10-K 1 wab1231201610k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
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)
(IRS Employer
Identification No.)
 
 
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
(412) 825-1000
(Address of principal executive offices, including zip code)
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
 
 
     Title of Class      
    Name of Exchange on which registered     
Common Stock, par value $.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  ý.
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  ý    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  ý    No   ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý.
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. (Check one):
Large accelerated filer  ý    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  ý.
The registrant estimates that as of June 30, 2016, the aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $6.0 billion based on the closing price on the New York Stock Exchange for such stock.
As of February 17, 2017, 95,786,017 shares of Common Stock of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held on May 10, 2017 are incorporated by reference into Part III of this Form 10-K.



TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
PART I
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
PART II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
PART III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
PART IV
 
 
 
 
Item 15.
Item 16.



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PART I
Item  1.
BUSINESS
General
Westinghouse Air Brake Technologies Corporation, doing business as Wabtec Corporation, is a Delaware corporation with headquarters at 1001 Air Brake Avenue in Wilmerding, Pennsylvania. Our telephone number is 412-825-1000, and our website is located at www.wabtec.com. All references to “we”, “our”, “us”, the “Company” and “Wabtec” refer to Westinghouse Air Brake Technologies Corporation and its consolidated subsidiaries. George Westinghouse founded the original Westinghouse Air Brake Co. in 1869 when he invented the air brake. Westinghouse Air Brake Company (“WABCO”) was formed in 1990 when it acquired certain assets and operations from American Standard, Inc., now known as Trane (“Trane”). The company went public on the New York Stock Exchange in 1995. In 1999, WABCO merged with MotivePower Industries, Inc. (“MotivePower”) and adopted the name Wabtec.
In 2016, Wabtec acquired majority ownership of Faiveley Transport, S.A. (“Faiveley Transport”), a leading provider of value-added, integrated systems and services, primarily for the global transit rail market, for a purchase price of approximately $746.5 million. Based in France, Faiveley Transport has roots to 1919 and became a leader in manufacturing pantographs, automatic door mechanisms and air conditioning systems. Faiveley Transport was listed on the Paris Stock Exchange in 1994 and during the next 20 years acquired a number of rail industry leaders including Sab Wabco, a specialist in railway braking systems and couplers. Faiveley Transport had revenues of about $1.2 billion in 2016. Wabtec believes that the acquisition of Faiveley Transport provides the following strategic benefits:
Increased diversity of revenues by product, geography and market. A majority of Faiveley Transport’s revenues are outside the U.S. and in the transit market, which helps to balance the cyclicality of Wabtec’s North American freight business.
Broadened product line. Faiveley Transport provides many products that Wabtec did not previously offer, including braking and door systems for high-speed trains and air conditioning systems.
Expanded international presence in the transit market. A majority of Faiveley Transport’s revenues come from transit markets outside the U.S., where Wabtec did not have a strong presence.
Increased technical and engineering expertise. With its more than 1,500 engineers, Faiveley Transport strengthens Wabtec’s technical capabilities and product development efforts.
Today, Wabtec is one of the world’s largest providers of value-added, technology-based equipment, systems and services for the global freight and transit rail industries. We believe we hold a leading market share for many of our core product lines globally. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most U.S. locomotives, freight cars, passenger transit cars and buses around the world. In 2016, the Company had sales of approximately $2.9 billion and net income attributable to Wabtec shareholders of about $304.9 million. In 2016, sales of aftermarket parts and services represented about 59% of total sales, while sales to customers outside of the U.S. accounted for about 54% of total sales.
Industry Overview
The Company primarily serves the worldwide freight and transit rail industries. As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of railroads and passenger transit agencies around the world, and transportation equipment manufacturers who serve those markets. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight carloadings and passenger ridership; government spending on public transportation; and investment in new technologies. In general, trends such as increasing urbanization, a focus on sustainability and environmental awareness, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight and transit rail.
According to the 2016 edition of a market study by UNIFE, the Association of the European Rail Industry, the accessible global market for railway products and services is more than $100 billion, and it is expected to grow at about 3.2% annually through 2021. The three largest geographic markets, which represent about 80% of the total accessible market, are Europe, North America and Asia Pacific. Over the next five years, UNIFE projects above-average growth in Asia Pacific and Europe due to overall economic growth and trends such as urbanization and increasing mobility, deregulation, investments in new technologies, energy and environmental issues, and increasing government support. The largest product segments of the market are rolling stock, services and infrastructure, which represent almost 90% of the accessible market. Over the next five years, UNIFE projects spending on rolling stock to grow at an above-average rate due to increased investment in passenger transit vehicles. UNIFE estimates that the global installed base of locomotives is about 114,000 units, with about 32% in Asia Pacific, about 25% in North America and about 18% in Russia-CIS (Commonwealth of Independent States).  Wabtec estimates that

