10-Q 1 wab-10q_20140331.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 March 31, 2014

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: 033-90866

 

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 April 28, 2014

Common Stock, $.01 par value per share

 

96,448,873 shares

 

 

 

 

 

 


 

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

March 31, 2014

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

 3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

3

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2014 and 2013

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013

5

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

6

 

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

 

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

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

26

Item 4.

 

Controls and Procedures

27

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

28

Item 1A.

 

Risk Factors

28

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 4.

 

Mine Safety Disclosures

28

Item 6.

 

Exhibits

28

 

 

Signatures

29

 

 

 

2


 

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

Unaudited

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

In thousands, except shares and par value

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

295,103

 

 

$

285,760

 

Accounts receivable

 

 

388,863

 

 

 

349,458

 

Unbilled accounts receivable

 

 

247,791

 

 

 

205,045

 

Inventories

 

 

420,058

 

 

 

403,229

 

Deferred income taxes

 

 

51,905

 

 

 

50,622

 

Other

 

 

30,458

 

 

 

38,933

 

Total current assets

 

 

1,434,178

 

 

 

1,333,047

 

Property, plant and equipment

 

 

598,269

 

 

 

597,740

 

Accumulated depreciation

 

 

(324,622

)

 

 

(321,662

)

Property, plant and equipment, net

 

 

273,647

 

 

 

276,078

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

787,610

 

 

 

786,433

 

Other intangibles, net

 

 

380,541

 

 

 

385,679

 

Other noncurrent assets

 

 

40,543

 

 

 

40,760

 

Total other assets

 

 

1,208,694

 

 

 

1,212,872

 

Total Assets

 

$

2,916,519

 

 

$

2,821,997

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

345,312

 

 

$

326,666

 

Customer deposits

 

 

67,066

 

 

 

66,573

 

Accrued compensation

 

 

51,205

 

 

 

57,058

 

Accrued warranty

 

 

44,051

 

 

 

43,197

 

Current portion of long-term debt

 

 

386

 

 

 

421

 

Other accrued liabilities

 

 

72,885

 

 

 

85,485

 

Total current liabilities

 

 

580,905

 

 

 

579,400

 

Long-term debt

 

 

450,247

 

 

 

450,288

 

Accrued postretirement and pension benefits

 

 

49,632

 

 

 

50,003

 

Deferred income taxes

 

 

118,184

 

 

 

114,486

 

Accrued warranty

 

 

18,843

 

 

 

17,396

 

Other long-term liabilities

 

 

18,320

 

 

 

23,257

 

Total liabilities

 

 

1,236,131

 

 

 

1,234,830

 

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 96,448,365 and 95,909,948 outstanding at March 31, 2014

   and December 31, 2013, respectively

 

 

1,323

 

 

 

1,323

 

Additional paid-in capital

 

 

427,968

 

 

 

415,059

 

Treasury stock, at cost, 35,901,169 and 36,439,586 shares, at March 31, 2014

   and December 31, 2013, respectively

 

 

(369,209

)

 

 

(372,969

)

Retained earnings

 

 

1,653,008

 

 

 

1,576,702

 

Accumulated other comprehensive loss

 

 

(34,063

)

 

 

(34,856

)

Total Westinghouse Air Brake Technologies Corporation shareholders' equity

 

 

1,679,027

 

 

 

1,585,259

 

Non-controlling interest (minority interest)

 

 

1,361

 

 

 

1,908

 

Total shareholders’ equity

 

 

1,680,388

 

 

 

1,587,167

 

Total Liabilities and Shareholders’ Equity

 

$

2,916,519

 

 

$

2,821,997

 

The accompanying notes are an integral part of these statements.

