10-Q 1 wab-10q_20131001.htm 10-Q

   

   

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

      

FORM 10-Q

      

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number: 1-13782

      

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

25-1615902

(State or other jurisdiction

of incorporation or organization)

   

(I.R.S. Employer

Identification No.)

   

   

   

1001 Air Brake Avenue

Wilmerding, PA

   

15148

(Address of principal executive offices)

   

(Zip code)

412-825-1000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   

 

Class

   

Outstanding at October 25, 2013

Common Stock, $.01 par value per share

   

96,304,944 shares

   

      

      

   

   

   


WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

September 30, 2013

FORM 10-Q

TABLE OF CONTENTS

   

 

       

Page

   

PART I—FINANCIAL INFORMATION

   

   

   

   

Item 1.

Financial Statements  

   

   

   

   

   

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012  

 

 3

   

   

   

   

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012  

 

 4

   

   

   

   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012  

 

 5

   

   

   

   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012  

6

   

   

   

   

Notes to Condensed Consolidated Financial Statements  

 

 7

   

   

   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

25

   

   

   

Item 3.

Quantitative and Qualitative Disclosures about Market Risk  

35

   

   

   

Item 4.

Controls and Procedures  

35

   

   

   

   

PART II—OTHER INFORMATION

   

   

   

   

Item 1.

Legal Proceedings  

36

   

   

   

Item 1A.

Risk Factors  

36

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds  

36

   

   

   

Item 4.

Mine Safety Disclosures  

36

   

   

   

Item 6.

Exhibits  

36

   

   

   

   

Signatures  

37

   

   

   

 

 2 

   


PART I—FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

   

 

In thousands, except shares and par value

   

Unaudited
September 30,
2013

   

      

December 31,
2012

   

Assets

   

   

   

   

      

   

   

   

Current Assets

   

   

   

   

      

   

   

   

Cash and cash equivalents

   

$

281,007

      

      

$

215,766

      

Accounts receivable

   

   

570,276

      

      

   

389,915

      

Inventories

   

   

400,295

      

      

   

407,039

      

Deferred income taxes

   

   

61,208

      

      

   

60,894

      

Other

   

   

31,648

      

      

   

19,324

      

Total current assets

   

   

1,344,434

      

      

   

1,092,938

      

Property, plant and equipment

   

   

585,355

      

      

   

555,924

      

Accumulated depreciation

   

   

(318,405

      

   

(311,836

Property, plant and equipment, net

   

   

266,950

      

      

   

244,088

      

Other Assets

   

   

   

   

      

   

   

   

Goodwill

   

   

790,756

      

      

   

666,022

      

Other intangibles, net

   

   

376,137

      

      

   

308,321

      

Other noncurrent assets

   

   

38,703

      

      

   

40,173

      

Total other assets

   

   

1,205,596

      

      

   

1,014,516

      

Total Assets

   

$

2,816,980

      

      

$

2,351,542

      

Liabilities and Shareholders’ Equity

   

   

   

   

      

   

   

   

Current Liabilities

   

   

   

   

      

   

   

   

Accounts payable

   

$

288,026

      

      

$

248,593

      

Customer deposits

   

   

70,896

      

      

   

82,810

      

Accrued compensation

   

   

51,608

      

      

   

53,222

      

Accrued warranty

   

   

43,767

      

      

   

39,860

      

Current portion of long-term debt

   

   

85

      

      

   

43

      

Other accrued liabilities

   

   

87,376

      

      

   

128,531

      

Total current liabilities

   

   

541,758

      

      

   

553,059

      

Long-term debt

   

   

539,606

      

      

   

317,853

      

Accrued postretirement and pension benefits

   

   

60,304

      

      

   

66,388

      

Deferred income taxes

   

   

118,460

      

      

   

91,176

      

Accrued warranty

   

   

18,517

      

      

   

18,352

      

Other long-term liabilities

   

   

21,286

      

      

   

22,697

      

Total liabilities

   

   

1,299,931

      

      

   

1,069,525

      

Shareholders’ Equity

   

   

   

   

      

   

   

   

Preferred stock, 1,000,000 shares authorized, no shares issued

   

   

—  

      

      

   

—  

   

