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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM
10-Q
____________________________________
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2019
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number:
033-90866
____________________________________
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORP
ORATION
(Exact name of registrant as specified in its charter)
____________________________________
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Delaware
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25-1615902
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1001 Air Brake Avenue
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Wilmerding
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PA
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15148
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(Address of principal executive offices)
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(Zip code)
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412
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825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, $.01 par value per share
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WAB
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New York Stock Exchange
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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
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes
☒
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
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☒
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Emerging growth company
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☐
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Smaller reporting company
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☐
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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
☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 29, 2019, there were
188,155,130
shares of common stock, par value $.01 per share, of the registrant outstanding.
WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
June 30, 2019
FORM 10-Q
TABLE OF CONTENTS
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Page
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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.
|
|
|
|
|
|
Item 2.
|
|
|
|
|
|
Item 4.
|
|
|
|
|
|
Item 6.
|
|
|
|
|
|
|
|
|
PART I—FINANCIAL INFORMATION
|
|
Item 1.
|
FINANCIAL STATEMENTS
|
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
In thousands, except shares and par value
|
June 30,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
461,371
|
|
|
$
|
580,908
|
|
Restricted cash
|
—
|
|
|
1,761,446
|
|
Accounts receivable
|
1,247,450
|
|
|
801,193
|
|
Unbilled accounts receivable
|
459,959
|
|
|
345,585
|
|
Inventories
|
1,881,791
|
|
|
844,886
|
|
Other current assets
|
178,569
|
|
|
115,649
|
|
Total current assets
|
4,229,140
|
|
|
4,449,667
|
|
Property, plant and equipment
|
2,170,618
|
|
|
1,036,550
|
|
Accumulated depreciation
|
(524,521
|
)
|
|
(472,813
|
)
|
Property, plant and equipment, net
|
1,646,097
|
|
|
563,737
|
|
Other Assets
|
|
|
|
Goodwill
|
8,150,671
|
|
|
2,396,544
|
|
Other intangibles, net
|
4,364,356
|
|
|
1,129,880
|
|
Other noncurrent assets
|
552,329
|
|
|
109,406
|
|
Total other assets
|
13,067,356
|
|
|
3,635,830
|
|
Total Assets
|
$
|
18,942,593
|
|
|
$
|
8,649,234
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current Liabilities
|
|
|
|
Accounts payable
|
$
|
1,232,597
|
|
|
$
|
589,449
|
|
Customer deposits
|
648,503
|
|
|
373,538
|
|
Accrued compensation
|
287,873
|
|
|
173,183
|
|
Accrued warranty
|
223,764
|
|
|
135,636
|
|
Current portion of long-term debt
|
104,413
|
|
|
64,099
|
|
Other accrued liabilities
|
714,165
|
|
|
310,785
|
|
Total current liabilities
|
3,211,315
|
|
|
1,646,690
|
|
Long-term debt
|
4,528,768
|
|
|
3,792,774
|
|
Accrued postretirement and pension benefits
|
95,625
|
|
|
95,446
|
|
Deferred income taxes
|
169,861
|
|
|
198,269
|
|
Accrued warranty
|
32,252
|
|
|
18,066
|
|
Other long-term liabilities
|
1,069,615
|
|
|
28,914
|
|
Total Liabilities
|
9,107,436
|
|
|
5,780,159
|
|
Commitments and contingencies (Note 16)
|
|
|
|
Equity
|
|
|
|
Convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, 1,220 and no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 500,000,000 shares authorized:
|
|
|
|
223,431,716 and 132,349,534 shares issued and 188,183,106 and 96,614,946 outstanding
|
|
|
|
at June 30, 2019 and December 31, 2018, respectively
|
1,981
|
|
|
1,323
|
|
Additional paid-in capital
|
7,807,109
|
|
|
914,568
|
|
Treasury stock, at cost, 35,248,610 and 35,734,588 shares,
|
|
|
|
at June 30, 2019 and December 31, 2018, respectively
|
(805,618
|
)
|
|
(816,145
|
)
|
Retained earnings
|
3,087,468
|
|
|
3,021,968
|
|
Accumulated other comprehensive loss
|
(289,180
|
)
|
|
(256,583
|
)
|
Total Westinghouse Air Brake Technologies Corporation shareholders' equity
|
9,801,760
|
|
|
2,865,131
|
|
Noncontrolling interest
|
33,397
|
|
|
3,944
|
|
Total Equity
|
9,835,157
|
|
|
2,869,075
|
|
Total Liabilities and Equity
|
$
|
18,942,593
|
|
|
$
|
8,649,234
|
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
In thousands, except per share data
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
Sales of goods
|
$
|
1,892,508
|
|
|
$
|
1,065,893
|
|
|
$
|
3,327,017
|
|
|
$
|
2,076,570
|
|
Sales of services
|
343,776
|
|
|
45,787
|
|
|
502,884
|
|
|
91,287
|
|
Total net sales
|
2,236,284
|
|
|
1,111,680
|
|
|
3,829,901
|
|
|
2,167,857
|
|
Cost of sales:
|
|
|
|
|
|
|
|
Cost of goods
|
(1,377,758
|
)
|
|
(749,097
|
)
|
|
(2,451,329
|
)
|
|
(1,458,375
|
)
|
Cost of services
|
(243,850
|
)
|
|
(38,616
|
)
|
|
(374,879
|
)
|
|
(74,634
|
)
|
Total cost of sales
|
(1,621,608
|
)
|
|
(787,713
|
)
|
|
(2,826,208
|
)
|
|
(1,533,009
|
)
|
Gross profit
|
614,676
|
|
|
323,967
|
|
|
1,003,693
|
|
|
634,848
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(290,959
|
)
|
|
(171,157
|
)
|
|
(550,682
|
)
|
|
(318,358
|
)
|
Engineering expenses
|
(57,120
|
)
|
|
(19,388
|
)
|
|
(91,665
|
)
|
|
(41,437
|
)
|
Amortization expense
|
(65,960
|
)
|
|
(9,899
|
)
|
|
(93,402
|
)
|
|
(20,251
|
)
|
Total operating expenses
|
(414,039
|
)
|
|
(200,444
|
)
|
|
(735,749
|
)
|
|
(380,046
|
)
|
Income from operations
|
200,637
|
|
|
123,523
|
|
|
267,944
|
|
|
254,802
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
Interest expense, net
|
(58,560
|
)
|
|
(31,920
|
)
|
|
(103,129
|
)
|
|
(52,204
|
)
|
Other income (expense), net
|
2,177
|
|
|
2,171
|
|
|
(6,051
|
)
|
|
4,757
|
|
Income from operations before income taxes
|
144,254
|
|
|
93,774
|
|
|
158,764
|
|
|
207,355
|
|
Income tax expense
|
(41,400
|
)
|
|
(10,503
|
)
|
|
(59,923
|
)
|
|
(36,627
|
)
|
Net income
|
102,854
|
|
|
83,271
|
|
|
98,841
|
|
|
170,728
|
|
Less: Net loss attributable to noncontrolling interest
|
1,381
|
|
|
1,145
|
|
|
922
|
|
|
2,054
|
|
Net income attributable to Wabtec shareholders
