10-Q 1 wab-10q_20150630.htm 10-Q wab-10q_20150630.htm

 

 

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 June 30, 2015

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 July 27, 2015

Common Stock, $.01 par value per share

 

96,674,083 shares

 

 

 

 

 

 


 

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

June 30, 2015

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements - (Unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

3

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

6

 

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

 

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

24

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

33

Item 4.

 

Controls and Procedures

34

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

35

Item 1A.

 

Risk Factors

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 4.

 

Mine Safety Disclosures

35

Item 6.

 

Exhibits

35

 

 

Signatures

36

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

Unaudited

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

In thousands, except shares and par value

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

264,844

 

 

$

425,849

 

Accounts receivable

 

 

505,539

 

 

 

443,464

 

Unbilled accounts receivable

 

 

174,730

 

 

 

187,762

 

Inventories

 

 

535,002

 

 

 

510,949

 

Deferred income taxes

 

 

44,208

 

 

 

43,953

 

Other

 

 

55,643

 

 

 

25,887

 

Total current assets

 

 

1,579,966

 

 

 

1,637,864

 

Property, plant and equipment

 

 

711,966

 

 

 

683,034

 

Accumulated depreciation

 

 

(354,996

)

 

 

(343,923

)

Property, plant and equipment, net

 

 

356,970

 

 

 

339,111

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

864,921

 

 

 

862,338

 

Other intangibles, net

 

 

454,533

 

 

 

422,811

 

Other noncurrent assets

 

 

41,733

 

 

 

41,717

 

Total other assets

 

 

1,361,187

 

 

 

1,326,866

 

Total Assets

 

$

3,298,123

 

 

$

3,303,841

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

377,457

 

 

$

399,845

 

Customer deposits

 

 

98,636

 

 

 

111,797

 

Accrued compensation

 

 

66,919

 

 

 

70,857

 

Accrued warranty

 

 

74,300

 

 

 

68,031

 

Current portion of long-term debt

 

 

478

 

 

 

792

 

Other accrued liabilities

 

 

81,737

 

 

 

87,480

 

Total current liabilities

 

 

699,527

 

 

 

738,802

 

Long-term debt

 

 

400,348

 

 

 

520,403

 

Accrued postretirement and pension benefits

 

 

79,434

 

 

 

81,908

 

Deferred income taxes

 

 

118,396

 

 

 

112,915

 

Accrued warranty

 

 

22,353

 

 

 

19,818

 

Other long-term liabilities

 

 

21,733

 

 

 

21,697

 

Total liabilities

 

 

1,341,791

 

 

 

1,495,543

 

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 96,666,083 and 96,274,395 outstanding

 

 

 

 

 

 

 

 

at June 30, 2015 and December 31, 2014, respectively

 

 

1,323

 

 

 

1,323

 

Additional paid-in capital

 

 

456,498

 

 

 

448,531

 

Treasury stock, at cost, 35,683,451 and 36,075,139 shares, at

 

 

 

 

 

 

 

 

at June 30, 2015 and December 31, 2014, respectively

 

 

(388,001

)

 

 

(392,262

)

Retained earnings

 

 

2,095,224

 

 

 

1,909,136

 

Accumulated other comprehensive loss

 

 

(209,696

)

 

 

(159,486

)

Total Westinghouse Air Brake Technologies Corporation shareholders' equity

 

 

1,955,348

 

 

 

1,807,242

 

Non-controlling interest (minority interest)

 

 

984

 

 

 

1,056

 

Total shareholders’ equity

 

 

1,956,332

 

 

 

1,808,298

 

Total Liabilities and Shareholders’ Equity

 

$

3,298,123

 

 

$

3,303,841

 

 

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

In thousands, except per share data

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

847,028

 

 

$

731,068

 

 

$

1,665,622

 

 

$

1,426,317

 

Cost of sales

 

(579,264

)

 

 

(506,410

)

 

 

(1,142,503

)

 

 

(992,090

)

