Document
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 September 30, 2017
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
(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) |
412-825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
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. Yes x 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). Yes x 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 | ¨
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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 |
WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
September 30, 2017
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
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| | | | | | | |
| Unaudited | | |
In thousands, except shares and par value | September 30, 2017 | | December 31, 2016 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 228,080 |
| | $ | 398,484 |
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Accounts receivable | 792,726 |
| | 667,596 |
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Unbilled accounts receivable | 351,613 |
| | 274,912 |
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Inventories | 764,781 |
| | 658,510 |
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Deposit in escrow | — |
| | 744,748 |
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Other current assets | 139,925 |
| | 123,381 |
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Total current assets | 2,277,125 |
| | 2,867,631 |
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Property, plant and equipment | 988,223 |
| | 912,230 |
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Accumulated depreciation | (437,856 | ) | | (393,854 | ) |
Property, plant and equipment, net | 550,367 |
| | 518,376 |
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Other Assets | | | |
Goodwill | 2,384,758 |
| | 2,078,765 |
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Other intangibles, net | 1,140,387 |
| | 1,053,860 |
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Other noncurrent assets | 97,013 |
| | 62,386 |
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Total other assets | 3,622,158 |
| | 3,195,011 |
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Total Assets | $ | 6,449,650 |
| | $ | 6,581,018 |
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| | | |
Liabilities and Shareholders’ Equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 512,905 |
| | $ | 530,211 |
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Customer deposits | 373,815 |
| | 256,591 |
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Accrued compensation | 151,952 |
| | 145,324 |
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Accrued warranty | 134,964 |
| | 123,190 |
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Current portion of long-term debt | 49,748 |
| | 129,809 |
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Other accrued liabilities | 242,056 |
| | 261,514 |
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Total current liabilities | 1,465,440 |
| | 1,446,639 |
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Long-term debt | 1,824,156 |
| | 1,762,967 |
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Accrued postretirement and pension benefits | 108,182 |
| | 110,597 |
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Deferred income taxes | 282,557 |
| | 245,680 |
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Accrued warranty | 13,800 |
| | 15,802 |
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Other long-term liabilities | 19,146 |
| | 22,508 |
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Total Liabilities | 3,713,281 |
| | 3,604,193 |
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Commitments and contingent liabilities (Note 14) |
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Equity | | | |
Preferred stock, 1,000,000 shares authorized, no shares issued | — |
| | — |
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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 |
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Additional paid-in capital | 900,536 |
| | 869,951 |
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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 | ) |
Retained earnings | 2,735,876 |
| | 2,553,258 |
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Accumulated other comprehensive loss | (91,930 | ) | | (379,605 | ) |
Total Westinghouse Air Brake Technologies Corporation shareholders' equity | 2,717,702 |
| | 2,205,977 |
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Noncontrolling interest | 18,667 |
| | 770,848 |
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Total Equity | 2,736,369 |
| | 2,976,825 |
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Total Liabilities and Equity | $ | 6,449,650 |
| | $ | 6,581,018 |
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The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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| | | | | | | | | | | | | | | | |
| Unaudited | | Unaudited | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
In thousands, except per share data | 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 |
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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 |
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Other income and expenses | | | | | | | | |
Interest expense, net | (17,893 | ) | | (6,057 | ) | | (51,025 | ) | | (15,897 | ) | |
Other income (expense), net | (2,933 | ) | | 1,188 |
| | (2,166 | ) | | 113 |
| |
Income from operations before income taxes | 81,185 |
| | 115,227 |
| | 277,379 |
| | 379,777 |