|
104,235
|
|
|
84,416
|
|
|
99,763
|
|
|
172,782
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Net income attributable to Wabtec shareholders
|
$
|
0.58
|
|
|
$
|
0.88
|
|
|
$
|
0.66
|
|
|
$
|
1.80
|
|
Diluted
|
|
|
|
|
|
|
|
Net income attributable to Wabtec shareholders
|
$
|
0.54
|
|
|
$
|
0.87
|
|
|
$
|
0.61
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
Basic
|
177,348
|
|
|
95,992
|
|
|
149,553
|
|
|
95,867
|
|
Diluted
|
191,453
|
|
|
96,575
|
|
|
162,155
|
|
|
96,471
|
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Net income attributable to Wabtec shareholders
|
$
|
104,235
|
|
|
$
|
84,416
|
|
|
$
|
99,763
|
|
|
$
|
172,782
|
|
Foreign currency translation gain (loss)
|
18,832
|
|
|
(192,778
|
)
|
|
(27,721
|
)
|
|
(114,811
|
)
|
Unrealized loss on derivative contracts
|
(22
|
)
|
|
(7,567
|
)
|
|
(4,115
|
)
|
|
(5,501
|
)
|
Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans
|
1,328
|
|
|
10,665
|
|
|
(2,294
|
)
|
|
10,235
|
|
Other comprehensive income (loss) before tax
|
20,138
|
|
|
(189,680
|
)
|
|
(34,130
|
)
|
|
(110,077
|
)
|
Income tax (benefit) expense related to components of
|
|
|
|
|
|
|
|
other comprehensive income
|
(318
|
)
|
|
(537
|
)
|
|
1,533
|
|
|
(1,132
|
)
|
Other comprehensive income (loss), net of tax
|
19,820
|
|
|
(190,217
|
)
|
|
(32,597
|
)
|
|
(111,209
|
)
|
Comprehensive income (loss) attributable to Wabtec shareholders
|
$
|
124,055
|
|
|
$
|
(105,801
|
)
|
|
$
|
67,166
|
|
|
$
|
61,573
|
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Six Months Ended
June 30,
|
In thousands, except per share data
|
2019
|
|
2018
|
|
|
|
|
Operating Activities
|
|
|
|
Net income
|
$
|
98,841
|
|
|
$
|
170,728
|
|
Adjustments to reconcile net income to cash provided by operations:
|
|
|
|
Depreciation and amortization
|
165,064
|
|
|
53,227
|
|
Stock-based compensation expense
|
23,932
|
|
|
13,983
|
|
Below market intangible amortization
|
(9,400
|
)
|
|
—
|
|
Loss on disposal of property, plant and equipment
|
461
|
|
|
1,353
|
|
Changes in operating assets and liabilities, net of acquisitions
|
|
|
|
Accounts receivable and unbilled accounts receivable
|
(35,705
|
)
|
|
(59,979
|
)
|
Inventories
|
147,424
|
|
|
(116,131
|
)
|
Accounts payable
|
(71,935
|
)
|
|
59,411
|
|
Accrued income taxes
|
21,399
|
|
|
(202
|
)
|
Accrued liabilities and customer deposits
|
24,188
|
|
|
27,545
|
|
Other assets and liabilities
|
79,655
|
|
|
(82,031
|
)
|
Net cash provided by operating activities
|
443,924
|
|
|
67,904
|
|
Investing Activities
|
|
|
|
Purchase of property, plant and equipment
|
(61,867
|
)
|
|
(39,723
|
)
|
Proceeds from disposal of property, plant and equipment
|
3,055
|
|
|
8,900
|
|
Acquisitions of businesses, net of cash acquired
|
(2,981,552
|
)
|
|
(38,277
|
)
|
Net cash used for investing activities
|
(3,040,364
|
)
|
|
(69,100
|
)
|
Financing Activities
|
|
|
|
Proceeds from debt
|
2,325,934
|
|
|
591,890
|
|
Payments of debt
|
(1,552,121
|
)
|
|
(546,394
|
)
|
Proceeds from exercise of stock options and other benefit plans
|
775
|
|
|
6,867
|
|
Payment of income tax withholding on share-based compensation
|
(4,117
|
)
|
|
(6,503
|
)
|
Payment of contingent consideration on acquisitions
|
(10,100
|
)
|
|
—
|
|
Cash dividends
|
(34,263
|
)
|
|
(23,096
|
)
|
Net cash provided by financing activities
|
726,108
|
|
|
22,764
|
|
Effect of changes in currency exchange rates
|
(10,651
|
)
|
|
(9,395
|
)
|
(Decrease) increase in cash
|
(1,880,983
|
)
|
|
12,173
|
|
Cash, cash equivalents and restricted cash beginning of period
|
2,342,354
|
|
|
233,401
|
|
Cash and cash equivalents end of period
|
$
|
461,371
|
|
|
$
|
245,574
|
|
The accompanying notes are an integral part of these statements.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Treasury
Stock
|
|
Treasury
Stock
|
|
Retained
|
|
Accumulated
Other
|
|
Non-controlling
|
|
|
In thousands, except share and per share data
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Comprehensive Loss
|
|
Interest
|
|
Total
|
Balance, December 31, 2017
|
|
132,349,534
|
|
|
1,323
|
|
|
906,616
|
|
|
(36,315,182
|
)
|
|
(827,379
|
)
|
|
2,773,300
|
|
|
(44,992
|
)
|
|
19,664
|
|
|
2,828,532
|
|
Cash dividends ($0.12 dividend per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,531
|
)
|
|
—
|
|
|
—
|
|
|
(11,531
|
)
|
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
|
|
—
|
|
|
—
|
|
|
(4,511
|
)
|
|
193,013
|
|
|
3,222
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,289
|
)
|
Stock based compensation
|
|
—
|
|
|
—
|
|
|
5,696
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,696
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88,366
|
|
|
—
|
|
|
(909
|
)
|
|
87,457
|
|
Other comprehensive income, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79,008
|
|
|
—
|
|
|
79,008
|
|
Other owner changes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
356
|
|
|
356
|
|
Balance, March 31, 2018
|
|
132,349,534
|
|
|
$
|
1,323
|
|
|
$
|
907,801
|
|
|
(36,122,169
|
)
|
|
$
|
(824,157
|
)
|
|
$
|
2,850,135
|
|
|
$
|
34,016
|
|
|
$
|
19,111
|
|
|
$
|
2,988,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.12 dividend per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,565
|
)
|
|
—
|
|
|
—
|
|
|
(11,565
|
)
|
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
|
|
—
|
|
|
—
|
|
|
(5,738
|
)
|
|
159,014
|
|
|
2,979
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,759
|
)
|
Stock based compensation
|
|
—
|
|
|
—
|
|
|
8,287
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,287
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84,416
|
|
|
—
|
|
|
(1,145
|
)
|
|
83,271
|
|
Other comprehensive loss, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(190,217
|
)
|
|
—
|
|
|
(190,217
|
)
|
Other owner changes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(618
|
)
|
|
(618
|
)
|
Balance, June 30, 2018
|
|
132,349,534
|
|
|
$
|
1,323
|
|
|
$
|
910,350
|
|
|
(35,963,155
|
)
|
|
$
|
(821,178
|
)
|
|
$
|
2,922,986
|
|
|
$
|
(156,201
|
)
|
|
$
|
17,348
|
|
|
$
|
2,874,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
132,349,534
|
|
|
1,323
|
|
|
914,568
|
|
|
(35,734,588
|
)
|
|
(816,145
|
)
|
|
3,021,968
|
|
|
(256,583
|
)
|
|
3,944
|
|
|
2,869,075
|
|
Cash dividends ($0.12 dividend per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,687
|
)
|
|
—
|
|
|
—
|
|
|
(11,687
|
)
|
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
|
|
—
|
|
|
—
|
|
|
(14,446
|
)
|
|
420,472
|
|
|
8,931
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,515
|
)
|
Stock based compensation
|
|
—
|
|
|
—
|
|
|
8,526
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,526
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,472
|
)
|
|
—
|
|
|
459
|
|
|
(4,013
|
)
|
Other comprehensive loss, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52,417
|
)
|
|
—
|
|
|
(52,417
|
)
|
Acquisitions
|
|
65,782,182
|
|
|
658
|
|
|
6,887,622
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86,765
|
|
|
6,975,045
|
|
Other owner changes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,432
|
|