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about 3,400 new locomotives were delivered worldwide in 2016, and it expects deliveries of about 3,200 in 2017. UNIFE estimates the global installed base of freight cars is about 5.5 million units, with about 37% in North America, about 26% in Russia-CIS and about 20% in Asia Pacific. Wabtec estimates that about 108,000 new freight cars were delivered worldwide in 2016, and it expects deliveries of about 97,000 in 2017.  UNIFE estimates the global installed base of passenger transit vehicles to be about 569,000 units, with about 43% in Asia Pacific, about 32% in Europe and about 14% in Russia-CIS. UNIFE estimates that about 208,000 new passenger transit vehicles were ordered annually from 2013-2015, and that about 184,000 will be ordered annually from 2016-2018.
In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as energy and environmental factors encourage continued investment in public mass transit. France, Germany and the United Kingdom are the largest Western European transit markets, representing almost two-thirds of industry spending in the European Union. UNIFE projects the Western European rail market to grow at about 3.6% annually during the next five years, led by investments in new rolling stock in France and Germany.  Significant investments are also expected in Turkey, the largest market in Eastern Europe. About 75% of freight traffic in Europe is hauled by truck, while rail accounts for about 20%. The largest freight markets in Europe are Germany, Poland and the United Kingdom. In recent years, the European Commission has adopted a series of measures designed to increase the efficiency of the European rail network by standardizing operating rules and certification requirements. UNIFE believes that adoption of these measures should have a positive effect on ridership and investment in public transportation over time.
In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation. Through direct ownership and operating partnerships, U.S. railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service. There are more than 500 railroads operating in North America, with the largest railroads, referred to as “Class I,” accounting for more than 90% of the industry’s revenues. The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain, and petroleum.  These commodities represent about 55% of total rail carloadings, with intermodal carloads accounting for the rest. Railroads operate in a competitive environment, especially with the trucking industry, and are always seeking ways to improve safety, cost and reliability. New technologies offered by Wabtec and others in the industry can provide some of these benefits. Demand for our freight related products and services in North America is driven by a number of factors, including rail traffic, and production of new locomotives and new freight cars.  In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues. Demand for North American passenger transit products is driven by a number of factors, including government funding, deliveries of new subway cars and buses, and ridership. The U.S. federal government provides money to local transit authorities, primarily to fund the purchase of new equipment and infrastructure for their transit systems.
Growth in the Asia Pacific market has been driven mainly by the continued urbanization of China and India, and by investments in freight rail rolling stock and infrastructure in Australia to serve its mining and natural resources markets. During the next five years, UNIFE expects India to make significant investments in rolling stock and infrastructure to modernize its rail system; for example, the country has awarded a 1,000-unit locomotive order to a U.S. manufacturer. UNIFE expects the increased spending in India to offset decreased spending on very-high-speed rolling stock in China during the next five years.
Other key geographic markets include Russia-CIS and Africa-Middle East.  With about 1.4 million freight cars and about 20,000 locomotives, Russia-CIS is among the largest freight rail markets in the world, and it’s expected to invest in both freight and transit rolling stock. PRASA, the Passenger Rail Agency of South Africa, is expected to continue to invest in new transit cars and new locomotives. According to UNIFE, emerging markets are expected to grow at above-average rates as global trade creates increases in freight volumes and urbanization leads to increased demand for efficient mass-transportation systems. As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets.
In its study, UNIFE also said it expects increased investment in digital tools for data and asset management, and in rail control technologies, both of which would improve efficiency in the global rail industry during the next five years. UNIFE said data-driven asset management tools have the potential to reduce equipment maintenance costs and improve asset utilization, while rail control technologies have been focused on increasing track capacity, improving operational efficiency and ensuring safer railway traffic. Wabtec offers products and services to help customers make ongoing investments in these initiatives.
Business Segments and Products
We provide our products and services through two principal business segments, the Freight Segment and the Transit Segment, both of which have different market characteristics and business drivers. The acquisition of Faiveley Transport significantly strengthened our capabilities and presence in the worldwide transit market.

4


The Freight Segment primarily manufactures and services components for new and existing locomotives and freight cars; supplies rail control and infrastructure products including electronics, positive train control equipment, and signal design and engineering services; overhauls locomotives; and provides heat exchangers and cooling systems for rail and other industrial markets. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities. Demand is primarily driven by general economic conditions; traffic volumes, as measured by freight carloadings; investment in new technologies; and deliveries of new locomotives and freight cars. In 2016, the Freight Segment accounted for 53% of our total sales, with about 59% of its sales in the U.S. In 2016, slightly more than half of the Freight Segment’s sales were in aftermarket.
The Transit Segment, mainly operating worldwide as Faiveley Transport, primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses; supplies rail control and infrastructure products including electronics, positive train control equipment, and signal design and engineering services; builds new commuter locomotives; and refurbishes passenger transit vehicles. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of passenger transit vehicles and buses around the world. Demand in the transit market is primarily driven by general economic conditions, passenger ridership levels, government spending on public transportation, and investment in new rolling stock. In 2016, the Transit Segment accounted for 47% of our total sales, with about 33% of its sales in the U.S. About two-thirds of the Transit Segment’s sales are in the aftermarket with the remainder in the original equipment market. The addition of Faiveley Transport’s key products strengthens Wabtec’s presence in the following areas: high-speed braking and door systems; heating, ventilation and air conditioning systems; pantographs and power collection; information systems; platform screen doors and gates; couplers; and aftermarket services, maintenance and spare parts. Geographically, Wabtec’s presence in the European and Asia Pacific transit markets has been strengthened significantly through the acquisition of Faiveley Transport.
Following is a summary of our leading product lines in both aftermarket and original equipment across both of our business segments:
Specialty Products & Electronics:
Positive Train Control equipment and electronically controlled pneumatic braking products
Railway electronics, including event recorders, monitoring equipment and end of train devices
Signal design and engineering services
Freight car trucks and couplers
Draft gears, couplers and slack adjusters
Air compressors and dryers
Heat exchangers and cooling products for locomotives and power generation equipment
Track and switch products
Brake Products:
Railway braking equipment and related components for Freight and Transit applications, including high-speed passenger transit vehicles
Friction products, including brake shoes, discs and pads
Remanufacturing, Overhaul and Build:
New commuter and switcher locomotives
Transit car and locomotive overhaul and refurbishment
Transit Products:
Heating, ventilation and air conditioning equipment
Doors for buses and subway cars
Platform screen doors
Pantographs
Window assemblies
Couplers