 

 

 

3


 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

In thousands, except per share data

 

2014

 

 

2013

 

Net sales

 

$

695,249

 

 

$

615,510

 

Cost of sales

 

 

(485,680

)

 

 

(432,622

)

Gross profit

 

 

209,569

 

 

 

182,888

 

Selling, general and administrative expenses

 

 

(70,081

)

 

 

(64,300

)

Engineering expenses

 

 

(12,946

)

 

 

(11,334

)

Amortization expense

 

 

(4,696

)

 

 

(3,587

)

Total operating expenses

 

 

(87,723

)

 

 

(79,221

)

Income from operations

 

 

121,846

 

 

 

103,667

 

Other income and expenses

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,450

)

 

 

(3,614

)

Other (expense) income, net

 

 

(17

)

 

 

(581

)

Income from operations before income taxes

 

 

117,379

 

 

 

99,472

 

Income tax expense

 

 

(37,245

)

 

 

(29,859

)

Net income attributable to Wabtec shareholders

 

$

80,134

 

 

$

69,613

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

 

$

0.84

 

 

$

0.73

 

Diluted

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

 

$

0.83

 

 

$

0.72

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

95,529

 

 

 

95,025

 

Diluted

 

 

96,805

 

 

 

96,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

March 31,

 

In thousands, except per share data

 

2014

 

 

2013

 

Net income attributable to Wabtec shareholders

 

$

80,134

 

 

$

69,613

 

Foreign currency translation loss

 

 

(643

)

 

 

(27,941

)

Unrealized gain (loss) on derivative contracts

 

 

283

 

 

 

(57

)

Pension benefit plans and post-retirement benefit plans

 

 

1,808

 

 

 

3,102

 

Other comprehensive income (loss) before tax

 

 

1,448

 

 

 

(24,896

)

Income tax expense related to components of other comprehensive income

 

 

(655

)

 

 

(844

)

Other comprehensive income (loss), net of tax

 

 

793

 

 

 

(25,740

)

Comprehensive income attributable to Wabtec shareholders

 

$

80,927

 

 

$

43,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

5


 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

In thousands, except per share data

 

2014

 

 

2013

 

Operating Activities

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

 

$

80,134

 

 

$

69,613

 

Adjustments to reconcile net income to cash provided by operations:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,578

 

 

 

11,170

 

Stock-based compensation expense

 

 

6,707

 

 

 

5,560

 

Loss on disposal of property, plant and equipment

 

 

14

 

 

 

32

 

Excess income tax benefits from exercise of stock options

 

 

(642

)

 

 

(1,292

)

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable and unbilled accounts receivable

 

 

(80,440

)

 

 

(42,534

)

Inventories

 

 

(19,105

)

 

 

(13,206

)

Accounts payable

 

 

19,141

 

 

 

14,960

 

Accrued income taxes

 

 

16,530

 

 

 

9,555

 

Accrued liabilities and customer deposits

 

 

(15,920

)

 

 

(15,036

)

Other assets and liabilities

 

 

6,218

 

 

 

(6,782

)

Net cash provided by operating activities

 

 

26,215

 

 

 

32,040

 

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(6,333

)

 

 

(6,448

)

Proceeds from disposal of property, plant and equipment

 

 

1,405

 

 

 

718

 

Acquisitions of businesses, net of cash acquired

 

 

 

 

 

(115,071

)

Net cash used for investing activities

 

 

(4,928

)

 

 

(120,801

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

50,000

 

 

 

203,900

 

Payments of debt

 

 

(50,067

)

 

 

(104,228

)

Stock re-purchase

 

 

(2,151

)

 

 

 

Proceeds from exercise of stock options and other benefit plans

 

 

879

 

 

 

1,589

 

Excess income tax benefits from exercise of stock options

 

 

642

 

 

 

1,292

 

Earn-out settlement

 

 

(4,429

)

 

 

 

Cash dividends ($0.04 and $0.025 per share for the three months ended

   March 31, 2014 and 2013, respectively)

 

 

(3,828

)

 

 

(2,386

)

Net cash (used for) provided by financing activities

 

 

(8,954

)

 

 

100,167

 

Effect of changes in currency exchange rates

 

 

(2,990

)

 

 

(1,834

)

Increase in cash

 

 

9,343

 

 

 

9,572

 

Cash and cash equivalents, beginning of year

 

 

285,760

 

 

 

215,766

 

Cash and cash equivalents, end of period

 

$

295,103

 

 

$

225,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 MARCH 31, 2014 (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 three months of 2014, about 45% 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, 2013. The December 31, 2013 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 footnote 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 $247.8 million and $205.0 million, customer deposits were $67.1 million and $66.6 million, and provisions for loss contracts were $10.8 million and $14.0 million at March 31, 2014 and December 31, 2013, 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 $17.7 million and $19.2 million at March 31, 2014 and December 31, 2013, 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 March 31, 2014, 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 March 31, 2014, the Company has recorded a current liability of $2.6 million and a corresponding offset in accumulated other comprehensive loss of $1.6 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 $0.4 million and $0.9 million for the three months ended March 31, 2014 and 2013, 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 March 31, 2014 and December 31, 2013. Net income attributable to non-controlling interests for the three months ended March 31, 2014 and 2013 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 three months ended March 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

post

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

retirement

 