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Income tax expense | (12,746 | ) | | (32,799 | ) | | (64,776 | ) | | (112,701 | ) | |
Net income | 68,439 |
| | 82,428 |
| | 212,603 |
| | 267,076 |
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Less: Net (Gain) Loss attributable to noncontrolling interest | (1,040 | ) | | — |
| | 710 |
| | — |
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Net income attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| | $ | 213,313 |
| | $ | 267,076 |
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| | | | | | | | |
Earnings Per Common Share | | | | | | | | |
Basic | | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 0.70 |
| | $ | 0.92 |
| | $ | 2.23 |
| | $ | 2.94 |
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Diluted | | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 0.70 |
| | $ | 0.91 |
| | $ | 2.22 |
| | $ | 2.92 |
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| | | | | | | | |
Weighted average shares outstanding | | | | | | | | |
Basic | 95,709 |
| | 89,589 |
| | 95,163 |
| | 90,546 |
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Diluted | 96,316 |
| | 90,293 |
| | 95,808 |
| | 91,316 |
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The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Unaudited | | Unaudited | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
In thousands | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | |
Net income attributable to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
| | $ | 213,313 |
| | $ | 267,076 |
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Foreign currency translation gain (loss) | 82,905 |
| | 2,734 |
| | 277,984 |
| | (7,385 | ) | |
Unrealized gain (loss) on derivative contracts | 15,021 |
| | 1,169 |
| | 18,400 |
| | (1,740 | ) | |
Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans | 27 |
| | 982 |
| | (3,017 | ) | | (652 | ) | |
Other comprehensive income (loss) before tax | 97,953 |
| | 4,885 |
| | 293,367 |
| | (9,777 | ) | |
Income tax (expense) benefit related to components of | | | | | | | | |
other comprehensive income | (5,333 | ) | | (594 | ) | | (5,692 | ) | | 441 |
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Other comprehensive income (loss), net of tax | 92,620 |
| | 4,291 |
| | 287,675 |
| | (9,336 | ) | |
Comprehensive income attributable to Wabtec shareholders | $ | 160,019 |
| | $ | 86,719 |
| | $ | 500,988 |
| | $ | 257,740 |
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The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Unaudited |
| Nine Months Ended September 30, |
In thousands, except per share data | 2017 | | 2016 |
| | | |
Operating Activities | | | |
Net income | $ | 212,603 |
| | $ | 267,076 |
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Adjustments to reconcile net income to cash provided by operations: | | | |
Depreciation and amortization | 76,970 |
| | 49,375 |
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Stock-based compensation expense | 14,539 |
| | 14,788 |
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Loss on disposal of property, plant and equipment | 1,633 |
| | 151 |
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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 | ) |
Inventories | (53,365 | ) | | 2,301 |
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Accounts payable | (121,389 | ) | | (43,777 | ) |
Accrued income taxes | (35,942 | ) | | 5,952 |
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Accrued liabilities and customer deposits | 81,270 |
| | (8,353 | ) |
Other assets and liabilities | (89,562 | ) | | (1,812 | ) |
Net cash provided by operating activities | 26,511 |
| | 246,893 |
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Investing Activities | | | |
Purchase of property, plant and equipment | (60,263 | ) | | (31,676 | ) |
Proceeds from disposal of property, plant and equipment | 1,066 |
| | 140 |
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Acquisitions of businesses, net of cash acquired | (114,175 | ) | | (84,355 | ) |
Release of deposit in escrow | 23,548 |
| | — |
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Net cash used for investing activities | (149,824 | ) | | (115,891 | ) |
Financing Activities | | | |
Proceeds from debt | 883,473 |
| | 346,000 |
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Payments of debt | (918,919 | ) | | (215,850 | ) |
Purchase of treasury stock | — |
| | (212,176 | ) |
Proceeds from exercise of stock options and other benefit plans | 2,888 |
| | 1,773 |
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Payment of income tax withholding on share-based compensation | (6,798 | ) | | (9,006 | ) |
Excess income tax benefits from exercise of equity options | — |
| | 446 |
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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 | ) |
Effect of changes in currency exchange rates | 22,958 |
| | 5,525 |
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(Decrease) Increase in cash | (170,404 | ) | | 24,191 |
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Cash, beginning of period | 398,484 |
| | 226,191 |
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Cash, end of period | $ | 228,080 |
| | $ | 250,382 |
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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 SEPTEMBER 30, 2017 (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 products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 31 countries. In the first nine months of 2017, approximately 65% 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. The December 31, 2016 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Revenue Recognition Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition.” Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined.