Common stock, $.01 par value; 200,000,000 shares authorized: 132,349,534 shares issued and 96,304,944 and 95,407,368 outstanding at September 30, 2013 and December 31, 2012, respectively

   

   

1,323

      

      

   

1,323

      

Additional paid-in capital

   

   

402,527

      

      

   

381,348

      

Treasury stock, at cost, 36,044,590 and 36,942,166 shares, at September 30, 2013 and December 31, 2012, respectively

   

   

(345,603

      

   

(349,388

Retained earnings

   

   

1,506,505

      

      

   

1,297,111

      

Accumulated other comprehensive loss

   

   

(52,079

      

   

(53,564

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

   

   

1,512,673

      

      

   

1,276,830

      

Non-controlling interest

   

   

4,376

      

      

   

5,187

      

Total shareholders’ equity

   

   

1,517,049

      

      

   

1,282,017

      

Total Liabilities and Shareholders’ Equity

   

$

2,816,980

      

      

$

2,351,542

      

The accompanying notes are an integral part of these statements.

   

   

   

 

 3 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   

 

   

      

Unaudited
Three Months Ended
September 30,

   

   

Unaudited
Nine Months Ended
September 30,

   

In thousands, except per share data

      

2013

   

      

2012

   

   

2013

   

      

2012

   

Net sales

      

$

631,398

      

      

$

587,593

      

   

$

1,884,910

      

      

$

1,780,722

      

Cost of sales

      

   

(443,265

      

   

(416,314

   

   

(1,321,008

      

   

(1,266,635

Gross profit

      

   

188,133

      

      

   

171,279

      

   

   

563,902

      

      

   

514,087

      

Selling, general and administrative expense

      

   

(63,402

      

   

(59,743

   

   

(191,576

      

   

(180,935

Engineering expense

      

   

(10,921

      

   

(10,753

   

   

(33,535

      

   

(31,047

Amortization expense

      

   

(3,939

      

   

(3,941

   

   

(12,699

      

   

(10,288

Total operating expenses

      

   

(78,262

      

   

(74,437

   

   

(237,810

      

   

(222,270

Income from operations

      

   

109,871

      

      

   

96,842

      

   

   

326,092

      

      

   

291,817

      

Other income and expenses

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Interest expense, net

      

   

(3,829

      

   

(3,070

   

   

(10,714

      

   

(10,303

Other income (expense) , net

      

   

(1,658

      

   

(1,393

)  

   

   

(1,833

      

   

(1,284

)  

Income from operations before income taxes

      

   

104,384

      

      

   

92,379

      

   

   

313,545

      

      

   

280,230

      

Income tax expense

      

   

(30,441

      

   

(29,385

   

   

(95,351

      

   

(93,263

Net income attributable to Wabtec shareholders

      

$

73,943

      

      

$

62,994

      

   

$

218,194

      

      

$

186,967

      

Earnings Per Common Share

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

0.77

      

      

$

0.66

      

   

$

2.28

      

      

$

1.95

      

Diluted

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

0.76

      

      

$

0.65

      

   

$

2.25

      

      

$

1.93

      

Weighted average shares outstanding

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

      

   

95,848

      

      

   

95,286

      

   

   

95,383

      

      

   

95,464

      

Diluted

      

   

97,174

      

      

   

96,542

      

   

   

96,754

      

      

   

96,720

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

 

 4 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   

 

   

      

Unaudited
Three Months Ended
September 30,

   

   

Unaudited
Nine Months Ended
September 30,

   

In thousands

      

2013

   

      

2012

   

   

2013

   

      

2012

   

Net income attributable to Wabtec shareholders

      

$

73,943

      

      

$

62,994

      

   

$

218,194

      

      

$

186,967

      

Foreign currency translation gain (loss)

      

   

34,179

   

      

   

11,916

   

   

   

(2,799

)

      

   

6,298

   

Unrealized (loss) gain on interest rate swap contracts

      

   

(411

)

      

   

(903

)

   

   

599

      

      

   

(3,064

)

Pension benefit plans and post-retirement benefit plans

      

   

1,341

      

      

   

(128

)  

   

   

6,746

      

      

   

2,158

      

Other comprehensive income before tax

      

   

35,109

   

      

   

10,885

   

   

   

