weighted-average common shares outstanding | 95,163 |
| | 90,546 |
|
Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 95,740 |
| | 90,819 |
|
Percentage allocated to common shareholders | 99.4 | % | | 99.7 | % |
The Company’s non-vested restricted stock contains rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share. The calculation of earnings per share for common stock shown above excludes the income attributable to the non-vested restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator.
11.
13. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
|
| | | | | | | |
In thousands | 2019 | | 2018 |
Balance at beginning of year | $ | 153,702 |
| | $ | 153,063 |
|
Acquisitions | 97,559 |
| | 1,089 |
|
Warranty expense | 65,797 |
| | 27,475 |
|
Warranty claim payments | (60,643 | ) | | (26,405 | ) |
Foreign currency impact/other | (399 | ) | | (1,380 | ) |
Balance at June 30 | $ | 256,016 |
| | $ | 153,842 |
|
|
| | | | | | | |
In thousands | 2017 | | 2016 |
Balance at beginning of year | $ | 138,992 |
| | $ | 92,064 |
|
Warranty expense | 33,108 |
| | 22,788 |
|
Acquisitions | 3,412 |
| | 7,571 |
|
Warranty claim payments | (33,492 | ) | | (27,693 | ) |
Foreign currency impact/other | 6,744 |
| | (620 | ) |
Balance at September 30 | $ | 148,764 |
| | $ | 94,110 |
|
12.14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Foreign Currency Hedging The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gain and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. The contracts are scheduled to mature within two years. For the three and ninesix months ended SeptemberJune 30, 20172019 and SeptemberJune 30, 2016,2018, the amounts reclassified into income were not material.
Other Activities The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized gainloss related to these contracts was $0.2$0.5 million for the threesix months ended SeptemberJune 30, 2017.2019. These contracts are scheduled to mature within one year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of SeptemberJune 30, 2017.2019.
| | In millions | | Designated | | Non-Designated | | Total | | Designated | | Non-Designated | | Total |
Gross notional amount | | $ | 728.7 |
| | $ | 406.4 |
| | $ | 1,135.1 |
| | $ | 2,574.0 |
| | $ | 608.0 |
| | $ | 3,182.0 |
|
| | | | | | | | | | | | |
Fair Value: | | | | | | | | | | | | |
Other current assets | | 4.4 |
| | 0.2 |
| | 4.6 |
| | $ | 3.2 |
| | $ | — |
| | $ | 3.2 |
|
Other current liabilities | | — |
| | — |
| | — |
| | — |
| | (3.2 | ) | | (3.2 | ) |
Total | | $ | 4.4 |
| | $ | 0.2 |
| | $ | 4.6 |
| | $ | 3.2 |
| | $ | (3.2 | ) | | $ | — |
|
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2016.2018.
|
| | | | | | | | | | | | |
In millions | | Designated | | Non-Designated | | Total |
Gross notional amount | | $ | 863.0 |
| | $ | 834.0 |
| | $ | 1,697.0 |
|
| | | | | | |
Fair Value: | | | | | | |
Other current assets | | $ | — |
| | $ | 1.3 |
| | $ | 1.3 |
|
Other current liabilities | | (2.3 | ) | | — |
| | (2.3 | ) |
Total | | $ | (2.3 | ) | | $ | 1.3 |
| | $ | (1.0 | ) |
|
| | | | | | | | | | | | |
In millions | | Designated | | Non-Designated | | Total |
Gross notional amount | | $ | 911.0 |
| | $ | 490.0 |
| | $ | 1,401.0 |
|
| | | | | | |
Fair Value: | | | | | | |
Other current assets | | 1.1 |
| | 0.4 |
| | 1.5 |
|
Other current liabilities | | (0.5 | ) | | (0.2 | ) | | (0.7 | ) |
Total | | $ | 0.6 |
| | $ | 0.2 |
| | $ | 0.8 |
|
Interest Rate Hedging The Company useshas historically used interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt arewere primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of debt obligations arewere recognized in current period earnings. Refer to footnote 1315 for further information on interest rate swaps.
As of September 30, 2017, the Company has recorded a current liability of $2.0 million and an accumulated other comprehensive loss of $1.2 million, net of tax, related to these agreements.
13.15. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” ("ASC 820") defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2017, which are included in other current liabilities on the Condensed Consolidated Balance sheet:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at September 30, 2017 Using |
In thousands | Total Carrying Value at September 30, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Interest rate swap agreements | $ | 1,952 |
| | $ | — |
| | $ | 1,952 |
| | $ | — |
|
Total | $ | 1,952 |
| | $ | — |
| | $ | 1,952 |
| | $ | — |
|
The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2016, which is included in other current liabilities on the Condensed Consolidated Balance sheet:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2016 Using |
In thousands | Total Carrying Value at December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Interest rate swap agreements | $ | 3,888 |
| | $ | — |
| | $ | 3,888 |
| | $ | — |
|
Total | $ | 3,888 |
| | $ | — |
| | $ | 3,888 |
| | $ | — |
|
To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company historically entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizesmitigates these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at SeptemberJune 30, 20172019 and December 31, 2016.2018. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets. Trusts are valued at the net asset value (“NAV”) as determined by their custodian. NAV represent the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates. The 2013 Notes, 2016 Notes, and 2016the Senior Notes are considered Level 2 based on the fair value valuation hierarchy.
The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
In thousands | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
4.375% Senior Notes | $ | 248,952 |
| | $ | 259,010 |
| | $ | 248,823 |
| | $ | 254,218 |
|
3.45% Senior Notes | $ | 748,396 |
| | $ | 737,123 |
| | $ | 748,282 |
| | $ | 675,075 |
|
Floating Rate Notes 2021 | $ | 497,396 |
| | $ | 496,830 |
| | $ | 496,796 |
| | $ | 497,425 |
|
4.15% Senior Notes | $ | 743,638 |
| | $ | 792,390 |
| | $ | 742,957 |
| | $ | 729,350 |
|
4.7% Senior Notes | $ | 1,240,191 |
| | $ | 1,349,025 |
| | $ | 1,239,657 |
| | $ | 1,179,625 |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
In thousands | Carry Value | | Fair Value | | Carry Value | | Fair Value |
Interest rate swap agreement | $ | 1,952 |
| | $ | 1,952 |
| | $ | 3,888 |
| | $ | 3,888 |
|
4.375% Senior Notes | 248,502 |
| | 264,000 |
| | 248,310 |
| | 260,265 |
|
3.45% Senior Notes | 747,590 |
| | 739,050 |
| | 747,474 |
| | 719,273 |
|
The fair value of the Company’s interest rate swap agreements and the 2013 and 2016 Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement.
14.16. COMMITMENTS AND CONTINGENCIES
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Further information and detail on these claims is described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, in Note 1921 therein, filed on February 28, 2017.27, 2019. During the first ninesix months of 2017,2019, there were no material changes to the information described in the Form 10-K.10-K related to claims arising from asbestos exposure.
From time to time, the Company is involved in litigation related to claims arising out of the Company's operations in the ordinary course of business, including claims based on product liability, contracts, intellectual property, or other causes of action. Further information and detail on any potentially material litigation is as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, in Note 1921 therein, filed on February 28, 2017.27, 2019. Except as described below, there have been no material changes to the information described in the Form 10-K including with respectrelated to claims arising from Company's ordinary operations.
On April 21, 2016, Siemens Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company has infringed seven patents owned by Siemens related to the litigation withCompany's Positive Train Control (PTC) technology. On November 2, 2016, Siemens described therein.amended its complaint to add six additional patents they also claim are infringed by the Company's PTC Products or End of Train (EOT) Products (Siemen Patent Case). The Company has filed Answers, and asserted counterclaims, in response to Siemens’ complaints. Additionally, after filings by the Company, the US Patent & Trademark Office’s Patent Trail and Appeal Board (PTAB) has granted Inter-Parties Review (IPR) proceedings on eight (8) of the patents asserted by Siemens to contest their validity. Following pre-trial rulings that greatly reduced Siemens’ alleged damages, a jury trial was held in federal district court in Delaware in January 2019 on eight patents, two of which were still subject to an IPR decision on validity from the PTAB. At the conclusion of the trial, the jury awarded Siemens damages of $5.6 million related to PTC patents and $1.1 million related to EOT patents. Since the jury’s verdict was issued, one of the PTC patents found to be infringed was held to be invalid by the PTAB. All PTAB proceedings have been now been completed, pending appeals; five (5) of the (8) Siemens patents reviewed by the PTAB were found to be invalid. On February 26, 2019, the Court entered a Judgment on the verdict, subject to post-trial motions. On May 28, 2019, the Court held a hearing on both parties' post-trial motions, any of which, if granted, could potentially affect the final Judgment. After the Court's ruling on the post-trial motions, a final Judgment will be entered and either party may file appeals to the Federal Circuit.
On March 20, 2019, Siemens filed a new action in federal district court in Delaware alleging violations of federal antitrust and state trade practices laws since before 2008, related to Wabtec’s PTC sales, including on-board, back-office, wayside and aftermarket support systems (Siemens originally raised these antitrust claims as counterclaims in a separate Delaware patent case filed by Wabtec alleging that Siemens has violated three (3) of Wabtec’s patents; the antitrust claims were ultimately severed from that case in January, 2019, resulting in Siemens re-filing them as another separate proceeding in Delaware.) Wabtec believes Siemens’ antitrust claims are without merit and will vigorously defend itself against these claims.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed. Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossings,crossing issue, as of September 8, 2017, Denver TransitDTC alleged that total damages were $36.8 million through July 31, 2017 and are continuing to accumulate. The crossings have not been certified for use without flaggers, which Denver Transit alleges is due to Xorail's failure to achieve constant warning times satisfactory tomajority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"). No claims have been filed, resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by Denver Transit with regard to either issue.the FRA and PUC. Xorail has denied Denver Transit’sDTC's assertions, regardingstating that its system satisfied the wireless crossings, and Denver Transit has also notified RTD that Denver Transit considers the new certification requirements imposed by FRA and/or PUC as a change in law, for which neither Denver Transit nor its subcontractors are liable.contractual requirements. Xorail has worked with Denver TransitDTC to modify its system to meetand implement the FRA’sFRA's and PUC's previously undefined and evolving, certification requirements. On September 28, 2017,approval requirements; the FRA granted a 5 year approval of theand PUC have both approved modified wireless crossing system, and as currently implemented; however,of August 2018, DTC completed the PUCprocess of certifying the crossings and eliminated the use of flaggers. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements; a jury trial is scheduled to begin in May 2020. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail; DTC has not granted approval of the modified system and therefore the crossings are still not certified for use without flaggers. Denver Transit and RTD are continuing to seek approval from PUC. The Company does not believe that it hasupdated its notices against Xorail, nor have they filed any liability with respect to the wireless crossing issue.formal claim against Xorail.
15.
17. SEGMENT INFORMATION
Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:
Freight Segment primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.
Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment, and doors for buses and subways. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
Segment financial information for the three months ended SeptemberJune 30, 20172019 is as follows: | | In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 340,185 |
| | $ | 617,746 |
| | $ | — |
| | $ | 957,931 |
| $ | 1,493,949 |
| | $ | 742,335 |
| | $ | — |
| | $ | 2,236,284 |
|
Intersegment sales/(elimination) | 8,376 |
| | 4,494 |
| | (12,870 | ) | | — |
| 13,709 |
| | 7,383 |
| | (21,092 | ) | | — |
|
Total sales | $ | 348,561 |
| | $ | 622,240 |
| | $ | (12,870 | ) | | $ | 957,931 |
| $ | 1,507,658 |
| | $ | 749,718 |
| | $ | (21,092 | ) | | $ | 2,236,284 |
|
Income (loss) from operations | $ | 61,596 |
| | $ | 47,531 |
| | $ | (7,116 | ) | | $ | 102,011 |
| $ | 151,978 |
| | $ | 71,211 |
| | $ | (22,552 | ) | | $ | 200,637 |
|
Interest expense and other, net | — |
| | — |
| | (20,826 | ) | | (20,826 | ) | — |
| | — |
| | (56,383 | ) | | (56,383 | ) |
Income (loss) from operations before income taxes | $ | 61,596 |
| | $ | 47,531 |
| | $ | (27,942 | ) | | $ | 81,185 |
| $ | 151,978 |
| | $ | 71,211 |
| | $ | (78,935 | ) | | $ | 144,254 |
|
Segment financial information for the three months ended SeptemberJune 30, 20162018 is as follows: |
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 412,258 |
| | $ | 699,422 |
| | $ | — |
| | $ | 1,111,680 |
|
Intersegment sales/(elimination) | 18,699 |
| | 2,984 |
| | (21,683 | ) | | — |
|
Total sales | $ | 430,957 |
| | $ | 702,406 |
| | $ | (21,683 | ) | | $ | 1,111,680 |
|
Income (loss) from operations | $ | 84,347 |
| | $ | 57,975 |
| | $ | (18,799 | ) | | $ | 123,523 |
|
Interest expense and other, net | — |
| | — |
| | (29,749 | ) | | (29,749 | ) |
Income (loss) from operations before income taxes | $ | 84,347 |
| | $ | 57,975 |
| | $ | (48,548 | ) | | $ | 93,774 |
|
|
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 361,998 |
| | $ | 313,576 |
| | $ | — |
| | $ | 675,574 |
|
Intersegment sales/(elimination) | 10,341 |
| | 1,823 |
| | (12,164 | ) | | — |
|
Total sales | $ | 372,339 |
| | $ | 315,399 |
| | $ | (12,164 | ) | | $ | 675,574 |
|
Income (loss) from operations | $ | 77,999 |
| | $ | 51,164 |
| | $ | (9,067 | ) | | $ | 120,096 |
|
Interest expense and other, net | — |
| | — |
| | (4,869 | ) | | (4,869 | ) |
Income (loss) from operations before income taxes | $ | 77,999 |
| | $ | 51,164 |
| | $ | (13,936 | ) | | $ | 115,227 |
|
Segment financial information for the ninesix months ended SeptemberJune 30, 20172019 is as follows:
| | In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 1,032,959 |
| | $ | 1,773,259 |
| | $ | — |
| | $ | 2,806,218 |
| $ | 2,370,383 |
|
| $ | 1,459,518 |
| | $ | — |
| | $ | 3,829,901 |
|
Intersegment sales/(elimination) | 27,602 |
| | 16,253 |
| | (43,855 | ) | | — |
| 30,413 |
| | 13,505 |
| | (43,918 | ) | | — |
|
Total sales | $ | 1,060,561 |
| | $ | 1,789,512 |
| | $ | (43,855 | ) | | $ | 2,806,218 |
| $ | 2,400,796 |
| | $ | 1,473,023 |
| | $ | (43,918 | ) | | $ | 3,829,901 |
|
Income (loss) from operations | $ | 196,328 |
| | $ | 155,901 |
| | $ | (21,659 | ) | | $ | 330,570 |
| $ | 227,188 |
| | $ | 130,144 |
| | $ | (89,388 | ) | | $ | 267,944 |
|
Interest expense and other, net | — |
| | — |
| | (53,191 | ) | | (53,191 | ) | — |
| | — |
| | (109,180 | ) | | (109,180 | ) |
Income (loss) from operations before income taxes | $ | 196,328 |
| | $ | 155,901 |
| | $ | (74,850 | ) | | $ | 277,379 |
| $ | 227,188 |
| | $ | 130,144 |
| | $ | (198,568 | ) | | $ | 158,764 |
|
Segment financial information for the ninesix months ended SeptemberJune 30, 20162018 is as follows: |
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 791,812 |
| | $ | 1,376,045 |
| | $ | — |
| | $ | 2,167,857 |
|
Intersegment sales/(elimination) | 30,701 |
| | 6,873 |
| | (37,574 | ) | | — |
|
Total sales | $ | 822,513 |
| | $ | 1,382,918 |
| | $ | (37,574 | ) | | $ | 2,167,857 |
|
Income (loss) from operations | $ | 153,969 |
| | $ | 126,059 |
| | $ | (25,226 | ) | | $ | 254,802 |
|
Interest expense and other, net | — |
| | — |
| | (47,447 | ) | | (47,447 | ) |
Income (loss) from operations before income taxes | $ | 153,969 |
| | $ | 126,059 |
| | $ | (72,673 | ) | | $ | 207,355 |
|
|
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 1,201,734 |
| | $ | 969,472 |
| | $ | — |
| | $ | 2,171,206 |
|
Intersegment sales/(elimination) | 29,765 |
| | 7,606 |
| | (37,371 | ) | | — |
|
Total sales | $ | 1,231,499 |
| | $ | 977,078 |
| | $ | (37,371 | ) | | $ | 2,171,206 |
|
Income (loss) from operations | $ | 276,990 |
| | $ | 148,321 |
| | $ | (29,750 | ) | | $ | 395,561 |
|
Interest expense and other, net | — |
| | — |
| | (15,784 | ) | | (15,784 | ) |
Income (loss) from operations before income taxes | $ | 276,990 |
| | $ | 148,321 |
| | $ | (45,534 | ) | | $ | 379,777 |
|
Sales by product line are as follows: |
| | | | | | | |
| Three Months Ended September 30, |
In thousands | 2017 | | 2016 |
Specialty Products & Electronics | $ | 335,143 |
| | $ | 334,349 |
|
Transit Products | 276,913 |
| | 44,996 |
|
Brake Products | 177,165 |
| | 134,900 |
|
Remanufacturing, Overhaul & Build | 132,018 |
| | 129,264 |
|
Other | 36,692 |
| | 32,065 |
|
Total sales | $ | 957,931 |
| | $ | 675,574 |
|
| | | Nine Months Ended September 30, | Three Months Ended June 30, |
In thousands | 2017 | | 2016 | 2019 | | 2018 |
Remanufacturing, Overhaul & Build | | $ | 1,171,147 |
| | $ | 127,202 |
|
Specialty Products & Electronics | $ | 975,006 |
| | $ | 1,051,806 |
| 443,333 |
| | 434,399 |
|
Transit Products | 789,096 |
| | 143,434 |
| 310,839 |
| | 282,130 |
|
Brake Products | 550,181 |
| | 428,785 |
| 254,260 |
| | 217,574 |
|
Remanufacturing, Overhaul & Build | 387,634 |
| | 444,278 |
| |
Other | 104,301 |
| | 102,903 |
| 56,705 |
| | 50,375 |
|
Total sales | $ | 2,806,218 |
| | $ | 2,171,206 |
| $ | 2,236,284 |
| | $ | 1,111,680 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
In thousands | 2019 | | 2018 |
Remanufacturing, Overhaul & Build | $ | 1,753,324 |
| | $ | 262,900 |
|
Specialty Products & Electronics | 861,447 |
| | 820,947 |
|
Transit Products | 605,656 |
| | 556,409 |
|
Brake Products | 496,482 |
| | 433,192 |
|
Other | 112,992 |
| | 94,409 |
|
Total sales | $ | 3,829,901 |
| | $ | 2,167,857 |
|
16.
18. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's 2016 Notes, 2013 Notes and Revolving Credit Facility and Term Loan are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.
Balance Sheet for SeptemberJune 30, 2017:2019:
| | In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Cash and cash equivalents | $ | 3,049 |
| | $ | 6,082 |
| | $ | 218,949 |
| | $ | — |
| | $ | 228,080 |
| $ | 7,011 |
| | $ | 9,820 |
| | $ | 444,540 |
| | $ | — |
| | $ | 461,371 |
|
Receivables, net | 75,123 |
| | 232,060 |
| | 837,156 |
| | — |
| | 1,144,339 |
| 134,298 |
| | 252,077 |
| | 1,321,034 |
| | — |
| | 1,707,409 |
|
Inventories | 132,044 |
| | 140,745 |
| | 491,992 |
| | — |
| | 764,781 |
| 141,400 |
| | 662,717 |
| | 1,077,674 |
| | — |
| | 1,881,791 |
|
Current assets - other | 39,216 |
| | 4,283 |
| | 96,426 |
| | — |
| | 139,925 |
| 15,094 |
| | 30,484 |
| | 132,991 |
| | — |
| | 178,569 |
|
Total current assets | 249,432 |
| | 383,170 |
| | 1,644,523 |
| | — |
| | 2,277,125 |
| 297,803 |
| | 955,098 |
| | 2,976,239 |
| | — |
| | 4,229,140 |
|
Property, plant and equipment, net | 51,196 |
| | 134,397 |
| | 364,774 |
| | — |
| | 550,367 |
| 57,966 |
| | 36,879 |
| | 1,551,252 |
| | — |
| | 1,646,097 |
|
Goodwill | 25,276 |
| | 549,198 |
| | 1,810,284 |
| | — |
| | 2,384,758 |
| 504,818 |
| | 283,241 |
| | 7,362,612 |
| | — |
| | 8,150,671 |
|
Investment in subsidiaries | 6,304,037 |
| | 2,508,725 |
| | — |
| | (8,812,762 | ) | | — |
| 16,878,245 |
| | 6,134,117 |
| | — |
| | (23,012,362 | ) | | — |
|
Other intangibles, net | 30,905 |
| | 251,485 |
| | 857,997 |
| | — |
| | 1,140,387 |
| 28,594 |
| | 77,301 |
| | 4,258,461 |
| | — |
| | 4,364,356 |
|
Other long term assets | 29,724 |
| | 6,273 |
| | 61,016 |
| | — |
| | 97,013 |
| |
Other long-term assets | | 27,223 |
| | 166,012 |
| | 359,094 |
| | — |
| | 552,329 |
|
Total assets | $ | 6,690,570 |
| | $ | 3,833,248 |
| | $ | 4,738,594 |
| | $ | (8,812,762 | ) | | $ | 6,449,650 |
| $ | 17,794,649 |
| | $ | 7,652,648 |
| | $ | 16,507,658 |
| | $ | (23,012,362 | ) | | $ | 18,942,593 |
|
Current liabilities | $ | 162,470 |
| | 199,511 |
| | $ | 1,103,459 |
| | — |
| | $ | 1,465,440 |
| $ | 472,747 |
| | $ | 1,036,279 |
| | $ | 1,702,289 |
| | $ | — |
| | $ | 3,211,315 |
|
Inter-company | 2,031,256 |
| | (1,942,433 | ) | | (88,823 | ) | | — |
| | — |
| 2,858,761 |
| | (1,606,278 | ) | | (1,252,483 | ) | | — |
| | — |
|
Long-term debt | 1,740,541 |
| | 25 |
| | 83,590 |
| | — |
| | 1,824,156 |
| 4,274,718 |
| | — |
| | 254,050 |
| | — |
| | 4,528,768 |
|
Long-term liabilities - other | 38,601 |
| | 87,935 |
| | 297,149 |
| | — |
| | 423,685 |
| 386,662 |
| | 135,254 |
| | 845,437 |
| | — |
| | 1,367,353 |
|
Total liabilities | 3,972,868 |
| | (1,654,962 | ) | | 1,395,375 |
| | — |
| | 3,713,281 |
| 7,992,888 |
| | (434,745 | ) | | 1,549,293 |
| | — |
| | 9,107,436 |
|
Shareholders' equity | 2,717,702 |
| | 5,489,597 |
| | 3,323,165 |
| | (8,812,762 | ) | | 2,717,702 |
| 9,786,761 |
| | 8,087,393 |
| | 14,939,968 |
| | (23,012,362 | ) | | 9,801,760 |
|
Non-controlling interest | — |
| | (1,387 | ) | | 20,054 |
| | — |
| | 18,667 |
| 15,000 |
| | — |
| | 18,397 |
| | — |
| | 33,397 |
|
Total shareholders' equity | $ | 2,717,702 |
| | $ | 5,488,210 |
| | $ | 3,343,219 |
| | $ | (8,812,762 | ) | | $ | 2,736,369 |
| $ | 9,801,761 |
| | $ | 8,087,393 |
| | $ | 14,958,365 |
| | $ | (23,012,362 | ) | | $ | 9,835,157 |
|
Total Liabilities and Shareholders' Equity | $ | 6,690,570 |
| | $ | 3,833,248 |
| | $ | 4,738,594 |
| | $ | (8,812,762 | ) | | $ | 6,449,650 |
| $ | 17,794,649 |
| | $ | 7,652,648 |
| | $ | 16,507,658 |
| | $ | (23,012,362 | ) | | $ | 18,942,593 |
|
Balance Sheet for December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Cash and cash equivalents | $ | 1,782,682 |
| | $ | (119 | ) | | $ | 559,791 |
| | $ | — |
| | $ | 2,342,354 |
|
Receivables, net | 106,815 |
| | 61,513 |
| | 978,450 |
| | — |
| | 1,146,778 |
|
Inventories | 149,622 |
| | 69,116 |
| | 626,148 |
| | — |
| | 844,886 |
|
Current assets - other | 11,884 |
| | 690 |
| | 103,075 |
| | — |
| | 115,649 |
|
Total current assets | 2,051,003 |
| | 131,200 |
| | 2,267,464 |
| | — |
| | 4,449,667 |
|
Property, plant and equipment, net | 51,551 |
| | 24,755 |
| | 487,431 |
| | — |
| | 563,737 |
|
Goodwill | 25,275 |
| | 283,241 |
| | 2,088,028 |
| | — |
| | 2,396,544 |
|
Investment in subsidiaries | 6,707,979 |
| | 4,022,107 |
| | — |
| | (10,730,086 | ) | | — |
|
Other intangibles, net | 29,254 |
| | 78,547 |
| | 1,022,079 |
| | — |
| | 1,129,880 |
|
Other long-term assets | 8,775 |
| | 149 |
| | 100,482 |
| | — |
| | 109,406 |
|
Total assets | $ | 8,873,837 |
| | $ | 4,539,999 |
| | $ | 5,965,484 |
| | $ | (10,730,086 | ) | | $ | 8,649,234 |
|
Current liabilities | $ | 264,630 |
| | $ | 91,004 |
| | $ | 1,291,056 |
| | $ | — |
| | $ | 1,646,690 |
|
Inter-company | 1,947,504 |
| | (1,436,222 | ) | | (511,282 | ) | | — |
| | — |
|
Long-term debt | 3,779,627 |
| | — |
| | 13,147 |
| | — |
| | 3,792,774 |
|
Long-term liabilities - other | 16,945 |
| | 48,714 |
| | 275,036 |
| | — |
| | 340,695 |
|
Total liabilities | 6,008,706 |
| | (1,296,504 | ) | | 1,067,957 |
| | — |
| | 5,780,159 |
|
Shareholders' equity | 2,865,131 |
| | 5,836,503 |
| | 4,893,583 |
| | (10,730,086 | ) | | 2,865,131 |
|
Non-controlling interest | — |
| | — |
| | 3,944 |
| | — |
| | 3,944 |
|
Total shareholders' equity | $ | 2,865,131 |
| | $ | 5,836,503 |
| | $ | 4,897,527 |
| | $ | (10,730,086 | ) | | $ | 2,869,075 |
|
Total Liabilities and Shareholders' Equity | $ | 8,873,837 |
| | $ | 4,539,999 |
| | $ | 5,965,484 |
| | $ | (10,730,086 | ) | | $ | 8,649,234 |
|
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Cash and cash equivalents | $ | 2,522 |
| | $ | 9,496 |
| | $ | 386,466 |
| | $ | — |
| | $ | 398,484 |
|
Receivables, net | 79,041 |
| | 202,779 |
| | 660,688 |
| | — |
| | 942,508 |
|
Inventories | 120,042 |
| | 128,076 |
| | 410,392 |
| | — |
| | 658,510 |
|
Current assets - other | 52,576 |
| | (17,844 | ) | | 833,397 |
| | — |
| | 868,129 |
|
Total current assets | 254,181 |
| | 322,507 |
| | 2,290,943 |
| | — |
| | 2,867,631 |
|
Property, plant and equipment, net | 49,031 |
| | 126,661 |
| | 342,684 |
| | — |
| | 518,376 |
|
Goodwill | 25,275 |
| | 477,472 |
| | 1,576,018 |
| | — |
| | 2,078,765 |
|
Investment in subsidiaries | 5,388,613 |
| | 1,325,150 |
| | — |
| | (6,713,763 | ) | | — |
|
Other intangibles, net | 31,897 |
| | 204,512 |
| | 817,451 |
| | — |
| | 1,053,860 |
|
Other long term assets | 9,592 |
| | (1,914 | ) | | 54,708 |
| | — |
| | 62,386 |
|
Total assets | $ | 5,758,589 |
| | $ | 2,454,388 |
| | $ | 5,081,804 |
| | $ | (6,713,763 | ) | | $ | 6,581,018 |
|
Current liabilities | $ | 194,983 |
| | 196,956 |
| | $ | 1,054,700 |
| | — |
| | $ | 1,446,639 |
|
Inter-company | 1,562,399 |
| | (1,848,777 | ) | | 286,378 |
| | — |
| | — |
|
Long-term debt | 1,761,933 |
| | 58 |
| | 976 |
| | — |
| | 1,762,967 |
|
Long-term liabilities - other | 33,298 |
| | 74,977 |
| | 286,312 |
| | — |
| | 394,587 |
|
Total liabilities | 3,552,613 |
| | (1,576,786 | ) | | 1,628,366 |
| | — |
| | 3,604,193 |
|
Shareholders' equity | 2,205,976 |
| | 4,032,250 |
| | 2,681,514 |
| | (6,713,763 | ) | | 2,205,977 |
|
Non-controlling interest | — |
| | (1,076 | ) | | 771,924 |
| | — |
| | 770,848 |
|
Total shareholders' equity | $ | 2,205,976 |
| | $ | 4,031,174 |
| | $ | 3,453,438 |
| | $ | (6,713,763 | ) | | $ | 2,976,825 |
|
Total Liabilities and Shareholders' Equity | $ | 5,758,589 |
| | $ | 2,454,388 |
| | $ | 5,081,804 |
| | $ | (6,713,763 | ) | | $ | 6,581,018 |
|
Income Statement for the Three Months Ended SeptemberJune 30, 20172019:
| | In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net Sales | $ | 134,906 |
| | $ | 270,116 |
| | $ | 587,289 |
| | $ | (34,380 | ) | | $ | 957,931 |
| $ | 185,695 |
| | $ | 1,104,741 |
| | $ | 1,432,790 |
| | $ | (486,942 | ) | | $ | 2,236,284 |
|
Cost of sales | (111,775 | ) | | (176,291 | ) | | (444,704 | ) | | 28,042 |
| | (704,728 | ) | (144,237 | ) | | (820,294 | ) | | (1,037,244 | ) | | 380,167 |
| | (1,621,608 | ) |
Gross profit (loss) | 23,131 |
| | 93,825 |
| | 142,585 |
| | (6,338 | ) | | 253,203 |
| |
Gross profit | | 41,458 |
| | 284,447 |
| | 395,546 |
| | (106,775 | ) | | 614,676 |
|
Total operating expenses | (22,714 | ) | | (29,991 | ) | | (98,487 | ) | | — |
| | (151,192 | ) | (67,447 | ) | | (81,933 | ) | | (264,659 | ) | | — |
| | (414,039 | ) |
Income (loss) from operations | 417 |
| | 63,834 |
| | 44,098 |
| | (6,338 | ) | | 102,011 |
| |
Income from operations | | (25,989 | ) | | 202,514 |
| | 130,887 |
| | (106,775 | ) | | 200,637 |
|
Interest (expense) income, net | (19,222 | ) | | 1,143 |
| | 186 |
| | — |
| | (17,893 | ) | (59,365 | ) | | 3,116 |
| | (2,311 | ) | | — |
| | (58,560 | ) |
Other income (expense), net | 274 |
| | (356 | ) | | (2,851 | ) | | — |
| | (2,933 | ) | 1,237 |
| | (4,217 | ) | | 5,157 |
| | — |
| | 2,177 |
|
Equity earnings (loss) | 80,874 |
| | 19,806 |
| | — |
| | (100,680 | ) | | — |
| 185,813 |
| | 83,926 |
| | — |
| | (269,739 | ) | | — |
|
Pretax income (loss) | 62,343 |
| | 84,427 |
| | 41,433 |
| | (107,018 | ) | | 81,185 |
| 101,696 |
| | 285,339 |
| | 133,733 |
| | (376,514 | ) | | 144,254 |
|
Income tax expense | 5,056 |
| | (5 | ) | | (17,797 | ) | | — |
| | (12,746 | ) | |
Net income (loss) | 67,399 |
| | 84,422 |
| | 23,636 |
| | (107,018 | ) | | 68,439 |
| |
Less: Net income attributable to noncontrolling interest | — |
| | 155 |
| | (1,195 | ) | | — |
| | (1,040 | ) | |
Income tax benefit (expense) | | 2,538 |
| | (42,556 | ) | | (1,382 | ) | | — |
| | (41,400 | ) |
Net income | | 104,234 |
| | 242,783 |
| | 132,351 |
| | (376,514 | ) | | 102,854 |
|
Less: Net loss attributable to noncontrolling interest | | — |
| | — |
| | 1,381 |
| | — |
| | 1,381 |
|
Net income (loss) attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 84,577 |
| | $ | 22,441 |
| | $ | (107,018 | ) | | $ | 67,399 |
| $ | 104,234 |
| | $ | 242,783 |
| | $ | 133,732 |
| | $ | (376,514 | ) | | $ | 104,235 |
|
| | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) attributable to Wabtec shareholders | $ | 66,813 |
| | $ | 84,577 |
| | $ | 115,647 |
| | $ | (107,018 | ) | | $ | 160,019 |
| $ | 104,234 |
| | $ | 242,783 |
| | $ | 153,552 |
| | $ | (376,514 | ) | | $ | 124,055 |
|
Income Statement for the Three Months Ended SeptemberJune 30, 2016:2018:
| | In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net Sales | $ | 155,731 |
| | $ | 259,174 |
| | $ | 295,336 |
| | $ | (34,667 | ) | | $ | 675,574 |
| $ | 168,426 |
| | $ | 137,966 |
| | $ | 873,375 |
| | $ | (68,087 | ) | | $ | 1,111,680 |
|
Cost of sales | (109,414 | ) | | (186,546 | ) | | (211,392 | ) | | 44,259 |
| | (463,093 | ) | (122,919 | ) | | (88,688 | ) | | (614,861 | ) | | 38,755 |
| | (787,713 | ) |
Gross profit (loss) | 46,317 |
| | 72,628 |
| | 83,944 |
| | 9,592 |
| | 212,481 |
| |
Gross profit | | 45,507 |
| | 49,278 |
| | 258,514 |
| | (29,332 | ) | | 323,967 |
|
Total operating expenses | (21,979 | ) | | (29,019 | ) | | (41,387 | ) | | — |
| | (92,385 | ) | (49,780 | ) | | (12,267 | ) | | (138,397 | ) | | — |
| | (200,444 | ) |
(Loss) income from operations | 24,338 |
| | 43,609 |
| | 42,557 |
| | 9,592 |
| | 120,096 |
| |
Income from operations | | (4,273 | ) | | 37,011 |
| | 120,117 |
| | (29,332 | ) | | 123,523 |
|
Interest (expense) income, net | (7,854 | ) | | 1,728 |
| | 69 |
| | — |
| | (6,057 | ) | (31,734 | ) | | 3,137 |
| | (3,323 | ) | | — |
| | (31,920 | ) |
Other income (expense), net | 6,600 |
| | (86 | ) | | (5,326 | ) | | — |
| | 1,188 |