5


Accessibility lifts and ramps for buses and subway cars
Traction motors
We have become a leader in the freight and transit rail industries by capitalizing on the strength of our existing products, technological capabilities and new product innovation, and by our ability to harden products to protect them from severe conditions, including extreme temperatures and high-vibration environments. Supported by our technical staff of over 2,900 engineers and specialists, we have extensive experience in a broad range of product lines, which enables us to provide comprehensive, systems-based solutions for our customers.
Over the past several years, we introduced a number of significant new products, including electronic braking equipment and train control equipment that encompasses onboard digital data and global positioning communication protocols. In the U.S., for example, the Federal Railroad Administration ("FRA") approved the use of our Electronic Train Management System®, or Positive Train Control (“PTC”) technology, which offers safety benefits to the rail industry. PTC includes on-board locomotive computer and related software, which must be installed on a majority of the locomotives and track in the U.S. to meet the requirements of a 2008 rail safety bill. With our Electronic Train Management System®, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the deadline of December 31, 2018. In 2016, Wabtec recorded about $345 million of revenue from freight and transit train control and signaling projects, which includes PTC. New products introduced for the transit market in recent years include HVAC inverter integrated solutions, brake discs, and platform doors and gates.
For additional information on our business segments, see Note 20 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
Competitive Strengths
Our key strengths include:
Leading market positions in core products. Dating back to 1869 and George Westinghouse’s invention of the air brake, we are an established leader in the development and manufacture of pneumatic braking equipment for freight and passenger transit vehicles. Faiveley Transport, founded nearly 100 years ago, has a long history and is a market leader for its core products, including pantographs, automatic door mechanisms and air conditioning systems. We have leveraged our leading positions by focusing on research and engineering to expand beyond pneumatic braking components to supplying integrated parts and assemblies for the locomotive through the end of the train. We are a recognized leader in the development and production of electronic recording, measuring and communications systems, positive train control equipment, highly engineered compressors and heat exchangers for locomotives, and a leading manufacturer of freight car components, including electronic braking equipment, draft gears, trucks, brake shoes and electronic end-of-train devices. We are also a leading provider of braking equipment; heating, ventilation and air conditioning equipment; door assemblies and platform screen doors; lifts and ramps; couplers and current collection equipment, such as pantographs, for passenger transit vehicles.
Breadth of product offering with a stable mix of original equipment market (OEM) and aftermarket business. Our product portfolio is one of the broadest in the rail industry, as we offer a wide selection of quality parts, components and assemblies across the entire train and worldwide. We provide our products in both the original equipment market and the aftermarket. Our substantial installed base of products with end-users such as the railroads and the passenger transit authorities is a significant competitive advantage for providing products and services to the aftermarket because these customers often look to purchase safety- and performance-related replacement parts from the original equipment components supplier. In addition, as OEMs and railroad operators attempt to modernize fleets with new products designed to improve and maintain safety and efficiency, these products must be designed to be interoperable with existing equipment. On average, over the last several years, more than 61% of our total net sales have come from our aftermarket products and services business.
Leading design and engineering capabilities. We believe a hallmark of our relationship with our customers has been our leading design and engineering practice, which has, in our opinion, assisted in the improvement and modernization of global railway equipment. We believe both our customers and the government authorities value our technological capabilities and commitment to innovation, as we seek not only to enhance the efficiency and profitability of our customers, but also to improve the overall safety of the railways through continuous improvement of product performance. The Company has an established record of product improvements and new product development. We have assembled a wide range of patented products, which we believe provides us with a competitive advantage. Wabtec currently owns 2,382 active patents worldwide and 683 U.S. patents. During the last three years, we have filed for more than 437 patents worldwide in support of our new and evolving product lines. These figures include Faiveley Transport's patent portfolio, which has been a key factor in its success, as well.

6


Experience with industry regulatory requirements. The freight rail and passenger transit industries are governed by various government agencies and regulators in each country and region. These groups mandate rigorous manufacturer certification, new product testing and approval processes that we believe are difficult for new entrants to meet cost-effectively and efficiently without the scale and extensive experience we possess. Certification processes are lengthy, and often require local presence and expertise. In addition, each transit agency places a high degree of importance on vehicle customization, which requires experience and technical expertise to meet ever-evolving specifications.
Experienced management team and the Wabtec Excellence Program (WEP), formerly known as the Wabtec Performance System. Wabtec’s lean manufacturing and continuous improvement initiatives have been a part of the Company’s culture for more than 25 years and have enabled Wabtec to manage successfully through cycles in the rail supply market. With the acquisition of Faiveley Transport (see Note 3 of "Notes to Consolidated Financial Statements" for further details), which introduced its Worldwide Excellence Program several years ago, we have combined the best practices of both organizations into WEP. We expect WEP will drive a successful integration of Wabtec and Faiveley Transport, will result in a reduced cost structure and will ensure standardized excellence in all processes. By using WEP as our operational foundation, we will strive for continuous improvements in safety, quality, cost, delivery and all aspects of serving our customers and other stakeholders.
Business strategy
Using WEP, we strive to generate sufficient cash to invest in our growth strategies and to build on what we consider to be a leading position as a low-cost producer in the industry while maintaining world-class product quality, technology and customer responsiveness. Through WEP and employee-directed initiatives such as Kaizen, a Japanese-developed team concept, we continuously strive to improve quality, delivery and productivity, and to reduce costs such as global sourcing and supply chain management. These practices enable us to streamline processes, improve product reliability and customer satisfaction, reduce product cycle times and respond more rapidly to market developments. We also rely on functional experts within the company across various disciplines to train, coach and share best practices throughout the corporation, while benchmarking against best-in-class competitors and peers. Over time, we believe the principles of WEP will enable us to continue to increase operating margins, improve cash flow and strengthen our ability to invest in the following growth strategies:
Product innovation and new technologies. We continue to emphasize innovation and development funding to create new and improved products. We are focusing on technological advances, especially in the areas of electronics, braking products and other on-board equipment, as a means of new product growth. We seek to provide customers with incremental technological advances that offer immediate benefits with cost-effective investments.
Global and market expansion. We believe that international markets represent a significant opportunity for future growth. In 2016, sales to non-U.S. customers were $1.6 billion, including export sales from the Company’s U.S. operations of $470.5 million. We intend to increase our existing international sales through strategic acquisitions, direct sales of products through our existing subsidiaries and licensees, and joint ventures with railway suppliers which have a strong presence in their local markets. We are specifically targeting markets that operate significant fleets of U.S.-style locomotives and freight cars, including Australia, Brazil, China, India, Russia, South Africa, and other select areas within Europe and South America. In addition, we have opportunities to increase the sale of certain products that we currently manufacture for the rail industry into other industrial markets, such as mining, off-highway and energy. These products include heat exchangers and friction materials.
Aftermarket products and services. Historically, aftermarket sales are less cyclical than OEM sales because a certain level of aftermarket maintenance and service work must be performed, even during an industry slowdown. In 2016, Wabtec’s aftermarket sales and services represented approximately 59% of the Company’s total sales across both of our business segments. Wabtec provides aftermarket parts and services for its components, and the Company is seeking to expand this business with customers who currently perform the work in-house. In this way, we expect to take advantage of the rail industry trend toward outsourcing, as railroads and transit authorities focus on their core function of transporting goods and people.
Acquisitions, joint ventures and alliances. We invest in acquisitions, joint ventures and alliances using a disciplined, selective approach and rigorous financial criteria. These transactions are expected to meet the financial criteria and contribute to our growth strategies of product innovation and new technologies, global expansion, and aftermarket products and services. We believe these expansion strategies will help Wabtec to grow profitably, expand geographically, and dampen the impact from potential cycles in the North American rail industry.