4,546

   

      

   

5,392

   

Income tax (expense) benefit related to components of other comprehensive income

      

   

(1,075

)

      

   

333

      

   

   

(3,061

)

      

   

425

   

Other comprehensive income, net of tax

      

   

34,034

   

      

   

11,218

   

   

   

1,485

   

      

   

5,817

   

Comprehensive income attributable to Wabtec shareholders

      

$

107,977

      

      

$

74,212

      

   

$

219,679

      

      

$

192,784

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

 

 5 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   

 

   

      

Unaudited
Nine Months Ended
September 30,

   

In thousands

      

2013

   

      

2012

   

Operating Activities

      

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

218,194

      

      

$

186,967

      

Adjustments to reconcile net income to net cash provided by operations:

      

   

   

   

      

   

   

   

Depreciation and amortization

      

   

37,135

      

      

   

31,488

      

Stock-based compensation expense

      

   

17,596

      

      

   

15,007

      

(Gain) loss on disposal of property, plant and equipment

      

   

(641

      

   

674

      

Excess income tax benefits from exercise of stock options

      

   

(9,445

      

   

(2,518

Changes in operating assets and liabilities, net of acquisitions

      

   

   

   

      

   

   

   

Accounts receivable

      

   

(167,175

      

   

(71,430

Inventories

      

   

29,025

      

      

   

(26,599

Accounts payable

      

   

23,542

      

      

   

(18,569

Accrued income taxes

      

   

(2,032

      

   

(17,378

Accrued liabilities and customer deposits

      

   

(45,407

      

   

37,700

      

Other assets and liabilities

      

   

(15,796

      

   

(21,817

Net cash provided by operating activities

      

   

84,996

      

      

   

113,525

      

Investing Activities

      

   

   

   

      

   

   

   

Purchase of property, plant and equipment

      

   

(23,595

      

   

(24,694

Proceeds from disposal of property, plant and equipment

      

   

6,168

      

      

   

931

      

Acquisitions of business, net of cash acquired

      

   

(222,058

      

   

(102,304

)

Net cash used for investing activities

      

   

(239,485

      

   

(126,067

Financing Activities

      

   

   

   

      

   

   

   

Proceeds from debt

      

   

868,538

      

      

   

211,000

      

Payments of debt

      

   

(649,359

      

   

(173,992

Proceeds from exercise of stock options and other benefit plans

      

   

4,736

      

      

   

3,021

      

Excess income tax benefits from exercise of stock options

      

   

9,445

      

      

   

2,518

      

Stock repurchase

      

   

(5,486

      

   

(27,997

)  

Cash dividends ($0.09 and $0.06 per share for the nine months ended September 30, 2013 and 2012, respectively)

      

   

(8,800

      

   

(5,256

Net cash provided by financing activities

      

   

219,074

      

      

   

9,294

      

Effect of changes in currency exchange rates

      

   

656

   

      

   

(312

Increase (decrease) in cash

      

   

65,241

   

      

   

(3,560

Cash, beginning of year

      

   

215,766

      

      

   

285,615

      

Cash, end of period

   

$

281,007

      

      

$

282,055

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

 

 6 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013 (UNAUDITED)

   

1. BUSINESS

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 19 countries. In the first nine months of 2013, about 49% of the Company’s revenues came from customers outside the U.S.

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. 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, 2012. The December 31, 2012 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Capital Structure On May 14, 2013, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 200.0 million shares.  In addition, on May 14, 2013, our Board of Directors approved a two-for-one split of the Company’s issued and outstanding common stock in the form of a 100% stock dividend.  The increase in the authorized shares and the stock split became effective on May 14, 2013 and June 11, 2013, respectively.  

The Company issued approximately 66.2 million shares of its common stock as a result of the two-for-one stock split. The par value of the Company’s common stock remained unchanged at $0.01 per share.

Information regarding shares of common stock (except par value per share), retained earnings, and net income per common share attributable to Wabtec shareholders for all periods presented reflects the two-for-one split of the Company’s common stock. The number of shares of the Company’s common stock issuable upon exercise of outstanding stock options and vesting of other stock-based awards was proportionally increased, and the exercise price per share thereof was proportionally decreased, in accordance with the terms of the stock incentive plans.