| 483 |
| | — |
| | 1,688 |
| | — |
| | 2,171 |
|
Equity earnings (loss) | 86,731 |
| | 27,099 |
| | — |
| | (113,830 | ) | | — |
| 128,744 |
| | 118,771 |
| | — |
| | (247,515 | ) | | — |
|
Pretax income (loss) | 109,815 |
| | 72,350 |
| | 37,300 |
| | (104,238 | ) | | 115,227 |
| 93,220 |
| | 158,919 |
| | 118,482 |
| | (276,847 | ) | | 93,774 |
|
Income tax expense | (27,387 | ) | | 1,567 |
| | (6,979 | ) | | — |
| | (32,799 | ) | (7,213 | ) | | — |
| | (3,290 | ) | | — |
| | (10,503 | ) |
Net income (loss) | 82,428 |
| | 73,917 |
| | 30,321 |
| | (104,238 | ) | | 82,428 |
| |
Less: Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income attributable to Wabtec shareholders | $ | 82,428 |
| | $ | 73,917 |
| | $ | 30,321 |
| | $ | (104,238 | ) | | $ | 82,428 |
| |
Net income | | 86,007 |
| | 158,919 |
| | 115,192 |
| | (276,847 | ) | | 83,271 |
|
Less: Net loss attributable to noncontrolling interest | | — |
| | — |
| | 1,145 |
| | — |
| | 1,145 |
|
Net income (loss) attributable to Wabtec shareholders | | $ | 86,007 |
| | $ | 158,919 |
| | $ | 116,337 |
| | $ | (276,847 | ) | | $ | 84,416 |
|
| | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) attributable to Wabtec shareholders | $ | 82,987 |
| | $ | 73,916 |
| | $ | 34,054 |
| | $ | (104,238 | ) | | $ | 86,719 |
| $ | 86,231 |
| | $ | 158,919 |
| | $ | (74,104 | ) | | $ | (276,847 | ) | | $ | (105,801 | ) |
Income Statement for the NineSix Months Ended SeptemberJune 30, 2017:2019:
| | In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net Sales | $ | 417,156 |
| | $ | 778,893 |
| | $ | 1,708,646 |
| | $ | (98,477 | ) | | $ | 2,806,218 |
| $ | 378,761 |
| | $ | 1,233,544 |
| | $ | 2,760,039 |
| | $ | (542,443 | ) | | $ | 3,829,901 |
|
Cost of sales | (311,037 | ) | | (503,686 | ) | | (1,270,668 | ) | | 76,046 |
| | (2,009,345 | ) | (301,887 | ) | | (902,309 | ) | | (2,035,263 | ) | | 413,251 |
| | (2,826,208 | ) |
Gross profit (loss) | 106,119 |
| | 275,207 |
| | 437,978 |
| | (22,431 | ) | | 796,873 |
| |
Gross profit | | 76,874 |
| | 331,235 |
| | 724,776 |
| | (129,192 | ) | | 1,003,693 |
|
Total operating expenses | (79,960 | ) | | (89,935 | ) | | (296,408 | ) | | — |
| | (466,303 | ) | (164,987 | ) | | (97,254 | ) | | (473,508 | ) | | — |
| | (735,749 | ) |
Income (loss) from operations | 26,159 |
| | 185,272 |
| | 141,570 |
| | (22,431 | ) | | 330,570 |
| |
Income from operations | | (88,113 | ) | | 233,981 |
| | 251,268 |
| | (129,192 | ) | | 267,944 |
|
Interest (expense) income, net | (52,565 | ) | | 5,554 |
| | (4,014 | ) | | — |
| | (51,025 | ) | (101,011 | ) | | 6,594 |
| | (8,712 | ) | | — |
| | (103,129 | ) |
Other income (expense), net | 3,127 |
| | (2,233 | ) | | (3,060 | ) | | — |
| | (2,166 | ) | 21,570 |
| | (6,702 | ) | | (20,919 | ) | | — |
| | (6,051 | ) |
Equity earnings (loss) | 246,103 |
| | 69,954 |
| | — |
| | (316,057 | ) | | — |
| 277,295 |
| | 163,685 |
| | — |
| | (440,980 | ) | | — |
|
Pretax income (loss) | 222,824 |
| | 258,547 |
| | 134,496 |
| | (338,488 | ) | | 277,379 |
| 109,741 |
| | 397,558 |
| | 221,637 |
| | (570,172 | ) | | 158,764 |
|
Income tax expense | (9,511 | ) | | (22 | ) | | (55,243 | ) | | — |
| | (64,776 | ) | (9,979 | ) | | (42,556 | ) | | (7,388 | ) | | — |
| | (59,923 | ) |
Net income (loss) | 213,313 |
| | 258,525 |
| | 79,253 |
| | (338,488 | ) | | 212,603 |
| |
Less: Net income attributable to noncontrolling interest | — |
| | 311 |
| | 399 |
| | — |
| | 710 |
| |
Net income | | 99,762 |
| | 355,002 |
| | 214,249 |
| | (570,172 | ) | | 98,841 |
|
Less: Net loss attributable to noncontrolling interest | | — |
| | — |
| | 922 |
| | — |
| | 922 |
|
Net income (loss) attributable to Wabtec shareholders | $ | 213,313 |
| | $ | 258,836 |
| | $ | 79,652 |
| | $ | (338,488 | ) | | $ | 213,313 |
| $ | 99,762 |
| | $ | 355,002 |
| | $ | 215,171 |
| | $ | (570,172 | ) | | $ | 99,763 |
|
| | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) attributable to Wabtec shareholders | $ | 214,482 |
| | $ | 258,838 |
| | $ | 366,156 |
| | $ | (338,488 | ) | | $ | 500,988 |
| $ | 99,762 |
| | $ | 355,002 |
| | $ | 182,574 |
| | $ | (570,172 | ) | | $ | 67,166 |
|
Income Statement for the NineSix Months Ended SeptemberJune 30, 2016:2018:
| | In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net Sales | $ | 494,350 |
| | $ | 865,850 |
| | $ | 924,559 |
| | $ | (113,553 | ) | | $ | 2,171,206 |
| $ | 329,727 |
| | $ | 256,083 |
| | $ | 1,700,594 |
| | $ | (118,547 | ) | | $ | 2,167,857 |
|
Cost of sales | (356,575 | ) | | (561,361 | ) | | (641,550 | ) | | 93,330 |
| | (1,466,156 | ) | (241,577 | ) | | (161,678 | ) | | (1,200,588 | ) | | 70,834 |
| | (1,533,009 | ) |
Gross profit (loss) | 137,775 |
| | 304,489 |
| | 283,009 |
| | (20,223 | ) | | 705,050 |
| 88,150 |
| | 94,405 |
| | 500,006 |
| | (47,713 | ) | | 634,848 |
|
Total operating expenses | (88,916 | ) | | (91,967 | ) | | (128,606 | ) | | — |
| | (309,489 | ) | (85,407 | ) | | (25,941 | ) | | (268,698 | ) | | — |
| | (380,046 | ) |
(Loss) income from operations | 48,859 |
| | 212,522 |
| | 154,403 |
| | (20,223 | ) | | 395,561 |
| |
Income (loss) from operations | | 2,743 |
| | 68,464 |
| | 231,308 |
| | (47,713 | ) | | 254,802 |
|
Interest (expense) income, net | (21,608 | ) | | 5,049 |
| | 662 |
| | — |
| | (15,897 | ) | (52,128 | ) | | 6,079 |
| | (6,155 | ) | | — |
| | (52,204 | ) |
Other income (expense), net | 17,640 |
| | (3,956 | ) | | (13,571 | ) | | — |
| | 113 |
| 9,212 |
| | (679 | ) | | (3,776 | ) | | — |
| | 4,757 |
|
Equity earnings (loss) | 308,681 |
| | 111,917 |
| | — |
| | (420,598 | ) | | — |
| 235,442 |
| | 210,877 |
| | — |
| | (446,319 | ) | | — |
|
Pretax income (loss) | 353,572 |
| | 325,532 |
| | 141,494 |
| | (440,821 | ) | | 379,777 |
| 195,269 |
| | 284,741 |
| | 221,377 |
| | (494,032 | ) | | 207,355 |
|
Income tax expense | (86,495 | ) | | (380 | ) | | (25,826 | ) | | — |
| | (112,701 | ) | (20,895 | ) | | — |
| | (15,732 | ) | | — |
| | (36,627 | ) |
Net income (loss) | 267,077 |
| | 325,152 |
| | 115,668 |
| | (440,821 | ) | | 267,076 |
| 174,374 |
| | 284,741 |
| | 205,645 |
| | (494,032 | ) | | 170,728 |
|
Less: Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income attributable to Wabtec shareholders | $ | 267,077 |
| | $ | 325,152 |
| | $ | 115,668 |
| | $ | (440,821 | ) | | $ | 267,076 |
| |
Less: Net loss attributable to noncontrolling interest | | — |
| | — |
| | 2,054 |
| | — |
| | 2,054 |
|
Net income (loss) attributable to Wabtec shareholders | | $ | 174,374 |
| | $ | 284,741 |
| | $ | 207,699 |
| | $ | (494,032 | ) | | $ | 172,782 |
|
| | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) attributable to Wabtec shareholders | $ | 266,355 |
| | $ | 325,152 |
| | $ | 107,054 |
| | $ | (440,821 | ) | | $ | 257,740 |
| $ | 174,881 |
| | $ | 284,741 |
| | $ | 95,983 |
| | $ | (494,032 | ) | | $ | 61,573 |
|
Condensed Statement of Cash Flows for the NineSix Months Ended SeptemberJune 30, 2017:2019:
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net cash (used for) provided by operating activities | $ | (38,954 | ) | | $ | 115,816 |
| | $ | (27,921 | ) | | $ | (22,430 | ) | | $ | 26,511 |
|
Net cash used for investing activities | (12,591 | ) | | (110,741 | ) | | (26,492 | ) | | — |
| | (149,824 | ) |
Net cash provided by (used for) financing activities | 52,072 |
| | (8,489 | ) | | (136,062 | ) | | 22,430 |
| | (70,049 | ) |
Effect of changes in currency exchange rates | — |
| | — |
| | 22,958 |
| | — |
| | 22,958 |
|
Increase (decrease) in cash | 527 |
| | (3,414 | ) | | (167,517 | ) | | — |
| | (170,404 | ) |
Cash, beginning of period | 2,522 |
| | 9,496 |
| | 386,466 |
| | — |
| | 398,484 |
|
Cash, end of period | $ | 3,049 |
| | $ | 6,082 |
| | $ | 218,949 |
| | $ | — |
| | $ | 228,080 |
|
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net cash (used for) provided by operating activities | $ | (99,188 | ) | | $ | 215,772 |
| | $ | 456,532 |
| | $ | (129,192 | ) | | $ | 443,924 |
|
Net cash provided by (used for) investing activities | 6,854,818 |
| | (476,597 | ) | | (9,418,585 | ) | | — |
| | (3,040,364 | ) |
Net cash (used for) provided by financing activities | (8,531,301 | ) | | 270,764 |
| | 8,857,453 |
| | 129,192 |
| | 726,108 |
|
Effect of changes in currency exchange rates | — |
| | — |
| | (10,651 | ) | | — |
| | (10,651 | ) |
(Decrease) increase in cash | (1,775,671 | ) | | 9,939 |
| | (115,251 | ) | | — |
| | (1,880,983 | ) |
Cash, cash equivalents, and restricted cash beginning of period | 1,782,682 |
| | (119 | ) | | 559,791 |
| | — |
| | 2,342,354 |
|
Cash and cash equivalents, end of period | $ | 7,011 |
| | $ | 9,820 |
| | $ | 444,540 |
| | $ | — |
| | $ | 461,371 |
|
Condensed Statement of Cash Flows for the NineSix Months Ended SeptemberJune 30, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net cash (used for) provided by operating activities | $ | (116,378 | ) | | $ | 72,206 |
| | $ | 159,789 |
| | $ | (47,713 | ) | | $ | 67,904 |
|
Net cash (used for) provided by investing activities | (9,669 | ) | | (249 | ) | | (59,182 | ) | | — |
| | (69,100 | ) |
Net cash provided by (used for) financing activities | 125,855 |
| | (72,009 | ) | | (78,795 | ) | | 47,713 |
| | 22,764 |
|
Effect of changes in currency exchange rates | — |
| | — |
| | (9,395 | ) | | — |
| | (9,395 | ) |
(Decrease) increase in cash
| (192 | ) | | (52 | ) | | 12,417 |
| | — |
| | 12,173 |
|
Cash and cash equivalents, beginning of period | 933 |
| | 625 |
| | 231,843 |
| | — |
| | 233,401 |
|
Cash and cash equivalents, end of period | $ | 741 |
| | $ | 573 |
| | $ | 244,260 |
| | $ | — |
| | $ | 245,574 |
|
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Net cash (used for) provided by operating activities | $ | (53,967 | ) | | $ | 220,963 |
| | $ | 100,120 |
| | $ | (20,223 | ) | | $ | 246,893 |
|
Net cash used for investing activities | (5,067 | ) | | (26,693 | ) | | (84,131 | ) | | — |
| | (115,891 | ) |
Net cash provided by (used for) financing activities | 70,272 |
| | (193,669 | ) | | (9,162 | ) | | 20,223 |
| | (112,336 | ) |
Effect of changes in currency exchange rates | — |
| | — |
| | 5,525 |
| | — |
| | 5,525 |
|
Increase (decrease) in cash
| 11,238 |
| | 601 |
| | 12,352 |
| | — |
| | 24,191 |
|
Cash, beginning of period | — |
| | 13,157 |
| | 213,034 |
| | — |
| | 226,191 |
|
Cash, end of period | $ | 11,238 |
| | $ | 13,758 |
| | $ | 225,386 |
| | $ | — |
| | $ | 250,382 |
|
17.19. OTHER INCOME (EXPENSE), NET
The components of other income (expense) are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
In thousands | 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency (loss) gain | $ | (1,120 | ) | | $ | (2,277 | ) | | $ | (13,802 | ) | | $ | (3,309 | ) |
Equity income | 1,021 |
| | 1,594 |
| | 1,950 |
| | 2,223 |
|
Expected return on pension assets/amortization | 1,789 |
| | 3,027 |
| | 5,165 |
| | 6,050 |
|
Other miscellaneous expense (income) | 487 |
| | (173 | ) | | 636 |
| | (207 | ) |
Total other (expense) income, net | $ | 2,177 |
| | $ | 2,171 |
| | $ | (6,051 | ) | | $ | 4,757 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
In thousands | 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency (loss) gain | $ | (4,113 | ) | | $ | 880 |
| | $ | (5,202 | ) | | $ | (488 | ) |
Equity income | 520 |
| | — |
| | 1,587 |
| | — |
|
Other miscellaneous expense | 660 |
| | 308 |
| | 1,449 |
| | 601 |
|
Total other income (expense), net | $ | (2,933 | ) | | $ | 1,188 |
| | $ | (2,166 | ) | | $ | 113 |
|
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2016,2018, filed with the Securities and Exchange Commission on February 28, 2017.27, 2019.