In general, the Company recognizes revenue from long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $351.6 million and $274.9 million, customer deposits were $373.8 million and $256.6 million, and provisions for loss contracts were $93.8 million and $60.5 million at September 30, 2017 and December 31, 2016, respectively.
Pre-Production Costs Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $28.8 million and $29.4 million at September 30, 2017 and December 31, 2016, respectively.
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Refer to Recently Adopted Accounting Pronouncements below.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ 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 to changes in foreign currencies and interest rates. For further information regarding financial derivatives and hedging activities, refer to Footnotes 12 and 13.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of 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 September 30, 2017 and December 31, 2016. Net income attributable to noncontrolling interests for the three and nine months ended September 30, 2017 was a $1.0 million gain and a $0.7 million loss, respectively, and was not material for the three and nine months ended September 30, 2016. Other comprehensive income attributable to noncontrolling interests for the three and nine months ended September 30, 2017 and 2016 was not material.
Recently Issued Accounting Pronouncements In March 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' 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.
In November 2016, the FASB issued ASU No. 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash". The amendments in this update require a statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for public companies in the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. The ASU is effective for public companies in the fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contract with Customers.” The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. 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.
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 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 loss by component, net of tax, for the nine months ended September 30, 2017 are as follows:
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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 |
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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 September 30, 2017 are as follows:
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| | | | | |
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 | $ | (422 | ) | | Cost of sales |
Amortization of net loss | 1,240 |
| | Cost of sales |
| 818 |
| | Income from Operations |
| (226 | ) | | Income tax expense |
| $ | 592 |
| | Net income |
| | | |
Derivative contracts | | | |
Realized loss on derivative contracts | $ | 497 |
| | Interest expense, net |
| (131 | ) | | Income tax expense |
| $ | 366 |
| | Net income |
Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2017 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 | $ | (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 Transport
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport S.A. (“Faiveley Transport”) under the terms of a Share Purchase Agreement (“Share Purchase Agreement”). Faiveley Transport is a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries. Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of value-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes and Safety (braking systems and couplers). The transaction was structured as a step acquisition as follows:
| |
• | On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest under the terms of the Share Purchase Agreement, which directed the Company to pay €100 per share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately |
49% of the outstanding voting shares of Faiveley Transport. Upon completion of the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to elect to receive €100 per share in cash or 1.1538 shares of Wabtec common stock per share of Faiveley Transport. The common stock portion of the consideration was subject to a cap on issuance of Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
| |
• | On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights. |
| |
• | On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport. |
| |
• | On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport. |
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport.
The aggregate value of consideration paid for 100% ownership 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 escrow on the consolidated balance sheet at December 31, 2016 was cash designated for use as consideration for the tender offers.
The fair values of the assets acquired and liabilities assumed are preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The December 31, 2016 consolidated balance sheet includes the assets and liabilities of Faiveley Transport, which have been measured at fair value. The fair value of the noncontrolling interest was 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 of the noncontrolling interest in the three months ended March 31, 2017 resulted in a $8.9 million increase to additional paid-in capital on the consolidated balance sheet which represents the difference in consideration paid to acquire the noncontrolling interest and the carrying value of noncontrolling interest at acquisition.
The following table summarizes the preliminary estimated fair values of the Faiveley Transport assets acquired and liabilities assumed:
|
| | | | |
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 nine months ended September 30, 2017, the estimated fair values for customer relationships and current liabilities were adjusted by $21.8 million and $51.8 million, respectively, for changes to initial estimates 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 million to 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 that are obligated to be settled in cash. Contingent liabilities assumed as part of the transaction were not material. These 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 is an exception to the fair value basis of accounting.
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 expects to achieve as a result of the acquisition. Purchased goodwill is not expected to be deductible for tax purposes. The goodwill has been preliminarily allocated to the Transit segment.
For the three and nine months ended September 30, 2017, the Company’s consolidated statement of income included $294.4 million and $851.8 million of revenues, respectively, from Faiveley Transport.
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 acquisitions 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, the Company acquired AM General Contractor ("AM"), a manufacturer of safety 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, for a purchase price of approximately $62.8 million, net of cash acquired, resulting in goodwill of $17.5 million, none of which will be deductible for tax purposes. |
The acquisitions listed above include escrow deposits of $38.4 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.
