NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 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 passenger transit and freight rail industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in over
50
countries and our products can be found in more than
100
countries throughout the world. In the first
three
months of
2019
, approximately
61%
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 quarterly at a minimum 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
$119.2 million
at
March 31, 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 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
$58.1 million
at
March 31, 2019
and were not material at
December 31, 2018
. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract 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
$81.5 million
and
$71.2 million
at
March 31, 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 quarterly estimate-at-completion process where management reviews the progress of long term-projects. 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 quarterly 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 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 March 31, 2019, the Company's remaining performance obligations were $
22.0 billion
. The Company expects to recognize revenue of approximately
27%
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. 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 mitigate the impact of changes in foreign currencies 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
March 31, 2019
and
December 31, 2018
. Net income attributable to noncontrolling interests was
$0.5 million
for the
three months ended March 31, 2019
. Net loss attributable to noncontrolling interests was
$0.9 million
for the
three months ended March 31, 2018
.
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
three months ended March 31, 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
|
(46,553
|
)
|
|
(3,111
|
)
|
|
(3,305
|
)
|
|
(52,969
|
)
|
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
|
|
comprehensive income
|
—
|
|
|
—
|
|
|
552
|
|
|
552
|
|
|
Net current period other comprehensive income (loss)
|
(46,553
|
)
|
|
(3,111
|
)
|
|
(2,753
|
)
|
|
(52,417
|
)
|
|
Balance at March 31, 2019
|
$
|
(248,757
|
)
|
|
$
|
(3,164
|
)
|
|
$
|
(57,079
|
)
|
|
$
|
(309,000
|
)
|
Reclassifications out of accumulated other comprehensive income (loss) for the
three months ended March 31, 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
|
|
|
(174
|
)
|
|
Income tax expense
|
|
|
$
|
552
|
|
|
Net income
|
|
|
|
|
|
|
Derivative contracts
|
|
|
|
|
Realized loss on derivative contracts
|
$
|
—
|
|
|
Interest expense, net
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
—
|
|
|
Net income
|
The changes in accumulated other comprehensive loss by component, net of tax, for the
three months ended March 31, 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
|
77,967
|
|
|
920
|
|
|
(847
|
)
|
|
78,040
|
|
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
|
|
comprehensive income
|
—
|
|
|
448
|
|
|
520
|
|
|
968
|
|
|
Net current period other comprehensive income (loss)
|
77,967
|
|
|
1,368
|
|
|
(327
|
)
|
|
79,008
|
|
|
Balance at March 31, 2018
|
$
|
83,030
|
|
|
$
|
5,383
|
|
|
$
|
(54,397
|
)
|
|
$
|
34,016
|
|
Reclassifications out of accumulated other comprehensive loss for the
three months ended March 31, 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
|
$
|
679
|
|
|
Interest expense, net
|
|
|
(231
|
)
|
|
Income tax expense
|
|
|
$
|
448
|
|
|
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, 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. Immediately after the Distribution, Merger Sub merged with and into SpinCo, 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 March 31, 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
|
|
530,054
|
|
|
Inventories
|
|
1,179,439
|
|
|
Other current assets
|
|
64,464
|
|
|
Property, plant, and equipment
|
|
1,071,402
|
|
|
Goodwill
|
|
5,783,358
|
|
|
Trade names
|
|
50,000
|
|
|
Customer relationships
|
|
529,984
|
|
|
Intellectual property
|
|
1,219,968
|
|
|
Backlog
|
|
1,480,000
|
|
|
Other noncurrent assets
|
|
234,823
|
|
|
Total assets acquired
|
|
12,317,826
|
|
|
Liabilities assumed
|
|
|
|
Current liabilities
|
|
1,495,438
|
|
|
Contingent consideration
|
|
440,000
|
|
|
Other noncurrent liabilities
|
|
523,801
|
|
|
Total liabilities assumed
|
|
2,459,239
|
|
|
Net assets acquired
|
|
9,858,587
|
|
|
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. 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, 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.
For the 34 day period ended March 31, 2019, the Company's consolidated statement of income included
$495.0 million
of revenues and
$0.5 million
of operating income from GET. Acquisition related costs were approximately
$58.9 million
for the three months ended March 31, 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
$28.7 million
, net of cash acquired, resulting in final goodwill of
$27.2 million
, none of which will be deductible for tax purposes.
|
The acquisitions listed above include escrow deposits of
$13.2 million
, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.