Reclassifications Certain prior year amounts have been reclassified where necessary to conform to the current year presentation.

Revenue Recognition Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”. Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined.

In general, the Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $213.5 million and $97.1 million, customer deposits were $70.9 million and $82.8 million, and provisions for loss contracts were $13.8 million and $14.2 million at September 30, 2013 and December 31, 2012, respectively.

 

 7 

   


Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $17.8 million and $20.5 million at September 30, 2013 and December 31, 2012, respectively.

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 The Company has periodically entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counter-party to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis. At September 30, 2013, the Company had no material foreign currency forward contracts.

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. Effective July 31, 2013, with a termination date of November 7, 2016, this interest rate swap agreement converts a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible. The Company concluded that the interest rate swap agreement qualifies for special cash flow hedge accounting which requires the recording of the fair value of the interest rate swap agreement and permits the corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. As of September 30, 2013, the Company has recorded a current liability of $3.3million and a corresponding offset in accumulated other comprehensive loss of $2.0 million, net of tax, related to this agreement.

Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the year. 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. Foreign exchange transaction losses recognized in other income (expense), net were $1.0 million and $2.9 million for the three and nine months ended September 30, 2013, respectively. Foreign exchange transaction losses recognized in other income (expense), net were $1.4 million and $0.4 million for the three and nine months ended September 30, 2012, respectively.

Non-controlling Interests In accordance with ASC 810, the Company has classified non-controlling interests as equity on our condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012. Net income attributable to non-controlling interests for the three and nine months ended September 30, 2013 and 2012 was not material.

Other Comprehensive Income Comprehensive income is defined as net income and all other non-owner changes in shareholders’ equity.

The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2013 are as follows:

   

 

In thousands

   

Foreign
currency
translation

   

      

Interest
rate swap
contracts

   

   

Pension
and post
retirement
benefit
plans

   

   

Total

   

Balance at December 31, 2012

      

$

11,981

      

      

$

(2,459

   

$

(63,086

   

$

(53,564

Other comprehensive income before reclassifications

   

   

(2,799

      

   

335

      

   

   

1,188

      

   

   

(1,276

Amounts reclassified from accumulated other comprehensive income

   

   

—  

      

      

   

13

      

   

   

2,748

      

   

   

2,761

      

Net current period other comprehensive income

   

   

(2,799

      

   

348

      

   

   

3,936

      

   

   

1,485

      

Balance at September 30, 2013

   

$

9,182

   

      

$

(2,111

   

$

(59,150

   

$

(52,079

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

 

 8 

   


Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2013 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

   

$

(672

)  

      

Cost of sales

    Amortization of net loss

   

   

1,832

      

      

Cost of sales

   

   

   

1,160

      

      

Income from Operations

   

   

   

(371

)  

      

Income tax expense

   

   

$

789

      

      

Net income

Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2013 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

   

$

(1,896

)  

      

Cost of sales

    Amortization of net loss

   

   

5,878

      

      

Cost of sales

   

   

   

3,982

      

      

Income from Operations

   

   

   

(1,234

)  

      

Income tax expense

   

   

$

2,748

      

      

Net income

   

3. ACQUISITIONS

The Company has made the following acquisitions within the Transit Segment:

 

·

On October 1, 2012, the Company acquired LH Group (“LH”), a UK-based provider of maintenance and overhaul services for the passenger transit market, for a net purchase price of approximately $48.1 million, net of cash, resulting in preliminary goodwill of $20.1 million, none of which will be deductible for tax purposes.

 

·

On July 13, 2012, the Company acquired Tec Tran Corp. and its affiliates (“Tec Tran”), the only U.S.-owned manufacturer of hydraulic braking systems for transit cars, based in North Carolina, for a net purchase price of approximately $8.3 million, net of cash, resulting in additional goodwill of $1.7 million, which will be deductible for tax purposes.

 

·

On June 14, 2012, the Company acquired Mors Smitt Holding (“Mors Smitt”), a leading manufacturer of electronic components for rail and industrial markets with operations in the Netherlands, the United Kingdom, the U.S., France, China and Hong-Kong, for a net purchase price of approximately $90.0 million, net of cash, resulting in additional goodwill of $42.9 million, none of which will be deductible for tax purposes.

