10-Q 1 wab-10q_20140930.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, 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 October 27, 2014

Common Stock, $.01 par value per share

 

96,254,818 shares

 

 

 

 

 

 


 

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

September 30, 2014

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

3

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

5

 

 

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

23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

 

Controls and Procedures

32

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

33

Item 1A.

 

Risk Factors

33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 4.

 

Mine Safety Disclosures

33

Item 6.

 

Exhibits

33

 

 

Signatures

34

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

Unaudited

 

 

 

 

 

 

September 30,

 

 

December 31,

 

In thousands, except shares and par value

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

212,541

 

 

$

285,760

 

Accounts receivable

 

474,930

 

 

 

349,458

 

Unbilled accounts receivable

 

240,178

 

 

 

205,045

 

Inventories

 

489,053

 

 

 

403,229

 

Deferred income taxes

 

52,240

 

 

 

50,622

 

Other

 

64,866

 

 

 

38,933

 

Total current assets

 

1,533,808

 

 

 

1,333,047

 

Property, plant and equipment

 

682,297

 

 

 

597,740

 

Accumulated depreciation

 

(339,932

)

 

 

(321,662

)

Property, plant and equipment, net

 

342,365

 

 

 

276,078

 

Other Assets

 

 

 

 

 

 

 

Goodwill

 

864,460

 

 

 

786,433

 

Other intangibles, net

 

449,533

 

 

 

385,679

 

Other noncurrent assets

 

38,221

 

 

 

40,760

 

Total other assets

 

1,352,214

 

 

 

1,212,872

 

Total Assets

$

3,228,387

 

 

$

2,821,997

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

$

389,284

 

 

$

326,666

 

Customer deposits

 

74,901

 

 

 

66,573

 

Accrued compensation

 

64,168

 

 

 

57,058

 

Accrued warranty

 

53,509

 

 

 

43,197

 

Current portion of long-term debt

 

955

 

 

 

421

 

Other accrued liabilities

 

91,931

 

 

 

85,485

 

Total current liabilities

 

674,748

 

 

 

579,400

 

Long-term debt

 

521,087

 

 

 

450,288

 

Accrued postretirement and pension benefits

 

62,371

 

 

 

50,003

 

Deferred income taxes

 

143,549

 

 

 

114,486

 

Accrued warranty

 

17,203

 

 

 

17,396

 

Other long-term liabilities

 

19,820

 

 

 

23,257

 

Total liabilities

 

1,438,778

 

 

 

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 96,254,818 and 95,909,948 outstanding

 

 

 

 

 

 

 

at September 30, 2014 and December 31, 2013, respectively

 

1,323

 

 

 

1,323

 

Additional paid-in capital

 

441,869

 

 

 

415,059

 

Treasury stock, at cost, 36,094,716 and 36,439,586 shares, at

 

(392,475

)

 

 

(372,969

)

September 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

 

 

Retained earnings

 

1,822,225

 

 

 

1,576,702

 

Accumulated other comprehensive loss

 

(84,285

)

 

 

(34,856

)

Total Westinghouse Air Brake Technologies Corporation shareholders' equity

 

1,788,657

 

 

 

1,585,259

 

Non-controlling interest (minority interest)

 

952

 

 

 

1,908

 

Total shareholders’ equity

 

1,789,609

 

 

 

1,587,167

 

Total Liabilities and Shareholders’ Equity

$

3,228,387

 

 

$

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

 

 

Unaudited

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

In thousands, except per share data

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

797,271

 

 

$

631,398

 

 

$

2,223,588

 

 

$

1,884,910

 

Cost of sales

 

(549,813

)

 

 

(443,265

)

 

 

(1,541,903

)

 

 

(1,321,008

)

Gross profit

 

247,458

 

 

 

188,133

 

 

 

681,685

 

 

 

563,902

 

Selling, general and administrative expenses

 

(88,359

)

 

 

(63,402

)

 

 

(231,422

)

 

 

(191,576

)

Engineering expenses

 

(16,391

)

 

 

(10,921

)

 

 

(43,558

)

 

 

(33,535

)

Amortization expense

 

(6,731

)

 

 

(3,939

)

 

 

(16,559

)

 

 

(12,699

)

Total operating expenses

 

(111,481

)

 

 

(78,262

)

 

 

(291,539

)

 

 

(237,810

)

Income from operations

 

135,977

 

 

 

109,871

 

 

 

390,146

 

 

 

326,092

 

Other income and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(4,594

)

 

 

(3,829

)

 

 

(13,569

)

 

 

(10,714

)

Other income (expense), net

 

(154

)

 

 

(1,658

)

 

 

72

 

 

 

(1,833

)

Income from operations before income taxes

 