The following table summarizes the preliminary estimated 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| TTC | | ATP | | Workhorse | | Precision Turbo | | Gerken | | Unitrac |
In thousands | April 5, 2017 | | March 14, 2017 | | December 14, 2016 | | November 17, 2016 | | August 1, 2016 | | May 5, 2016 |
Current assets | $ | 3,746 |
| | $ | 11,666 |
| | $ | 9,137 |
| | $ | 4,145 |
| | $ | 32,706 |
| | $ | 11,476 |
|
Property, plant & equipment | 5,909 |
| | 5,354 |
| | — |
| | 1,346 |
| | 7,667 |
| | 1,768 |
|
Goodwill | 16,309 |
| | 31,934 |
| | 24,373 |
| | 4,019 |
| | 17,470 |
| | 2,442 |
|
Other intangible assets | 12,300 |
| | 22,100 |
| | 19,400 |
| | 5,200 |
| | 30,560 |
| | 1,230 |
|
Other assets | — |
| | — |
| | — |
| | — |
| | 1,706 |
| | — |
|
Total assets acquired | 38,264 |
| | 71,054 |
| | 52,910 |
| | 14,710 |
| | 90,109 |
| | 16,916 |
|
Total liabilities assumed | (5,753 | ) | | (5,800 | ) | | (9,083 | ) | | (884 | ) | | (27,262 | ) | | (2,145 | ) |
Net assets acquired | $ | 32,511 |
| | $ | 65,254 |
| | $ | 43,827 |
| | $ | 13,826 |
| | $ | 62,847 |
| | $ | 14,771 |
|
Of the $671.8 million of total acquired other intangible assets, $367.6 million was assigned to trade names, $296.7 million was assigned to customer relationships, and $5.0 million was assigned to intellectual property. 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:
|
| | | | | | | | | | | | | | | |
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 | 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 nine months ended September 30, 2017 is as follows:
|
| | | | | | | | | | | |
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 September 30, 2017 and December 31, 2016, the Company’s trade names had a net carrying amount of $583.7 million and $510.5 million, respectively, and the Company believes these intangibles have indefinite lives.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
|
| | | | | | | |
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, customer relationships and other intangibles were 10 years, 17 years and 15 years, respectively. Amortization expense for intangible assets was $8.6 million and $27.0 million for the three and nine months ended September 30, 2017, and $5.3 million and $16.1 million for the three and nine months ended September 30, 2016, respectively.
Amortization expense for the five succeeding years is estimated to be as follows:
|
| | | |
Remainder of 2017 | $ | 8,873 |
|
2018 | 34,794 |
|
2019 | 33,537 |
|
2020 | 32,014 |
|
2021 | 31,827 |
|
6. LONG-TERM DEBT
Long-term debt consisted of the following:
|
| | | | | | | |
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 |
|
Wabtec's acquisition of the controlling stake of Faiveley Transport triggered the early repayment of a syndicated loan and the mandatory offer to investors to repay the U.S. and Schuldschein private placements. Both the syndicated loan and U.S. private placements were repaid in full in December 2016.
3.45% Senior Notes Due November 2026
On November 3 2016, the Company issued $750.0 million of Senior Notes due in 2026 (the "2016 Notes"). The 2016 Notes were issued at 99.965% of face value. Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.7 million of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (the “2013 Notes”). The 2013 Notes were issued at 99.879% of face value. Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness,
payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
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 “2016 Refinancing Credit Agreement” provides the Company with a $1.2 billion, five years revolving credit facility and a $400.0 million delayed draw term loan (the “Term Loan”). The Company incurred approximately $3.3 million of deferred financing costs related to the 2016 Refinancing Credit Agreement. The facility expires on June 22, 2021. The 2016 Refinancing Credit Agreement borrowings bear 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 may 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% 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.