The Company has made the following acquisitions within the Freight Segment:

 

·

On September 24, 2013, the Company acquired Longwood Industries, Inc (“Longwood”), a manufacturer of specialty rubber products for transportation, oil and gas, and industrial markets, for a net purchase price of approximately $83.9 million, net of cash, resulting in preliminary goodwill of $41.5 million, none of which will be deductible for tax purposes.

 

·

On July 30, 2013, the Company acquired Turbonetics Holdings, Inc (“Turbonetics”), a manufacturer of turbochargers and related components for various industrial markets, for a net purchase price of approximately $23.1 million, net of cash, resulting in preliminary goodwill of $6.9 million, none of which will be deductible for tax purposes.

 

·

On February 26, 2013, the Company acquired Transdyne (“Transdyne”), a distributor of wear-protection components and other hardware used primarily on railroad freight cars, for a net purchase price of approximately $2.4 million, net of cash, resulting in preliminary goodwill of $0.5 million, which will be deductible for tax purposes.

 

·

On January 31, 2013, the Company acquired Napier Turbochargers Ltd. (“Napier”), a UK-based provider of turbochargers and related parts for the worldwide power generation and marine markets, for a net purchase price of approximately $112.3 million, net of cash, resulting in preliminary goodwill of $68.4 million, none of which will be deductible for tax purposes.

 

·

On July 31, 2012, the Company acquired Winco Equipamentos Ferroviarios Ltda. (“Winco”), an established marketing and sales company and provider of freight car components with capabilities including value-added engineering and assembly, service, technical support and logistics, based in Brazil, for an initial net payment of approximately $3.7

   

 

 9 

   


million, net of cash, resulting in additional goodwill of $3.8 million, none of which will be deductible for tax purposes. In addition to the $3.7 million, the purchase agreement includes contingent consideration to be paid in future periods based on the achievement of certain financial results.

The acquisitions listed above include escrow deposits of $20.8 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

For the Longwood, Turbonetics, Transdyne, LH, and Napier acquisitions, the following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition.  For the Winco, Tec Tran and Mors Smitt acquisition, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.

   

 

   

   

Longwood

   

   

Turbonetics

   

   

Transdyne

   

   

Napier

   

   

LH

   

   

Winco

   

   

Tec Tran

   

   

Mors Smitt

   

In thousands

   

September 24, 2013

   

   

July 30,
2013

   

   

February 26,
2013

   

   

January 31,
2013

   

   

October 1,
2012

   

   

July 31,
2012

   

   

July 13,
2012

   

   

June 14,
2012

   

Current assets

   

$

19,632

   

   

$

5,550

   

   

$

1,062

   

   

$

15,934

   

   

$

19,126

   

   

$

1,584

   

   

$

1,955

   

   

$

23,649

   

Property, plant & equipment

   

   

14,838

   

   

   

996

   

   

   

83

   

   

   

9,184

   

   

   

5,874

   

   

   

47

   

   

   

116

   

   

   

10,389

   

Goodwill and other intangible assets

   

   

73,013

   

   

   

18,088

   

   

   

1,485

   

   

   

106,373

   

   

   

38,712

   

   

   

6,471

   

   

   

6,717

   

   

   

79,730

   

Other assets

   

   

187

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

1,825

   

   

   

—  

   

   

   

944

   

Total assets acquired

   

   

107,670

   

   

   

24,634

   

   

   

2,630

   

   

   

131,491

   

   

   

63,712

   

   

   

9,927

   

   

   

8,788

   

   

   

114,712

   

Total liabilities assumed

   

   

(23,807

)

   

   

(1,510

)

   

   

(228

)

   

   

(19,150

)

   

   

(15,592

)

   

   

(6,271

)

   

   

(470

)

   

   

(24,724

)

Net assets acquired

   

$

83,863

   

   

$

23,124

   

   

$

2,402

   

   

$

112,341

   

   

$

48,120

   

   

$

3,656

   

   

$

8,318

   

   

$

89,988

   

   

   

   

The total goodwill and other intangible assets for acquisitions listed in the table above was $330.5 million, of which $185.8 million and $144.7 million was related to goodwill and other intangible assets, respectively.  Of the allocation of $144.7 million of acquired intangible assets for the companies listed in the above table exclusive of goodwill, $107.4 million was assigned to customer relationships, $27.6 million was assigned to trade names, $4.7 million was assigned to patents, $0.6 million was assigned to non-compete agreements, $0.8 million was assigned to favorable leasehold interest and $3.6 million was assigned to customer backlog. The trade names are considered to have an indefinite useful life, while the customer relationships’ average useful life is 20 years, the patents’ useful life is twelve years, the favorable leasehold interest useful life is five years and the non-compete agreements average useful life is two years.