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Recent Acquisitions and Joint Ventures
In addition to the Faiveley Transport acquisition, Wabtec has completed the following acquisitions in support of its growth strategies mentioned above:
On December 14, 2016, the Company acquired Workhorse Rail LLC ("Workhorse"), a supplier of engineered freight car components, mainly for the aftermarket for a purchase price of approximately $44.3 million, net of cash acquired, resulting in preliminary goodwill of $23.1 million, 37.8% of which will be deductible for tax purposes.
On November 17, 2016, the Company acquired the assets of Precision Turbo & Engine ("Precision Turbo"), a designer and manufacturer of high-performance, aftermarket turbochargers, wastegates, and heat exchangers for the automotive performance market for a purchase price of approximately $13.8 million, net of cash acquired, resulting in preliminary goodwill of $3.9 million, all of which will be deductible for tax purposes.
On August 1, 2016, the Company acquired Gerken Group S.A. ("Gerken"), a manufacturer of specialty carbon and graphite products for rail and other industrial applications, for a purchase price of approximately $62.8 million, net of cash acquired, resulting in preliminary goodwill of $17.5 million, none of which will be deductible for tax purposes.
On May 5, 2016, the Company acquired the assets of Unitrac Railroad Materials ("Unitrac"), a leading designer and manufacturer of railroad products and track work services for a purchase price of approximately $14.4 million, net of cash acquired, resulting in preliminary goodwill of $1.4 million, all of which will be deductible for tax purposes.  
On October 30, 2015, the Company acquired Relay Monitoring Systems PTY Ltd. ("RMS"), an Australian based manufacturer of electrical protection and control products for a purchase price of approximately $18.7 million, net of cash acquired, resulting in preliminary goodwill of $8.9 million, none of which will be deductible for tax purposes. 
On October 8, 2015, the Company acquired Track IQ, an Australian based manufacturer of wayside sensor systems for the global rail industry for a purchase price of approximately $9.3 million, net of cash acquired, resulting in preliminary goodwill of $6.5 million, all of which will be deductible for tax purposes.
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 $13.2 million, none of which will be deductible for tax purposes.
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 $78.0 million, net of cash acquired, resulting in goodwill of $14.8 million, all of which will be deductible for tax purposes.
Backlog
The Company’s backlog was about $4.0 billion at December 31, 2016. For 2016, about 59% of total sales came from aftermarket orders, which typically carry lead times of less than 30 days, and are not recorded in backlog for a significant period of time.
The Company’s contracts are subject to standard industry cancellation provisions, including cancellations on short notice or upon completion of designated stages. Substantial scope-of-work adjustments are common. For these and other reasons, completion of the Company’s backlog may be delayed or canceled. The railroad industry, in general, has historically been subject to fluctuations due to overall economic conditions and the level of use of alternative modes of transportation.
The backlog of firm customer orders as of December 31, 2016 and December 31, 2015, and the expected year of completion are as follows:
 
 
Total
 
Expected Delivery
 
Total
 
Expected Delivery
 
 
Backlog
 
 
 
Other
 
Backlog
 
 
 
Other
In thousands
 
12/31/2016
 
2017
 
Years
 
12/31/2015
 
2016
 
Years
Freight Segment
 
$
575,931

 
$
396,160

 
$
179,771

 
$
671,910

 
$
585,981

 
$
85,929

Transit Segment
 
3,405,561

 
1,565,519

 
1,840,042

 
1,474,974

 
621,736

 
853,238

Total
 
$
3,981,492

 
$
1,961,679

 
$
2,019,813

 
$
2,146,884

 
$
1,207,717

 
$
939,167

Engineering and Development
To execute our strategy to develop new products, we invest in a variety of engineering and development activities. For the fiscal years ended December 31, 2016, 2015, and 2014, we invested about $71.4 million, $71.2 million and $61.9 million, respectively, on product development and improvement activities. The engineering resources of the Company are allocated between research and development activities and the execution of original equipment customer contracts. Across the

8


corporation we have established multiple Centers of Competence, which have specialized, technical expertise in various disciplines and product areas.
Our engineering and development program includes investment in train control and new braking technologies, with an emphasis on applying electronics to traditional pneumatic equipment. Electronic braking has been used in the transit industry for years, and freight railroads are conducting pilot programs to test its reliability and benefits. Freight railroads have generally been slower to accept the technology due to issues over interoperability, connectivity and durability. We are proceeding with efforts to enhance the major components for existing hard-wired braking equipment and development of new electronic technologies for the freight railroads. We have also developed advanced cooling systems that enable lower emissions from diesel engines used in rail and other industrial markets.  Sometimes we conduct specific research projects in conjunction with universities, customers and other industry suppliers.
We use our Product Development System (PDS) to develop and monitor new product programs. The system requires the product development team to follow consistent steps throughout the development process, from concept to launch, to ensure the product will meet customer expectations and internal profitability targets.
Intellectual Property
We have 2,382 active patents worldwide and on average file for approximately 150 new patents each year. We also rely on a combination of trade secrets and other intellectual property laws, nondisclosure agreements and other protective measures to establish and protect our proprietary rights in our intellectual property. We also follow the product development practices of our competitors to monitor any possible patent infringement by them, and to evaluate their strategies and plans.
Certain trademarks, among them the name WABCO®, were acquired or licensed from American Standard Inc., now known as Trane, in 1990 at the time of our acquisition of the North American operations of the Railway Products Group of Trane. Other trademarks have been developed through the normal course of business, or acquired as a part of our ongoing merger and acquisition program.
We have entered into a variety of license agreements as licensor and licensee. We do not believe that any single license agreement is of material importance to our business or either of our business segments as a whole.
We have issued licenses to the two sole suppliers of railway air brakes and related products in Japan, Nabtesco and Mitsubishi Electric Company. The licensees pay annual license fees to us and also assist us by acting as liaisons with key Japanese passenger transit vehicle builders for projects in North America. We believe that our relationships with these licensees have been beneficial to our core transit business and customer relationships in North America.
Customers
We provide products and services for more than 500 customers worldwide. Our customers include railroads and passenger transit authorities throughout North America, Europe, Asia Pacific, South Africa and South America; manufacturers of transportation equipment, such as locomotives, freight cars, passenger transit vehicles and buses; and companies that lease and maintain such equipment.
Top customers can change from year to year. For the fiscal year ended December 31, 2016, our top five customers accounted for 23% of net sales: CSX Corporation, Trinity Industries, the BNSF Railway, the Greenbrier Companies, and Norfolk Southern Railway. No one customer represents 10% or more of consolidated sales. We believe that we have strong relationships with all of our key customers.
Competition
We believe we hold a leading market share for many of our core product lines globally. Our market shares are typically higher in North America and lower in other regions of the world, depending on specific product lines and geographies. We operate in a highly competitive marketplace. Price competition is strong because we have a relatively small number of customers and they are very cost-conscious. In addition to price, competition is based on product performance and technological leadership, quality, reliability of delivery, and customer service and support.
Our principal competitors vary across product lines and geographies. Within North America, New York Air Brake Company, a subsidiary of the German air brake producer Knorr-Bremse AG (“Knorr”) and Amsted Rail Company, Inc., a subsidiary of Amsted Industries Corporation, are our principal overall OEM competitors. Our competition for locomotive, freight and passenger transit service and repair is mostly from the railroads’ and passenger transit authorities’ in-house operations, Electro-Motive Diesel, a division of Caterpillar, GE Transportation Systems, and New York Air Brake/Knorr. We believe our key strengths, which include leading market positions in core products, breadth of product offering with a stable mix of OEM and aftermarket business, leading design and engineering capabilities, significant barriers to entry and an experienced management team, enable us to compete effectively in this marketplace. Outside of North America, no individual