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. 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 |
| Three Months Ended September 30, | | Three Months Ended September 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 |
Net periodic benefit cost | | | | | | | |
Service cost | $ | 86 |
| | $ | 84 |
| | $ | 614 |
| | $ | 258 |
|
Interest cost | 356 |
| | 369 |
| | 1,677 |
| | 1,257 |
|
Expected return on plan assets | (433 | ) | | (519 | ) | | (2,910 | ) | | (2,437 | ) |
Net amortization/deferrals | 248 |
| | 229 |
| | 685 |
| | 397 |
|
Net periodic benefit cost | $ | 257 |
| | $ | 163 |
| | $ | 66 |
| | $ | (525 | ) |
|
| | | | | | | | | | | | | | | |
| U.S. | | International |
| Nine Months Ended September 30, | | Nine Months Ended September 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 |
Net periodic benefit cost | | | | | | | |
Service cost | $ | 258 |
| | $ | 252 |
| | $ | 1,842 |
| | $ | 986 |
|
Interest cost | 1,068 |
| | 1,107 |
| | 5,031 |
| | 4,193 |
|
Expected return on plan assets | (1,299 | ) | | (1,557 | ) | | (8,730 | ) | | (7,723 | ) |
Net amortization/deferrals | 744 |
| | 687 |
| | 2,055 |
| | 1,452 |
|
Curtailment loss recognized | — |
| | — |
| | — |
| | 240 |
|
Net periodic benefit (credit) cost | $ | 771 |
| | $ | 489 |
| | $ | 198 |
| | $ | (852 | ) |
|
| | | | | | | | | | | |
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 million to the international and U.S. plans, respectively, during 2017.
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 |
| Three Months Ended September 30, | | Three Months Ended September 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 |
Net periodic benefit cost | | | | | | | |
Service cost | $ | 1 |
| | $ | 1 |
| | $ | 7 |
| | $ | 7 |
|
Interest cost | 88 |
| | 97 |
| | 24 |
| | 25 |
|
Net amortization/deferrals | (73 | ) | | (105 | ) | | (7 | ) | | (9 | ) |
Net periodic benefit (credit) cost | $ | 16 |
| | $ | (7 | ) | | $ | 24 |
| | $ | 23 |
|
|
| | | | | | | | | | | | | | | |
| U.S. | | International |
| Nine Months Ended September 30, | | Nine Months Ended September 30, |
In thousands, except percentages | 2017 | | 2016 | | 2017 | | 2016 |
Net periodic benefit cost | | | | | | | |
Service cost | $ | 3 |
| | $ | 3 |
| | $ | 21 |
| | $ | 21 |
|
Interest cost | 264 |
| | 291 |
| | 72 |
| | 75 |
|
Net amortization/deferrals | (219 | ) | | (315 | ) | | (21 | ) | | (27 | ) |
Net periodic (credit) benefit cost | $ | 48 |
| | $ | (21 | ) | | $ | 72 |
| | $ | 69 |
|
|
| | | | | | | | | | | |
Assumptions | | | | | | | |
Discount Rate | 3.76 | % | | 3.95 | % | | 3.46 | % | | 3.90 | % |
8. STOCK-BASED COMPENSATION
As of September 30, 2017, 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 (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 Stockholders of Wabtec on May 10, 2017. The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (“the Directors Plan”).
Stock-based compensation expense was $14.5 million and $14.8 million for the nine months ended September 30, 2017 and 2016, respectively. Included in stock-based compensation expense for the nine months ended September 30, 2017 is $1.2 million of expense related to stock options, $5.3 million related to restricted stock, $3.2 million related to restricted stock units, $3.7 million related to incentive stock units and $1.1 million related to units issued for Directors’ fees. At September 30, 2017, 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.
Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four-year vesting period and expire 10 years from the date of grant.
The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the nine months ended September 30, 2017:
|
| | | | | | | | | | | | |
| 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:
|
| | | | | |
| 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 September 30, 2017, the Company estimates that it will achieve 73%, 68% and 80% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2017, 2018, and 2019, respectively, and has recorded incentive compensation expense accordingly. If our 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 nine months ended September 30, 2017:
|
| | | | | | | | | |
| 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. INCOME TAXES
The overall effective income tax rate was 15.7% and 23.4% for the three and nine months ended September 30, 2017, respectively, and 28.5% and 29.7% for the three and nine months ended September 30, 2016, respectively. For the three and nine months ended September 30, 2017, 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. These adjustments were not material to the current year-to-date financial statements or prior years annual financial statements.