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
|
$
|
32,831
|
|
|
Property, plant & equipment
|
674
|
|
|
Goodwill
|
27,188
|
|
|
Other intangible assets
|
11,715
|
|
|
Total assets acquired
|
72,408
|
|
|
Total liabilities assumed
|
(43,741
|
)
|
|
Net assets acquired
|
$
|
28,667
|
|
The total goodwill and other intangible assets for the acquisition listed in the table above was
$38.9 million
, of which
$27.2 million
and
$11.7 million
was related to goodwill and other intangible assets, respectively. Of the allocation of
$11.7 million
of total acquired other intangible assets,
$3.8 million
was assigned to trade names and
$7.5 million
was 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 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
March 31, 2019
|
|
Three Months Ended
March 31, 2018
|
|
Net sales
|
$
|
2,079,771
|
|
|
$
|
1,881,724
|
|
|
Gross profit
|
543,480
|
|
|
553,681
|
|
|
Net income attributable to Wabtec shareholders
|
83,277
|
|
|
77,275
|
|
|
Diluted earnings per share
|
|
|
|
|
As Reported
|
$
|
(0.04
|
)
|
|
$
|
0.92
|
|
|
Pro forma
|
$
|
0.44
|
|
|
$
|
0.41
|
|
4. INVENTORIES
The components of inventory, net of reserves, were:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
March 31,
2019
|
|
December 31,
2018
|
|
Raw materials
|
$
|
822,178
|
|
|
$
|
465,873
|
|
|
Work-in-progress
|
435,565
|
|
|
154,485
|
|
|
Finished goods
|
689,477
|
|
|
224,528
|
|
|
Total inventories
|
$
|
1,947,220
|
|
|
$
|
844,886
|
|
5. INTANGIBLES
The change in the carrying amount of goodwill by segment for the
three
months ended
March 31, 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
|
5,783,358
|
|
|
—
|
|
|
5,783,358
|
|
|
Foreign currency impact
|
(15,315
|
)
|
|
(22,114
|
)
|
|
(37,429
|
)
|
|
Balance at March 31, 2019
|
$
|
6,481,434
|
|
|
$
|
1,661,039
|
|
|
$
|
8,142,473
|
|
As of
March 31, 2019
and
December 31, 2018
, the Company’s trade names had a net carrying amount of
$624.6 million
and
$582.8 million
, respectively. The Company believes these intangibles have indefinite lives, with the exception of the GET 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
|
March 31,
2019
|
|
December 31,
2018
|
|
Intellectual property, patents, non-compete and other intangibles, net of accumulated
|
|
|
|
|
amortization of $51,127 and $42,446
|
$
|
2,697,919
|
|
|
$
|
15,328
|
|
|
Customer relationships, net of accumulated amortization
|
|
|
|
|
of $168,774 and $158,533
|
1,041,551
|
|
|
531,761
|
|
|
Total
|
$
|
3,739,470
|
|
|
$
|
547,089
|
|
The weighted average remaining useful life of intellectual property, customer relationships and other intangibles were
10 years
,
18 years
and
13 years
, respectively. Amortization expense for intangible assets was
$27.4 million
for the
three
months ended
March 31, 2019
, and
$10.4 million
for the
three
months ended
March 31, 2018
, respectively.
Amortization expense for the
five
succeeding years is estimated to be as follows:
|
|
|
|
|
|
|
|
Remainder of 2019
|
$
|
191,746
|
|
|
2020
|
254,053
|
|
|
2021
|
253,908
|
|
|
2022
|
253,596
|
|
|
2023
|
253,258
|
|
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
three months ended March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
Contract Assets
|
|
Balance at beginning of year
|
|
$
|
345,585
|
|
|
Acquisitions
|
|
238,665
|
|
|
Recognized in current year
|
|
188,299
|
|
|
Reclassified to accounts receivable
|
|
(196,973
|
)
|
|
Foreign currency impact
|
|
(756
|
)
|
|
Balance at March 31, 2019
|
|
$
|
574,820
|
|
|
|
|
|
|
In thousands
|
|
Contract Liabilities
|
|
Balance at beginning of year
|
|
$
|
444,805
|
|
|
Acquisitions
|
|
274,054
|
|
|
Recognized in current year
|
|
205,272
|
|
|
Amounts in beginning balance reclassified to revenue
|
|
(204,388
|
)
|
|
Current year amounts reclassified to revenue
|
|
(6,421
|
)
|
|
Foreign currency impact
|
|
(424
|
)
|
|
Balance at March 31, 2019
|
|
$
|
712,898
|
|
7. LEASES
During the March 2019 quarter, 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 over the term. Many of our 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. We have established discount rates by geographic region ranging from
1.19%
to
12.26%
.
Lease Expense for the quarter is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in thousands)
|
2019
|
|
Operating Lease Expense
|
$
|
13,397
|
|
|
Finance Lease Expense
|
|
|
Amortization of Leased Assets
|
271
|
|
|
Interest on Lease Liabilities
|
4
|
|
|
Short-term and Variable Lease Expense
|
105
|
|
|
Sublease Income
|
(138
|
)
|
|
Total
|
$
|
13,639
|
|
Maturity of Lease Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Finance
Leases
|
|
Total
|
|
Remaining 2019
|
$
|
38,094
|
|
|
$
|
278
|
|
|
$
|
38,372
|
|
|
2020
|
44,455
|
|
|
377
|
|
|
44,832
|
|
|
2021
|
36,350
|
|
|
180
|
|
|
36,530
|
|
|
2022
|
29,824
|
|
|
121
|
|
|
29,945
|
|
|
2023
|
25,377
|
|
|
121
|
|
|
25,498
|
|
|
Thereafter
|
106,069
|
|
|
348
|
|
|
106,417
|
|
|
Total Lease Payments
|
280,169
|
|
|
1,425
|
|
|
281,594
|
|
|
Less: Present Value Discount
|
(30,949
|
)
|
|
(5
|
)
|
|
(30,954
|
)
|
|
Present Value Lease Liabilities
|
$
|
249,220
|
|
|
$
|
1,420
|
|
|
$
|
250,640
|
|
Lease Term and Discount Rate:
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
Weighted-average remaining lease term (years)
|
|
|
Operating Leases
|
8.44
|
|
|
Finance Leases
|
5.68
|
|
|
Weighted-average discount rate
|
|
|
Operating Leases
|
3.00
|
%
|
|
Finance Leases
|
1.19
|
%
|
8. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
March 31,
2019
|
|
December 31,
2018
|
|
Floating Senior Notes, due 2021, net of unamortized debt
issuance costs of $2,904 and $3,204
|
$
|
497,096
|
|
|
$
|
496,796
|
|
|
4.150% Senior Notes, due 2024, net of unamortized debt
issuance costs of $6,703 and $7,043
|
743,297
|
|
|
742,957
|
|
|
4.70% Senior Notes, due 2028, net of unamortized debt
issuance costs of $10,076 and $10,343
|
1,239,924
|
|
|
1,239,657
|
|
|
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $1,661 and $1,718
|
748,339
|
|
|
748,282
|
|
|
4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,113 and $1,177
|
248,888
|
|
|
248,823
|
|
|
Revolving Credit Facility, net of unamortized
debt issuance costs of $2,865 and $3,138
|
1,226,903
|
|
|
338,112
|
|
|
Other Borrowings
|
258,147
|
|
|
42,246
|
|
|
Total
|
4,962,594
|
|
|
3,856,873
|
|
|
Less - current portion
|
321,308
|
|
|
64,099
|
|
|
Long-term portion
|
$
|
4,641,286
|
|
|
$
|
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 shall be 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 our 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
, such facility to 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 March 31, 2019, the Company had approximately
$675.1 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 March 31, 2019, the weighted average interest rate on the Company’s variable rate debt was
3.46%
. 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 March 31,
|
|
Three Months Ended March 31,
|
|
In thousands, except percentages
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Discount Rate
|
4.30
|
%
|
|
3.56
|
%
|
|
2.53
|
%
|
|
2.40
|
%
|
|
Expected long-term rate of return
|
5.35
|
%
|
|
5.15
|
%
|
|
5.01
|
%
|
|
5.10
|
%
|
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
2.60
|
%
|
|
2.60
|
%
|
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 March 31,
|
|
Three Months Ended March 31,
|
|
In thousands, except percentages
|
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
|
|
|
$
|
0
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Discount Rate
|
4.17
|
%
|
|
3.43
|
%
|
|
3.49
|
%
|
|
3.21
|
%
|
10. STOCK-BASED COMPENSATION
As of
March 31, 2019
, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027 and provides a maximum of
3,800,000
shares for grants or awards, plus any shares which remain available under the 2000 Plan. The amendment and restatement of the 2011 Plan was approved by stockholders of Wabtec on May 10, 2017. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).
Stock-based compensation expense was
$8.5 million
and
$5.7 million
for the
three
months ended
March 31, 2019
and
2018
, respectively. Included in stock-based compensation expense for the
three
months ended
March 31, 2019
is
$0.4 million
of expense related to stock options,
$2.7 million
related to restricted stock,
$0.8 million
related to restricted stock units,
$4.3 million
related to incentive stock units and
$0.3 million
related to units issued for Directors’ fees. At
March 31, 2019
, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled
$75.6 million
.
Stock Options
Stock options are granted to eligible employees at an exercise price equivalent to the stock's fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options granted prior to 2019 become exercisable over a
four
-year vesting period, while options granted in 2019 become exercisable over a
three
-year vesting period. Both vesting periods expire
10
years from the date of grant.
The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic value
(in thousands)
|
|
Outstanding at December 31, 2018
|
466,677
|
|
|
$
|
61.04
|
|
|
5.7
|
|
$
|
5,917
|
|
|
Granted
|
128,555
|
|
|
72.85
|
|
|
|
|
112
|
|
|
Exercised
|
(734
|
)
|
|
64.54
|
|
|
|
|
7
|
|
|
Canceled
|
(228
|
)
|
|
74.38
|
|
|
|
|
—
|
|
|
Outstanding at March 31, 2019
|
594,270
|
|
|
63.58
|
|
|
6.4
|
|
6,027
|
|
|
Exercisable at March 31, 2019
|
355,222
|
|
|
56.00
|
|
|
5.2
|
|
6,295
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Dividend yield
|
0.66
|
%
|
|
0.33
|
%
|
|
Risk-free interest rate
|
2.63
|
%
|
|
2.70
|
%
|
|
Stock price volatility
|
25.8
|
%
|
|
23.9
|
%
|
|
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
March 31, 2019
, the Company estimates that it will achieve
100%
,
100%
and
100%
for the incentive stock awards expected to vest based on performance for the
three
-year periods ending
December 31, 2019
,
2020
, and
2021
, respectively, and has recorded incentive compensation expense accordingly. If 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
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
and Units
|
|
Incentive
Stock
Units
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Outstanding at December 31, 2018
|
445,089
|
|
|
415,243
|
|
|
$
|
75.51
|
|
|
Granted
|
535,873
|
|
|
258,600
|
|
|
70.64
|
|
|
Vested
|
(105,651
|
)
|
|
(119,835
|
)
|
|
68.62
|
|
|
Adjustment for incentive stock awards expected to vest
|
—
|
|
|
18,398
|
|
|
81.20
|
|
|
Canceled
|
(6,733
|
)
|
|
(5,350
|
)
|
|
80.17
|
|
|
Outstanding at March 31, 2019
|
868,578
|
|
|
567,056
|
|
|
73.93
|
|
11. INCOME TAXES
The overall effective tax rate was
127.7%
and
23.0%
for the three months ended
March 31, 2019
and
2018
. The increase in the effective rate for the three months ended March 31, 2019 is primarily the result of non-deductible transaction related expenses incurred as a result of the acquisition of GE Transportation.