|
1,432
|
|
Balance, March 31, 2019
|
|
198,131,716
|
|
|
$
|
1,981
|
|
|
$
|
7,796,270
|
|
|
(35,314,116
|
)
|
|
$
|
(807,214
|
)
|
|
$
|
3,005,809
|
|
|
$
|
(309,000
|
)
|
|
$
|
92,600
|
|
|
$
|
9,780,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.12 dividend per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,576
|
)
|
|
—
|
|
|
—
|
|
|
(22,576
|
)
|
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
|
|
—
|
|
|
—
|
|
|
(4,567
|
)
|
|
65,506
|
|
|
1,596
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,971
|
)
|
Stock based compensation
|
|
—
|
|
|
—
|
|
|
15,406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,406
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
104,235
|
|
|
—
|
|
|
(1,381
|
)
|
|
102,854
|
|
Other comprehensive income, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,820
|
|
|
—
|
|
|
19,820
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,179
|
)
|
|
(56,179
|
)
|
Other owner changes
|
|
25,300,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,643
|
)
|
|
(1,643
|
)
|
Balance, June 30, 2019
|
|
223,431,716
|
|
|
$
|
1,981
|
|
|
$
|
7,807,109
|
|
|
(35,248,610
|
)
|
|
$
|
(805,618
|
)
|
|
$
|
3,087,468
|
|
|
$
|
(289,180
|
)
|
|
$
|
33,397
|
|
|
$
|
9,835,157
|
|
The accompanying notes are an integral part of these statements
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2019
(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 equipment, systems and services for the global freight rail and passenger transit industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers and can be found on most locomotives, freight cars, passenger transit cars and buses around the world. Many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in over
50
countries and our products can be found in more than
100
countries throughout the world. In the first
six
months of
2019
, approximately
59%
of the Company’s revenues came from customers outside the United States.
2. ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.
The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended
December 31, 2018
. The
December 31, 2018
information has been derived from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Revenue Recognition
On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.
Approximately
75%
of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract revenues and cost estimates are reviewed and revised periodically through the year and adjustments are reflected in the accounting period as such amounts are determined.
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” while the noncurrent contract assets are classified as other assets under the caption "Other Noncurrent Assets" on the consolidated balance sheet. Noncurrent contract assets were
$122.5 million
at
June 30, 2019
and were not material at
December 31, 2018
, respectively. Included in noncurrent contract assets are certain costs that are specifically related to a contract, however, do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.
Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract
liabilities are classified as current liabilities under the caption “Customer Deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other Long-Term Liabilities" on the consolidated balance sheet. Noncurrent contract liabilities were
$36.9 million
at
June 30, 2019
and were not material at
December 31, 2018
. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were
$103.6 million
and
$71.2 million
at
June 30, 2019
and
December 31, 2018
, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other Accrued Liabilities” on the consolidated balance sheet.
Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good; however, a single contract may have multiple performance obligations comprising multiple promises to customers. Performance obligations are determined based on customer's intended use of products and services. Less complex products principally result in each completed product being a separate performance obligation recognized at a point in time. More complex products or services principally result in a single performance obligation as a customer is either procuring a bundled offering that is managed or utilized on a combined basis or there are multiple complex goods or services in the contract, which are substantially the same and recognized over time. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.
Remaining performance obligations represent the transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of
June 30, 2019
, the Company's remaining performance obligations were $
21.3 billion
. The Company expects to recognize revenue of approximately
26%
of remaining performance obligation over the next
12 months
, with the remainder recognized thereafter.
Reclassifications
Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation, including the reclassification of "Net Sales" to "Sales of Goods" and "Sales of Services".
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Financial Derivatives and Hedging Activities
As part of its risk management strategy, the Company utilizes derivative financial instruments to mitigate the impact of changes in foreign currency exchange rates and interest rates on earnings and cash flow. For further information regarding financial derivatives and hedging activities, refer to Footnotes 14 and 15.
Foreign Currency Translation
Certain of our international operations have determined that the local currency is the functional currency whereas others have determined the U.S. dollar is their functional currency. Assets and liabilities of foreign subsidiaries where the functional currency is the local currency are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings.
Noncontrolling Interests
In accordance with ASC 810 "Consolidation", the Company has classified noncontrolling interests as equity on the condensed consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
. Net loss attributable to noncontrolling interests was
$1.4 million
and
$1.1 million
for the
three months ended June 30, 2019
and
2018
, respectively. Net loss attributable to noncontrolling interests was
$0.9 million
and
$2.1 million
for the
six months ended June 30, 2019
and
2018
, respectively.
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this update eliminate the requirement to perform Step 2 of the goodwill impairment test. Instead, an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value up to the carrying amount of the goodwill. The ASU is effective for public companies in the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The impact of adopting this guidance could result in a change in the overall conclusion as to whether or not a reporting unit's goodwill is impaired and the amount of an impairment charge recognized in the event a reporting units' carrying value exceeds its fair value. All of the Company's reporting units had fair values that were substantially greater than the carrying value as of the Company's last quantitative goodwill impairment test, which was performed as of October 1, 2018.