Gross profit

 

267,764

 

 

 

224,658

 

 

 

523,119

 

 

 

434,227

 

Selling, general and administrative expenses

 

(88,992

)

 

 

(72,982

)

 

 

(173,763

)

 

 

(143,063

)

Engineering expenses

 

(17,750

)

 

 

(14,221

)

 

 

(34,613

)

 

 

(27,167

)

Amortization expense

 

(5,162

)

 

 

(5,132

)

 

 

(10,463

)

 

 

(9,828

)

Total operating expenses

 

(111,904

)

 

 

(92,335

)

 

 

(218,839

)

 

 

(180,058

)

Income from operations

 

155,860

 

 

 

132,323

 

 

 

304,280

 

 

 

254,169

 

Other income and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(4,041

)

 

 

(4,525

)

 

 

(8,347

)

 

 

(8,975

)

Other (expense) income, net

 

(1,887

)

 

 

243

 

 

 

(4,753

)

 

 

226

 

Income from operations before income taxes

 

149,932

 

 

 

128,041

 

 

 

291,180

 

 

 

245,420

 

Income tax expense

 

(48,428

)

 

 

(39,336

)

 

 

(93,512

)

 

 

(76,581

)

Net income attributable to Wabtec shareholders

$

101,504

 

 

$

88,705

 

 

$

197,668

 

 

$

168,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

1.05

 

 

$

0.92

 

 

$

2.05

 

 

$

1.76

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

$

1.04

 

 

$

0.91

 

 

$

2.03

 

 

$

1.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

96,338

 

 

 

96,048

 

 

 

96,066

 

 

 

95,674

 

Diluted

 

97,435

 

 

 

97,058

 

 

 

97,112

 

 

 

96,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

In thousands, except per share data

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

 

$

101,504

 

 

$

88,705

 

 

$

197,668

 

 

$

168,839

 

Foreign currency translation gain (loss)

 

 

36,082

 

 

 

8,731

 

 

 

(51,849

)

 

 

8,088

 

Unrealized gain (loss) on derivative contracts

 

 

949

 

 

 

(876

)

 

 

(756

)

 

 

(593

)

Pension benefit plans and post-retirement benefit plans

 

 

(822

)

 

 

(26

)

 

 

3,000

 

 

 

1,782

 

Other comprehensive income (loss) before tax

 

 

36,209

 

 

 

7,829

 

 

 

(49,605

)

 

 

9,277

 

Income tax (expense) benefit related to components of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income (loss)

 

 

(320

)

 

 

274

 

 

 

(605

)

 

 

(381

)

Other comprehensive income (loss), net of tax

 

 

35,889

 

 

 

8,103

 

 

 

(50,210

)

 

 

8,896

 

Comprehensive income attributable to Wabtec shareholders

 

$

137,393

 

 

$

96,808

 

 

$

147,458

 

 

$

177,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

5


 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Unaudited

 

 

 

Six Months Ended

 

 

 

June 30,

 

In thousands, except per share data

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net income attributable to Wabtec shareholders

 

$

197,668

 

 

$

168,839

 

Adjustments to reconcile net income to cash provided by operations:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31,612

 

 

 

27,862

 

Stock-based compensation expense

 

 

14,989

 

 

 

12,103

 

Loss on disposal of property, plant and equipment

 

 

420

 

 

 

106

 

Excess income tax benefits from exercise of stock options

 

 

(1,388

)

 

 

(1,281

)

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable and unbilled accounts receivable

 

 

(35,788

)

 

 

(91,926

)

Inventories

 

 

(25,536

)

 

 

(20,249

)

Accounts payable

 

 

(25,015

)

 

 

43,653

 

Accrued income taxes

 

 

19,185

 

 

 

15,459

 

Accrued liabilities and customer deposits

 

 

(27,089

)

 

 

(3,878

)

Other assets and liabilities

 

 

(38,132

)

 

 

(13,029

)

Net cash provided by operating activities

 

 

110,926

 