131,229

 

 

 

104,384

 

 

 

376,649

 

 

 

313,545

 

Income tax expense

 

(41,074

)

 

 

(30,441

)

 

 

(117,655

)

 

 

(95,351

)

Net income attributable to Wabtec shareholders

$

90,155

 

 

$

73,943

 

 

$

258,994

 

 

$

218,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

0.94

 

 

$

0.77

 

 

$

2.69

 

 

$

2.28

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

0.93

 

 

$

0.76

 

 

$

2.67

 

 

$

2.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

95,935

 

 

 

95,848

 

 

 

95,745

 

 

 

95,383

 

Diluted

 

97,004

 

 

 

97,174

 

 

 

96,834

 

 

 

96,754

 

 

  

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

4


 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Unaudited

 

 

Unaudited

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

In thousands, except per share data

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

90,155

 

 

$

73,943

 

 

$

258,994

 

 

$

218,194

 

Foreign currency translation gain (loss)

 

(60,964

)

 

 

34,179

 

 

 

(52,876

)

 

 

(2,799

)

Unrealized gain (loss) on derivative contracts

 

1,153

 

 

 

(411

)

 

 

560

 

 

 

599

 

Pension benefit plans and post-retirement benefit plans

 

2,553

 

 

 

1,341

 

 

 

4,335

 

 

 

6,746

 

Other comprehensive income (loss) before tax

 

(57,258

)

 

 

35,109

 

 

 

(47,981

)

 

 

4,546

 

Income tax benefit (expense) related to components of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income (loss)

 

(1,067

)

 

 

(1,075

)

 

 

(1,448

)

 

 

(3,061

)

Other comprehensive income (loss), net of tax

 

(58,325

)

 

 

34,034

 

 

 

(49,429

)

 

 

1,485

 

Comprehensive income attributable to Wabtec shareholders

$

31,830

 

 

$

107,977

 

 

$

209,565

 

 

$

219,679

 

 

 

 

 

 

 

 

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, except per share data

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

258,994

 

 

$

218,194

 

Adjustments to reconcile net income to cash provided by operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

44,977

 

 

 

37,135

 

Stock-based compensation expense

 

19,107

 

 

 

17,596

 

Loss (gain) on disposal of property, plant and equipment

 

114

 

 

 

(641

)

Excess income tax benefits from exercise of stock options

 

(2,739

)

 

 

(9,445

)

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

Accounts receivable and unbilled accounts receivable

 

(89,359

)

 

 

(167,175

)

Inventories

 

(33,958

)

 

 

29,025

 

Accounts payable

 

40,971

 

 

 

23,542

 

Accrued income taxes

 

16,355

 

 

 

(2,032

)

Accrued liabilities and customer deposits

 

8,342

 

 

 

(45,407

)

Other assets and liabilities

 

(32,640

)

 

 

(15,796

)

Net cash provided by operating activities

 

230,164

 

 

 

84,996

 

Investing Activities

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(30,977

)

 

 

(23,595

)

Proceeds from disposal of property, plant and equipment

 

340

 

 

 

6,168

 

Acquisitions of businesses, net of cash acquired

 

(299,661

)

 

 

(222,058

)

Net cash used for investing activities

 

(330,298

)

 

 

(239,485

)

Financing Activities

 

 

 

 

 

 

 

Proceeds from debt

 

433,400

 

 

 

868,538

 

Payments of debt

 

(362,965

)

 

 

(649,359

)

Purchase of treasury stock

 

(26,757

)

 

 

(5,486

)

Proceeds from exercise of stock options and other benefit plans

 

3,044

 

 

 

4,736

 

Excess income tax benefits from exercise of stock options

 

2,739

 

 

 

9,445

 

Earn-out settlement

 

(4,429

)

 

 

-

 

Cash dividends ($0.14 and $0.09 per share for the nine months

 

 

 

 

 

 

 

ended September 30, 2014 and 2013, respectively)

 

(13,471

)

 

 

(8,800

)

Net cash provided by financing activities

 

31,561

 

 

 

219,074

 

Effect of changes in currency exchange rates

 

(4,646

)

 

 

656

 

(Decrease) increase in cash

 

(73,219

)

 

 

65,241

 

Cash, beginning of year

 

285,760

 

 

 

215,766

 

Cash, end of period

$

212,541

 

 

$

281,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014 (UNAUDITED)

 

1. BUSINESS

Westinghouse Air Brake Technologies Corporation (“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 2014, about 48% 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 $240.2 million and $205.0 million, customer deposits were $74.9 million and $66.6 million, and provisions for loss contracts were $7.4 million and $14.0 million at September 30, 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 $19.2 million at September 30, 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 periodically enters 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, 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 has entered into two forward starting interest rate swap agreements with notional values of $150.0 million. As of September 30, 2014, the Company has recorded a current liability of $2.4 million and a corresponding offset in accumulated other comprehensive loss of $1.4 million, net of tax, related to this agreement. For further information regarding the forward starting interest rate swap agreements, see Footnote 6.