OVERVIEW
Wabtec is one of the world’s largest providers of value-added, technology-based productsequipment, systems and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight carsrail and passenger transit vehicles, as well as in more than 100 countries throughout the world.industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers and manycan be found on most locomotives, freight cars, passenger transit cars and buses around the world. Many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 31 countries. For50 countries and our products can be found in more than 100 countries throughout the nineworld. In the six months ended SeptemberJune 30, 2017,2019, approximately 65%59% of the Company’s revenues came from customers outside the U.S.United States.
Management Review and Future Outlook
Wabtec’s long-term financial goals are to generate cash flow from operations in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Excellence Program, and increase revenues through a focused growth strategy, including product innovation and new technologies, global and market expansion, aftermarket products and services, and acquisitions. In addition, managementManagement evaluates the Company’s current operational performance through measures such as quality and on-time delivery.
The Company primarily serves the worldwideglobal freight rail and passenger transit rail industries. As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of freight railroads and passenger transit agencies around the world, and transportation equipment manufacturers who serve those markets. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight carloadings and passenger ridership; government spending on public transportation; and investment in new technologies. In general, trends such as increasing urbanization and growth in developing markets, a focus on sustainability and environmental awareness, increasing investment in technology solutions, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight and transit rail.
The Company monitors a variety of factors and statistics to gauge market activity. Freight rail markets around the world are driven primarily by overall economic conditions and activity, while Transit markets are driven primarily by government funding and passenger ridership. Changes in these market drivers can cause fluctuations in demand for Wabtec's products and services.transit.
According to the 20162018 bi-annual edition of a market study by UNIFE, the Association of the European Rail Industry, the accessible global market for railway products and services iswas more than $100 billion and it iswas expected to grow at about 3.2% annuallya compounded annual growth rate of 2.6% through 2021.2023. The three largest geographic markets, which representrepresented about 80% of the total accessible market, arewere Europe, North America and Asia Pacific. Over the next five years, UNIFE projectsprojected above-average growth rates in North America, Latin America and Africa/Middle East, with Asia Pacific and Europe due to overall economic growth andgrowing at about the industry average. UNIFE said trends such as urbanization and increasing mobility, deregulation, investments in new technologies, energy and environmental issues, and increasing government support.support continue to drive investment. The largest product segments of the market arewere rolling stock, services and infrastructure, which represent almost 90% of the accessible market. Over the next five years, UNIFE projectsprojected spending on rolling stockturnkey management projects and infrastructure to grow at an above-average rate due to increased investment in passenger transit vehicles.rates. UNIFE estimatesestimated that the global installed base of locomotives iswas about 114,000 units, with about 32%33% in Asia Pacific, about 25%26% in North America and about 18% in Russia-CIS (Commonwealth of Independent States). Wabtec estimates that about 3,4002,500 new locomotives were delivered worldwide in 2016,2018, and it expectswe expect deliveries of about 3,2002,900 in 2017.2019. UNIFE estimatesestimated the global installed base of freight cars iswas about 5.55.1 million, units, with about 37%33% in North America, about 26% in Russia-CISAsia Pacific and about 20%24% in Asia Pacific.Russia-CIS. Wabtec estimates that about 108,000175,000 new freight cars were delivered worldwide in 2016,2018, and it expectswe expect deliveries of about 97,000174,000 in 2017.2019. UNIFE estimatesestimated the global installed base of passenger transit vehicles to be about 569,000600,000 units, with about 43%45% in Asia Pacific, about 32%33% in Europe and about 14%12% in Russia-CIS. UNIFEWabtec estimates that about 208,00030,000 new passenger transit vehicles were ordered annually from 2013-2015,worldwide in 2018, and thatwe expect orders of about 184,000 will be ordered annually from 2016-2018.the same number in 2019.
In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as energy and environmental factors encourage continued investment in public mass transit. According to UNIFE, France, Germany and the United
Kingdom arewere the largest Western European transit markets, representing almost two-thirds of industry spending in the European Union. UNIFE projectsprojected the accessible Western European rail market to grow at about 3.6%2.3% annually, during the next five years, led by investments in new rolling stock in France and Germany. Significant investments are also expected in Turkey, the largest market in Eastern Europe. About 75% of freight traffic in Europe is hauled by truck, while rail accounts for about 20%. The largest freight markets in Europe are Germany, Poland and the United Kingdom. In recent years, the European Commission has adopted a series of measures designed to increase the efficiency of the European rail network by standardizing operating rules and certification requirements. UNIFE believes that adoption of these measures should have a positive effect on ridership and investment in public transportation over time.
In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation. Through direct ownership and operating partnerships, U.S. railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service. There are more than 500 railroads operating in North America, with the largest railroads, referred to as “Class I,” accounting for more than 90% of the industry’s revenues. The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain, and petroleum. These commodities represent about 55%50% of total rail carloadings, with intermodal carloads accounting for the rest. Railroads operate in a competitive environment, especially with the trucking industry, and are always seeking ways to improve safety, cost and reliability. New technologies offered by Wabtec and others in the industry can provide some of these benefits. Demand for our freight related products and services in North America is driven by a number of factors, including rail traffic, and production of new locomotives and new freight cars. In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues. Demand for North American passenger transit products is driven by a number of factors, including government funding, deliveries of new subway cars and buses, and ridership. The U.S. federal government provides money to local transit authorities, primarily to fund the purchase of new equipment and infrastructure for their transit systems.
Growth in the Asia Pacific market has been driven mainly by the continued urbanization of China and India, and by investments in freight rail rolling stock and infrastructure in Australia to serve its mining and natural resources markets. During the next five years, UNIFE expects India to makeis making significant investments in rolling stock and infrastructure to modernize its rail system; for example, the country has awarded a 1,000-unit locomotive order to a U.S. manufacturer. UNIFE expects the increased spending in India to offset decreased spending on very-high-speed rolling stock in China during the next five years.GE Transportation, now part of Wabtec.
Other key geographic markets include Russia-CIS and Africa-Middle East. With about 1.41.2 million freight cars and about 20,000 locomotives, Russia-CIS is among the largest freight rail markets in the world, and it’s expected to invest in both freight and transit rolling stock. PRASA, the Passenger Rail Agency of South Africa, is expected to continue to invest in new transit cars and new locomotives. According to UNIFE, emerging markets arewere expected to grow at above-average rates as global trade creates increases inled to increased freight volumes and urbanization leadsled to increased demand for efficient mass-transportation systems. As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets.
In its study, UNIFE also said it expectsexpected increased investment in digital tools for data and asset management, and in rail control technologies, both of which would improve efficiency in the global rail industry during the next five years.industry. UNIFE said data-driven asset management tools have the potential to reduce equipment maintenance costs and improve asset utilization, while rail control technologies have been focused on increasing track capacity, improving operational efficiency and ensuring safer railway traffic. Wabtec offers products and services to help customers make ongoing investments in these initiatives.
In 20172019 and beyond, general global economic and market conditions in the United States and internationally will have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.
ACQUISITIONMERGER OF FAIVELEY TRANSPORT S.A.WABTEC WITH GE TRANSPORTATION
On November 30, 2016,Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec Company formerly known as Transportation System Holdings Inc. ("SpinCo"), which was a newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc. ("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company, acquired majority ownershipentered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo, Wabtec and Wabtec US Rail, Inc. ("Direct Sale Purchaser") entered into the Original Separation Agreement on May 20, 2018, which together provided for the combination of Faiveley Transport underWabtec and GE Transportation. The Original Merger Agreement and Original Separation Agreement were subsequently amended on January 25, 2019 and the termsmerger was completed on February 25, 2019.
As part of the Share Purchase Agreement. Faiveley Transport isMerger, certain assets of GE Transportation ("GET"), including the equity interests of certain pre-Transaction subsidiaries of GE that compose part of GE Transportation, were sold to Direct Sale Purchaser for a leading global providercash payment of value-added, integrated systems and services for the railway industry with annual sales of about $1.2$2.875 billion, and more than 5,700 employeesDirect Sale Purchaser assumed certain liabilities of GE Transportation in 24 countries. Faiveley Transport supplies railway manufacturers, operatorsconnection with this purchase (the "Direct Sale"). Thereafter, GE transferred the SpinCo business to SpinCo and maintenance providers with a range of value-added, technology-based systemsits subsidiaries (to the extent not already held by SpinCo and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access &
Mobility (passenger access systems and platform doors)its subsidiaries), and BrakesSpinCo issued to GE shares of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class C preferred stock and Safety (braking systemsadditional shares of SpinCo common stock in the SpinCo Transfer. Following this issuance of additional SpinCo common stock to GE, and couplers). The transaction was structured as a step acquisition as follows:
On November 30, 2016,immediately prior to the Company acquired majority ownershipDistribution (as defined below), GE owned 8,700,000,000 shares of Faiveley Transport, after completing the purchaseSpinCo common stock, 15,000 shares of the Faiveley family’s ownership interest under the termsSpinCo Class A preferred stock, 10,000 shares of the Share Purchase Agreement, which directed the Company to pay €100 perSpinCo Class B preferred stock and one share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately 49%SpinCo Class C preferred stock, which constituted all of the outstanding votingstock of SpinCo.
Following the Direct Sale, GE distributed the distribution shares of Faiveley Transport. Upon completionSpinCo in a spin-off transaction to its stockholder (the "Distribution"). Immediately after the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), whereby the separate corporate existence of Merger Sub ceased and SpinCo continued as the surviving company and a wholly owned subsidiary of Wabtec (except with respect to shares of SpinCo Class A preferred stock held by GE). In the Merger, subject to adjustment in accordance with the Merger Agreement, each share purchase underof SpinCo common stock converted into the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to electright to receive €100 per share in cash or 1.1538a number of shares of Wabtec common stock perbased on the common stock exchange ratio set forth in the Merger Agreement and the share of Faiveley Transport. TheSpinCo Class C preferred stock was converted into the right to receive (a) 10,000 shares of Wabtec convertible preferred stock and (b) a number of shares of Wabtec common stock portionequal to 9.9% of the fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec paid $10.0 million in cash to GE in exchange for all of the shares of SpinCo Class B preferred stock.
Upon consummation of the Merger, Wabtec issued 46,763,975 shares of common stock to the holders of GE common stock, 19,018,207 shares of common stock to GE and 10,000 shares of preferred stock to GE and made a cash payment to GE of $2.885 billion. As a result and calculated based on Wabtec’s outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as of December 31, 2018, approximately 49.2% of the outstanding shares of Wabtec common stock was held collectively by GE and holders of GE common stock (with 9.9% to be held by GE directly in shares of Wabtec common stock and 15% underlying the shares of Wabtec convertible preferred stock to be held by GE) and approximately 50.8% of the outstanding shares of Wabtec common stock would be held by pre-Merger Wabtec stockholders, in each case calculated on a fully-diluted, as-converted and as-exercised basis. Following the Merger, GE also retained 15,000 shares of SpinCo Class A non-voting preferred stock, and Wabtec held 10,000 shares of SpinCo Class B non-voting preferred stock. The shares of Wabtec common stock and Wabtec convertible preferred stock held by GE are subject to GE’s obligations under the Shareholders Agreement, including, among other things, and in each case subject to certain exceptions, (i) restrictions on the ability to sell, transfer or otherwise divest such shares for a period of 30 days and (ii) an obligation to sell, transfer or otherwise divest (A) by no later than 120 days following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not less than 14.9% and not more than 19.9% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, (B) by no later than one year following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not more than 18.5% of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, in each case of clauses (A) and (B) treating the Wabtec convertible preferred stock as the Wabtec common stock into which it is convertible both for purposes of determining the number of shares of Wabtec common stock owned and for purposes of determining the number of shares of Wabtec common stock outstanding and (C) by no later than the third anniversary of the closing date of the Merger, all of the subject shares that GE (together with its affiliates) beneficially owns, and (iii) an obligation to vote all of such shares of Wabtec common stock in the proportion required under the Shareholders Agreement.
After the Merger, SpinCo, which is Wabtec’s wholly owned subsidiary (except with respect to shares of SpinCo Class A preferred stock held by GE), holds the SpinCo business and Direct Sale Purchaser, which also is Wabtec’s wholly owned subsidiary, holds the assets purchased and the liabilities assumed in connection with the Direct Sale. Together, SpinCo and Direct Sale Purchaser own and operate the post-transaction GE Transportation. All shares of the Company’s common stock, including those issued in the Merger, are listed on the NYSE under the Company’s current trading symbol “WAB.” On the date of the Distribution, GE or its subsidiaries and SpinCo or the SpinCo Transferred Subsidiaries entered into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development and transition services.