Recently Adopted Accounting Pronouncements
In February 2018, FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance became effective for reporting periods beginning after December 15, 2018. The Company adopted this accounting standard at the beginning of the period and elected to not retrospectively apply the new standard. The impact of adopting the new standard was not material to the consolidated statement of income or the consolidated balance sheet.
In February 2016, FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. This guidance became effective for the Company on January 1, 2019. The Company elected the practical expedient which does not require the capitalization of leases with terms of 12 months or less. And the Company did not elect the practical expedient which allows hindsight to be used to determine the term of a lease. The Company adopted the standard using the transition alternative, which allowed for the application of the guidance at beginning of the period in which it is adopted, rather than requiring the adjustment of prior comparative periods. For further information regarding the Company's adoption of the new standard, see Footnote 7.
Other Comprehensive Income (Loss)
Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from nonowner sources.
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the
six months ended June 30, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Foreign
currency
translation
|
|
Derivative
contracts
|
|
Pension and
post
retirement
benefit plans
|
|
Total
|
Balance at December 31, 2018
|
$
|
(202,204
|
)
|
|
$
|
(53
|
)
|
|
$
|
(54,326
|
)
|
|
$
|
(256,583
|
)
|
Other comprehensive income (loss) before reclassifications
|
(27,721
|
)
|
|
(3,128
|
)
|
|
(2,849
|
)
|
|
(33,698
|
)
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
|
comprehensive income
|
—
|
|
|
—
|
|
|
1,101
|
|
|
1,101
|
|
Net current period other comprehensive income (loss)
|
(27,721
|
)
|
|
(3,128
|
)
|
|
(1,748
|
)
|
|
(32,597
|
)
|
Balance at June 30, 2019
|
$
|
(229,925
|
)
|
|
$
|
(3,181
|
)
|
|
$
|
(56,074
|
)
|
|
$
|
(289,180
|
)
|
Reclassifications out of accumulated other comprehensive income (loss) for the
three months ended June 30, 2019
are as follows:
|
|
|
|
|
|
|
In thousands
|
Amount reclassified from
accumulated other
comprehensive income
|
|
Affected line item in the
Condensed Consolidated
Statements of Income
|
Amortization of defined pension and post retirement items
|
|
|
|
Amortization of initial net obligation and prior service cost
|
$
|
(366
|
)
|
|
Other income (expense), net
|
Amortization of net loss
|
1,092
|
|
|
Other income (expense), net
|
|
726
|
|
|
Other income (expense), net
|
|
(176
|
)
|
|
Income tax expense
|
|
$
|
550
|
|
|
Net income
|
Reclassifications out of accumulated other comprehensive income (loss) for the
six months ended June 30, 2019
are as follows:
|
|
|
|
|
|
|
In thousands
|
Amount reclassified from
accumulated other
comprehensive income
|
|
Affected line item in the
Condensed Consolidated
Statements of Income
|
Amortization of defined pension and post retirement items
|
|
|
|
Amortization of initial net obligation and prior service cost
|
$
|
(732
|
)
|
|
Other income (expense), net
|
Amortization of net loss
|
2,184
|
|
|
Other income (expense), net
|
|
1,452
|
|
|
Other income (expense), net
|
|
(351
|
)
|
|
Income tax expense
|
|
$
|
1,101
|
|
|
Net income
|
The changes in accumulated other comprehensive loss by component, net of tax, for the
six months ended June 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
translation
|
|
Derivative
contracts
|
|
Pension and
post
retirement
benefit plans
|
|
Total
|
Balance at December 31, 2017
|
$
|
5,063
|
|
|
$
|
4,015
|
|
|
$
|
(54,070
|
)
|
|
$
|
(44,992
|
)
|
Other comprehensive income (loss) before reclassifications
|
(114,811
|
)
|
|
(4,760
|
)
|
|
6,744
|
|
|
(112,827
|
)
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
|
comprehensive income
|
—
|
|
|
579
|
|
|
1,039
|
|
|
1,618
|
|
Net current period other comprehensive income (loss)
|
(114,811
|
)
|
|
(4,181
|
)
|
|
7,783
|
|
|
(111,209
|
)
|
Balance at June 30, 2018
|
$
|
(109,748
|
)
|
|
$
|
(166
|
)
|
|
$
|
(46,287
|
)
|
|
$
|
(156,201
|
)
|
Reclassifications out of accumulated other comprehensive loss for the
three months ended June 30, 2018
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
|
$
|
(375
|
)
|
|
Other income (expense), net
|
Amortization of net loss
|
1,093
|
|
|
Other income (expense), net
|
|
718
|
|
|
Other income (expense), net
|
|
(198
|
)
|
|
Income tax expense
|
|
$
|
520
|
|
|
Net income
|
|
|
|
|
Derivative contracts
|
|
|
|
Realized loss on derivative contracts
|
$
|
176
|
|
|
Interest expense, net
|
|
(42
|
)
|
|
Income tax expense
|
|
$
|
134
|
|
|
Net income
|
Reclassifications out of accumulated other comprehensive loss for the
six months ended June 30, 2018
are as follows:
|
|
|
|
|
|
|
In thousands
|
Amount reclassified from
accumulated other
comprehensive income
|
|
Affected line item in the
Condensed Consolidated
Statements of Operations
|
Amortization of defined pension and post retirement items
|
|
|
|
Amortization of initial net obligation and prior service cost
|
$
|
(751
|
)
|
|
Other income (expense), net
|
Amortization of net loss
|
2,186
|
|
|
Other income (expense), net
|
|
1,435
|
|
|
Other income (expense), net
|
|
(396
|
)
|
|
Income tax expense
|
|
$
|
1,039
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
855
|
|
|
Interest expense, net
|
Realized loss on derivative contracts
|
(276
|
)
|
|
Income tax expense
|
|
$
|
579
|
|
|
Net income
|
3. ACQUISITIONS
General Electric Transportation
Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec Company formerly known as Transportation System Holdings Inc. ("SpinCo"), which was a newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc. ("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company, entered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo, Wabtec and Wabtec US Rail, Inc. ("Direct Sale Purchaser") entered into the Original Separation Agreement on May 20, 2018, which together provided for the combination of Wabtec and GE Transportation. The Original Merger Agreement and Original Separation Agreement were subsequently amended on January 25, 2019 and the Merger was completed on February 25, 2019.
As part of the Merger, certain assets of GE Transportation ("GET"), including the equity interests of certain pre-Transaction subsidiaries of GE that compose part of GE Transportation, were sold to Direct Sale Purchaser for a cash payment of
$2.875 billion
, and Direct Sale Purchaser assumed certain liabilities of GE Transportation in connection with this purchase (the "Direct Sale"). Thereafter, GE transferred the SpinCo business to SpinCo and its subsidiaries (to the extent not already held
by SpinCo and its subsidiaries), and SpinCo issued to GE shares of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class C preferred stock and additional shares of SpinCo common stock in the SpinCo Transfer. Following this issuance of additional SpinCo common stock to GE, and immediately prior to the Distribution (as defined below), GE owned
8,700,000,000
shares of SpinCo common stock,
15,000
shares of SpinCo Class A preferred stock,
10,000
shares of SpinCo Class B preferred stock and
one
share of SpinCo Class C preferred stock, which constituted all of the outstanding stock of SpinCo.