 

 

 

 

In thousands

 

translation

 

 

contracts

 

 

benefits plans

 

 

Total

 

Balance at December 31, 2013

 

$

17,326

 

 

$

(2,010

)

 

$

(50,172

)

 

$

(34,856

)

Other comprehensive (loss) income before reclassifications

 

 

(643

)

 

 

(248

)

 

 

563

 

 

 

(328

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

390

 

 

 

731

 

 

 

1,121

 

Net current period other comprehensive (loss) income

 

 

(643

)

 

 

142

 

 

 

1,294

 

 

 

793

 

Balance at March 31, 2014

 

$

16,683

 

 

$

(1,868

)

 

$

(48,878

)

 

$

(34,063

)

8


 

 

Reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2014 are as follows:

 

 

 

Amount reclassified from

 

 

Affected line item in the

 

 

accumulated other

 

 

Condensed Consolidated

In thousands

 

comprehensive income

 

 

Statements of Operations

Amortization of defined pension and post retirement items

 

 

 

 

 

 

Amortization of initial net obligation and

   prior service cost

 

$

(616

)

 

Cost of sales

Amortization of net loss (gain)

 

 

1,687

 

 

Cost of sales

 

 

 

1,071

 

 

Income from Operations

 

 

 

(340

)

 

Income tax expense

 

 

$

731

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contracts

 

 

 

 

 

 

Realized loss on derivative contracts

 

 

571

 

 

Interest expense, net

 

 

 

(181

)

 

Income tax expense

 

 

$

390

 

 

Net income

 

 

3. ACQUISITIONS

The Company has made the following acquisitions operating as a business unit or component of a business unit in 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 acquired, resulting in preliminary goodwill of $36.0 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 $23.2 million, net of cash acquired, resulting in preliminary goodwill of $7.0 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 acquired, resulting in additional 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 acquired, resulting in additional goodwill of $67.0 million, none of which will be deductible for tax purposes.

The acquisitions listed above include escrow deposits of $8.9 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

·

On February 12, 2014, the Company signed a definitive agreement to acquire Fandstan Electric Group Ltd. (“Fandstan”), a leading rail and industrial equipment manufacturer for a variety of markets, including rail and tram transportation, industrial and energy, for a purchase price of approximately $215.0 million.  The Company expects the transaction to be completed in the second quarter of 2014, subject to customary closing conditions and competition authority clearance. Fandstan will operate as a business unit or component of a business unit in the Transit Segment.

9


 

For the Longwood and Turbonetics 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 Transdyne and Napier 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

 

 

 

September 24,

 

 

July 30,

 

 

February 26,

 

 

January 31,

 

In thousands

 

2013

 

 

2013

 

 

2013

 

 

2013

 

Current assets

 

$

18,162

 

 

$

5,562

 

 

$

1,062

 

 

$

13,441

 

Property, plant & equipment

 

 

15,018

 

 

 

996

 

 

 

83

 

 

 

8,837

 

Goodwill

 

 

35,971

 

 

 

6,995

 

 

 

485

 

 

 

67,045

 

Other intangible assets

 

 

39,440

 

 

 

11,140

 

 

 

1,000

 

 

 

40,583

 

Other assets

 

 

7

 

 

 

 

 

 

 

 

 

 

Total assets acquired

 

 

108,598

 

 

 

24,693

 

 

 

2,630

 

 

 

129,906

 

Total liabilities assumed

 

 

(24,735

)

 

 

(1,510

)

 

 

(228

)

 

 

(17,565

)

Net assets acquired

 

$

83,863

 

 

$

23,183

 

 

$

2,402

 

 

$

112,341

 

 

   Of the $92.1 million of total acquired intangible assets, $60.4 million was assigned to customer relationships, $24.0 million was assigned to trade names, $5.2 million was assigned to patents, $0.8 million was assigned to favorable leasehold interest and $1.7 million was assigned to customer backlog. The trade names were determined to have an indefinite useful life, while the customer relationships’ average useful life is 20 years, the patents’ useful life is twelve years and the favorable leasehold interest useful life is five years.