On May 6, 2019, GE completed the sale of approximately 8,780 shares of Wabtec's Series A Preferred stock which converted upon the sale to 25,300,000 shares of Wabtec's common stock. After the sale Wabtec had approximately 1,220 shares of Series A Preferred Stock outstanding convertible to approximately 3,515,500 shares of common stock and GE's aggregate beneficial ownership percentage of the Company was reduced from approximately 24.9% to approximately 11.7% on a fully-diluted, as-converted and as-exercised basis. In conjunction with this secondary offering the Company waived the requirement under the shareholders agreement for GE to maintain ownership of at least 14.9% of Wabtec's stock for 120 days following the closing date of the Merger. The Company did not receive any proceeds from the sale of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment of $470.0 million, which is directly related to the timing of tax benefits expected to be realized by Wabtec as a result of the merger. This payment is considered contingent consideration because the timing of cash payments to GE is directly related to the future timing of tax benefits received by the Company as a result of the merger. The estimated total value of the consideration was subject to a cap on issuance ofbe paid by Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiringTransactions is approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in$10.3 billion, including the cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport. The aggregate value of consideration paid for 100% ownershipthe Direct Sales Assets, equity transferred for SpinCo, contingent consideration, assumed debt and net of Faiveley Transport was $1,736.1 million, including $944.3 million in cash, $560.2 million in stock or approximately 6.6 million shares, $409.9 million in debt assumed, less $178.3 million in cash acquired. The $744.7 million included as deposits in escrowestimated consideration is based on the consolidated balance sheet at December 31, 2016 was cash designated for use asCompany’s closing share price of $73.36 on February 22, 2019 and the preliminary fair value of the contingent consideration. The value of the preliminary purchase price consideration forcould change when the tender offers.Company has completed the detailed valuation of the contingent consideration and other necessary calculations.
RESULTS OF OPERATIONS
Consolidated Results
SECOND QUARTER 2019 COMPARED TO SECOND QUARTER 2018
The following table shows our Consolidated Statements of Operations for the periods indicated.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
In millions | 2017 | | 2016 | | 2017 | | 2016 |
Net sales | $ | 957,931 |
| | $ | 675,574 |
| | $ | 2,806,218 |
| | $ | 2,171,206 |
|
Cost of sales | (704,728 | ) | | (463,093 | ) | | (2,009,345 | ) | | (1,466,156 | ) |
Gross profit | 253,203 |
| | 212,481 |
| | 796,873 |
| | 705,050 |
|
Selling, general and administrative expenses | (117,838 | ) | | (70,757 | ) | | (367,753 | ) | | (241,118 | ) |
Engineering expenses | (24,709 | ) | | (16,289 | ) | | (71,511 | ) | | (52,271 | ) |
Amortization expense | (8,645 | ) | | (5,339 | ) | | (27,039 | ) | | (16,100 | ) |
Total operating expenses | (151,192 | ) | | (92,385 | ) | | (466,303 | ) | | (309,489 | ) |
Income from operations | 102,011 |
| | 120,096 |
| | 330,570 |
| | 395,561 |
|
Interest expense, net | (17,893 | ) | | (6,057 | ) | | (51,025 | ) | | (15,897 | ) |
Other (expense) income, net | (2,933 | ) | | 1,188 |
| | (2,166 | ) | | 113 |
|
Income from operations before income taxes | 81,185 |
| | 115,227 |
| | 277,379 |
| | 379,777 |
|
Income tax expense | (12,746 | ) | | (32,799 | ) | | (64,776 | ) | | (112,701 | ) |
Net income | 68,439 |
| | 82,428 |
| | $ | 212,603 |
| | $ | 267,076 |
|
Less: Net (gain) loss attributable to noncontrolling interest | (1,040 | ) | | — |
| | 710 |
| | — |
|
Net income attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| | $ | 213,313 |
| | $ | 267,076 |
|
THIRD QUARTER 2017 COMPARED TO THIRD QUARTER 2016
The following table summarizes our results of operations for the periods indicated:
| | | Three Months Ended September 30, | Three Months Ended June 30, |
In thousands | 2017 | | 2016 | | Percent Change | 2019 | | 2018 | | Percent Change |
Freight Segment Sales | $ | 340,185 |
| | $ | 361,998 |
| | (6.0 | )% | |
Transit Segment Sales | 617,746 |
| | 313,576 |
| | 97.0 | % | |
Net sales | 957,931 |
| | 675,574 |
| | 41.8 | % | |
Net sales: | | | | | | |
Sales of goods | | $ | 1,892,508 |
| | $ | 1,065,893 |
| | 77.6 | % |
Sales of services | | 343,776 |
| | 45,787 |
| | 650.8 | % |
Total net sales | | 2,236,284 |
| | 1,111,680 |
| | 101.2 | % |
Cost of sales: | | | | | | |
Cost of goods | | (1,377,758 | ) | | (749,097 | ) | | 83.9 | % |
Cost of services | | (243,850 | ) | | (38,616 | ) | | 531.5 | % |
Total cost of sales | | (1,621,608 | ) | | (787,713 | ) | | 105.9 | % |
Gross profit | | 614,676 |
| | 323,967 |
| | 89.7 | % |
Operating expenses: | | | | | | |
Selling, general and administrative expenses | | (290,959 | ) | | (171,157 | ) | | 70.0 | % |
Engineering expenses | | (57,120 | ) | | (19,388 | ) | | 194.6 | % |
Amortization expense | | (65,960 | ) | | (9,899 | ) | | 566.3 | % |
Total operating expenses | | (414,039 | ) | | (200,444 | ) | | 106.6 | % |
Income from operations | 102,011 |
| | 120,096 |
| | (15.1 | )% | 200,637 |
| | 123,523 |
| | 62.4 | % |
Other income and expenses: | | | | | | |
Interest expense, net | | (58,560 | ) | | (31,920 | ) | | 83.5 | % |
Other income (expense), net | | 2,177 |
| | 2,171 |
| | 0.3 | % |
Income from operations before income taxes | | 144,254 |
| | 93,774 |
| | 53.8 | % |
Income tax expense | | (41,400 | ) | | (10,503 | ) | | 294.2 | % |
Net income | | 102,854 |
| | 83,271 |
| | 23.5 | % |
Less: Net loss attributable to noncontrolling interest | | 1,381 |
| | 1,145 |
| | 20.6 | % |
Net income attributable to Wabtec shareholders | 67,399 |
| | 82,428 |
| | (18.2 | )% | 104,235 |
| | 84,416 |
| | 23.5 | % |
The following table shows the major components of the change in sales in the thirdsecond quarter of 20172019 from the thirdsecond quarter of 2016:2018:
| | In thousands | Freight Segment | | Transit Segment | | Total | Freight Segment | | Transit Segment | | Total |
Third Quarter 2016 Net Sales | $ | 361,998 |
| | $ | 313,576 |
| | $ | 675,574 |
| |
Second Quarter 2018 Net Sales | | $ | 412,258 |
| | $ | 699,422 |
| | $ | 1,111,680 |
|
Acquisitions | 40,633 |
| | 289,941 |
| | 330,574 |
| 1,122,134 |
| | 2,842 |
| | 1,124,976 |
|
Change in Sales by Product Line: | | | | | | | | | | |
Specialty Products & Electronics | (40,429 | ) | | 5,819 |
| | (34,610 | ) | |
Transit Products | | — |
| | 57,885 |
| | 57,885 |
|
Brake Products | (12,579 | ) | | (1,353 | ) | | (13,932 | ) | 4,153 |
| | 30,470 |
| | 34,623 |
|
Remanufacturing, Overhaul & Build | (12,666 | ) | | 3,351 |
| | (9,315 | ) | (3,872 | ) | | 9,699 |
| | 5,827 |
|
Transit Products | — |
| | 2,400 |
| | 2,400 |
| |
Specialty Products & Electronics | | (35,891 | ) | | (16,685 | ) | | (52,576 | ) |
Other | 996 |
| | (615 | ) | | 381 |
| 1,581 |
| | (92 | ) | | 1,489 |
|
Foreign exchange | 2,232 |
| | 4,627 |
| | 6,859 |
| (6,414 | ) | | (41,206 | ) | | (47,620 | ) |
Third Quarter 2017 Net Sales | $ | 340,185 |
| | $ | 617,746 |
| | $ | 957,931 |
| |
Second Quarter 2019 Net Sales | | $ | 1,493,949 |
| | $ | 742,335 |
| | $ | 2,236,284 |
|
Net sales
Net sales for the three months ended SeptemberJune 30, 20172019 increased by $282.4 million,$1.12 billion, or 41.8%101%, to $957.9 million.$2.24 billion. The increase is primarily due to sales from acquisitions of $330.6$1.12 billion, mainly, the acquisition of GE Transportation. GE Transportation contributed $1.12 billion of net sales in the quarter primarily from equipment products and services. Additionally, Transit Segment sales increased $43 million with the majority relatedprimarily due to the Faiveley Transport acquisition. This increase wasincreased original equipment project deliveries for HVAC and door systems, and Brake Products. These increases were partially offset by a $34.6 million decrease forin Specialty Products and Electronics due to lower demand for freight original equipment rail products, and a $13.9of $53 million decrease for Brake Products primarily due to lower demand for original equipment brakes for freight customers. Favorable foreign exchange increased sales by $6.9 million.
Freight Segment sales decreased by $21.8 million, or 6.0%, primarily due to a decrease of $40.4 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products, a decrease of $12.7 million for Remanufacturing, Overhaul & Build sales primarily due to the absencecompletion of a large locomotive rebuild contract that completedsignaling project in 2016,2018 and a decrease of $12.6 million for Brake Products sales from lower demand for original equipment brakes for freight customers. Acquisitions increasedPTC hardware sales. Unfavorable changes in foreign exchange rates reduced sales by $40.6 million and favorable foreign exchange increased sales by $2.2$48 million.
Transit Segment sales increased by $304.2 million, or 97.0%, primarily due to sales from acquisitions of $289.9 million with the majority related to the Faiveley Transport acquisition. Favorable foreign exchange increased sales by $4.6 million.
Cost of Sales The following table shows the major components of cost of sales for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
In thousands | Freight | | Percentage of Sales | | Transit | | Percentage of Sales | | Total | | Percentage of Sales |
Material | $ | 129,912 |
| | 38.2 | % | | $ | 283,376 |
| | 45.9 | % | | $ | 413,288 |
| | 43.1 | % |
Labor | 48,473 |
| | 14.2 | % | | 81,828 |
| | 13.2 | % | | 130,301 |
| | 13.6 | % |
Overhead | 54,712 |
| | 16.1 | % | | 90,508 |
| | 14.7 | % | | 145,220 |
| | 15.2 | % |
Other/Warranty | 2,630 |
| | 0.8 | % | | 13,288 |
| | 2.2 | % | | 15,918 |
| | 1.7 | % |
Total cost of sales | $ | 235,727 |
| | 69.3 | % | | $ | 469,000 |
| | 76.0 | % | | $ | 704,727 |
| | 73.6 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
In thousands | Freight | | Percentage of Sales | | Transit | | Percentage of Sales | | Total | | Percentage of Sales |
Material | $ | 135,798 |
| | 37.5 | % | | $ | 136,311 |
| | 43.5 | % | | $ | 272,109 |
| | 40.3 | % |
Labor | 44,583 |
| | 12.3 | % | | 38,317 |
| | 12.2 | % | | 82,900 |
| | 12.3 | % |
Overhead | 57,990 |
| | 16.0 | % | | 43,516 |
| | 13.9 | % | | 101,506 |
| | 15.0 | % |
Other/Warranty | 2,125 |
| | 0.6 | % | | 4,453 |
| | 1.4 | % | | 6,578 |
| | 1.0 | % |
Total cost of sales | $ | 240,496 |
| | 66.4 | % | | $ | 222,597 |
| | 71.0 | % | | $ | 463,093 |
| | 68.6 | % |
Cost of sales increased by $241.6$834 million to $704.7$1.62 billion in 2019 compared to $788 million in 2018. The increase is primarily due to $844 million of incremental cost of sales from acquisitions, mainly from the thirdacquisition of GE Transportation. In the second quarter of 2017 compared to $463.1 million in the same period of 2016. In the third quarter of 2017,2019, cost of sales as a percentage of sales was 73.6%72.5% compared to 68.6%70.9% in the same period of 2016. The increase2018. Cost of sales in 2019 includes $89 million of non-recurring costs related to purchase price accounting for the step-up of GE Transportation inventory on the date of acquisition. Excluding these non-recurring costs, cost of sales as a percentage of sales iswas 68.5% in 2019, a decrease from the prior year due to higher margin Freight Segment sales increased and a favorable product mix largelyshift in the Transit Segment to brake and HVAC systems from lower margin overhaul projects.
Operating expenses
Total operating expenses as a percentage of sales increased to 18.5% of sales in the second quarter of 2019 compared to 18.0% during the second quarter of 2018. Selling, general, and administrative expenses increased $120 million or 70.0%, primarily due to $94 million in incremental expense from acquisitions, mainly GE Transportation, and $31 million in transaction and restructuring costs related to the acquisition of GE Transportation. Engineering expense increased $38 million and amortization expense increased $56 million due to incremental expense from the GE Transportation acquisition.
Interest expense, net
Interest expense, net, increased $27 million in the second quarter of 2019 over the same period in 2018 attributable to higher transit segment salesoverall debt balances in 2019, related to the GE Transportation acquisition.
Income taxes
The effective income tax rate was 28.7% and 11.2% for the second quarter of 2019 and 2018, respectively. The increase in the effective rate for the three months ended June 30, 2019 is primarily the result of a $13 million benefit recorded in the second quarter of 2018 to revise estimates of the impact of U.S. tax legislation on the Transition Tax on unrepatriated earnings and the deductibility of certain executive compensation. In addition, the rate increased due to acquisitions, along with an unfavorable product mix withinnon-deductible transaction related expenses incurred as a result of the freight segmentacquisition of GE Transportation as well as increased estimated liabilities resulting from provisions of the Tax Cuts and higher project adjustmentsJobs Act.
Freight Segment
The following table shows our Consolidated Statements of $20.4Operations for our Freight Segment for the periods indicated.
|
| | | | | | | | | | |
| Three Months Ended June 30, |
In thousands | 2019 | | 2018 | | Percent Change |
Net sales: | | | | | |
Sales of goods | $ | 1,161,919 |
| | $ | 377,794 |
| | 207.6 | % |
Sales of services | 332,030 |
| | 34,464 |
| | 863.4 | % |
Total net sales | 1,493,949 |
| | 412,258 |
| | 262.4 | % |
Cost of sales: | | | | | |
Cost of goods | (850,689 | ) | | (245,397 | ) | | 246.7 | % |
Cost of services | (235,017 | ) | | (29,887 | ) | | 686.4 | % |
Total cost of sales | (1,085,706 | ) | | (275,284 | ) | | 294.4 | % |
| | | | | |
Gross profit | 408,243 |
| | 136,974 |
| | 198.0 | % |
| | | | | |
Operating expenses | (256,264 | ) | | (52,626 | ) | | 387.0 | % |
| | | | | |
Income from operations ($) | 151,979 |
| | 84,348 |
| | 80.2 | % |
Income from operations (%) | 10.2 | % | | 20.5 | % | | |
Net sales
Freight Segment sales increased by $1.08 billion, or 262%, to $1.49 billion, due to the acquisition of GE Transportation which contributed $1.12 billion of net sales in the quarter primarily from equipment products and services. This increase was partially offset by a decrease in Specialty Products and Electronics sales of $36 million on certain existing contracts.due to lower PTC hardware sales. Unfavorable foreign currency exchange rates decreased sales by $6 million.