 

 

137,659

 

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(20,860

)

 

 

(18,357

)

Proceeds from disposal of property, plant and equipment

 

 

178

 

 

 

217

 

Acquisitions of businesses, net of cash acquired

 

 

(100,108

)

 

 

(199,417

)

Net cash used for investing activities

 

 

(120,790

)

 

 

(217,557

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

174,300

 

 

 

266,900

 

Payments of debt

 

 

(294,589

)

 

 

(216,698

)

Purchase of treasury stock

 

 

-

 

 

 

(16,622

)

Proceeds from exercise of stock options and other benefit plans

 

 

1,409

 

 

 

1,844

 

Excess income tax benefits from exercise of stock options

 

 

1,388

 

 

 

1,281

 

Payment of income tax withholding on share-based compensation

 

 

(14,565

)

 

 

-

 

Earn-out settlement

 

 

-

 

 

 

(4,429

)

Cash dividends ($0.12 and $0.08 per share for the six months

 

 

 

 

 

 

 

 

ended June 30, 2015 and 2014, respectively)

 

 

(11,580

)

 

 

(7,691

)

Net cash (used for) provided by financing activities

 

 

(143,637

)

 

 

24,585

 

Effect of changes in currency exchange rates

 

 

(7,504

)

 

 

(4,540

)

Decrease in cash

 

 

(161,005

)

 

 

(59,853

)

Cash, beginning of period

 

 

425,849

 

 

 

285,760

 

Cash, end of period

 

$

264,844

 

 

$

225,907

 

 

 

 

 

 

 

 

 

 

 

 

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 JUNE 30, 2015 (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 20 countries. In the first six months of 2015, 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, 2014. The December 31, 2014 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 $174.7 million and $187.8 million, customer deposits were $98.6 million and $111.8 million, and provisions for loss contracts were $8.4 million and $7.1 million at June 30, 2015 and December 31, 2014, respectively.

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 $28.7 million and $24.9 million at June 30, 2015 and December 31, 2014, 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. On June 24, 2015, the Company entered into a forward contract for the sale of Brazilian Real (BRL) and the purchase of U.S. dollars (USD).  As of June 30, 2015 the notional value of this contract was 84.6 million BRL, or $27.0 million USD.

7


 

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 June 30, 2015, the Company has recorded a current liability of $4.2 million and a corresponding offset in accumulated other comprehensive loss of $2.5 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 June 30, 2015 and December 31, 2014. Net income attributable to non-controlling interests for the three and six months ended June 30, 2015 and 2014 was not material.

Recent Accounting Pronouncements In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset.  ASU 2015-03 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2015.  Early adoption is permitted.  The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU no. 2014-09, “Revenue from Contract with Customers.”  The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.  The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted.  The Board voted to propose that the standard would take effect for reporting periods beginning after December 15, 2017 and that early adoption would be allowed as of the original effective date. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.

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 six months ended June 30, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

post

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

retirement

 

 

 

 

 

In thousands

 

translation

 

 

contracts

 

 

benefits plans

 

 

Total

 

Balance at December 31, 2014

 

$

(94,450

)

 

 

(2,243

)

 

 

(62,793

)

 

$

(159,486

)

Other comprehensive (loss) income before reclassifications

 

 

(51,849

)

 

 

(1,070

)

 

 

1,165

 

 

 

(51,754

)

Amounts reclassified from accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income

 

 

-

 

 

 

627

 

 

 

917

 

 

 

1,544

 

Net current period other comprehensive (loss) income

 

 

(51,849

)

 

 

(443

)

 

 

2,082

 

 

 

(50,210

)

Balance at June 30, 2015

 

$

(146,299

)

 

$

(2,686

)

 

$

(60,711

)

 

$

(209,696

)

 

8


 

Reclassifications out of accumulated other comprehensive loss for the three months ended June 30, 2015 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

 

$

(521

)

 

Cost of sales

Amortization of net loss

 

 

1,198

 