As of
March 31, 2019
, the liability for income taxes associated with uncertain tax positions was
$12.1 million
, of which
$10.2 million
, if recognized, would favorably affect the Company’s effective income tax rate. As of
December 31, 2018
, the liability for income taxes associated with unrecognized tax benefits was
$9.5 million
, of which
$8.4 million
, if recognized, would favorably affect the Company's effective tax rate.
The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of
March 31, 2019
, the total interest and penalties accrued was approximately
$1.0 million
. As of
December 31, 2018
, the total interest and penalties accrued was approximately was
$0.9 million
.
At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately
$6.2 million
may change within the next 12 months due to the expiration of statutory review periods and current examinations.
12. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
In thousands, except per share data
|
2019
|
|
2018
|
|
Numerator
|
|
|
|
|
Numerator for basic and diluted earnings per common
share - net income attributable
|
|
|
|
|
to Wabtec shareholders
|
$
|
(4,472
|
)
|
|
$
|
88,366
|
|
|
Less: dividends declared - common shares
and non-vested restricted stock
|
(11,687
|
)
|
|
(11,531
|
)
|
|
Undistributed earnings
|
(16,159
|
)
|
|
76,835
|
|
|
Percentage allocated to common shareholders (1)
|
99.7
|
%
|
|
99.7
|
%
|
|
|
(16,111
|
)
|
|
76,604
|
|
|
Add: dividends declared - common shares
|
11,646
|
|
|
11,497
|
|
|
Numerator for basic and diluted earnings per
common share
|
$
|
(4,465
|
)
|
|
$
|
88,101
|
|
|
Denominator
|
|
|
|
|
Denominator for basic earnings per common
share - weighted average shares
|
121,226
|
|
|
95,810
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Assumed conversion of dilutive stock-based
compensation plans
|
—
|
|
|
561
|
|
|
Denominator for diluted earnings per common share -
|
|
|
|
|
adjusted weighted average shares and assumed conversion
|
121,226
|
|
|
96,371
|
|
|
Net income attributable to Wabtec
shareholders per common share
|
|
|
|
|
Basic
|
$
|
(0.04
|
)
|
|
$
|
0.92
|
|
|
Diluted
|
$
|
(0.04
|
)
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
(1) Basic weighted-average common shares outstanding
|
121,226
|
|
|
95,810
|
|
|
Basic weighted-average common shares outstanding and
non-vested restricted stock expected to vest
|
121,565
|
|
|
96,091
|
|
|
Percentage allocated to common shareholders
|
99.7
|
%
|
|
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.
For the three months ended March 31, 2019, basic weighted average shares outstanding and diluted shares outstanding were the same because the effect of assumed conversion of preferred shares and assumed conversion of shares related to stock-based compensation plans were anti-dilutive since the Company generated a net loss.
13. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
Balance at beginning of year
|
$
|
153,702
|
|
|
$
|
153,063
|
|
|
Acquisitions
|
89,919
|
|
|
1,975
|
|
|
Warranty expense
|
34,627
|
|
|
11,677
|
|
|
Warranty claim payments
|
(27,841
|
)
|
|
(11,282
|
)
|
|
Foreign currency impact/other
|
(1,092
|
)
|
|
2,138
|
|
|
Balance at March 31
|
$
|
249,315
|
|
|
$
|
157,571
|
|
14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Foreign Currency Hedging
The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gain and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. The contracts are scheduled to mature within
two
years. For the
three
months ended
March 31, 2019
and
March 31, 2018
, the amounts reclassified into income were not material.
Other Activities
The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized loss related to these contracts was
$3.0 million
for the
three months ended March 31, 2019
. These contracts are scheduled to mature within
one
year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of
March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Designated
|
|
Non-Designated
|
|
Total
|
|
Gross notional amount
|
|
$
|
1,727.0
|
|
|
$
|
524.0
|
|
|
$
|
2,251.0
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
4.3
|
|
|
$
|
—
|
|
|
$
|
4.3
|
|
|
Other current liabilities
|
|
—
|
|
|
(3.3
|
)
|
|
(3.3
|
)
|
|
Total
|
|
$
|
4.3
|
|
|
$
|
(3.3
|
)
|
|
$
|
1.0
|
|
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, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Designated
|
|
Non-Designated
|
|
Total
|
|
Gross notional amount
|
|
$
|
863.0
|
|
|
$
|
834.0
|
|
|
$
|
1,697.0
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
Other current liabilities
|
|
(2.3
|
)
|
|
—
|
|
|
(2.3
|
)
|
|
Total
|
|
$
|
(2.3
|
)
|
|
$
|
1.3
|
|
|
$
|
(1.0
|
)
|
Interest Rate Hedging
The Company has historically used interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt were 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 were recognized in current period earnings. Refer to footnote 15 for further information on interest rate swaps.
15. 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.
To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company historically entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company mitigates 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
March 31, 2019
and
December 31, 2018
. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
In thousands
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
4.375% Senior Notes
|
248,888
|
|
|
250,108
|
|
|
248,823
|
|
|
254,218
|
|
|
3.45% Senior Notes
|
748,339
|
|
|
698,258
|
|
|
748,282
|
|
|
675,075
|
|
|
Floating Rate Notes 2021
|
497,096
|
|
|
500,495
|
|
|
496,796
|
|
|
497,425
|
|
|
4.15% Senior Notes
|
743,298
|
|
|
762,870
|
|
|
742,957
|
|
|
729,350
|
|
|
4.7% Senior Notes
|
1,239,924
|
|
|
1,267,750
|
|
|
1,239,657
|
|
|
1,179,625
|
|
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.