9


company is our principal competitor in all of our operating locations. The largest competitor for Brake and Transit products is Knorr. In addition, our competitors often include smaller, local suppliers in most international markets.
Employees
At December 31, 2016, we had approximately 20,000 full-time employees, approximately 35% of whom were unionized. A majority of the employees subject to collective bargaining agreements are outside North America and these agreements are generally effective from 2017 through 2019. Agreements expiring at various times during 2017 cover approximately 20% of the Company’s workforce. We consider our relations with employees and union representatives to be good, but cannot assure that future contract negotiations will be favorable to us.
Regulation
In the course of our operations, we are subject to various regulations and standards of governments and other agencies in the U.S. and around the world. These entities typically govern equipment, safety and interoperability standards for freight rail and passenger transit rolling stock, oversee a wide variety of rules and regulations governing safety and design of equipment, and evaluate certification and qualification requirements for suppliers.  New products generally must undergo testing and approval processes that are rigorous and lengthy. As a result of these regulations and requirements, we must usually obtain and maintain certifications in a variety of jurisdictions and countries.  The governing bodies include the FRA and AAR in the U.S., and the International Union of Railways (“UIC”) and the European Railway Agencies ("EUAR") in Europe. Also in Europe, the European Committees for Standardization ("CEN" and "CENELEC") continually draft new European standards which cover, for example, the Reliability, Availability, Maintainability and Safety of railways systems. To guarantee interoperability in Europe, the European Union for Railway Agencies is responsible for defining and implementing Technical Standards of Interoperability (TSI), which covers areas such as infrastructure, energy, rolling stock, telematic applications, traffic operation and management subsystems, noise pollution and waste generation, protection against fire and smoke, and system safety.
Most countries and regions in which Wabtec does business have similar rule-making bodies. In Russia, a GOST-R certificate of conformity is mandatory for all products related to the safety of individuals on Russian territory. In China, any product or system sold on the Chinese market must have been certified in accordance with national standards. In the local Indian market, most products are covered by regulations patterned after AAR and UIC standards.
Effects of Seasonality
Our business is not typically seasonal, although the third quarter results may be affected by vacation and scheduled plant shutdowns at several of our major customers during this period. Quarterly results can also be affected by the timing of projects in backlog and by project delays.
Environmental Matters
Additional information on environmental matters is included in Note 19 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
Available Information
We maintain an Internet site at www.wabtec.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as the annual report to stockholders and other information, are available free of charge on this site. The Internet site and the information contained therein or connected thereto are not incorporated by reference into this Form 10-K. The following are also available free of charge on this site and are available in print to any shareholder who requests them: Our Corporate Governance Guidelines, the charters of our Audit, Compensation and Nominating and Corporate Governance Committees, our Code of Conduct, which is applicable to all employees, our Code of Ethics for Senior Officers, which is applicable to our executive officers, our Policies on Related Party Transactions and Conflict Minerals, and our Sustainability Report.

10


Item 1A.
RISK FACTORS
Prolonged unfavorable economic and market conditions could adversely affect our business.
Unfavorable general economic and market conditions in the United States and internationally could have a negative impact on our sales and operations. To the extent that these factors result in continued instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected.
We are dependent upon key customers.
We rely on several key customers who represent a significant portion of our business. Our top customers can change from year to year. For the fiscal year ended December 31, 2016, our top five customers accounted for 23% of our net sales. While we believe our relationships with our customers are generally good, our top customers could choose to reduce or terminate their relationships with us. In addition, many of our customers place orders for products on an as-needed basis and operate in cyclical industries. As a result, their order levels have varied from period to period in the past and may vary significantly in the future. Such customer orders are dependent upon their markets and customers, and may be subject to delays and cancellations. As a result of our dependence on our key customers, we could experience a material adverse effect on our business, results of operations and financial condition if we lost any one or more of our key customers or if there is a reduction in their demand for our products.
Our business operates in a highly competitive industry.
We operate in a global, competitive marketplace and face substantial competition from a limited number of established competitors, some of which may have greater financial resources than we do. Price competition is strong and, coupled with the existence of a number of cost conscious customers, has historically limited our ability to increase prices. In addition to price, competition is based on product performance and technological leadership, quality, reliability of delivery and customer service and support. There can be no assurance that competition in one or more of our markets will not adversely affect us and our results of operations.
We intend to pursue acquisitions, joint ventures and alliances that involve a number of inherent risks, any of which may cause us not to realize anticipated benefits.
One aspect of our business strategy is to selectively pursue acquisitions, joint ventures and alliances that we believe will improve our market position, and provide opportunities to realize operating synergies. These transactions involve inherent risks and uncertainties, any one of which could have a material adverse effect on our business, results of operations and financial condition including:
difficulties in achieving identified financial and operating synergies, including the integration of operations, services and products;
diversion of management’s attention from other business concerns;
the assumption of unknown liabilities; and
unanticipated changes in the market conditions, business and economic factors affecting such an acquisition.
We cannot assure that we will be able to consummate any future acquisitions, joint ventures or other business combinations. If we are unable to identify suitable acquisition candidates or to consummate strategic acquisitions, we may be unable to fully implement our business strategy, and our business and results of operations may be adversely affected as a result. In addition, our ability to engage in strategic acquisitions will be dependent on our ability to raise substantial capital, and we may not be able to raise the funds necessary to implement our acquisition strategy on terms satisfactory to us, if at all.
As we introduce new products and services, a failure to predict and react to customer demand could adversely affect our business.
We have dedicated significant resources to the development, manufacturing and marketing of new products. Decisions to develop and market new transportation products are typically made without firm indications of customer acceptance. Moreover, by their nature, new products may require alteration of existing business methods or threaten to displace existing equipment in which our customers may have a substantial capital investment. There can be no assurance that any new products that we develop will gain widespread acceptance in the marketplace or that such products will be able to compete successfully with other new products or services that may be introduced by competitors. In addition, we may incur additional warranty or other costs as new products are tested and used by customers.