Cost of sales
Freight Segment cost of sales increased 2.9%by $810 million to $1.09 billion in 2019. The increase is primarily due to $844 million of incremental cost of sales and services from the GE Transportation acquisition. In 2019, total cost of sales as a percentage of total net sales was 72.7% compared to 66.8% in 2018. Total cost of sales in the second quarter of 2019 includes $89 million of non-recurring costs related to purchase price accounting for the step-up of GE Transportation inventory on the date of acquisition. Excluding this non-recurring charge, total cost of sales as a percentage of sales was 66.7% in 2019 consistent with 2018.
Operating expenses
Freight Segment operating expenses increased $204 million, or 387%, in 2019 and increased 440 basis points to 69.3%17.2% of sales. Selling, general, and administrative expenses increased $113 million due to $94 million in 2017 comparedincremental expense from the GE Transportation acquisition and $11 million of transaction and restructuring costs related to 66.4%the acquisition of GE Transportation. Engineering expense increased $35 million and amortization expense increased $56 million, both due to the GE Transportation acquisition.
Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the same period in 2016.periods indicated.
|
| | | | | | | | | | |
| Three Months Ended June 30, |
In thousands | 2019 | | 2018 | | Percent Change |
| | | | | |
Net sales | $ | 742,335 |
| | $ | 699,422 |
| | 6.1 | % |
Cost of sales | (535,903 | ) | | (512,428 | ) | | 4.6 | % |
Gross profit | 206,432 |
| | 186,994 |
| | 10.4 | % |
| | | | | |
Operating expenses | (135,221 | ) | | (129,019 | ) | | 4.8 | % |
| | | | | |
Income from operations ($) | 71,211 |
| | 57,975 |
| | 22.8 | % |
Income from operations (%) | 9.6 | % | | 8.3 | % | | |
Net sales
Transit Segment sales increased by $43 million, or 6.1%, primarily due to increased original equipment project deliveries for HVAC and door systems of $58 million, and higher Brake Products sales of $30 million. The increase is primarily relatedin Brake Product sales was due to lower demandincreased deliveries on contracts for freight original equipment rail productsbrake and coupler systems and higher sales of aftermarket spares. These increases were partially offset by unfavorable foreign currency exchange rate changes of $41 million and a $17 million decrease in Specialty Products and Electronics due to the completion of a large signaling project contract adjustmentsin the prior year.
Cost of $5.5 million on certain existing contracts primarily related to labor and warranty costs.sales
Transit Segment cost of sales increased 5.0%by $23 million to $536 million in the second quarter of 2019. In the second quarter 2019, cost of sales as a percentage of sales was 72.2% compared to approximately 76.0%73.3% in the third quarter of 2017 from 71.0% for the same period of 2016. The increase2018. This decrease is primarily relatedattributable to a favorable product mix largely attributabletowards more brake and HVAC systems and less overhaul contracts, which typically carry a lower margin due to the acquisition of Faiveley Transport, which has lower overall marginstheir higher material and higher project adjustments of $14.9 million on certain existing contracts primarily related to material costs.
Included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claimslabor costs as a percentage of sales. Additionally, project performance on the brake and HVAC systems improved period over period. Unfavorable foreign currency exchange rate changes decreased cost of sales which can cause variability in warranty expense between quarters. Warranty expense was $17.1by $31 million.
Operating expenses
Transit Segment operating expenses increased $6 million to $135 million, or 4.8%, in the thirdsecond quarter of 20172019 and decreased 20 basis points to 18.2% compared to $6.8 millionthe same period in the third quarter of 2016. The increase in warranty expense is primarily related to the increase in sales and the higher project costs on certain existing contacts discussed above.
Operating expenses The following table shows our operating expenses for the periods indicated:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
In thousands | 2017 | | Percentage of Sales | | 2016 | | Percentage of Sales |
Selling, general and administrative expenses | $ | 117,838 |
| | 12.3 | % | | $ | 70,757 |
| | 10.5 | % |
Engineering expenses | 24,709 |
| | 2.6 | % | | 16,289 |
| | 2.4 | % |
Amortization expense | 8,645 |
| | 0.9 | % | | 5,339 |
| | 0.8 | % |
Total operating expenses | $ | 151,192 |
| | 15.8 | % | | $ | 92,385 |
| | 13.7 | % |
Total operating expenses were 15.8% and 13.7% of sales for the third quarters of 2017 and 2016, respectively.2018. Selling, general, and administrative expenses increased $47.1 million, or 66.5%, primarily due to $56.7$3 million in incremental expense from acquisitions and $4.7the second quarter of 2019, consisting of a $8 million in Faiveley Transport transaction and integration related chargesorganic increase to support the higher sales volumes, partially offset by lower costsa $5 million decrease due to cost saving initiativesfavorable foreign currency exchange rate changes. Engineering and lower organic sales volumes. Engineeringamortization expense increased by $8.4 million, or 51.7%, due to $5.1 million of incremental costs associated with acquisitions but remained relatively constant as a percentage of sales at 2.6%. Amortization expense increased $3.3 million due to amortization of intangibles associated with acquisitions.consistent year over year.
FIRST SIX MONTHS OF 2019 COMPARED TO FIRST SIX MONTHS OF 2018
The following table shows our segment operating expenseConsolidated Statements of Operations for the periods indicated:indicated.
|
| | | | | | | | | | |
| Three Months Ended September 30, |
In thousands | 2017 | | 2016 | | Percent Change |
Freight Segment | $ | 42,862 |
| | $ | 40,270 |
| | 6.4 | % |
Transit Segment | 101,214 |
| | 43,048 |
| | 135.1 | % |
Corporate | 7,116 |
| | 9,067 |
| | (21.5 | )% |
Total operating expenses | 151,192 |
| | 92,385 |
| | 63.7 | % |
Freight Segment operating expenses increased $2.6 million, or 6.4%, in 2017 and increased 150 basis points to 12.6% of sales. The increase is primarily attributable to $5.0 million of incremental operating expenses from acquisitions and $0.6 million of integration and restructuring costs, partially offset by cost saving initiatives across the freight business and lower selling expenses related to reduced volume.
Transit Segment operating expenses increased $58.2 million, or 135.1%, in 2017 and increased 270 basis points to 16.4% of sales. The increase is primarily attributable to acquisitions with $51.7 million of incremental operating expenses and $3.4 million of Faiveley Transport integration costs.
Corporate non-allocated operating expenses decreased $2.0 million in 2017 primarily due to lower Faiveley Transport transaction costs in the current quarter as well as lower costs associated with cost saving initiatives.
Interest expense, net Interest expense, net, increased $11.8 million in 2017 attributable to higher overall debt balances in 2017 than 2016, primarily related to the Faiveley Transport acquisition and higher interest rates.
Other income (expense), net Other income/(expense), net, totaled $2.9 million of expense in 2017 compared to $1.2 million of income in 2016 primarily due to foreign currency losses.
Income taxes The effective income tax rate was 15.7% and 28.5% for the third quarter of 2017 and 2016, respectively. The decrease in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related to the adjustment of deferred tax liabilities which had originally been established in prior periods in several foreign jurisdictions.
FIRST NINE MONTHS OF 2017 COMPARED TO FIRST NINE MONTHS OF 2016
The following table summarizes our results of operations for the periods indicated:
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
In thousands | 2017 | | 2016 | | Percent Change | 2019 | | 2018 | | Percent Change |
Freight Segment Sales | $ | 1,032,959 |
| | $ | 1,201,734 |
| | (14.0 | )% | |
Transit Segment Sales | 1,773,259 |
| | 969,472 |
| | 82.9 | % | |
Net sales | 2,806,218 |
| | 2,171,206 |
| | 29.2 | % | |
Net sales: | | | | | | |
Sales of goods | | $ | 3,327,017 |
| | $ | 2,076,570 |
| | 60.2 | % |
Sales of services | | 502,884 |
| | 91,287 |
| | 450.9 | % |
Total net sales | | 3,829,901 |
| | 2,167,857 |
| | 76.7 | % |
Cost of sales: | | | | | | |
Cost of goods | | (2,451,329 | ) | | (1,458,375 | ) | | 68.1 | % |
Cost of services | | (374,879 | ) | | (74,634 | ) | | 402.3 | % |
Total cost of sales | | (2,826,208 | ) | | (1,533,009 | ) | | 84.4 | % |
Gross profit | | 1,003,693 |
| | 634,848 |
| | 58.1 | % |
Operating expenses: | | | | | | |
Selling, general and administrative expenses | | (550,682 | ) | | (318,358 | ) | | 73.0 | % |
Engineering expenses | | (91,665 | ) | | (41,437 | ) | | 121.2 | % |
Amortization expense | | (93,402 | ) | | (20,251 | ) | | 361.2 | % |
Total operating expenses | | (735,749 | ) | | (380,046 | ) | | 93.6 | % |
Income from operations | 330,570 |
| | 395,561 |
| | (16.4 | )% | 267,944 |
| | 254,802 |
| | 5.2 | % |
Other income and expenses: | | | | | | |
Interest expense, net | | (103,129 | ) | | (52,204 | ) | | 97.5 | % |
Other income (expense), net | | (6,051 | ) | | 4,757 |
| | (227.2 | )% |
Income from operations before income taxes | | 158,764 |
| | 207,355 |
| | (23.4 | )% |
Income tax expense | | (59,923 | ) | | (36,627 | ) | | 63.6 | % |
Net income | | 98,841 |
| | 170,728 |
| | (42.1 | )% |
Less: Net loss attributable to noncontrolling interest | | 922 |
| | 2,054 |
| | (55.1 | )% |
Net income attributable to Wabtec shareholders | 213,313 |
| | 267,076 |
| 267,076 |
| (20.1 | )% | 99,763 |
| | 172,782 |
| | (42.3 | )% |
The following table shows the major components of the change in sales forin the ninefirst six months ended September 30, 2017of 2019 from the ninefirst six months ended September 30, 2016:of 2018:
| | In thousands | Freight Segment | | Transit Segment | | Total | Freight Segment | | Transit Segment | | Total |
First Nine Months of 2016 Net Sales | $ | 1,201,734 |
| | $ | 969,472 |
| | $ | 2,171,206 |
| |
First Six Months of 2018 Net Sales | | $ | 791,812 |
| | $ | 1,376,045 |
| | 2,167,857 |
|
Acquisitions | 121,246 |
| | 843,251 |
| | 964,497 |
| 1,617,110 |
| | 17,590 |
| | 1,634,700 |
|
Change in Sales by Product Line: |
| |
| |
| | | | | |
Transit Products | | — |
| | 115,062 |
| | 115,062 |
|
Brake Products | | 4,445 |
| | 58,685 |
| | 63,130 |
|
Remanufacturing, Overhaul & Build | | (4,043 | ) | | 8,064 |
| | 4,021 |
|
Specialty Products & Electronics | (162,744 | ) | | (12,403 | ) | | (175,147 | ) | (26,650 | ) | | (25,895 | ) | | (52,545 | ) |
Remanufacturing, Overhaul, and Build | (74,243 | ) | | (1,930 | ) | | (76,173 | ) | |
Brake Products | (43,270 | ) | | (5,887 | ) | | (49,157 | ) | |
Transit Products | — |
| | (801 | ) | | (801 | ) | |
Other | (6,725 | ) | | 606 |
| | (6,119 | ) | 1,526 |
| | 1,971 |
| | 3,497 |
|
Foreign exchange | (3,040 | ) | | (19,048 | ) | | (22,088 | ) | (13,817 | ) | | (92,004 | ) | | (105,821 | ) |
First Nine Months of 2017 Net Sales | $ | 1,032,958 |
| | $ | 1,773,260 |
| | $ | 2,806,218 |
| |
First Six Months of 2019 Net Sales | | $ | 2,370,383 |
| | $ | 1,459,518 |
| | $ | 3,829,901 |
|
Net sales
Net sales for the ninesix months ended SeptemberJune 30, 20172019 increased by $635.0 million,$1.66 billion, or 29.2%76.7%, to $2,806.2 million from $2,171.2 million.$3.83 billion. The increase is primarily due to sales from acquisitions of $964.5 million with$1.63 billion, mainly, the majority related toacquisition of GE Transportation. GE Transportation contributed $1.62 billion of net sales in the Faiveley Transport acquisition. This increase was partially offset by a $175.1 million decrease for Specialty Products and Electronics due to lower demand for freight originalyear primarily from equipment rail products and train control and signaling products and services, and a $76.2 million decrease for Remanufacturing, Overhaul and Build primarily due to the absence of a large locomotive rebuild contract that completed in 2016. Unfavorable foreign exchange decreased sales by $22.1 million.
Freight Segment sales decreased by $168.8 million, or 14.0%, primarily due to a decrease of $162.7 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products as well as train control and signaling products and services, a decrease of $74.2 million for Remanufacturing, Overhaul & Build sales primarily due to the absence of a large locomotive rebuild contract that completed in 2016, and a decrease of $43.3 million for Brake Products sales from lower demand for original equipment brakes for freight customers. Acquisitions increased sales by $121.2 million and unfavorable foreign exchange decreased sales by $3.0 million.
services. Additionally, Transit Segment sales increased by $803.8$83 million or 82.9%, primarily due to an increase in sales from acquisitions of $843.3 million with the majority related to the Faiveley Transport acquisition. This increase wasincreased original equipment project deliveries for HVAC and door systems, and Brake Products. These increases were partially offset by a decrease of $12.4 million forin Specialty Products and Electronics of $53 million due to the completion of a large project signaling project in 2018 and lower demand for original equipment conduction systems and current collectors.PTC hardware sales. Unfavorable changes in foreign currency exchange decreasedrates reduced sales by $19.0$106 million.
Cost of Sales The following table shows the major components of cost of sales for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
In thousands | Freight | | Percentage of Sales | | Transit | | Percentage of Sales | | Total | | Percentage of Sales |
Material | $ | 395,683 |
| | 38.3 | % | | $ | 778,222 |
| | 43.9 | % | | $ | 1,173,905 |
| | 41.8 | % |
Labor | 140,679 |
| | 13.6 | % | | 241,400 |
| | 13.6 | % | | 382,079 |
| | 13.6 | % |
Overhead | 164,503 |
| | 15.9 | % | | 250,879 |
| | 14.1 | % | | 415,382 |
| | 14.8 | % |
Other/Warranty | 4,236 |
| | 0.4 | % | | 33,743 |
| | 1.9 | % | | 37,979 |
| | 1.4 | % |
Total cost of sales | $ | 705,101 |
| | 68.2 | % | | $ | 1,304,244 |
| | 73.5 | % | | $ | 2,009,345 |
| | 71.6 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
In thousands | Freight | | Percentage of Sales | | Transit | | Percentage of Sales | | Total | | Percentage of Sales |
Material | $ | 450,990 |
| | 37.5 | % | | $ | 410,244 |
| | 42.3 | % | | $ | 861,234 |
| | 39.7 | % |
Labor | 139,867 |
| | 11.6 | % | | 119,553 |
| | 12.3 | % | | 259,420 |
| | 11.9 | % |
Overhead | 185,964 |
| | 15.5 | % | | 137,749 |
| | 14.2 | % | | 323,713 |
| | 14.9 | % |
Other/Warranty | 6,261 |
| | 0.5 | % | | 15,528 |
| | 1.6 | % | | 21,789 |
| | 1.0 | % |
Total cost of sales | $ | 783,082 |
| | 65.1 | % | | $ | 683,074 |
| | 70.4 | % | | $ | 1,466,156 |
| | 67.5 | % |
Cost of sales increased by $543.2 million$1.29 billion to $2,009.3 million$2.83 billion in the nine months ended September 30, 20172019 compared to $1,466.2 million$1.53 billion in the same period2018. The increase is primarily due to $1.28 billion of 2016. For the nine months ended September 30, 2017,incremental costs from acquisitions, mainly from GE Transportation. In 2019, cost of sales as a percentage of sales was 71.6%73.8% compared to 67.5%70.7% in 2018. Cost of sales in 2019 includes $169 million of non-recurring costs related to purchase price accounting for the same periodstep-up of 2016. The increaseGE Transportation inventory on the date of acquisition. Excluding this non-recurring charge, cost of sales as a percentage of sales was 69.4% in 2019, a 1.3% improvement over 2018. This improvement is attributable to a favorable product mix towards more Freight Segment products, which typically carry higher margins than the Transit Segment.