Following the Direct Sale, GE distributed the distribution shares of SpinCo in a spin-off transaction to its stockholder (the "Distribution"). Immediately after the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), whereby the separate corporate existence of Merger Sub ceased and SpinCo continued as the surviving company and a wholly owned subsidiary of Wabtec (except with respect to shares of SpinCo Class A preferred stock held by GE). In the Merger, subject to adjustment in accordance with the Merger Agreement, each share of SpinCo common stock converted into the right to receive a number of shares of Wabtec common stock based on the common stock exchange ratio set forth in the Merger Agreement and the share of SpinCo Class C preferred stock was converted into the right to receive (a)
10,000
shares of Wabtec convertible preferred stock and (b) a number of shares of Wabtec common stock equal to
9.9%
of the fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec paid
$10.0 million
in cash to GE in exchange for all of the shares of SpinCo Class B preferred stock.
Upon consummation of the Merger, Wabtec issued
46,763,975
shares of common stock to the holders of GE common stock,
19,018,207
shares of common stock to GE and
10,000
shares of preferred stock to GE and made a cash payment to GE of
$2.885 billion
. As a result and calculated based on Wabtec’s outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as of December 31, 2018, approximately
49.2%
of the outstanding shares of Wabtec common stock was held collectively by GE and holders of GE common stock (with
9.9%
to be held by GE directly in shares of Wabtec common stock and
15%
underlying the shares of Wabtec convertible preferred stock to be held by GE) and approximately
50.8%
of the outstanding shares of Wabtec common stock would be held by pre-Merger Wabtec stockholders, in each case calculated on a fully-diluted, as-converted and as-exercised basis. Following the Merger, GE also retained
15,000
shares of SpinCo Class A non-voting preferred stock, and Wabtec held
10,000
shares of SpinCo Class B non-voting preferred stock. The shares of Wabtec common stock and Wabtec convertible preferred stock held by GE are subject to GE’s obligations under the shareholders agreement, including, among other things, and in each case subject to certain exceptions, (i) restrictions on the ability to sell, transfer or otherwise divest such shares for a period of 30 days and (ii) an obligation to sell, transfer or otherwise divest (A) by no later than 120 days following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not less than
14.9%
and not more than
19.9%
of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, (B) by no later than one year following the closing date of the Merger, GE’s (and its affiliates’) ownership of Wabtec common stock and/or Wabtec convertible preferred stock so that GE (together with its affiliates) beneficially owns not more than
18.5%
of the number of shares of Wabtec common stock that were outstanding immediately after the closing of the Merger, in each case of clauses (A) and (B) treating the Wabtec convertible preferred stock as the Wabtec common stock into which it is convertible both for purposes of determining the number of shares of Wabtec common stock owned and for purposes of determining the number of shares of Wabtec common stock outstanding and (C) by no later than the third anniversary of the closing date of the Merger, all of the subject shares that GE (together with its affiliates) beneficially owns, and (iii) an obligation to vote all of such shares of Wabtec common stock in the proportion required under the Shareholders Agreement.
After the Merger, SpinCo, which is Wabtec’s wholly owned subsidiary (except with respect to shares of SpinCo Class A preferred stock held by GE), holds the SpinCo business and Direct Sale Purchaser, which also is Wabtec’s wholly owned subsidiary, holds the assets purchased and the liabilities assumed in connection with the Direct Sale. Together, SpinCo and Direct Sale Purchaser own and operate the post-transaction GE Transportation. All shares of the Company’s common stock, including those issued in the Merger, are listed on the NYSE under the Company’s current trading symbol “WAB.” On the date of the Distribution, GE or its subsidiaries and SpinCo or the SpinCo Transferred Subsidiaries entered into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development and transition services.
On May 6, 2019, GE completed the sale of approximately
8,780
shares of Wabtec's Series A Preferred stock which converted upon the sale to
25,300,000
shares of Wabtec's common stock. After the sale Wabtec had approximately
1,220
shares of Series A Preferred Stock outstanding convertible to approximately
3,515,500
shares of common stock and GE's aggregate beneficial ownership percentage of the Company was reduced from approximately
24.9%
to approximately
11.7%
on a fully-diluted, as-converted and as-exercised basis. In conjunction with this secondary offering the Company waived the requirement under the shareholders agreement for GE to maintain ownership of at least
14.9%
of Wabtec's stock for 120 days following the closing date of the Merger. The Company did not receive any proceeds from the sale of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment of
$470.0 million
, which is directly related to the timing of tax benefits expected to be realized by Wabtec as a result of the merger. This payment is considered
contingent consideration because the timing of cash payments to GE is directly related to the future timing of tax benefits received by the Company as a result of the merger. The estimated total value of the consideration to be paid by Wabtec in the Transactions is approximately
$10.3 billion
, including the cash paid for the Direct Sales Assets, equity transferred for SpinCo, contingent consideration, assumed debt and net of cash acquired. The estimated consideration is based on the Company’s closing share price of
$73.36
on February 22, 2019 and the preliminary fair value of the contingent consideration. The value of the preliminary purchase price consideration could change when the Company has completed the detailed valuation of the contingent consideration and other necessary calculations.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The June 30, 2019 consolidated balance sheet includes the assets and liabilities of GET, which have been initially measured at fair value. The noncontrolling interest includes equity interests in GET's Brazil operations held by third parties on the date of acquisition. At the time of acquisition, quotable market prices of the noncontrolling interest existed; therefore, the noncontrolling interest in the GET Brazil operations were measured using a Level 1 input. In April 2019, the Company acquired the noncontrolling interest in GET's Brazil operations for
$56.2 million
which approximated the fair value assigned to the noncontrolling interest on the date of acquisition. The remaining noncontrolling interest value was determined based on inputs that are not observable in the market and are considered Level 3.