11


A portion of our sales are related to delivering products and services to help our U.S. railroad and transit customers meet the Positive Train Control (PTC) mandate from the U.S. federal government, which requires the use of on-board locomotive computers and software by the end of 2018.
For the year ended December 31, 2016, we had sales of about $345 million related to Train Control and Signaling, which includes PTC. In 2015, the industry's PTC deadline was extended by three years through December 31, 2018, which also included the ability of railroads to request an additional two years for compliance with the approval of the Department of Transportation if certain parameters are met. This could change the timing of our revenues and could cause us to reassess the staffing, resources and assets deployed in delivering Positive Train Control services.
Our revenues are subject to cyclical variations in the railway and passenger transit markets and changes in government spending.
The railway industry historically has been subject to significant fluctuations due to overall economic conditions, the use of alternate methods of transportation and the levels of government spending on railway projects. In economic downturns, railroads have deferred, and may defer, certain expenditures in order to conserve cash in the short term. Reductions in freight traffic may reduce demand for our replacement products.
The passenger transit railroad industry is also cyclical. New passenger transit car orders vary from year to year and are influenced greatly by major replacement programs and by the construction or expansion of transit systems by transit authorities. To the extent that future funding for proposed public projects is curtailed or withdrawn altogether as a result of changes in political, economic, fiscal or other conditions beyond our control, such projects may be delayed or cancelled, resulting in a potential loss of business for us, including transit aftermarket and new transit car orders. There can be no assurance that economic conditions will be favorable or that there will not be significant fluctuations adversely affecting the industry as a whole and, as a result, us.
Our backlog is not necessarily indicative of the level of our future revenues.
Our backlog represents future production and estimated potential revenue attributable to firm contracts with, or written orders from, our customers for delivery in various periods.  Instability in the global economy, negative conditions in the global credit markets, volatility in the industries that our products serve, changes in legislative policy, adverse changes in the financial condition of our customers, adverse changes in the availability of raw materials and supplies, or un-remedied contract breaches could possibly lead to contract termination or cancellations of orders in our backlog or request for deferred deliveries of our backlog orders, each of which could adversely affect our cash flows and results of operations.
A growing portion of our sales may be derived from our international operations, which exposes us to certain risks inherent in doing business on an international level.
In fiscal year 2016, approximately 54% of our consolidated net sales were to customers outside of the U.S. and we intend to continue to expand our international operations in the future. With the acquisition of Faiveley Transport, we anticipate over 60% of our consolidated net sales will be to customers outside of the U.S. Our global headquarters for the Transit group is located in France, and we currently conduct other international operations through a variety of wholly and majority-owned subsidiaries and joint ventures in Australia, Austria, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Macedonia, Mexico, the Netherlands, Poland, Russia, Spain, South Africa, Turkey, and the United Kingdom. As a result, we are subject to various risks, any one of which could have a material adverse effect on those operations and on our business as a whole, including:
lack of complete operating control;
lack of local business experience;
currency exchange fluctuations and devaluations;
foreign trade restrictions and exchange controls;
difficulty enforcing agreements and intellectual property rights;
the potential for nationalization of enterprises; and
economic, political and social instability and possible terrorist attacks against American interests.
In addition, certain jurisdictions have laws that limit the ability of non-U.S. subsidiaries and their affiliates to pay dividends and repatriate cash flows.



12


We may have liability arising from asbestos litigation.
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (RFPC), and are based on a product sold by RFPC prior to the time that the Company acquired any interest in RFPC.
Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with most other pending litigation, cannot be estimated.
We are subject to a variety of environmental laws and regulations.
We are subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. We believe our operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements.
Future climate change regulation could result in increased operating costs, affect the demand for our products or affect the ability of our critical suppliers to meet our needs.
The Company has followed the current debate over climate change and the related policy discussion and prospective legislation. The potential challenges for the Company that climate change policy and legislation may pose have been reviewed by the Company. Any such challenges are heavily dependent on the nature and degree of climate change legislation and the extent to which it applies to our industry. At this time, the Company cannot predict the ultimate impact of climate change and climate change legislation on the Company’s operations. Further, when or if these impacts may occur cannot be assessed until scientific analysis and legislative policy are more developed and specific legislative proposals begin to take shape. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gas could require us to incur increased operating costs, and could have an adverse effect on demand for our products. In addition, the price and availability of certain of the raw materials that we use could vary in the future as a result of environmental laws and regulations affecting our suppliers. An increase in the price of our raw materials or a decline in their availability could adversely affect our operating margins or result in reduced demand for our products.
The occurrence of litigation in which we could be named as a defendant is unpredictable.
From time to time, the Company is subject to litigation or other commercial disputes and other legal and regulatory proceedings with respect to our business, customers, suppliers, creditors, shareholders, product liability, intellectual property infringement, warranty claims or environmental-related matters. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. We may incur significant expense to defend or otherwise address current or future claims. Any litigation, even a claim without merit, could result in substantial costs and diversion of resources and could have a material adverse effect on our business and results of operations. Although we maintain insurance policies for certain risks, we cannot make assurances that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all.
The Company is subject to national and international laws and regulations, such as the anti-corruption laws of the U.S. Foreign Corrupt Practices Act, the French Law n° 2016-1691 (Sapin II) and the U.K. Bribery Act, relating to its business and its employees. Despite the Company's policies, procedures and compliance programs, its internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by its employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject it to civil or criminal judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact the Company's business, financial condition or results of operations.
If we are not able to protect our intellectual property and other proprietary rights, we may be adversely affected.
Our success can be impacted by our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our