 

Cost of sales

 

 

 

677

 

 

Income from Operations

 

 

 

(219

)

 

Income tax expense

 

 

$

458

 

 

Net income

 

 

 

 

 

 

 

Derivative contracts

 

 

 

 

 

 

Realized loss on derivative contracts

 

$

460

 

 

Interest expense, net

 

 

 

(149

)

 

Income tax expense

 

 

$

311

 

 

Net income

 

Reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2015 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

 

$

(1,043

)

 

Cost of sales

Amortization of net loss

 

 

2,394

 

 

Cost of sales

 

 

 

1,351

 

 

Income from Operations

 

 

 

(434

)

 

Income tax expense

 

 

$

917

 

 

Net income

 

 

 

 

 

 

 

Derivative contracts

 

 

 

 

 

 

Realized loss on derivative contracts

 

$

923

 

 

Interest expense, net

 

 

 

(296

)

 

Income tax expense

 

 

$

627

 

 

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 February 4, 2015, the Company acquired Railroad Controls L.P. (“RCL”), a provider of railway signal construction services, for a purchase price of approximately $76.4 million, net of cash acquired, resulting in preliminary goodwill of $12.2 million, none of which will be deductible for tax purposes.

·

On September 3, 2014, the Company acquired C2CE Pty Ltd. (“C2CE”), a provider of railway signal design services, for a purchase price of approximately $25.5 million, net of cash acquired, resulting in preliminary goodwill of $15.6 million, none of which will be deductible for tax purposes.

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

·

On June 17, 2015, the Company acquired Metalocaucho (“MTC”), a manufacturer of transit products, primarily rubber components for suspension and vibration control systems, for a purchase price of approximately $23.4 million, net of cash acquired, resulting in preliminary goodwill of $10.1 million, none of which will be deductible for tax purposes.

·

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 purchase price of approximately $70.6 million, net of cash acquired, resulting in preliminary goodwill of $36.1 million, none of which will be deductible for tax purposes.  

9


 

·

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 purchase price of approximately $199.4 million, net of cash acquired, resulting in additional goodwill of $64.7 million, none of which will be deductible for tax purposes.  

The acquisitions listed above include escrow deposits of $53.9 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

For the MTC, RCL, C2CE, and Dia-Frag 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 Fandstan acquisition, the following table summarizes the final fair values of the assets and liabilities assumed at the date of acquisition.

 

 

 

MTC

 

 

RCL

 

 

C2CE

 

 

Dia-Frag

 

 

Fandstan

 

 

 

June 17,

 

 

February 4,

 

 

September 3,

 

 

August 21,

 

 

June 6,

 

In thousands

 

2015

 

 

2015

 

 

2014

 

 

2014

 

 

2014

 

Current assets

 

$

10,906

 

 

$

16,445

 

 

$

9,812

 

 

$

12,476

 

 

$

124,280

 

Property, plant & equipment

 

 

1,510

 

 

 

11,983

 

 

 

1,853

 

 

 

13,749

 

 

 

67,948

 

Goodwill

 

 

10,051

 

 

 

12,197

 

 

 

15,572

 

 

 

36,050

 

 

 

64,713

 

Other intangible assets

 

 

11,414

 

 

 

40,403

 

 

 

3,654

 

 

 

26,150

 

 

 

50,598

 

Other assets

 

 

114

 

 

 

-

 

 

 

-

 

 

 

66

 

 

 

216

 

Total assets acquired

 

 

33,995

 

 

 

81,028

 

 

 

30,891

 

 

 

88,491

 

 

 

307,755

 

Total liabilities assumed

 

 

(10,635

)

 

 

(4,646

)

 

 

(5,412

)

 

 

(17,850

)

 

 

(108,351

)

Net assets acquired

 

$

23,360

 

 

$

76,382

 

 

$

25,479

 

 

$

70,641

 

 

$

199,404

 

 