Operating expenses
Total operating expenses as a percentage of sales increased to 19.2% of sales in 2019 compared to 17.5% in 2018. Selling, general, and administrative expenses increased $232 million or 73.0%, primarily due to product mix largely$136 million of incremental expense from acquisitions, mainly GE Transportation, and $90 million in transaction and restructuring costs related to the acquisition of GE Transportation. Engineering expense increased $50 million and amortization expense increased $73 million due to incremental expense from the GE Transportation acquisition.
Interest expense, net
Interest expense, net, increased $51 million in 2019 attributable to higher transit segment salesoverall debt balances in 2019, related to the GE Transportation acquisition.
Other expense, net
Other expense/(income), net, totaled $6 million of expense in 2019 compared to $5 million of income in 2018 primarily due to acquisitions, along with an unfavorable product mix withinlosses on the freight segmentremeasurement of certain foreign currency denominated original locomotive equipment contracts.
Income taxes
The effective income tax rate was 37.7% and higher project adjustments17.7% for 2019 and 2018, respectively. The increase in the effective rate for the six months ended June 30, 2019 is primarily the result of $20.4a $13 million benefit recorded in the three months ended September 30, 2017second quarter of 2018 to revise estimates of the impact of U.S. tax legislation on the Transition Tax on unrepatriated earnings and the deductibility of certain existing contractsexecutive compensation. In addition, the rate increased due to non-deductible transaction related expenses incurred as a result of the acquisition of GE Transportation as well as increased estimated liabilities resulting from provisions of the Tax Cuts and $6.0Jobs Act.
Freight Segment
The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated.
|
| | | | | | | | | | |
| Six Months Ended June 30, |
In thousands | 2019 | | 2018 | | Percent Change |
Net sales: | | | | | |
Sales of goods | $ | 1,891,080 |
| | $ | 723,657 |
| | 161.3 | % |
Sales of services | 479,303 |
| | 68,155 |
| | 603.3 | % |
Total net sales | 2,370,383 |
| | 791,812 |
| | 199.4 | % |
Cost of sales: | | | | | |
Cost of goods | (1,398,677 | ) | | (475,635 | ) | | 194.1 | % |
Cost of services | (357,077 | ) | | (56,629 | ) | | 530.6 | % |
Total cost of sales | (1,755,754 | ) | | (532,264 | ) | | 229.9 | % |
| | | | | |
Gross profit | 614,629 |
| | 259,548 |
| | 136.8 | % |
| | | | | |
Operating expenses | (387,441 | ) | | (105,577 | ) | | 267.0 | % |
| | | | | |
Income from operations ($) | 227,188 |
| | 153,971 |
| | 47.6 | % |
Income from operations (%) | 9.6 | % | | 19.4 | % | | |
Net sales
Freight Segment sales increased by $1.58 billion, or 199%, to $2.37 billion, due to the acquisition of GE Transportation which contributed $1.62 billion during the period, primarily from equipment products and services. This increase was partially offset by lower sales from Specialty Products and Electronics of $27 million due to the lower PTC hardware sales. Unfavorable foreign currency exchange rate changes decreased sales by $14 million.
Cost of restructuring and integration costs.sales
Freight Segment cost of sales increased 3.1%by $1.22 billion to $1.76 billion in 2019. The increase is primarily due to $1.26 billion of incremental cost of sales and services from the GE Transportation acquisition. In 2019, total cost of sales as a percentage of total net sales was 74.1% compared to 67.2% in 2018. Total cost of sales in 2019 includes $169 million of non-recurring costs related to purchase price accounting for the step-up of GE Transportation inventory on the date of acquisition. Excluding these non-recurring costs, total cost of sales as a percentage of sales was 66.9% in 2019, 0.3% lower than 2018 as lower sales for Specialty Products and Electronics, which typically carry higher margins, were offset by cost improvements in other areas.
Operating expenses
Freight Segment operating expenses increased $282 million, or 267.0%, in 2019 and increased 300 basis points to 68.2%16.3% of sales. Selling, general, and administrative expenses increased $162 million due to $134 million in incremental expense from the GE Transportation acquisition and $16 million for transaction and restructuring costs. Engineering expense increased $46 million and amortization expense increased $74 million, both due to the GE Transportation acquisition.
Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the nine months ended September 30, 2017 comparedperiods indicated.
|
| | | | | | | | | | |
| Six Months Ended June 30, |
In thousands | 2019 | | 2018 | | Percent Change |
| | | | | |
Net sales | $ | 1,459,518 |
| | $ | 1,376,045 |
| | 6.1 | % |
Cost of sales | (1,070,454 | ) | | (1,000,745 | ) | | 7.0 | % |
Gross profit | 389,064 |
| | 375,300 |
| | 3.7 | % |
| | | | | |
Operating expenses | (258,920 | ) | | (249,242 | ) | | 3.9 | % |
| | | | | |
Income from operations ($) | 130,144 |
| | 126,058 |
| | 3.2 | % |
Income from operations (%) | 8.9 | % | | 9.2 | % | | |
Net sales
Transit Segment sales increased by $83 million, or 6.1%, primarily due to 65.1%increased demand for the same period in 2016.door and HVAC systems of $115 million, increased Brake Product sales of $59 million, and acquisitions of $18 million. The increase is primarily relatedin Brake Product sales was due to lower demandincreased deliveries on contracts for freight original equipment rail productsbrake and train controlcoupler systems and aftermarket spares. These increases were partially offset by unfavorable foreign currency rate changes of $92 million, and a $26 million decrease in Specialty Products and Electronics due to the completion of a large signaling products and services which typically offer a higher margin, higher project adjustmentsprojects in the prior year.
Cost of $5.5 million on certain existing contracts primarily related to labor and warranty costs, and $1.7 million of restructuring and integration costs.sales
Transit Segment cost of sales increased 3.1%by $70 million to $1.07 billion in 2019. In 2019, cost of sales as a percentage of sales was 73.3% compared to 73.5% for the nine months ended September 30, 2017 from 70.4% for the same period of 2016. The72.7% in 2018. This increase is primarily relateddue to an unfavorable product mix largely attributable to the acquisition of Faiveley Transport,from a decrease in high margin Specialty Products and Electronics sales towards more original equipment products which hastypically carry lower overall margins and highercertain discrete project adjustments of $14.9 million on certain existing contracts primarily related to material costs and $4.3 million of restructuring and integration costs.
Included inwarranty cost. Favorable foreign currency exchange rates decreased cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentageby $68 million and incremental costs from acquisitions increased cost of sales which can cause variability in warranty expense between quarters. Warranty expense was $33.1 million in the nine months ended September 30, 2017 compared to $22.8 million in the nine months ended September 30, 2016. The increase in warranty expense is primarily related to the increase in sales.by $15 million.
Operating expenses The following table shows our
Transit Segment operating expenses for the periods indicated:
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
In thousands | 2017 | | Percentage of Sales | | 2016 | | Percentage of Sales |
Selling, general and administrative expenses | $ | 367,753 |
| | 13.1 | % | | $ | 241,118 |
| | 11.1 | % |
Engineering expenses | 71,511 |
| | 2.5 | % | | 52,271 |
| | 2.4 | % |
Amortization expense | 27,039 |
| | 1.0 | % | | 16,100 |
| | 0.7 | % |
Total operating expenses | $ | 466,303 |
| | 16.6 | % | | $ | 309,489 |
| | 14.2 | % |
Total operating expenses were 16.6%increased $10 million to $259 million, or 3.9% in 2019 and 14.2%decreased 40 basis points to 17.7% of sales for the nine months of 2017 and 2016, respectively.sales. Selling, general, and administrative expenses increased $126.6 million, or 52.5%, primarily due to $145.4$6 million in incremental expense from acquisitions and $18.02019, consisting of a $15 million of Faiveley Transport transaction and integration related chargesorganic increase to support the higher sales volumes, partially offset by lower costsa $11 million decrease due to cost saving initiatives and lower organic sales volumes. Engineering expense increased by $19.2 million, or 36.7%, primarily due to $16.6 million in expenses from acquisitions and remained relatively consistent as a percentage of sales. Amortization expense increased $10.9 million due to amortization of intangibles associated with acquisitions.
The following table shows our segment operating expense for the periods indicated:
|
| | | | | | | | | | |
| Nine Months Ended September 30, |
In thousands | 2017 | | 2016 | | Percent Change |
Freight Segment | $ | 131,530 |
| | $ | 135,544 |
| | (3.0 | )% |
Transit Segment | 313,114 |
| | 144,194 |
| | 117.1 | % |
Corporate | 21,659 |
| | 29,751 |
| | (27.2 | )% |
Total operating expenses | $ | 466,303 |
| | $ | 309,489 |
| | 50.7 | % |
Freight Segment operating expenses decreased $4.0 million, or 3.0%, in the nine months ended September 30, 2017 and increased 140 basis points to 12.7% of sales. The decrease is primarily attributable to reduced sales volumes, and realized benefits from the cost saving initiatives undertaken in 2016 and 2017, partially offset by $15.6 million of incremental operating expenses from acquisitions and $2.8 million of restructuring and integration costs.
Transit Segment operating expenses increased $168.9 million, or 117.1%, in the nine months ended September 30, 2017 and increased 280 basis points to 17.7% of sales. The increase is attributed to $156.9 million of incremental operating expenses from acquisitions and $11.0 million of Faiveley Transport and integration costs.
Corporate non-allocated operating expenses decreased $8.1 million in the nine months ended September 30, 2017 primarily due to lower Faiveley Transport transaction and integration costs as well as benefits from cost savings initiatives undertaken in 2017 and 2016.
Interest expense, net Interest expense, net, increased $35.1 million in the nine months ended September 30, 2017 attributable to higher overall debt balances in 2017 than 2016, primarily related to the Faiveley Transport acquisition and higher interest rates.
Other income (expense), net Other income/(expense), net, totaled $2.2 million of expense in the nine months ended September 30, 2017 compared to $0.1 million of income for the comparable period in 2016 primarily due tofavorable foreign currency losses.exchange rates. Engineering and amortization expense remained consistent year over year.
Income taxes The effective income tax rate was 23.4% and 29.7% for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related to the adjustment of deferred tax liabilities which had originally been established in prior periods in several foreign jurisdictions.
Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under the Company’s unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
In thousands | 2017 | | 2016 | 2019 | | 2018 |
Cash (used for) provided by: | | | | |
Cash provided by (used for): | | | | |
Operating activities | $ | 26,511 |
| | $ | 246,893 |
| $ | 443,924 |
| | $ | 67,904 |
|
Investing activities | (149,824 | ) | | (115,891 | ) | (3,040,364 | ) | | (69,100 | ) |
Financing activities | (70,049 | ) | | (112,336 | ) | 726,108 |
| | 22,764 |
|
(Decrease)/increase in cash | $ | (170,404 | ) | | $ | 24,191 |
| |
(Decrease)/increase in cash and restricted cash | | $ | (1,880,983 | ) | | $ | 12,173 |
|
Operating activities In the first ninesix months of 2017,2019, cash provided by operations was $26.5 million. In$444 million compared to $68 million in the first ninesix months of 2016, cash provided by operations was $246.9 million. In comparison to the first nine months of 2016, cash provided by operations for the comparable period in 2017 decreased2018. The increase is due to unfavorablefavorable working capital performance and lower net income of $54.5 million. The major components of working capital were as follows: an unfavorablea favorable change in inventory of $264 million, of which $169 million is attributable to purchase accounting costs related to the acquisition of GE Transportation and the remaining $95 million due to better control over inventory levels, a favorable change of $87.8$162 million in other assets and liabilities primarily due to an unfavorable change in accrued liabilities due tothe timing of payments related to contract liabilities,acquisition costs and accrued expenses, a favorable change in accounts receivable of $24 million, and acquisition costs duringa favorable change of $40 million from the first nine monthsincrease in net income, net of 2017,the change in non-cash items of $111 million. The increase in the change in non-cash items is primarily attributable to increased depreciation, amortization, and stock-based compensation as a result of the GE Transportation acquisition. These favorable changes were partially offset by an unfavorable change in accounts payable of $77.6$131 million due to the timing of payments to suppliers, an unfavorable change in inventory of $55.7 million due to efforts to ramp up production in anticipation of stronger product demand in the fourth quarter of 2017, an unfavorable change in accrued income taxes of $41.9 million, partially offset by a favorable change in accrued liabilities and customer deposits of $89.6 million primarily due to the timing of cash receipts from customers for long term projects.suppliers.
Investing activities In the first ninesix months of 20172019 and 2016,2018, cash used for investing activities was $149.8 million$3.04 billion and $115.9$69 million, respectively. The major components of the cash outflow in 20172019 were $114.2 million$2.98 billion in net cash paid for acquisitions, primarily GE Transportation, and $60.3$62 million in planned additions to property, plant and equipment for investments in our facilities and manufacturing processes. These outflows were partially offset by $23.5 million in cash released from escrow related to the Faiveley acquisition. This compares to $84.4$38 million in net cash paid for acquisitions and $31.7$40 million in property, plant, and equipment for investments in the first ninesix months of 2016.2018. Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions.
Financing activities In the first ninesix months of 2017,2019, cash used forprovided by financing activities was $70.0$726 million which included $883.5$2.33 billion in proceeds from the revolving credit facility, $1.55 billion in repayments of debt and $34 million of dividend payments. In the first six months of 2018, cash provided by financing activities was $22.8 million, which included $592 million in proceeds from the revolving credit facility, $918.9 million in repayments of debt and $30.7 million of dividend payments. In the first nine months of 2016, cash used for financing activities was $112.3 million, which included $346.0 million in proceeds from the revolving credit facility, $215.9$546 million in repayments of debt on the revolving credit facility, $212.2 million for purchases of treasury stock, $23.5$23 million of dividend payments, and $9.0$7 million related to payment of income tax withholding on share-based compensation.
On September 14, 2018, the Company issued $2.5 billion of senior notes with three different maturities.
| |
• | Floating Rate Senior Notes due 2021 - The Company issued $500.0 million of Floating Rate Senior Notes due 2021 (the "Floating Rate Notes"). The Floating Rate Notes, which are non-callable for one year, were issued at 100% of face value. Interest on the Floating Rate Notes accrues at a floating rate per annum equal to three-month Libor plus 105 basis points. The interest rate for the Floating Rate Notes for the initial interest period was the three-month Libor plus 105 basis points determined on September 12, 2018 and is payable quarterly on December 15, March 15, June 15, and September 15 of each year. The Company incurred $3.5 million of deferred financing costs related to the issuance of the Floating Rate Notes. |
| |
• | 4.15% Senior Notes due 2024 - The Company issued $750.0 million of 4.15%Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were issued at 99.805% of face value. Interest on the 2024 Notes accrues at a rate of 4.15% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $7.4 million of deferred financing costs related to the issuance of the 2024 Notes. |
| |
• | 4.70% Senior Notes Due 2028 - The Company issued $1,250.0 million of 4.70% Senior Notes due 2028 (the "2028 Notes" and together with the Floating Rate Notes and 2024 Notes, the "Senior Notes"). The 2028 Notes were issued at 99.889% of face value. Interest on the 2028 Notes accrues at a rate of 4.70% per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred $10.6 million of deferred financing costs related to the issuance of the 2028 Notes. |
The net proceeds from the issuance and sale of the Senior Notes were used to finance the cash portion of the GE Transportation acquisition. The principal balances are due in full at maturity. The Senior Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Senior Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sales of assets, change in control, mergers and consolidations and the incurrence of liens.