13


technology is not patented and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages and may be challenged by third parties. The laws of countries other than the United States may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be negatively impacted.
Our manufacturer’s warranties or product liability may expose us to potentially significant claims.
We warrant the workmanship and materials of many of our products. Accordingly, we are subject to a risk of product liability or warranty claims in the event that the failure of any of our products results in personal injury or death, or does not conform to our customers’ specifications. In addition, in recent years, we have introduced a number of new products for which we do not have a history of warranty experience. Although we have not had any material product liability or warranty claims made against us and we currently maintain liability insurance coverage, we cannot assure that product liability claims, if made, would not exceed our insurance coverage limits or that insurance will continue to be available on commercially acceptable terms, if at all. The possibility exists for these types of warranty claims to result in costly product recalls, significant repair costs and damage to our reputation.
Labor disputes may have a material adverse effect on our operations and profitability.
We collectively bargain with labor unions that represent approximately 35% of our employees. Our current collective bargaining agreements are generally effective from 2017 through 2019. Agreements expiring at various times during 2017 cover approximately 20% of the Company’s workforce. Failure to reach an agreement could result in strikes or other labor protests which could disrupt our operations. If we were to experience a strike or work stoppage, it would be difficult for us to find a sufficient number of employees with the necessary skills to replace these employees. We cannot assure that we will reach any such agreement or that we will not encounter strikes or other types of conflicts with the labor unions of our personnel. Such labor disputes could have an adverse effect on our business, financial condition or results of operations, could cause us to lose revenues and customers and might have permanent effects on our business.
We may incur increased costs due to fluctuations in interest rates and foreign currency exchange rates
In the ordinary course of business, we are exposed to increases in interest rates that may adversely affect funding costs associated with variable-rate debt and changes in foreign currency exchange rates. We may seek to minimize these risks through the use of interest rate swap contracts and currency hedging agreements. There can be no assurance that any of these measures will be effective. Any material changes in interest or exchange rates could result in material losses to us.
Our indebtedness could adversely affect our financial health.
At December 31, 2016, we had total debt of $1,892.8 million. If it becomes necessary to access our available borrowing capacity under our 2016 Refinancing Credit Agreement, the $796.2 million currently borrowed under this facility and the $747.5 million 3.450% senior notes, and the $248.3 million 4.375% senior notes, being indebted could have important consequences to us. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
place us at a disadvantage compared to competitors that have less debt; and
limit our ability to borrow additional funds.
The indenture for our $747.5 million 3.450% senior notes due in 2026, our $248.3 million 4.375% senior notes due in 2023, and our 2016 Refinancing Credit Agreement contain various covenants that limit our management’s discretion in the operation of our businesses.
The 2016 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 2016 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations and sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments,

14


loans and advances; certain debt payments; capital expenditures; and imposes a minimum interest expense coverage ratio and a maximum debt to EBITDA ratio.
The indentures under which the senior notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The integration of our recently completed acquisitions may not result in anticipated improvements in market position or the realization of anticipated operating synergies or may take longer to realize than expected.
In 2015 and 2016, we completed multiple acquisitions with a combined investment of $996.0 million, which included our acquisition of a 51% controlling stake in Faiveley Transport for $746.5 million. Additionally, we launched a tender offer for the remaining publicly traded shares with the intention of acquiring 100% ownership of Faiveley Transport and currently having a 78% controlling interest. Although we believe that the acquisitions will improve our market position and realize positive operating results, including operating synergies, operating expense reductions and overhead cost savings, we cannot be assured that these improvements will be obtained or the timing of such improvements. The management and acquisition of businesses involves substantial risks, any of which may result in a material adverse effect on our business and results of operations, including:
the uncertainty that an acquired business will achieve anticipated operating results;
significant expenses to integrate;
diversion of Management’s attention;
departure of key personnel from the acquired business;
effectively managing entrepreneurial spirit and decision-making;
integration of different information systems;
unanticipated costs and exposure to unforeseen liabilities; and
impairment of assets.

Item 1B.
UNRESOLVED STAFF COMMENTS
None.


15


Item 2.
PROPERTIES
Facilities
The following table provides certain summary information about the principal facilities owned or leased by the Company as of December 31, 2016. The Company believes that its facilities and equipment are generally in good condition and that, together with scheduled capital improvements, they are adequate for its present and immediately projected needs. Leases on the facilities are long-term and generally include options to renew. The Company’s corporate headquarters are located at the Wilmerding, PA site.
 
Location
 
 
Primary Use
 
 
Segment
 
 
Own/Lease
 
 
Approximate
Square Feet 
Domestic
 
 
 
 
 
 
 
 
 
 
Rothbury, MI
 
Manufacturing/Warehouse/Office
 
Freight
 
Own
 
500,000

 
 
Wilmerding, PA
 
Manufacturing/Service
 
Freight
 
Own
 
365,000

 
(1
)
Lexington, TN
 
Manufacturing
 
Freight
 
Own
 
170,000

 
 
Jackson, TN
 
Manufacturing
 
Freight
 
Own
 
150,000

 
 
Berwick, PA
 
Manufacturing/Warehouse
 
Freight
 
Own
 
150,000

 
 
Chicago, IL
 
Manufacturing/Service
 
Freight
 
Own
 
123,140

 
 
Greensburg, PA
 
Manufacturing
 
Freight
 
Own
 
113,000

 
 
Chillicothe, OH
 
Manufacturing/Office
 
Freight
 
Own
 
104,000

 
 
Warren, OH
 
Manufacturing
 
Freight
 
Own
 
102,650

 
 
Delray Beach, FL
 
Warehouse
 
Freight
 
Lease
 
125,888

 
 
Boise, ID
 
Manufacturing
 
Freight/Transit
 
Own
 
326,000

 
 
Maxton, NC
 
Manufacturing
 
Freight/Transit
 
Own
 
105,000

 
 
Salem, VA
 
Manufacturing
 
Transit
 
Own
 
320,000

 
 
Greenville, SC
 
Manufacturing
 
Transit
 
Own
 
253,996

 
 
Greenville, SC
 
Manufacturing
 
Transit
 
Own
 
154,020

 
 
Brenham, TX
 
Manufacturing/Office
 
Transit
 
Own
 
144,671

 
 
Shreveport, LA
 
Office/Warehouse
 
Transit
 
Lease
 
258,915

 
 
Spartanburg, SC
 
Manufacturing/Service
 
Transit
 
Lease
 
183,600

 
 
Carson City, NV
 
Manufacturing
 
Transit
 
Lease
 
176,033

 
 
Buffalo Grove, IL
 
Manufacturing
 
Transit
 
Lease
 
115,570

 
 
International
 
 
 
 
 
 
 
 
 
 
Sao Paulo, Brazil
 
Manufacturing/Office
 
Freight
 
Own
 
176,872

 
 
Wallaceburg (Ontario), Canada
 
Manufacturing
 
Freight
 
Own
 
126,000

 
 