The following unaudited pro forma financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2013:

 

 

 

Three Months Ended

 

In thousands

 

March 31, 2013

 

Net sales

 

$

640,564

 

Gross profit

 

 

188,633

 

Net income attributable to Wabtec shareholders

 

 

71,695

 

Diluted earnings per share

 

 

 

 

As Reported

 

$

0.72

 

Pro forma

 

$

0.74

 

 

 

4. INVENTORIES

The components of inventory, net of reserves, were:

 

 

 

March 31,

 

 

December 31,

 

In thousands

 

2014

 

 

2013

 

Raw materials

 

$

163,821

 

 

$

165,906

 

Work-in-progress

 

 

151,284

 

 

 

137,449

 

Finished goods

 

 

104,953

 

 

 

99,874

 

Total inventories

 

$

420,058

 

 

$

403,229

 

 

10


 

5. INTANGIBLES

The change in the carrying amount of goodwill by segment for the three months ended March 31, 2014 is as follows:

 

 

 

Freight

 

 

Transit

 

 

 

 

 

In thousands

 

Segment

 

 

Segment

 

 

Total

 

Balance at December 31, 2013

 

$

509,664

 

 

$

276,769

 

 

$

786,433

 

Adjustment to preliminary purchase allocation

 

 

1,775

 

 

 

 

 

 

1,775

 

Foreign currency impact

 

 

(245

)

 

 

(353

)

 

 

(598

)

Balance at March 31, 2014

 

 

511,194

 

 

 

276,416

 

 

 

787,610

 

As of March 31, 2014 and December 31, 2013, the Company’s trademarks had a net carrying amount of $156.4 million and $156.8 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:

 

 

 

March 31,

 

 

December 31,

 

In thousands

 

2014

 

 

2013

 

Patents, non-compete and other intangibles, net of accumulated

   amortization of $38,524 and $37,824

 

$

14,083

 

 

$

15,561

 

Customer relationships, net of accumulated amortization

   of $47,662 and $44,910

 

 

210,074

 

 

 

213,324

 

Total

 

$

224,157

 

 

$

228,885

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were ten years, 17 years and 15 years, respectively. Amortization expense for intangible assets was $4.7 million and $3.6 million for the three months ended March 31, 2014 and 2013, respectively.

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

 

Remainder of 2014

$

12,878

 

2015

 

16,131

 

2016

 

15,980

 

2017

 

15,084

 

2018

 

14,448

 

 

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

In thousands

 

2014

 

 

2013

 

4.375% Senior Notes, due 2023

 

$

250,000

 

 

$

250,000

 

Revolving Credit Facility

 

 

200,000

 

 

 

200,000

 

Capital Leases

 

 

633

 

 

 

709

 

Total

 

 

450,633

 

 

 

450,709

 

Less - current portion

 

 

386

 

 

 

421

 

Long-term portion

 

$

450,247

 

 

$

450,288

 

 

11


 

2013 Refinancing Credit Agreement

On December 19, 2013, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provides the Company with an $800 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The facility expires on December 19, 2018. The 2013 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At March 31, 2014, the Company had available bank borrowing capacity, net of $47.0 million of letters of credit, of approximately $553.0 million, subject to certain financial covenant restrictions.

 

Under the 2013 Refinancing Credit Agreement, the Company may elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies,  an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies  (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 100 basis points.

 

At March 31, 2014 the weighted average interest rate on the Company’s variable rate debt was 1.16%.  On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150 million. The effective date of the interest rate swap agreement is 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 2013 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 2013 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.

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” provided 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 was set to expire on November 7, 2016.

 

Under the 2011 Refinancing Credit Agreement, the Company may have elected 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 adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on quoted LIBOR rates 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 cash flow ratios. The current Base Rate margin was 0 basis points and the Alternate Rate margin was 100 basis points.

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.  

12


 

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.

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.