The following unaudited pro forma financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2012:

   

 

In thousands

      

Three Months Ended
September 30, 2013

   

      

Three Months Ended
September 30, 2012

   

      

Nine Months Ended
September 30, 2013

   

      

Nine Months Ended
September 30, 2012

   

Net sales

      

$

647,832

      

      

$

640,557

      

      

$

1,947,935

      

      

$

1,980,752

      

Gross profit

      

   

190,556

      

      

   

185,138

      

      

   

577,014

      

      

   

570,790

      

Net income attributable to Wabtec shareholders

      

   

74,496

      

      

   

68,077

      

      

   

222,999

      

      

   

206,059

      

Diluted earnings per share

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

As Reported

      

$

0.76

      

      

$

0.65

      

      

$

2.25

      

      

$

1.93

      

Pro forma

      

$

0.76

      

      

$

0.70

      

      

$

2.30

      

      

$

2.12

      

   

   

4. INVENTORIES

The components of inventory, net of reserves, were:

   

 

In thousands

      

September 30,
2013

   

      

December 31,
2012

   

Raw materials

      

$

167,792

      

      

$

186,341

      

Work-in-process

      

   

135,530

      

      

   

129,605

      

Finished goods

      

   

96,973

      

      

   

91,093

      

Total inventories

      

$

400,295

      

      

$

407,039

      

   

 

 10 

   


5. INTANGIBLES

The change in the carrying amount of goodwill by segment for the nine months ended September 30, 2013 is as follows:

   

 

In thousands

      

Freight
Segment

   

      

Transit
Segment

   

      

Total

   

Balance at December 31, 2012

      

$

397,184

      

      

$

268,838

      

      

$

666,022

      

Acquisitions

      

   

123,431

      

      

   

—  

      

      

   

123,431

      

Adjustments to preliminary purchase allocation

      

   

(891

)  

      

   

1,269

      

      

   

378

      

Foreign currency impact

      

   

(2,262

)  

      

   

3,187

      

      

   

925

      

Balance at September 30, 2013

      

$

517,462

      

      

$

273,294

      

      

$

790,756

      

As of September 30, 2013 and December 31, 2012, the Company’s trademarks had a net carrying amount of $144.0 million and $131.3 million, respectively, and the Company believes these intangibles have an indefinite life.

Intangible assets of the Company, other than goodwill and trademarks, consist of the following:

   

 

In thousands

      

September 30,
2013

   

      

December 31,
2012

   

Patents and other, net of accumulated amortization of $36,947 and  $35,556

      

$

13,995

      

      

$

11,835

      

Customer relationships, net of accumulated amortization of $40,911 and $31,572

      

   

218,169

      

      

   

165,160

      

Total

      

$

232,164

      

      

$

176,995

      

The weighted average remaining useful life of patents, customer relationships and intellectual property were nine years, 17 years and 16 years, respectively. Amortization expense for intangible assets was $3.9 million and $12.7 million for the three and nine months ended September 30, 2013, respectively, and $3.9 million and $10.3 million for the three and nine months ended September 30, 2012, respectively.