On February 12, 2019, the rating assigned by Moody's was decreased to Ba1. Accordingly, pursuant to the respective terms of the Senior Notes issued on September 14, 2018, the interest rate increased by 0.25%. The interest rate increase took effect during the interest period following February 12, 2019.
The Company is in compliance with the restrictions and covenants in the indenture under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing its operating activities.
3.45% Senior Notes Due November 2026
On November 3, 2016, the Company issued $750.0 million of 3.45% Senior Notes due in 2026.2026 (the "2016 Notes"). The 2016 Notes were issued at 99.965% of face value. Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes. The principal balance is due in full at maturity.
The Company incurred $2.7 million of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
4.375% Senior Notes Due August 2023
Faiveley Transport Tender OfferIn August 2013, the Company issued $250.0 million of 4.375% Senior Notes due in 2023 (the “2013 Notes”). The 2013 Notes were issued at 99.879% of face value. Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2018 Refinancing Credit Agreement
On June 8, 2018, the Company entered into a credit agreement (the “2018 Refinancing Credit Agreement”), which replaced the Company’s then-existing 2016 Refinancing Credit Agreement. As part of the 2018 Refinancing Credit Agreement, the Company entered into (i) a $1.2 billion revolving credit facility (the “Revolving Credit Facility”), which replaced the Company’s revolving credit facility under the 2016 Refinancing Credit Agreement, and includes a letter of credit sub-facility of up to $450.0 million and a swing line sub-facility of $75.0 million, (ii) a $350.0 million term loan (the “Refinancing Term Loan”), which refinanced the term loan under the 2016 Refinancing Credit Agreement, and (iii) a new $400.0 million delayed draw term loan (the “Delayed Draw Term Loan”). The 2018 Refinancing Credit Agreement also provided for a bridge loan facility (the “Bridge Loan Facility”) in an amount not to exceed $2.5 billion, which would only become effective at the Company’s request. Commitments in respect of the Bridge Loan Facility were terminated upon the issuance and sale of the Senior Notes on September 14, 2018. In addition, the 2018 Refinancing Credit Agreement contains an uncommitted accordion
feature allowing the Company to request, in an aggregate amount not to exceed $600.0 million, increases to the borrowing commitments under the Revolving Credit Facility or a new incremental term loan commitment. At June 30, 2019, the Company had approximately $780.3 million of available bank borrowing capacity subject to certain financial covenant restrictions, net of $27.6 million of letters of credit.
The Revolving Credit Facility matures on June 8, 2023 and is unsecured. The Refinancing Term Loan matures on June 8, 2021 and is unsecured. The Delayed Draw Term Loan matures on the third anniversary of the date on which it is borrowed and is unsecured. The applicable interest rate for borrowings under the 2018 Refinancing Credit Agreement includes interest rate spreads based on the lower of the pricing corresponding to (i) the Company’s ratio of total debt (less unrestricted cash up to $300.0 million) to EBITDA (“Leverage Ratio”) or (ii) the Company’s public rating, in each case that range between 1.000% and 1.875% for LIBOR/CDOR-based borrowings and 0.0% and 0.875% for Alternate Base Rate based borrowings. The obligations of the Company under the 2018 Refinancing Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
The Delayed Draw Term Loan was initially drawn on February 3, 2017,25, 2019. The Company incurred a 17.5 basis point commitment fee from June 8, 2018 until the initial cash tender offer was closed, which resulteddraw.
The 2018 Refinancing Credit Agreement contains customary representations and warranties by the Company and its subsidiaries, including customary use of materiality, material adverse effect, and knowledge qualifiers. The Company and its subsidiaries are also subject to (i) customary affirmative covenants that impose certain reporting obligations on the Company and its subsidiaries and (ii) customary negative covenants, including limitations on: indebtedness; liens; restricted payments; fundamental changes; business activities; transactions with affiliates; restrictive agreements; changes in fiscal year; and use of proceeds. In addition, the Company is required to maintain (i) an Interest Coverage ratio at least 3.00 to 1.00 over each period of four consecutive fiscal quarters ending on the last day of a fiscal quarter and (ii) a Leverage Ratio, calculated as of the last day of a fiscal quarter for a period of four consecutive fiscal quarters, of 3.25 to 1.00 or less; provided that, in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer,event the Company owned approximately 78%completes the Direct Sale and the Merger or any other material acquisition in which the cash consideration paid exceeds $500.0 million, the maximum Leverage Ratio permitted will be 3.75 to 1.00 at the end of outstanding share capitalthe fiscal quarter in which such acquisition is consummated and 76%each of voting rights.the three fiscal quarters immediately following such fiscal quarter and 3.50 to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of such acquisition. The Company is in compliance with the restrictions and covenants of the 2018 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
At June 30, 2019, the weighted average interest rate on the Company’s variable rate debt was 3.28%. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was November 7, 2016, and the termination date was December 19, 2018.
2016 Refinancing Credit Agreement
On March 6, 2017, the final cash tender offer was closed, which resulted inJune 22, 2016, the Company acquiring approximately 21%amended its existing revolving credit facility with a consortium of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer,commercial banks. This 2016 Refinancing Credit Agreement provided the Company ownedwith a $1.2 billion, 5 year revolving credit facility and a $400 million delayed draw term loan (the “Term Loan”). The Company incurred approximately 99%$3 million of deferred financing cost related to the 2016 Refinancing Credit Agreement. The 2016 Refinancing Credit Agreement borrowings bore variable interest rates indexed as described below.
Under the 2016 Refinancing Credit Agreement, the Company could elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the share capitalFederal Funds Effective Rate plus 0.50% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on the quoted rates specific to the applicable currency, plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and 98% ofAlternate Rate margins were dependent on the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedureCompany’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin was finalized, which resulted in0 basis points and the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.Alternate Rate margin is 175 basis points.
Company Stock Repurchase Plan
On February 8, 2016, the Board of Directors amended its stock repurchase authorization to $350 million of the Company’s outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $350 million of which about $33.3$33 million remained. During the first ninethree months of 2017,2019, the Company did not repurchase any shares.shares, leaving $138 million remaining under the authorization. The Company intends to purchase shares on the open market or in negotiated block trades from time to time depending on market conditions. No time limit was set for the completion of the programs which conforms to the requirements under the 2016 Refinancing Credit Agreement, as well as the senior notesSenior Notes currently outstanding.
Forward Looking Statements
We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:
Economic and industry conditions
prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and South Africa;
decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;
reliance on major original equipment manufacturer customers;
original equipment manufacturers’ program delays;
demand for services in the freight and passenger rail industry;
demand for our products and services;
orders either being delayed, canceled, not returning to historical levels, or reduced or any combination of the foregoing;
consolidations in the rail industry;
continued outsourcing by our customers;
industry demand for faster and more efficient braking equipment;
fluctuations in interest rates and foreign currency exchange rates; or
availability of credit.
credit;
Operating factors
supply disruptions;
technical difficulties;
changes in operating conditions and costs;
increases in raw material costs;
successful introduction of new products;
performance under material long-term contracts;
labor relations;
the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities or intellectual property claims;
completion and integration of acquisitions, including the acquisition of Faiveley Transport;Transport and GE Transportation; or
the development and use of new technology.technology;
Competitive factors
the actions of competitors.competitors; or
the outcome of negotiations with partners, suppliers, customers or others;
Political/governmental factors
political stability in relevant areas of the world;
future regulation/deregulation of our customers and/or the rail industry;
levels of governmental funding on transit projects, including for some of our customers;
political developments and laws and regulations, including those related to Positive Train Control; or
federal and state income tax legislation; and
the outcome of negotiations with partners, governments, suppliers, customers or others.governments.
Statements in this Quarterly Report on Form 10-Q apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Critical Accounting Policies
A summary of critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, warranty reserves, pensions and postretirement benefits, income taxes and revenue recognition. The Company's lease accounting policy has been updated due to the adoption of ASU No. 2016-02. There have been no other significant changes in accounting policies since December 31, 2016.
2018.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costsinterest expense associated with its variable-rate debt and refinancing or issuance of incremental fixed rate debt. The Company’s variable rate debt represents 38%35% and 36%22% of total long-term debt at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward interest rate swap agreements which convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. Refer to Note 68 – Long Term Debt of “Notes to Condensed Consolidated Financial Statements” for additional information regarding interest rate risk.
Foreign Currency Exchange Risk
The Company is subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the first ninesix months of 2017,2019, approximately 35%41% of Wabtec’s net sales were to customers in the United States, 9%10% in Canada, 6% in India, 5% in the United Kingdom, 7%5% in Canada, 6%Mexico, 4% in France, 6%4% in Germany, 4% in China, 4%Australia 3% in Mexico,China, 3% in Italy, 3% in Australia, and 23%15% in other international locations. To reducemitigate the impact of changes in foreign currency exchange rates on earnings and cash flows, the Company has periodically entered into foreign currency forward contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Condensed Consolidated Financial Statements” for more information regarding foreign currency exchange risk.
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Item 4. | CONTROLS AND PROCEDURES |
Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of SeptemberJune 30, 2017.2019. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
ThereThe business combination of Wabtec and GE Transportation, which was nocompleted on February 25, 2019, resulted in a material change in Wabtec’s “internal controlthe combined company's internal controls over financial reporting” (as definedreporting. The Company is in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, Wabtec’sprocess of designing and integrating policies, processes, operations, technology, and other components of internal controlcontrols over financial reporting.reporting of the combined company. Management will monitor the implementation of new controls and test the operating effectiveness when instances are available in future periods.
PART II—OTHER INFORMATION
Except as described below, thereClaims have been no material changes regardingfiled against the Company’s commitmentsCompany and contingenciescertain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Further information and detail on these claims is described in Note 19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, including with respect2018, in Note 21 therein, filed on February 27, 2019. During the first six months of 2019, there were no material changes to the information described in the Form 10-K related to claims arising from asbestos exposure.
From time to time, the Company is involved in litigation withrelated to claims arising out of the Company's operations in the ordinary course of business, including claims based on product liability, contracts, intellectual property, or other causes of action. Further information and detail on any potentially material litigation is as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, in Note 21 therein, filed on February 27, 2019. Except as described below, there have been no material changes to the information described in the Form 10-K related to claims arising from Company's ordinary operations.
On April 21, 2016, Siemens described therein.Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company has infringed seven patents owned by Siemens related to the Company's Positive Train Control (PTC) technology. On November 2, 2016, Siemens amended its complaint to add six additional patents they also claim are infringed by the Company's PTC Products or End of Train (EOT) Products (Siemen Patent Case). The Company has filed Answers, and asserted counterclaims, in response to Siemens’ complaints. Additionally, after filings by the Company, the US Patent & Trademark Office’s Patent Trail and Appeal Board (PTAB) has granted Inter-Parties Review (IPR) proceedings on eight (8) of the patents asserted by Siemens to contest their validity. Following pre-trial rulings that greatly reduced Siemens’ alleged damages, a jury trial was held in federal district court in Delaware in January 2019 on eight patents, two of which were still subject to an IPR decision on validity from the PTAB. At the conclusion of the trial, the jury awarded Siemens damages of $5.6 million related to PTC patents and $1.1 million related to EOT patents. Since the jury’s verdict was issued, one of the PTC patents found to be infringed was held to be invalid by the PTAB. All PTAB proceedings have been now been completed, pending appeals; five (5) of the (8) Siemens patents reviewed by the PTAB were found to be invalid. On February 26, 2019, the Court entered a Judgment on the verdict, subject to post-trial motions. On May 28, 2019, the Court held a hearing on both parties' post-trial motions, any of which, if granted, could potentially affect the final Judgment. After the Court's ruling on the post-trial motions, a final Judgment will be entered and either party may file appeals to the Federal Circuit.
On March 20, 2019, Siemens filed a new action in federal district court in Delaware alleging violations of federal antitrust and state trade practices laws since before 2008, related to Wabtec’s PTC sales, including on-board, back-office, wayside and aftermarket support systems (Siemens originally raised these antitrust claims as counterclaims in a separate Delaware patent case filed by Wabtec alleging that Siemens has violated three (3) of Wabtec’s patents; the antitrust claims were ultimately severed from that case in January, 2019, resulting in Siemens re-filing them as another separate proceeding in Delaware.) Wabtec believes Siemens’ antitrust claims are without merit and will vigorously defend itself against these claims.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed. Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossings,crossing issue, as of September 8, 2017, Denver TransitDTC alleged that total damages were $36.8 million through July 31, 2017 and are continuing to accumulate. The crossings have not been certified for use without flaggers, which Denver Transit alleges is due to Xorail's failure to achieve constant warning times satisfactory tomajority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"). No claims have been filed, resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by Denver Transit with regard to either issue.the FRA and PUC. Xorail has denied Denver Transit’sDTC's assertions, regardingstating that its system satisfied the wireless crossings, and Denver Transit has also notified RTD that Denver Transit considers the new certification requirements imposed by FRA and/or PUC as a change in law, for which neither Denver Transit nor its subcontractors are liable.contractual requirements. Xorail has worked with Denver TransitDTC to modify its system to meetand implement the FRA’sFRA's and PUC's previously undefined and evolving, certification requirements. On September 28, 2017,approval requirements; the FRA granted a 5 year approval of theand PUC have both approved modified wireless crossing system, and as currently implemented; however,of August 2018, DTC completed the PUCprocess of certifying the crossings and eliminated the use of flaggers. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements; a jury trial is scheduled to begin in May 2020. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail; DTC has not granted approval of the modified system and therefore the crossings are still not certified for use without flaggers. Denver Transit and RTD are continuing to seek approval from PUC. The Company does not believe that it hasupdated its notices against Xorail, nor have they filed any liability with respect to the wireless crossing issue.formal claim against Xorail.
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table summarizes the Company's stock repurchase activity for the three months ended SeptemberJune 30, 2017:2019: |
| | | | | | | | | | | | | | |
Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs (1) |
July 2017 | | — |
| | — |
| | — |
| | $ | — |
|
August 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
September 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
Total quarter ended September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | |
Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs (1) |
April 2019 | | — |
| | — |
| | — |
| | $ | 137,824 |
|
May 2019 | | — |
| | $ | — |
| | — |
| | $ | 137,824 |
|
June 2019 | | — |
| | $ | — |
| | — |
| | $ | 137,824 |
|
Total quarter ended June 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | 137,824 |
|
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(1) | On February 9, 2016, the Board of Directors amended its stock repurchase authorization to $350.0 million of the Company’s outstanding shares. No time limit was set for the completion of the programs which conforms to the requirements under the 2016 Refinancing Credit Agreement, as well as the senior notes currently outstanding. |
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Item 4. | MINE SAFETY DISCLOSURES |
Not Applicable
The following exhibits are being filed with this report:
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10.14.1 | Second Amendment to Second Amended and Restated Refinancing Credit Agreement, dated as of October 11, 2017,Tenth Supplemental Indenture, date June 6, 2019, by and among the Company, Wabtec Cooperatief UA, as borrowers, the subsidiary guarantors named therein, and the lenders party thereto and PNCWells Fargo Bank, National Association, as Administrative AgentTrustee |
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31.1 | |
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31.2 | |
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32.1 | |
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101.INS | XBRL Instance Document. |
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101.SCH | XBRL Taxonomy Extension Schema Document. |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION |
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By: | /s/ PATRICK D. DUGAN |
| Patrick D. Dugan, |
| Executive Vice President Finance and Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial Officer) |
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DATE: | NovemberAugust 1, 20172019 |