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.     

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, 2014 and December 31, 2013. Net income attributable to non-controlling interests for the three and nine months ended September 30, 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 nine months ended September 30, 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 income (loss) before reclassifications

 

(52,876

)

 

 

(876

)

 

 

1,156

 

 

 

(52,596

)

Amounts reclassified from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income

 

-

 

 

 

1,167

 

 

 

2,000

 

 

 

3,167

 

Net current period other comprehensive income (loss)

 

(52,876

)

 

 

291

 

 

 

3,156

 

 

 

(49,429

)

Balance at September 30, 2014

$

(35,550

)

 

$

(1,719

)

 

$

(47,016

)

 

$

(84,285

)

 

8


 

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

$

(613

)

 

Cost of sales

Amortization of net loss

 

1,368

 

 

Cost of sales

 

 

755

 

 

Income from Operations

 

 

(236

)

 

Income tax expense

 

$

519

 

 

Net income

 

 

 

 

 

 

Derivative contracts

 

 

 

 

 

Realized loss on derivative contracts

$

492

 

 

Interest expense, net

 

 

(154

)

 

Income tax expense

 

$

338

 

 

Net income

 

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

$

(1,843

)

 

Cost of sales

Amortization of net loss

 

4,751

 

 

Cost of sales

 

 

2,908

 

 

Income from Operations

 

 

(908

)

 

Income tax expense

 

$

2,000

 

 

Net income

 

 

 

 

 

 

Derivative contracts

 

 

 

 

 

Realized loss on derivative contracts

$

1,697

 

 

Interest expense, net

 

 

(530

)

 

Income tax expense

 

$

1,167

 

 

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 3, 2014, the Company acquired C2CE Pty Ltd. (“C2CE”), a provider of railway signal design services, for a net purchase price of approximately $25.1 million, net of cash acquired, resulting in preliminary goodwill of $15.0 million, none of which will be deductible for tax purposes.

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 goodwill of $28.3 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 $11.3 million, none of 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.

9


 

The Company has made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment:

·

On August 21, 2014, the Company acquired Dia-Frag (“Dia-Frag”), a manufacturer of friction products for various markets with a focus on motorcycle braking, for a net purchase price of approximately $70.6 million, net of cash acquired, resulting in additional goodwill of $32.6 million, none of which will be deductible for tax purposes.  

·

On June 6, 2014, the Company acquired 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 net purchase price of approximately $199.4 million, net of cash acquired, resulting in additional goodwill of $49.7 million, none of which will be deductible for tax purposes.  

The acquisitions listed above include escrow deposits of $41.6 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements. For the C2CE, Dia-Frag, and Fandstan 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 Longwood, Turbonetics, and Napier acquisitions, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.

 

 

C2CE

 

 

Dia-Frag

 

 

Fandstan

 

 

Longwood

 

 

Turbonetics

 

 

Napier

 

 

September 3,

 

 

August 21,

 

 

June 6,

 

 

September 24,

 

 

July 30,

 

 

January 31,

 

In thousands

2014

 

 

2014

 

 

2014

 

 

2013

 

 

2013

 

 

2013

 

Current assets

$

9,794

 

 

$

12,502

 

 

$

125,025

 

 

$

17,444

 

 

$

5,532

 

 

$

13,441

 

Property, plant & equipment

 

1,860

 

 

 

4,497

 

 

 

61,465

 

 

 

19,363

 

 

 

992

 

 

 

8,837

 

Goodwill

 

14,981

 

 

 

32,556

 

 

 

49,748

 

 

 

28,272

 

 

 

11,309

 

 

 

67,045

 

Other intangible assets

 

3,804

 

 

 

36,211

 

 

 

51,571

 

 

 

39,440

 

 

 

11,140

 

 

 

40,583

 

Other assets

 

-

 

 

 

65

 

 

 

309

 

 

 

7

 

 

 

-

 

 

 

-

 

Total assets acquired

 

30,439

 

 

 

85,831

 

 

 

288,118

 

 

 

104,526

 

 

 

28,973

 

 

 

129,906

 

Total liabilities assumed

 

(5,323

)

 

 

(15,190

)

 

 

(88,714

)

 

 

(20,663

)

 

 

(5,790

)

 

 

(17,565

)

Net assets acquired

$

25,116

 

 

$

70,641

 

 

$

199,404

 

 

$

83,863

 

 

$

23,183

 

 

$

112,341

 

 

Of the $182.6 million of total acquired intangible assets, $119.5 million was assigned to customer relationships, $45.9 million was assigned to trade names, $5.2 million was assigned to patents, $3.9 million was assigned to non-compete agreements, $0.8 million was assigned to favorable leasehold interest and $7.3 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 11 years, the non-compete useful life is five years and the favorable leasehold interest useful life is five years.