Amortization expense for the five succeeding years is as follows (in thousands):

   

 

Remainder of 2013

$

4,657

      

2014

   

17,416

      

2015

   

16,211

      

2016

   

16,059

      

2017

   

14,534

      

   

   

6. LONG-TERM DEBT

Long-term debt consisted of the following:

   

 

In thousands

      

September 30,
2013

   

      

December 31,
2012

   

4.375% Senior Notes, due 2023

      

$

250,000

      

      

$

—  

      

6.875% Senior Notes, due 2013

      

   

—  

      

      

   

150,000

   

Revolving Credit Facility

      

   

289,000

      

      

   

167,000

      

Capital Leases

      

   

691

      

      

   

896

      

Total

      

   

539,691

      

      

   

317,896

      

Less—current portion

      

   

85

      

      

   

43

      

Long-term portion

      

$

539,606

      

      

$

317,853

      

2011 Refinancing Credit Agreement

On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility with a consortium of commercial banks. This “2011 Refinancing Credit Agreement” provides the Company with a $600 million, five-year revolving credit facility. The Company incurred approximately $1.9 million of deferred financing cost related to the 2011 Refinancing Credit Agreement. The facility expires on November 7, 2016. The 2011 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At September 30, 2013, the Company had available bank borrowing capacity, net of $60.1 million of letters of credit, of approximately $250.9 million, subject to certain financial covenant restrictions.

 

 11 

   


Under the 2011 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5%per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on quoted LIBOR rates plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The current Base Rate margin is 0 basis points and the Alternate Rate margin is 100 basis points.

At September 30, 2013 the weighted average interest rate on the Company’s variable rate debt was 1.19%. On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement was July 31, 2013, and the termination date is November 7, 2016. The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible.

The 2011 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2011 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company does not expect that these measurements will limit the Company in executing our operating activities.

   

4.375% Senior Notes Due August 2023

   

In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (“the 2013 Notes”).  The 2013 Notes were issued at 99.879% of face value.  Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year.  The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.  The principal balance is due in full at maturity.  The Company incurred $2.6 million of deferred financing costs related to the issuance.  

   

The 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 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 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.

6.875% Senior Notes Due July 31, 2013

In August 2003, the Company issued $150.0 million of Senior Notes due in 2013 (“the 2003 Notes”). The 2003 Notes were issued at par. Interest on the 2003 Notes accrued at a rate of 6.875% per annum and was payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The Company paid off the 2003 Notes, which matured on July 31, 2013 utilizing available capacity under the 2011 Refinancing Credit Agreement.

   

   

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German, and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.

The Company uses a December 31 measurement date for the plans.

 

 12 

   


The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.

   

 

   

      

U.S.

   

   

International

   

   

      

Three months ended
September 30,

   

   

Three months ended
September 30,

   

In thousands, except percentages

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

111

      

   

$

94

      

   

$

505

      

   

$

493

      

Interest cost

      

   

490

      

   

   

501

      

   

   

1,651

      

   

   

1,773

      

Expected return on plan assets

      

   

(752

   

   

(771

   

   

(2,087

   

   

(2,035

Net amortization/deferrals

      

   

753

   

   

   

659

   

   

   

849

   

   

   

681

   

Settlement loss recognized

      

   

—  

      

   

   

—  

      

   

   

166

      

   

   

844

      

Net periodic benefit cost

      

$

602

      

   

$

483

      

   

$

1,084

      

   

$

1,756

      

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

4.96

%

Expected long-term rate of return

      

   

7.50

%

   

   

7.50

%

   

   

6.09

%

   

   

6.12

%

Rate of compensation increase

      

   

3.00

%

   

   

3.00

%

   

   

3.10

%

   

   

3.21

%

   

   

      

U.S.

   

   

International

   

   

      

Nine months ended
September 30,

   

   

Nine months ended
September 30,

   

In thousands, except percentages

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

323

      

   

$

285

      

   

$

1,524

      

   

$

1,479

      

Interest cost

      

   

1,472

      

   

   

1,585

      

   

   

4,984

      

   

   

5,309

      

Expected return on plan assets

      

   

(2,232

   

   

(2,321

   

   

(6,304

   

   

(6,085

Net amortization/deferrals

      

   

2,431

      

   

   

2,272

      

   

   

2,570

      

   

   

2,032

      

Settlement loss recognized

      

   

—  

      

   

   

—  

   

   

   

166

      

   

   

1,137

      

Net periodic benefit cost

      

$

1,994

      

   

$

1,821

      

   

$

2,940

      

   

$

3,872

      

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

4.96

%

Expected long-term rate of return

      

   

7.50

%

   

   

7.50

%

   

   

6.09

%

   

   

6.12

%

Rate of compensation increase

      

   

3.00

%

   

   

3.00

%