16. COMMITMENTS AND CONTINGENCIES
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Further information and detail on these claims is described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
, in Note 21 therein, filed on February 27, 2019. During the first
three
months of
2019
, there were no material changes to the information described in the Form 10-K related to claims arising from asbestos exposure.
From time to time, the Company is involved in litigation 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, 2018
, in Note 21 therein, filed on February 27, 2019. Except as described below, there have been no material changes to the information described in the Form 10-K related to claims arising from Company's ordinary operations.
On April 21, 2016, Siemens Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company has infringed seven patents owned by Siemens related to the Company's Positive Train Control (PTC) technology. On November 2, 2016, Siemens amended its complaint to add six additional patents they also claim are infringed by the Company's PTC Products or End of Train (EOT) Products (Siemen Patent Case). The Company has filed Answers, and asserted counterclaims, in response to Siemens’ complaints. Additionally, after filings by the Company, the US Patent & Trademark Office’s Patent Trail and Appeal Board (PTAB) has granted Inter-Parties Review (IPR) proceedings on eight (8) of the patents asserted by Siemens to contest their validity. Following pre-trial rulings that greatly reduced Siemens’ alleged damages, a jury trial was held in federal district court in Delaware in January 2019 on eight patents, two of which were still subject to an IPR decision on validity from the PTAB. At the conclusion of the trial, the jury awarded Siemens damages of
$5.6 million
related to PTC patents and
$1.1 million
related to EOT patents. Since the jury’s verdict was issued, one of the PTC patents found to be infringed was held to be invalid by the PTAB. All PTAB proceedings have been now been completed, pending appeals; five (5) of the (8) Siemens patents reviewed by the PTAB were found to be invalid. On February 26, 2019, the Court entered a Judgment on the verdict, subject to post-trial motions. Both parties have since filed post-trial motions, potentially affecting the Judgment, and a hearing is scheduled for May 28, 2019. Following the hearing, a final Judgment will be entered, and either party may file appeals to the Federal Circuit.
On March 20, 2019, Siemens filed a new action in federal district court in Delaware alleging violations of federal antitrust and state trade practices laws since before 2008, related to Wabtec’s PTC sales, including on-board, back-office, wayside and aftermarket support systems (Siemens originally raised these antitrust claims as counterclaims in a separate DE patent case filed by Wabtec alleging that Siemens has violated three (3) of Wabtec’s patents; the antitrust claims were ultimately severed from that case in January, 2019, resulting in Siemens re-filing them as another separate proceeding in DE.) Wabtec believes Siemens’ antitrust claims are without merit and will vigorously defend itself against these claims.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed. Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, DTC alleged that total damages were
$36.8 million
through July 31, 2017 and are continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC. Xorail has denied DTC's assertions, stating that its system satisfied the contractual requirements. Xorail has worked with DTC to modify its system an implement the FRA's and PUC's previously undefined approval requirements; the FRA and PUC have both approved modified wireless crossing system, and as of August 2018, DTC completed the process of certifying the crossings and eliminated the use of flaggers. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements; a jury trial is scheduled to begin on May 18, 2019. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail; DTC has not updated its notices against Xorail, nor have they filed any formal claim against Xorail.
17. SEGMENT INFORMATION
Wabtec has
two
reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:
Freight Segment
primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.
Transit Segment
primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment, and doors for buses and subways. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
Segment financial information for the
three months ended March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Freight
Segment
|
|
Transit
Segment
|
|
Corporate
Activities and
Elimination
|
|
Total
|
|
Sales to external customers
|
$
|
876,434
|
|
|
$
|
717,183
|
|
|
$
|
—
|
|
|
$
|
1,593,617
|
|
|
Intersegment sales/(elimination)
|
16,704
|
|
|
6,122
|
|
|
(22,826
|
)
|
|
—
|
|
|
Total sales
|
$
|
893,138
|
|
|
$
|
723,305
|
|
|
$
|
(22,826
|
)
|
|
$
|
1,593,617
|
|
|
Income (loss) from operations
|
$
|
75,210
|
|
|
$
|
58,933
|
|
|
$
|
(66,836
|
)
|
|
$
|
67,307
|
|
|
Interest expense and other, net
|
—
|
|
|
—
|
|
|
(52,797
|
)
|
|
(52,797
|
)
|
|
Income (loss) from operations before income taxes
|
$
|
75,210
|
|
|
$
|
58,933
|
|
|
$
|
(119,633
|
)
|
|
$
|
14,510
|
|
Segment financial information for the
three months ended March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Freight
Segment
|
|
Transit
Segment
|
|
Corporate
Activities and
Elimination
|
|
Total
|
|
Sales to external customers
|
$
|
379,554
|
|
|
$
|
676,623
|
|
|
$
|
—
|
|
|
$
|
1,056,177
|
|
|
Intersegment sales/(elimination)
|
12,002
|
|
|
3,889
|
|
|
(15,891
|
)
|
|
—
|
|
|
Total sales
|
$
|
391,556
|
|
|
$
|
680,512
|
|
|
$
|
(15,891
|
)
|
|
$
|
1,056,177
|
|
|
Income (loss) from operations
|
$
|
69,623
|
|
|
$
|
68,083
|
|
|
$
|
(6,427
|
)
|
|
$
|
131,279
|
|
|
Interest expense and other, net
|
—
|
|
|
—
|
|
|
(17,698
|
)
|
|
(17,698
|
)
|
|
Income (loss) from operations before income taxes
|
$
|
69,623
|
|
|
$
|
68,083
|
|
|
$
|
(24,125
|
)
|
|
$
|
113,581
|
|
Sales by product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
In thousands
|
2019
|
|
2018
|
|
Remanufacturing, Overhaul & Build
|
$
|
582,177
|
|
|
$
|
135,713
|
|
|
Specialty Products & Electronics
|
418,114
|
|
|
386,548
|
|
|
Transit Products
|
294,817
|
|
|
274,265
|
|
|
Brake Products
|
242,222
|
|
|
215,618
|
|
|
Other
|
56,287
|
|
|
44,033
|
|
|
Total sales
|
$
|
1,593,617
|
|
|
$
|
1,056,177
|
|
18. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's 2016 Notes, 2013 Notes and Revolving Credit Facility and Term Loan are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.