The following table summarizes the preliminary fair values of the GET assets acquired and liabilities assumed:
|
|
|
|
|
|
In thousands
|
|
|
Assets acquired
|
|
|
Cash and cash equivalents
|
|
$
|
174,334
|
|
Accounts receivable
|
|
525,966
|
|
Inventories
|
|
1,185,574
|
|
Other current assets
|
|
64,115
|
|
Property, plant, and equipment
|
|
1,086,245
|
|
Goodwill
|
|
5,758,264
|
|
Trade names
|
|
50,000
|
|
Customer relationships
|
|
550,000
|
|
Intellectual property
|
|
1,210,000
|
|
Backlog
|
|
1,530,000
|
|
Other noncurrent assets
|
|
211,081
|
|
Total assets acquired
|
|
12,345,579
|
|
Liabilities assumed
|
|
|
Current liabilities
|
|
1,514,189
|
|
Contingent consideration
|
|
440,000
|
|
Other noncurrent liabilities
|
|
522,465
|
|
Total liabilities assumed
|
|
2,476,654
|
|
Net assets acquired
|
|
9,868,925
|
|
Noncontrolling interest
|
|
$
|
86,765
|
|
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
three months ended June 30, 2019
, the estimated fair values for acquired backlog and customer relationships increased
$50.0 million
and
$20.0 million
, respectively. Additionally, the estimated fair value for other noncurrent assets decreased by
$23.7 million
primarily due to estimate revisions for long-term contract assets. These changes to initial estimates were based on information that existed at the date of acquisition. Substantially all of the accounts receivable acquired are expected to be collectible. Trade names, customer relationships, patents and backlog intangible assets are all subject to amortization. Contingent liabilities assumed as part of the transaction were not material. The contingent liabilities are related to legal and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting. Included in other noncurrent liabilities are customer contracts whose terms are unfavorable compared to market terms at the date of acquisition.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the acquisition. Substantially all of the purchased goodwill is expected to be deductible for tax purposes. The goodwill has been preliminarily allocated to the Freight segment.
Included in the Company's consolidated statement of income for the
six months ended June 30, 2019
is
$1,617.1 million
of revenues and
$88.2 million
of operating income from GET. Acquisition related costs were approximately
$55.3 million
for the
six months ended June 30, 2019
and are included in selling, general and administrative expenses on the consolidated statements of income.
Other Acquisitions
The Company has made the following acquisition operating as a business unit or component of a business unit in the Transit Segment:
|
|
•
|
On
March 22, 2018
, the Company acquired Annax GmbH ("Annax"), a leading supplier of public address and passenger information systems for transit vehicles, for a purchase price of approximately
$45.2 million
, net of cash acquired and including contingent consideration, resulting in final goodwill of
$38.5 million
, none of which will be deductible for tax purposes. A payment of
$10.1 million
was made in the three months ended June 30, 2019 related to contingent consideration associated with the purchase of Annax.
|
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of the acquisition for Annax.
|
|
|
|
|
|
Annax
|
In thousands
|
March 22,
2018
|
Current assets
|
$
|
32,827
|
|
Property, plant & equipment
|
674
|
|
Goodwill
|
38,511
|
|
Other intangible assets
|
11,715
|
|
Total assets acquired
|
83,727
|
|
Total liabilities assumed
|
(55,064
|
)
|
Net assets acquired
|
$
|
28,663
|
|
The allocation of
$11.7 million
of total acquired other intangible assets includes
$3.8 million
assigned to trade names and
$7.5 million
assigned to customer relationships. The trade names were determined to have indefinite useful lives, while the customer relationships’ average useful lives are
20 years
.
The Company also made smaller acquisitions not listed above which are individually and collectively immaterial.
The following unaudited pro forma consolidated financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three Months Ended
June 30, 2019
|
|
Three Months Ended
June 30, 2018
|
|
Six Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2018
|
Net sales
|
$
|
2,236,284
|
|
|
$
|
2,023,848
|
|
|
$
|
4,316,055
|
|
|
$
|
3,905,572
|
|
Gross profit
|
703,676
|
|
|
634,868
|
|
|
1,247,156
|
|
|
1,019,549
|
|
Net income attributable to Wabtec shareholders
|
171,875
|
|
|
151,475
|
|
|
255,152
|
|
|
99,206
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
As Reported
|
$
|
0.54
|
|
|
$
|
0.87
|
|
|
$
|
0.61
|
|
|
$
|
1.79
|
|
Pro forma
|
$
|
0.90
|
|
|
$
|
0.79
|
|
|
$
|
1.34
|
|
|
$
|
0.52
|
|
4. INVENTORIES
The components of inventory, net of reserves, were:
|
|
|
|
|
|
|
|
|
In thousands
|
June 30,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
786,281
|
|
|
$
|
465,873
|
|
Work-in-progress
|
434,731
|
|
|
154,485
|
|
Finished goods
|
660,779
|
|
|
224,528
|
|
Total inventories
|
$
|
1,881,791
|
|
|
$
|
844,886
|
|
5. INTANGIBLES
The change in the carrying amount of goodwill by segment for the
six
months ended
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Freight
Segment
|
|
Transit
Segment
|
|
Total
|
Balance at December 31, 2018
|
$
|
713,391
|
|
|
$
|
1,683,153
|
|
|
$
|
2,396,544
|
|
Additions
|
5,754,115
|
|
|
15,420
|
|
|
5,769,535
|
|
Foreign currency impact
|
(11,687
|
)
|
|
(3,721
|
)
|
|
(15,408
|
)
|
Balance at June 30, 2019
|
$
|
6,455,819
|
|
|
$
|
1,694,852
|
|
|
$
|
8,150,671
|
|
As of
June 30, 2019
and
December 31, 2018
, the Company’s trade names had a net carrying amount of
$626.6 million
and
$582.8 million
, respectively. The Company believes these intangibles have indefinite lives, with the exception of the GE Transportation trade name, to which the company has assigned a useful life of
5 years
.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
|
|
|
|
|
|
|
|
|
In thousands
|
June 30,
2019
|
|
December 31,
2018
|
Backlog, intellectual property, patents, and other intangibles, net of accumulated
|
|
|
|
amortization of $76,059 and $42,446
|
$
|
2,689,022
|
|
|
$
|
15,328
|
|
Customer relationships, net of accumulated amortization
|
|
|
|
of $183,933 and $158,533
|
1,048,774
|
|
|
531,761
|
|
Total
|
$
|
3,737,796
|
|
|
$
|
547,089
|
|
The weighted average remaining useful life of backlog, intellectual property, customer relationships and other intangibles were
18 years
,
10 years
,
18 years
and
13 years
, respectively. Amortization expense for intangible assets was
$66.0 million
and
$93.4 million
for the
three and six
months ended
June 30, 2019
, and
$9.9 million
and
$20.3 million
for the
three and six
months ended
June 30, 2018
, respectively.
Amortization expense for the
five
succeeding years is estimated to be as follows:
|
|
|
|
|
Remainder of 2019
|
$
|
130,967
|
|
2020
|
259,206
|
|
2021
|
259,117
|
|
2022
|
258,805
|
|
2023
|
258,174
|
|
6. CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract, advanced customer payments that are in excess of revenue recognized, and provisions for estimated losses from uncompleted contracts.