Of the $132.2 million of total acquired intangible assets, $95.2 million was assigned to customer relationships, $29.3 million was assigned to trade names, $2.1 million was assigned to non-compete agreements and $5.6 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, and the non-compete 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, 2014:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

In thousands

 

June 30, 2015

 

 

June 30, 2014

 

 

June 30, 2015

 

 

June 30, 2014

 

Net sales

 

$

853,103

 

 

$

810,098

 

 

$

1,692,364

 

 

$

1,595,832

 

Gross profit

 

 

269,794

 

 

 

247,791

 

 

 

531,760

 

 

 

486,639

 

Net income attributable to Wabtec shareholders

 

 

101,776

 

 

 

94,289

 

 

 

200,530

 

 

 

182,957

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

$

1.04

 

 

$

0.91

 

 

$

2.03

 

 

$

1.74

 

Pro forma

 

$

1.04

 

 

$

0.97

 

 

$

2.06

 

 

$

1.88

 

 

4. INVENTORIES

The components of inventory, net of reserves, were:

 

 

 

June 30,

 

 

December 31,

 

In thousands

 

2015

 

 

2014

 

Raw materials

 

$

202,421

 

 

$

222,059

 

Work-in-progress

 

 

186,073

 

 

 

154,094

 

Finished goods

 

 

146,508

 

 

 

134,796

 

Total inventories

 

$

535,002

 

 

$

510,949

 

 

10


 

5. INTANGIBLES

The change in the carrying amount of goodwill by segment for the six months ended June 30, 2015 is as follows:

 

 

 

Freight

 

 

Transit

 

 

 

 

 

In thousands

 

Segment

 

 

Segment

 

 

Total

 

Balance at December 31, 2014

 

$

515,067

 

 

$

347,271

 

 

$

862,338

 

Adjustment to preliminary purchase allocation

 

 

(170

)

 

 

(9,587

)

 

 

(9,757

)

Acquisitions

 

 

12,197

 

 

 

10,051

 

 

 

22,248

 

Foreign currency impact

 

 

(1,374

)

 

 

(8,534

)

 

 

(9,908

)

Balance at June 30, 2015

 

$

525,720

 

 

$

339,201

 

 

$

864,921

 

 

As of June 30, 2015 and December 31, 2014, the Company’s trademarks had a net carrying amount of $173.8 million and $170.1 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:

 

 

 

June 30,

 

 

December 31,

 

In thousands

 

2015

 

 

2014

 

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

 

 

 

 

 

 

 

 

amortization of $40,375 and $39,780

 

$

13,327

 

 

$

14,722

 

Customer relationships, net of accumulated amortization

 

 

 

 

 

 

 

 

of $63,845 and $56,684

 

 

267,456

 

 

 

237,983

 

Total

 

$

280,783

 

 

$

252,705

 

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were 10 years, 16 years and 14 years, respectively. Amortization expense for intangible assets was $5.2 million and $10.5 million for the three and six months ended June 30, 2015, and $5.1 million and $9.8 million for the three and six months ended June 30, 2014.

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

 

Remainder of 2015

 

$

12,859

 

2016

 

 

20,892

 

2017

 

 

19,486

 

2018

 

 

18,508

 

2019

 

 

18,065

 

 

 

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

 

 

 

June 30,

 

 

December 31,

 

In thousands

 

2015

 

 

2014

 

4.375% Senior Notes, due 2023

 

$

250,000

 

 

$

250,000

 

Revolving Credit Facility

 

 

150,000

 

 

 

270,000

 

Capital Leases

 

 

826

 

 

 

1,195

 

Total

 

 

400,826

 

 

 

521,195

 

Less - current portion

 

 

478

 

 

 

792

 

Long-term portion

 

$

400,348

 

 

$

520,403

 

 

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 June 30, 2015, the Company had available bank borrowing capacity, net of $27.4 million of letters of credit, of approximately $622.6 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 June 30, 2015, the weighted average interest rate on the Company’s variable rate debt was 0.94%.  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.

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.

12


 

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.