Balance Sheet for
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Cash and cash equivalents
|
$
|
5,288
|
|
|
$
|
(38
|
)
|
|
$
|
507,620
|
|
|
$
|
—
|
|
|
$
|
512,870
|
|
|
Receivables, net
|
137,358
|
|
|
69,745
|
|
|
1,519,721
|
|
|
—
|
|
|
1,726,824
|
|
|
Inventories
|
139,550
|
|
|
62,766
|
|
|
1,744,904
|
|
|
—
|
|
|
1,947,220
|
|
|
Current assets - other
|
11,335
|
|
|
920
|
|
|
181,968
|
|
|
—
|
|
|
194,223
|
|
|
Total current assets
|
293,531
|
|
|
133,393
|
|
|
3,954,213
|
|
|
—
|
|
|
4,381,137
|
|
|
Property, plant and equipment, net
|
54,641
|
|
|
25,550
|
|
|
1,554,775
|
|
|
—
|
|
|
1,634,966
|
|
|
Goodwill
|
503,700
|
|
|
283,241
|
|
|
7,355,532
|
|
|
—
|
|
|
8,142,473
|
|
|
Investment in subsidiaries
|
16,575,061
|
|
|
5,258,593
|
|
|
—
|
|
|
(21,833,654
|
)
|
|
—
|
|
|
Other intangibles, net
|
28,924
|
|
|
77,924
|
|
|
4,257,173
|
|
|
—
|
|
|
4,364,021
|
|
|
Other long-term assets
|
26,262
|
|
|
6,772
|
|
|
522,274
|
|
|
—
|
|
|
555,308
|
|
|
Total assets
|
$
|
17,482,119
|
|
|
$
|
5,785,473
|
|
|
$
|
17,643,967
|
|
|
$
|
(21,833,654
|
)
|
|
$
|
19,077,905
|
|
|
Current liabilities
|
$
|
467,702
|
|
|
$
|
84,137
|
|
|
$
|
2,702,596
|
|
|
$
|
—
|
|
|
$
|
3,254,435
|
|
|
Inter-company
|
2,557,628
|
|
|
(1,458,674
|
)
|
|
(1,098,954
|
)
|
|
—
|
|
|
—
|
|
|
Long-term debt
|
4,387,180
|
|
|
—
|
|
|
254,106
|
|
|
—
|
|
|
4,641,286
|
|
|
Long-term liabilities - other
|
381,763
|
|
|
54,560
|
|
|
965,415
|
|
|
—
|
|
|
1,401,738
|
|
|
Total liabilities
|
7,794,273
|
|
|
(1,319,977
|
)
|
|
2,823,163
|
|
|
—
|
|
|
9,297,459
|
|
|
Shareholders' equity
|
9,672,846
|
|
|
7,105,450
|
|
|
14,743,204
|
|
|
(21,833,654
|
)
|
|
9,687,846
|
|
|
Non-controlling interest
|
15,000
|
|
|
—
|
|
|
77,600
|
|
|
—
|
|
|
92,600
|
|
|
Total shareholders' equity
|
$
|
9,687,846
|
|
|
$
|
7,105,450
|
|
|
$
|
14,820,804
|
|
|
$
|
(21,833,654
|
)
|
|
$
|
9,780,446
|
|
|
Total Liabilities and Shareholders' Equity
|
$
|
17,482,119
|
|
|
$
|
5,785,473
|
|
|
$
|
17,643,967
|
|
|
$
|
(21,833,654
|
)
|
|
$
|
19,077,905
|
|
Balance Sheet for
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Cash and cash equivalents
|
$
|
1,782,682
|
|
|
$
|
(119
|
)
|
|
$
|
559,791
|
|
|
$
|
—
|
|
|
$
|
2,342,354
|
|
|
Receivables, net
|
106,815
|
|
|
61,513
|
|
|
978,450
|
|
|
—
|
|
|
1,146,778
|
|
|
Inventories
|
149,622
|
|
|
69,116
|
|
|
626,148
|
|
|
—
|
|
|
844,886
|
|
|
Current assets - other
|
11,884
|
|
|
690
|
|
|
103,075
|
|
|
—
|
|
|
115,649
|
|
|
Total current assets
|
2,051,003
|
|
|
131,200
|
|
|
2,267,464
|
|
|
—
|
|
|
4,449,667
|
|
|
Property, plant and equipment, net
|
51,551
|
|
|
24,755
|
|
|
487,431
|
|
|
—
|
|
|
563,737
|
|
|
Goodwill
|
25,275
|
|
|
283,241
|
|
|
2,088,028
|
|
|
—
|
|
|
2,396,544
|
|
|
Investment in subsidiaries
|
6,707,979
|
|
|
4,022,107
|
|
|
—
|
|
|
(10,730,086
|
)
|
|
—
|
|
|
Other intangibles, net
|
29,254
|
|
|
78,547
|
|
|
1,022,079
|
|
|
—
|
|
|
1,129,880
|
|
|
Other long-term assets
|
8,775
|
|
|
149
|
|
|
100,482
|
|
|
—
|
|
|
109,406
|
|
|
Total assets
|
$
|
8,873,837
|
|
|
$
|
4,539,999
|
|
|
$
|
5,965,484
|
|
|
$
|
(10,730,086
|
)
|
|
$
|
8,649,234
|
|
|