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

  

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

In thousands

 

September 30, 2014

 

 

September 30, 2013

 

 

September 30, 2014

 

 

September 30, 2013

 

Net sales

 

$

808,327

 

 

$

727,010

 

 

$

2,357,388

 

 

$

2,179,068

 

Gross profit

 

 

250,542

 

 

 

212,649

 

 

 

724,706

 

 

 

645,888

 

Net income attributable to Wabtec shareholders

 

 

91,519

 

 

 

79,897

 

 

 

269,469

 

 

 

239,151

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

$

0.93

 

 

$

0.76

 

 

$

2.67

 

 

$

2.25

 

Pro forma

 

$

0.94

 

 

$

0.82

 

 

$

2.78

 

 

$

2.46

 

 

 

 

10


 

4. INVENTORIES

The components of inventory, net of reserves, were:

 

 

September 30,

 

 

December 31,

 

In thousands

2014

 

 

2013

 

Raw materials

$

192,042

 

 

$

165,906

 

Work-in-progress

 

155,574

 

 

 

137,449

 

Finished goods

 

141,437

 

 

 

99,874

 

Total inventories

$

489,053

 

 

$

403,229

 

 

5. INTANGIBLES

The change in the carrying amount of goodwill by segment for the nine months ended September 30, 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

 

(2,488

)

 

 

(1,554

)

 

 

(4,042

)

Acquisitions

 

18,168

 

 

 

82,376

 

 

 

100,544

 

Foreign currency impact

 

(3,236

)

 

 

(15,239

)

 

 

(18,475

)

Balance at September 30, 2014

$

522,108

 

 

$

342,352

 

 

$

864,460

 

 

As of September 30, 2014 and December 31, 2013, the Company’s trademarks had a net carrying amount of $173.9 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:

 

 

September 30,

 

 

December 31,

 

In thousands

2014

 

 

2013

 

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

 

 

 

 

 

 

 

amortization of $39,867 and $37,824

$

19,573

 

 

$

15,561

 

Customer relationships, net of accumulated amortization

 

 

 

 

 

 

 

of $53,848 and $44,910

 

256,068

 

 

 

213,324

 

Total

$

275,641

 

 

$

228,885

 

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were eight years, 17 years and 15 years, respectively. Amortization expense for intangible assets was $6.7 million and $16.6 million for the three and nine months ended September 30, 2014, respectively, and $3.9 million and $12.7 million for the three and nine months ended September 30, 2013, respectively.

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

 

Remainder of 2014

$

6,353

 

2015

 

22,324

 

2016

 

19,799

 

2017

 

18,903

 

2018

 

18,267

 

 

 

11


 

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

 

September 30,

 

 

December 31,

 

In thousands

2014

 

 

2013

 

4.375% Senior Notes, due 2023

$

250,000

 

 

$

250,000

 

Revolving Credit Facility

 

270,000

 

 

 

200,000

 

Capital Leases

 

2,042

 

 

 

709

 

Total

 

522,042

 

 

 

450,709

 

Less - current portion

 

955

 

 

 

421

 

Long-term portion

$

521,087

 

 

$

450,288

 

 

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 September 30, 2014, the Company had available bank borrowing capacity, net of $17.0 million of letters of credit, of approximately $513.0 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 75 basis points.

At September 30, 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 $150.0 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.

On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million.  The effective date of the interest rate swap agreement is November 7, 2016, and the termination date is December 19, 2018.  The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing.  During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 2.56% plus the Alternate Rate margin.  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.

12


 

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.  

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.

13


 

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

 

 

September 30,

 

 

September 30,

 

In thousands, except percentages

2014

 

 

2013

 

 

2014

 

 

2013

 

Net periodic benefit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

54

 

 

$

111

 

 

$

659

 

 

$

505

 

Interest cost

 

488

 

 

 

490

 

 

 

2,271

 

 

 

1,651

 

Expected return on plan assets

 

(617

)

 

 

(752

)

 

 

(2,655

)

 

 

(2,087

)

Net amortization/deferrals

 

355

 

 

 

753

 

 

 

766

 

 

 

849

 

Settlement loss recognized

 

-

 

 

 

-

 

 

 

-

 

 

 

166

 

Net periodic benefit cost

$

280

 

 

$

602

 

 

$

1,041

 

 

$

1,084