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

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

In thousands, except percentages

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net periodic benefit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

98

 

 

$

106

 

 

$

424

 

 

$

513

 

Interest cost

 

 

532

 

 

 

491

 

 

 

1,821

 

 

 

1,677

 

Expected return on plan assets

 

 

(620

)

 

 

(740

)

 

 

(2,216

)

 

 

(2,122

)

Net amortization/deferrals

 

 

655

 

 

 

839

 

 

 

758

 

 

 

866

 

Net periodic benefit cost

 

$

665

 

 

$

696

 

 

$

787

 

 

$

934

 

Assumptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

4.70

%

 

 

3.90

%

 

 

4.43

%

 

 

4.30

%

Expected long-term rate of return

 

 

6.20

%

 

 

7.50

%

 

 

6.07

%

 

 

6.09

%

Rate of compensation increase

 

 

3.00

%

 

 

3.00

%

 

 

3.59

%

 

 

3.10

%

 

The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $5.2 million to the international plans and does not expect to make a contribution to the U.S. plans during 2014.

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.

13


 

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

 

 

 

U.S.

 

 

International

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

In thousands, except percentages

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net periodic benefit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

10

 

 

$

7

 

 

$

9

 

 

$

12

 

Interest cost

 

 

296

 

 

 

321

 

 

 

42

 

 

 

44

 

Net amortization/deferrals

 

 

(327

)

 

 

(212

)

 

 

(15

)

 

 

(77

)

Net periodic benefit (income) cost

 

$

(21

)

 

$

116

 

 

$

36

 

 

$

(21

)

Assumptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

4.70

%

 

 

3.90

%

 

 

4.60

%

 

 

4.30

%

 

 

8. STOCK-BASED COMPENSATION

As of March 31, 2014, the Company maintains employee stock-based compensation plans for stock options, restricted stock, restricted units, and incentive stock awards as governed by the 2011 Stock Incentive Compensation Plan (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a 10-year term through March 27, 2021 and provides a maximum of 3,800,000 shares for grants or awards. The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011. The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (“Directors Plan”). No awards may be made under the Directors Plan subsequent to October 31, 2016.

Stock-based compensation expense was $6.7 million and $5.6 million for the three months ended March 31, 2014 and 2013, respectively. Included in the stock-based compensation expense for the three months ended March 31, 2014 above is $0.6 million of expense related to stock options, $1.6 million related to restricted stock, $0.6 million related to restricted units, $3.6 million related to incentive stock awards and $0.3 million related to awards issued for Directors’ fees. At March 31, 2014, unamortized compensation expense related to stock options, restricted stock, restricted units and incentive stock awards expected to vest totaled $35.1 million and will be recognized over a weighted average period of 1.6 years.

Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four-year vesting period and expire 10 years from the date of grant.

The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

Aggregate

 

 

 

 

 

 

Weighted Average

 

 

Remaining

 

 

Intrinsic value

 

 

Options

 

 

Exercise Price

 

 

Contractual Life

 

 

(in thousands)

 

Outstanding at December 31, 2013

 

1,232,862

 

 

$

24.36

 

 

 

6.1

 

 

$

61,530

 

Granted

 

78,232

 

 

 

72.82

 

 

 

 

 

 

 

325

 

Exercised

 

(46,155

)

 

 

19.05

 

 

 

 

 

 

 

(2,673

)

Canceled

 

(261

)

 

 

43.11

 

 

 

 

 

 

 

(9

)

Outstanding at March 31, 2014

 

1,264,678

 

 

$

27.55

 

 

 

6.1

 

 

$

62,501

 

Exercisable at March 31, 2014

 

912,068

 

 

$

20.82

 

 

 

5.4

 

 

$

51,213

 

 

14


 

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,

 

 

2014

 

 

2013

 

Dividend yield

 

0.11

%

 

 

0.21

%

Risk-free interest rate

 

2.19

%

 

 

1.38

%

Stock price volatility

 

33.2

%

 

 

43.8

%

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 and 2000 Plans, eligible employees are granted restricted stock or restricted units that generally vest over four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant.

In addition, the Company has issued incentive stock awards 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 awards can vest and be awarded ranging from 0% to 200% of the initial incentive stock awards granted. The incentive stock awards included in the table below represent the number of shares that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of March 31, 2014, the Company estimates that it will achieve 167%, 100% and 100% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2014, 2015, and 2016, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these stock awards 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 restricted stock and incentive stock awards 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 and unit activity for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock awards activity for the 2011 Plan and the 2000 Plan with related information for the three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Restricted

 

 

Incentive

 

 

Average Grant