Current liabilities
|
$
|
264,630
|
|
|
$
|
91,004
|
|
|
$
|
1,291,056
|
|
|
$
|
—
|
|
|
$
|
1,646,690
|
|
|
Inter-company
|
1,947,504
|
|
|
(1,436,222
|
)
|
|
(511,282
|
)
|
|
—
|
|
|
—
|
|
|
Long-term debt
|
3,779,627
|
|
|
—
|
|
|
13,147
|
|
|
—
|
|
|
3,792,774
|
|
|
Long-term liabilities - other
|
16,945
|
|
|
48,714
|
|
|
275,036
|
|
|
—
|
|
|
340,695
|
|
|
Total liabilities
|
6,008,706
|
|
|
(1,296,504
|
)
|
|
1,067,957
|
|
|
—
|
|
|
5,780,159
|
|
|
Shareholders' equity
|
2,865,131
|
|
|
5,836,503
|
|
|
4,893,583
|
|
|
(10,730,086
|
)
|
|
2,865,131
|
|
|
Non-controlling interest
|
—
|
|
|
—
|
|
|
3,944
|
|
|
—
|
|
|
3,944
|
|
|
Total shareholders' equity
|
$
|
2,865,131
|
|
|
$
|
5,836,503
|
|
|
$
|
4,897,527
|
|
|
$
|
(10,730,086
|
)
|
|
$
|
2,869,075
|
|
|
Total Liabilities and Shareholders' Equity
|
$
|
8,873,837
|
|
|
$
|
4,539,999
|
|
|
$
|
5,965,484
|
|
|
$
|
(10,730,086
|
)
|
|
$
|
8,649,234
|
|
Income Statement for the
Three Months Ended March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Net Sales
|
$
|
193,066
|
|
|
$
|
128,803
|
|
|
$
|
1,327,249
|
|
|
$
|
(55,501
|
)
|
|
$
|
1,593,617
|
|
|
Cost of sales
|
(157,650
|
)
|
|
(82,015
|
)
|
|
(998,019
|
)
|
|
33,084
|
|
|
(1,204,600
|
)
|
|
Gross profit
|
35,416
|
|
|
46,788
|
|
|
329,230
|
|
|
(22,417
|
)
|
|
389,017
|
|
|
Total operating expenses
|
(97,540
|
)
|
|
(15,321
|
)
|
|
(208,849
|
)
|
|
—
|
|
|
(321,710
|
)
|
|
Income from operations
|
(62,124
|
)
|
|
31,467
|
|
|
120,381
|
|
|
(22,417
|
)
|
|
67,307
|
|
|
Interest (expense) income, net
|
(41,646
|
)
|
|
3,478
|
|
|
(6,401
|
)
|
|
—
|
|
|
(44,569
|
)
|
|
Other income (expense), net
|
20,333
|
|
|
(2,485
|
)
|
|
(26,076
|
)
|
|
—
|
|
|
(8,228
|
)
|
|
Equity earnings
|
91,482
|
|
|
79,759
|
|
|
—
|
|
|
(171,241
|
)
|
|
—
|
|
|
Pretax income
|
8,045
|
|
|
112,219
|
|
|
87,904
|
|
|
(193,658
|
)
|
|
14,510
|
|
|
Income tax (expense) benefit
|
(12,517
|
)
|
|
—
|
|
|
(6,006
|
)
|
|
—
|
|
|
(18,523
|
)
|
|
Net income
|
(4,472
|
)
|
|
112,219
|
|
|
81,898
|
|
|
(193,658
|
)
|
|
(4,013
|
)
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
(459
|
)
|
|
—
|
|
|
(459
|
)
|
|
Net income attributable to Wabtec shareholders
|
$
|
(4,472
|
)
|
|
$
|
112,219
|
|
|
$
|
81,439
|
|
|
$
|
(193,658
|
)
|
|
$
|
(4,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Wabtec shareholders
|
$
|
(4,472
|
)
|
|
$
|
112,219
|
|
|
$
|
29,022
|
|
|
$
|
(193,658
|
)
|
|
$
|
(56,889
|
)
|
Income Statement for the
Three Months Ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Net Sales
|
$
|
161,301
|
|
|
$
|
301,706
|
|
|
$
|
641,663
|
|
|
$
|
(48,493
|
)
|
|
$
|
1,056,177
|
|
|
Cost of sales
|
(118,658
|
)
|
|
(179,090
|
)
|
|
(488,233
|
)
|
|
40,685
|
|
|
(745,296
|
)
|
|
Gross profit
|
42,643
|
|
|
122,616
|
|
|
153,430
|
|
|
(7,808
|
)
|
|
310,881
|
|
|
Total operating expenses
|
(35,627
|
)
|
|
(37,327
|
)
|
|
(106,648
|
)
|
|
—
|
|
|
(179,602
|
)
|
|
Income from operations
|
7,016
|
|
|
85,289
|
|
|
46,782
|
|
|
(7,808
|
)
|
|
131,279
|
|
|
Interest (expense) income, net
|
(20,394
|
)
|
|
2,301
|
|
|
(2,191
|
)
|
|
—
|
|
|
(20,284
|
)
|
|
Other income (expense), net
|
8,729
|
|
|