The change in the carrying amount of contract assets and contract liabilities for the
six months ended June 30, 2019
is as follows:
|
|
|
|
|
|
In thousands
|
|
Contract Assets
|
Balance at beginning of year
|
|
$
|
345,585
|
|
Acquisitions
|
|
213,605
|
|
Recognized in current year
|
|
324,940
|
|
Reclassified to accounts receivable
|
|
(300,714
|
)
|
Foreign currency impact
|
|
(925
|
)
|
Balance at June 30, 2019
|
|
$
|
582,491
|
|
|
|
|
In thousands
|
|
Contract Liabilities
|
Balance at beginning of year
|
|
$
|
444,805
|
|
Acquisitions
|
|
282,054
|
|
Recognized in current year
|
|
572,644
|
|
Amounts in beginning balance reclassified to revenue
|
|
(251,980
|
)
|
Current year amounts reclassified to revenue
|
|
(257,640
|
)
|
Foreign currency impact
|
|
(867
|
)
|
Balance at June 30, 2019
|
|
$
|
789,016
|
|
7. LEASES
During the first quarter of 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)," which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.
The Company leases property and equipment under finance and operating leases. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of lease payments when appropriate. The Company does not separate lease and non-lease components contracts.
As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate our incremental borrowing rate to discount lease payments. The Company has established discount rates by geographic region ranging from
1.2%
to
12.3%
.
The components of lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
(in thousands)
|
2019
|
|
2019
|
Operating lease expense
|
$
|
13,387
|
|
|
$
|
26,784
|
|
Finance lease expense
|
|
|
|
Amortization of leased assets
|
272
|
|
|
543
|
|
Interest on lease liabilities
|
4
|
|
|
8
|
|
Short-term and variable lease expense
|
172
|
|
|
277
|
|
Sublease income
|
(138
|
)
|
|
(276
|
)
|
Total
|
$
|
13,697
|
|
|
$
|
27,336
|
|
Scheduled payments of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Finance
Leases
|
|
Total
|
Remaining 2019
|
$
|
25,598
|
|
|
$
|
188
|
|
|
$
|
25,786
|
|
2020
|
45,910
|
|
|
383
|
|
|
46,293
|
|
2021
|
37,570
|
|
|
185
|
|
|
37,755
|
|
2022
|
30,788
|
|
|
121
|
|
|
30,909
|
|
2023
|
26,252
|
|
|
121
|
|
|
26,373
|
|
Thereafter
|
107,810
|
|
|
349
|
|
|
108,159
|
|
Total lease payments
|
273,928
|
|
|
1,347
|
|
|
275,275
|
|
Less: Present value discount
|
(29,311
|
)
|
|
(2
|
)
|
|
(29,313
|
)
|
Present value lease liabilities
|
$
|
244,617
|
|
|
$
|
1,345
|
|
|
$
|
245,962
|
|
The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of lease liabilities:
|
|
|
|
|
June 30,
|
|
2019
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
8.3
|
|
Finance leases
|
5.5
|
|
Weighted-average discount rate
|
|
Operating leases
|
3.0
|
%
|
Finance leases
|
1.2
|
%
|
8. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands
|
June 30,
2019
|
|
December 31,
2018
|
Floating Senior Notes, due 2021, net of unamortized debt
issuance costs of $2,604 and $3,204
|
$
|
497,396
|
|
|
$
|
496,796
|
|
4.15% Senior Notes, due 2024, net of unamortized debt
issuance costs of $6,362 and $7,043
|
743,638
|
|
|
742,957
|
|
4.70% Senior Notes, due 2028, net of unamortized debt
issuance costs of $9,809 and $10,343
|
1,240,191
|
|
|
1,239,657
|
|
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $1,604 and $1,718
|
748,396
|
|
|
748,282
|
|
4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,048 and $1,177
|
248,952
|
|
|
248,823
|
|
Revolving Credit Facility, net of unamortized
debt issuance costs of $2,592 and $3,138
|
1,113,269
|
|
|
338,112
|
|
Other Borrowings
|
41,339
|
|
|
42,246
|
|
Total
|
4,633,181
|
|
|
3,856,873
|
|
Less: current portion
|
104,413
|
|
|
64,099
|
|
Long-term portion
|
$
|
4,528,768
|
|
|
$
|
3,792,774
|
|
On September 14, 2018, the Company issued
$2.5 billion
of senior notes with three different maturities.
|
|
•
|
Floating Rate Senior Notes due 2021
-
The Company issued
$500.0 million
of Floating Rate Senior Notes due 2021 (the "Floating Rate Notes"). The Floating Rate Notes, which are non-callable for
one year
, were issued at
100%
of face value. Interest on the Floating Rate Notes accrues at a floating rate per annum equal to three-month Libor plus 105 basis points. The interest rate for the Floating Rate Notes for the initial interest period was the three-month Libor plus 105 basis points determined on September 12, 2018 and is payable quarterly on December 15, March 15, June 15, and September 15 of each year. The Company incurred
$3.5 million
of deferred financing costs related to the issuance of the Floating Rate Notes.
|
|
|
•
|
4.15% Senior Notes due 2024
-
The Company issued
$750.0 million
of
4.15%
Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were issued at
99.805%
of face value. Interest on the 2024 Notes accrues at a rate of
4.15%
per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred
$7.4 million
of deferred financing costs related to the issuance of the 2024 Notes.
|
|
|
•
|
4.70% Senior Notes Due 2028
-
The Company issued
$1,250.0 million
of
4.70%
Senior Notes due 2028 (the "2028 Notes" and together with the Floating Rate Notes and 2024 Notes, the "Senior Notes"). The 2028 Notes were issued at
99.889%
of face value. Interest on the 2028 Notes accrues at a rate of
4.70%
per annum and is payable semi-annually on March 15 and September 15 of each year. The Company incurred
$10.6 million
of deferred financing costs related to the issuance of the 2028 Notes.
|
The net proceeds from the issuance and sale of the Senior Notes were used to finance the cash portion of the GE Transportation acquisition. The principal balances are due in full at maturity. The Senior Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Senior Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sales of assets, change in control, mergers and consolidations and the incurrence of liens.
On February 12, 2019, the rating assigned by Moody's was decreased to Ba1. Accordingly, pursuant to the respective terms of the Senior Notes issued on September 14, 2018, the interest rate increased by
0.25%
. The interest rate increase took effect during the interest period following February 12, 2019.
The Company is in compliance with the restrictions and covenants in the indenture under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
3.45% Senior Notes Due November 2026
On November 3, 2016, the Company issued
$750.0 million
of
3.45%
Senior Notes due in 2026 (the "2016 Notes"). The 2016 Notes were issued at
99.965%
of face value. Interest on the 2016 Notes accrues at a rate of
3.45%
per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred
$2.7 million
of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing its operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued
$250.0 million
of
4.375%
Senior Notes due in 2023 (the “2013 Notes”). The 2013 Notes were issued at
99.879%
of face value. Interest on the 2013 Notes accrues at a rate of
4.375%
per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred
$2.6 million
of deferred financing costs related to the issuance of the 2013 Notes.