As of September 30, 2017 and December 31, 2016, the liability for income taxes associated with uncertain tax positions was $5.7 million, of which $3.2 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 September 30, 2017, the total accrued interest and penalties were $0.6 million and $0.3 million, respectively. As of December 31, 2016, the total accrued interest and penalties were $0.8 million and $0.3 million, respectively.
At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately $3.6 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. 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, |
In thousands, except per share data | 2017 | | 2016 |
Numerator | | | |
Numerator for basic and diluted earnings per common share - net income attributable | | | |
to Wabtec shareholders | $ | 67,399 |
| | $ | 82,428 |
|
Less: dividends declared - common shares and non-vested restricted stock | (11,518 | ) | | (8,958 | ) |
Undistributed earnings | 55,881 |
| | 73,470 |
|
Percentage allocated to common shareholders (1) | 99.7 | % | | 99.7 | % |
| 55,713 |
| | 73,250 |
|
Add: dividends declared - common shares | 11,485 |
| | 8,933 |
|
Numerator for basic and diluted earnings per common share | $ | 67,198 |
| | $ | 82,183 |
|
Denominator | | | |
Denominator for basic earnings per common share - weighted average shares | 95,709 |
| | 89,589 |
|
Effect of dilutive securities: | | | |
Assumed conversion of dilutive stock-based compensation plans | 607 |
| | 704 |
|
Denominator for diluted earnings per common share - | | | |
adjusted weighted average shares and assumed conversion | 96,316 |
| | 90,293 |
|
Net income attributable to Wabtec shareholders per common share | | | |
Basic | $ | 0.70 |
| | $ | 0.92 |
|
Diluted | $ | 0.70 |
| | $ | 0.91 |
|
|
| | | | | |
(1) Basic weighted-average common shares outstanding | 95,709 |
| | 89,589 |
|
Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 95,983 |
| | 89,838 |
|
Percentage allocated to common shareholders | 99.7 | % | | 99.7 | % |
|
| | | | | | | |
| Nine Months Ended September 30, |
In thousands, except per share data | 2017 | | 2016 |
Numerator | | | |
Numerator for basic and diluted earnings per common share - net income attributable | | | |
to Wabtec shareholders | $ | 213,313 |
| | $ | 267,076 |
|
Less: dividends declared - common shares and non-vested restricted stock | (30,693 | ) | | (23,523 | ) |
Undistributed earnings | 182,620 |
| | 243,553 |
|
Percentage allocated to common shareholders (1) | 99.4 | % | | 99.7 | % |
| 181,524 |
| | 242,822 |
|
Add: dividends declared - common shares | 30,508 |
| | 23,452 |
|
Numerator for basic and diluted earnings per common share | $ | 212,032 |
| | $ | 266,274 |
|
Denominator | | | |
Denominator for basic earnings per common share - weighted average shares | 95,163 |
| | 90,546 |
|
Effect of dilutive securities: | | | |
Assumed conversion of dilutive stock-based compensation plans | 645 |
| | 770 |
|
Denominator for diluted earnings per common share - | | | |
adjusted weighted average shares and assumed conversion | 95,808 |
| | 91,316 |
|
Net income attributable to Wabtec shareholders per common share | | | |
Basic | $ | 2.23 |
| | $ | 2.94 |
|
Diluted | $ | 2.22 |
| | $ | 2.92 |
|
|
| | | | | |
(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. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
|
| | | | | | | |
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. 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 nine months ended September 30, 2017 and September 30, 2016, the amounts reclassified into income were not material.
Other Activities The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized gain related to these contracts was $0.2 million for the three months ended September 30, 2017. 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 September 30, 2017.
|
| | | | | | | | | | | | |
In millions | | Designated | | Non-Designated | | Total |
Gross notional amount | | $ | 728.7 |
| | $ | 406.4 |
| | $ | 1,135.1 |
|
| | | | | | |
Fair Value: | | | | | | |
Other current assets | | 4.4 |
| | 0.2 |
| | 4.6 |
|
Other current liabilities | | — |
| | — |
| | — |
|
Total | | $ | 4.4 |
| | $ | 0.2 |
| | $ | 4.6 |
|
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.
|
| | | | | | | | | | | | |
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 uses interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of debt obligations are recognized in current period earnings. Refer to footnote 13 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. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the liabilities carried at fair value measured on a recurring basis as of 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 entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at September 30, 2017 and December 31, 2016. 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 and 2016 Notes are considered Level 2 based on the fair value valuation hierarchy.