(2,469
|
)
|
|
(3,674
|
)
|
|
—
|
|
|
2,586
|
|
|
Equity earnings
|
106,698
|
|
|
28,720
|
|
|
—
|
|
|
(135,418
|
)
|
|
—
|
|
|
Pretax income
|
102,049
|
|
|
113,841
|
|
|
40,917
|
|
|
(143,226
|
)
|
|
113,581
|
|
|
Income tax expense
|
(13,682
|
)
|
|
1,194
|
|
|
(13,636
|
)
|
|
—
|
|
|
(26,124
|
)
|
|
Net income
|
88,367
|
|
|
115,035
|
|
|
27,281
|
|
|
(143,226
|
)
|
|
87,457
|
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
215
|
|
|
694
|
|
|
—
|
|
|
909
|
|
|
Net income attributable to Wabtec shareholders
|
$
|
88,367
|
|
|
$
|
115,250
|
|
|
$
|
27,975
|
|
|
$
|
(143,226
|
)
|
|
$
|
88,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Wabtec shareholders
|
$
|
88,649
|
|
|
$
|
115,250
|
|
|
$
|
106,701
|
|
|
$
|
(143,226
|
)
|
|
$
|
167,374
|
|
Condensed Statement of Cash Flows for the
Three Months Ended March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Net cash (used for) provided by operating activities
|
$
|
(118,411
|
)
|
|
$
|
24,140
|
|
|
$
|
148,026
|
|
|
$
|
(22,417
|
)
|
|
$
|
31,338
|
|
|
Net cash provided by (used for) investing activities
|
6,898,021
|
|
|
(1,601
|
)
|
|
(9,636,068
|
)
|
|
—
|
|
|
(2,739,648
|
)
|
|
Net cash (used for) provided by financing activities
|
(8,557,004
|
)
|
|
(22,458
|
)
|
|
9,440,035
|
|
|
22,417
|
|
|
882,990
|
|
|
Effect of changes in currency exchange rates
|
—
|
|
|
—
|
|
|
(4,164
|
)
|
|
—
|
|
|
(4,164
|
)
|
|
(Decrease) increase in cash
|
(1,777,394
|
)
|
|
81
|
|
|
(52,171
|
)
|
|
—
|
|
|
(1,829,484
|
)
|
|
Cash, cash equivalents, and restricted cash beginning of period
|
1,782,682
|
|
|
(119
|
)
|
|
559,791
|
|
|
—
|
|
|
2,342,354
|
|
|
Cash and cash equivalents, end of period
|
$
|
5,288
|
|
|
$
|
(38
|
)
|
|
$
|
507,620
|
|
|
$
|
—
|
|
|
$
|
512,870
|
|
Condensed Statement of Cash Flows for the
Three Months Ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Net cash (used for) provided by operating activities
|
$
|
(9,439
|
)
|
|
$
|
50,789
|
|
|
$
|
(9,342
|
)
|
|
$
|
(7,808
|
)
|
|
$
|
24,200
|
|
|
Net cash (used for) provided by investing activities
|
(1,759
|
)
|
|
(3,693
|
)
|
|
(38,413
|
)
|
|
—
|
|
|
(43,865
|
)
|
|
Net cash provided by (used for) financing activities
|
22,973
|
|
|
(49,808
|
)
|
|
47,695
|
|
|
7,808
|
|
|
28,668
|
|
|
Effect of changes in currency exchange rates
|
—
|
|
|
—
|
|
|
7,482
|
|
|
—
|
|
|
7,482
|
|
|
Increase (decrease) in cash
|
11,775
|
|
|
(2,712
|
)
|
|
7,422
|
|
|
—
|
|
|
16,485
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
933
|
|
|
4,802
|
|
|
227,666
|
|
|
—
|
|
|
233,401
|
|
|
Cash and cash equivalents, end of period
|
$
|
12,708
|
|
|
$
|
2,090
|
|
|
$
|
235,088
|
|
|
$
|
—
|
|
|
$
|
249,886
|
|
19. OTHER INCOME (EXPENSE), NET
The components of other income (expense) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
In thousands
|
2019
|
|
2018
|
|
Foreign currency (loss) gain
|
$
|
(12,682
|
)
|
|
$
|
(1,032
|
)
|
|
Equity income
|
929
|
|
|
629
|
|
|
Expected return on pension assets/amortization
|
3,376
|
|
|
3,023
|
|
|
Other miscellaneous expense (income)
|
149
|
|
|
(34
|
)
|
|
Total other (expense) income, net
|
$
|
(8,228
|
)
|
|
$
|
2,586
|
|