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2018 Refinancing Credit Agreement
On June 8, 2018, the Company entered into a credit agreement (the “2018 Refinancing Credit Agreement”), which replaced the Company’s then-existing 2016 Refinancing Credit Agreement. As part of the 2018 Refinancing Credit Agreement, the Company entered into (i) a
$1.2 billion
revolving credit facility (the “Revolving Credit Facility”), which replaced the Company’s revolving credit facility under the 2016 Refinancing Credit Agreement, and includes a letter of credit sub-facility of up to
$450.0 million
and a swing line sub-facility of
$75.0 million
, (ii) a
$350.0 million
term loan (the “Refinancing Term Loan”), which refinanced the term loan under the 2016 Refinancing Credit Agreement, and (iii) a new
$400.0 million
delayed draw term loan (the “Delayed Draw Term Loan”). The 2018 Refinancing Credit Agreement also provided for a bridge loan facility (the “Bridge Loan Facility”) in an amount not to exceed
$2.5 billion
, which would only become effective at the Company’s request. Commitments in respect of the Bridge Loan Facility were terminated upon the issuance and sale of the Senior Notes on September 14, 2018. In addition, the 2018 Refinancing Credit Agreement contains an uncommitted accordion feature allowing the Company to request, in an aggregate amount not to exceed
$600.0 million
, increases to the borrowing commitments under the Revolving Credit Facility or a new incremental term loan commitment. At
June 30, 2019
, the Company had approximately
$780.3 million
of available bank borrowing capacity subject to certain financial covenant restrictions, net of
$27.6 million
of letters of credit.
The Revolving Credit Facility matures on June 8, 2023 and is unsecured. The Refinancing Term Loan matures on June 8, 2021 and is unsecured. The Delayed Draw Term Loan matures on the third anniversary of the date on which it is borrowed and is unsecured. The applicable interest rate for borrowings under the 2018 Refinancing Credit Agreement includes interest rate spreads based on the lower of the pricing corresponding to (i) the Company’s ratio of total debt (less unrestricted cash up to
$300.0 million
) to EBITDA (“Leverage Ratio”) or (ii) the Company’s public rating, in each case that range between
1.000%
and
1.875%
for LIBOR/CDOR-based borrowings and
0.0%
and
0.875%
for Alternate Base Rate based borrowings. The obligations of the Company under the 2018 Refinancing Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
The Delayed Draw Term Loan was initially drawn on February 25, 2019. The Company incurred a 17.5 basis point commitment fee from June 8, 2018 until the initial draw.
The 2018 Refinancing Credit Agreement contains customary representations and warranties by the Company and its subsidiaries, including customary use of materiality, material adverse effect, and knowledge qualifiers. The Company and its subsidiaries are also subject to (i) customary affirmative covenants that impose certain reporting obligations on the Company and its subsidiaries and (ii) customary negative covenants, including limitations on: indebtedness; liens; restricted payments; fundamental changes; business activities; transactions with affiliates; restrictive agreements; changes in fiscal year; and use of proceeds. In addition, the Company is required to maintain (i) an Interest Coverage ratio at least
3.00
to 1.00 over each period of
four
consecutive fiscal quarters ending on the last day of a fiscal quarter and (ii) a Leverage Ratio, calculated as of the last day of a fiscal quarter for a period of four consecutive fiscal quarters, of
3.25
to 1.00 or less; provided that, in the event the Company completes the Direct Sale and the Merger or any other material acquisition in which the cash consideration paid exceeds
$500.0 million
, the maximum Leverage Ratio permitted will be
3.75
to 1.00 at the end of the fiscal quarter in which such acquisition is consummated and each of the three fiscal quarters immediately following such fiscal quarter and
3.50
to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of such acquisition. The Company is in compliance with the restrictions and covenants of the 2018 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
At
June 30, 2019
, the weighted average interest rate on the Company’s variable rate debt was
3.28%
. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of
$150.0 million
. The effective date of the interest rate swap agreement was November 7, 2016, and the termination date was December 19, 2018.
2016 Refinancing Credit Agreement
On
June 22, 2016
, the Company amended its existing revolving credit facility with a consortium of commercial banks. This 2016 Refinancing Credit Agreement provided the Company with a
$1.2 billion
,
5
year revolving credit facility and a
$400 million
delayed draw term loan (the “Term Loan”). The Company incurred approximately
$3 million
of deferred financing cost related to the 2016 Refinancing Credit Agreement. The 2016 Refinancing Credit Agreement borrowings bore variable interest rates indexed as described below.
Under the 2016 Refinancing Credit Agreement, the Company could elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus
0.50%
per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus
100
basis points, plus a margin that ranged from
0
to
75
basis points. The Alternate Rate was based on the quoted rates specific to the applicable currency, plus a margin that ranged from
75
to
175
basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin was
0
basis points and the Alternate Rate margin is
175
basis points.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee. The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
71
|
|
|
$
|
87
|
|
|
$
|
611
|
|
|
$
|
691
|
|
Interest cost
|
372
|
|
|
333
|
|
|
1,711
|
|
|
1,834
|
|
Expected return on plan assets
|
(433
|
)
|
|
(445
|
)
|
|
(2,927
|
)
|
|
(3,466
|
)
|
Net amortization/deferrals
|
207
|
|
|
243
|
|
|
641
|
|
|
554
|
|
Net periodic benefit cost (credit)
|
$
|
217
|
|
|
$
|
218
|
|
|
$
|
36
|
|
|
$
|
(387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
142
|
|
|
$
|
174
|
|
|
$
|
1,222
|
|
|
$
|
1,382
|
|
Interest cost
|
744
|
|
|
666
|
|
|
3,422
|
|
|
3,668
|
|
Expected return on plan assets
|
(866
|
)
|
|
(890
|
)
|
|
(5,854
|
)
|
|
(6,932
|
)
|
Net amortization/deferrals
|
414
|
|
|
486
|
|
|
1,282
|
|
|
1,108
|
|
Net periodic benefit cost (credit)
|
$
|
434
|
|
|
$
|
436
|
|
|
$
|
72
|
|
|
$
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
Discount Rate
|
4.3
|
%
|
|
3.6
|
%
|
|
2.5
|
%
|
|
2.4
|
%
|
Expected long-term rate of return
|
5.4
|
%
|
|
5.2
|
%
|
|
5.0
|
%
|
|
5.1
|
%
|
Rate of compensation increase
|
3.0
|
%
|
|
3.0
|
%
|
|
2.6
|
%
|
|
2.6
|
%
|
The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute
$6.4 million
to the international plans during
2019
. The Company does not expect to make contributions to the U.S. plans during
2019
.
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 June 30,
|
|
Three Months Ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
8
|
|
Interest cost
|
89
|
|
|
81
|
|
|
20
|
|
|
26
|
|
Net amortization/deferrals
|
(101
|
)
|
|
(76
|
)
|
|
(22
|
)
|
|
(4
|
)
|
Net periodic benefit cost
|
$
|
(11
|
)
|
|
$
|
6
|
|
|
| |