The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
|
| | | | | | | | | | | | | | | |
| 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. 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, in Note 19 therein, filed on February 28, 2017. During the first nine months of 2017, there were no material changes to the information described in the Form 10-K.
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, in Note 19 therein, filed on February 28, 2017. Except as described below, there have been no material changes to the information described in the Form 10-K, including with respect to the litigation with Siemens described therein.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”) 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 Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossings, as of September 8, 2017, Denver Transit 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 to the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"). No claims have been filed by Denver Transit with regard to either issue. Xorail has denied Denver Transit’s assertions regarding 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. Xorail has worked with Denver Transit to modify its system to meet the FRA’s and PUC's previously undefined, and evolving, certification requirements. On September 28, 2017, the FRA granted a 5 year approval of the modified wireless crossing system as currently implemented; however, the PUC 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 has any liability with respect to the wireless crossing issue.
15. 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 September 30, 2017 is as follows: |
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 340,185 |
| | $ | 617,746 |
| | $ | — |
| | $ | 957,931 |
|
Intersegment sales/(elimination) | 8,376 |
| | 4,494 |
| | (12,870 | ) | | — |
|
Total sales | $ | 348,561 |
| | $ | 622,240 |
| | $ | (12,870 | ) | | $ | 957,931 |
|
Income (loss) from operations | $ | 61,596 |
| | $ | 47,531 |
| | $ | (7,116 | ) | | $ | 102,011 |
|
Interest expense and other, net | — |
| | — |
| | (20,826 | ) | | (20,826 | ) |
Income (loss) from operations before income taxes | $ | 61,596 |
| | $ | 47,531 |
| | $ | (27,942 | ) | | $ | 81,185 |
|
Segment financial information for the three months ended September 30, 2016 is as follows: |
| | | | | | | | | | | | | | | |
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 nine months ended September 30, 2017 is as follows:
|
| | | | | | | | | | | | | | | |
In thousands | Freight Segment | | Transit Segment | | Corporate Activities and Elimination | | Total |
Sales to external customers | $ | 1,032,959 |
| | $ | 1,773,259 |
| | $ | — |
| | $ | 2,806,218 |
|
Intersegment sales/(elimination) | 27,602 |
| | 16,253 |
| | (43,855 | ) | | — |
|
Total sales | $ | 1,060,561 |
| | $ | 1,789,512 |
| | $ | (43,855 | ) | | $ | 2,806,218 |
|
Income (loss) from operations | $ | 196,328 |
| | $ | 155,901 |
| | $ | (21,659 | ) | | $ | 330,570 |
|
Interest expense and other, net | — |
| | — |
| | (53,191 | ) | | (53,191 | ) |
Income (loss) from operations before income taxes | $ | 196,328 |
| | $ | 155,901 |
| | $ | (74,850 | ) | | $ | 277,379 |
|
Segment financial information for the nine months ended September 30, 2016 is as follows:
|
| | | | | | | | | | | | | | | |
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, |
In thousands | 2017 | | 2016 |
Specialty Products & Electronics | $ | 975,006 |
| | $ | 1,051,806 |
|
Transit Products | 789,096 |
| | 143,434 |
|
Brake Products | 550,181 |
| | 428,785 |
|
Remanufacturing, Overhaul & Build | 387,634 |
| | 444,278 |
|
Other | 104,301 |
| | 102,903 |
|
Total sales | $ | 2,806,218 |
| | $ | 2,171,206 |
|
16. 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 September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | |
In thousands | Parent | | Guarantors | | Non-Guarantors | | Elimination | | Consolidated |
Cash and cash equivalents | $ | 3,049 |
| | $ | |