Northampton, UK
 
Manufacturing
 
Freight
 
Lease
 
300,000

 
 
Shenyang City, Liaoning Province, China
 
Manufacturing
 
Freight
 
Lease
 
290,550

 
 
Lincolnshire, UK
 
Manufacturing/Office
 
Freight
 
Lease
 
149,468

 
 
London (Ontario), Canada
 
Manufacturing
 
Freight
 
Lease
 
103,540

 
 
Doncaster, UK
 
Manufacturing/Service
 
Freight/Transit
 
Own
 
330,000

 
 
Kilmarnock, UK
 
Manufacturing
 
Freight/Transit
 
Own
 
107,975

 
 
Loughborough, UK
 
Manufacturing
 
Freight/Transit
 
Lease
 
245,245

 
 
Kempton Park, South Africa
 
Manufacturing
 
Freight/Transit
 
Lease
 
156,077

 
 
Piossasco, Italy
 
Manufacturing
 
Transit
 
Own
 
301,389

 
 
Monte Alto, Brazil
 
Manufacturing/Office
 
Transit
 
Own
 
244,081

 
 
Tamil Nadu, India
 
Manufacturing
 
Transit
 
Own
 
220,132

 
 
Schkeuditz, Germany
 
Manufacturing
 
Transit
 
Own
 
219,411

 
 

16


Location
 
 
Primary Use
 
 
Segment
 
 
Own/Lease
 
 
Approximate
Square Feet
Schuttorf, Germany
 
Manufacturing/Office
 
Transit
 
Own
 
189,445

 
 
Amiens, France
 
Manufacturing
 
Transit
 
Own
 
142,395

 
 
Chard, UK
 
Manufacturing/Office
 
Transit
 
Own
 
141,610

 
 
St Pierre Des Corps, France
 
Manufacturing
 
Transit
 
Own
 
133,278

 
 
Avellino, Italy
 
Manufacturing/Office
 
Transit
 
Own
 
132,495

 
 
Burton on Trent, UK
 
Manufacturing/Office
 
Transit
 
Lease
 
253,453

 
 
Blovice, Czech Republic
 
Manufacturing
 
Transit
 
Lease
 
234,814

 
 
Witten, Germany
 
Manufacturing
 
Transit
 
Lease
 
209,422

 
 
Verviers, Belgium
 
Manufacturing/Office
 
Transit
 
Lease
 
137,024

 
 
Camisano, Italy
 
Manufacturing/Office
 
Transit
 
Lease
 
136,465

 
 
San Luis Potosi, Mexico
 
Manufacturing/Office
 
Transit
 
Lease
 
112,825

 
 
Birkenhead, UK
 
Overhaul/Manufacturing
 
Transit
 
Lease
 
109,146

 
 
Shanghai, China
 
Manufacturing
 
Transit
 
Lease
 
104,097

 
 

 
(1)
Approximately 250,000 square feet are currently used in connection with the Company’s corporate and manufacturing operations. The remainder is leased to third parties.

Item  3.
LEGAL PROCEEDINGS
During 2016, the Company paid a settlement in the amount of $0.2 million to the United States Environmental Protection Agency ("EPA") concerning the failure of its Longwood subsidiary, which was acquired in September 2013, to make certain filings with the EPA during the period between 2011 and 2014.
Additional information with respect to legal proceedings is included in Note 19 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report and incorporate by reference herein.

Item  4.
MINE SAFETY DISCLOSURES
Not applicable.

17


EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information on our executive officers as of December 31, 2016. They are elected periodically by our Board of Directors and serve at its discretion.
Officers
 
Age
 
Position
Albert J. Neupaver
 
66
 
Executive Chairman
Raymond T. Betler
 
61
 
President and Chief Executive Officer
Stephane Rambaud-Measson
 
54
 
Executive Vice President, President and Chief Executive Officer-Transit Segment
Patrick D. Dugan
 
50
 
Executive Vice President Finance, and Chief Financial Officer
Guillaume Bouhours
 
40
 
Senior Vice President and Chief Financial Officer-Transit Segment
R. Mark Cox
 
48
 
Executive Vice President, Corporate Development
David L. DeNinno
 
61
 
Executive Vice President, General Counsel and Secretary
Scott E. Wahlstrom
 
53
 
Executive Vice President, Human Resources
John A. Mastalerz
 
50
 
Vice President of Finance, Corporate Controller and Principal Accounting Officer
Timothy R. Wesley
 
55
 
Vice President, Investor Relations and Corporate Communications

Albert J. Neupaver was named Executive Chairman of the Company in May 2014. Previously, Mr. Neupaver served as Chairman and CEO from May 2013 to May 2014 and as the Company’s President and CEO from February 2006 to May 2013.  Prior to joining Wabtec, Mr. Neupaver served in various positions at AMETEK, Inc., a leading global manufacturer of electronic instruments and electric motors. Most recently he served as President of its Electromechanical Group for nine years.
Raymond T. Betler was named President and Chief Executive Officer in May 2014. Previously, Mr. Betler was President and Chief Operating Officer since May 2013 and the Company’s Chief Operating Officer since December 2010.  Prior to that, he served as Vice President, Group Executive of the Company since August 2008. Prior to joining Wabtec, Mr. Betler served in various positions of increasing responsibility at Bombardier Transportation since 1979. Most recently, Mr. Betler served as President, Total Transit Systems from 2004 until 2008 and before that as President, London Underground Projects from 2002 to 2004.

Stephane Rambaud-Measson was named Executive Vice President and President and CEO Transit Segment effective December 2016. Previously, Mr. Rambaud-Measson was Chairman of the Management Board and Chief Executive Officer of Faiveley Transport from April 2014 until November 30, 2016.  Prior to that position, he served as Executive Vice President of Faiveley Transport from March 2014 to April 2014. Prior to joining Faiveley Transport, Mr. Rambaud-Measson was Chief Executive Officer of Veolia Verkehr. Prior to that, Mr. Rambaud-Measson served in various management roles at Bombardier Transport including President of the Passengers Division beginning in 2008. Before that, in 2005, he was appointed President of Mainline & Metro after serving as Group Vice President Project Management and Administration, which he began in 2004.
Patrick D. Dugan was named Executive Vice President and Chief Financial Officer effective December 2016. Previously Mr. Dugan served as Senior Vice President and Chief Financial Officer since January 2014.  Previously, Mr. Dugan was Senior Vice President, Finance and Corporate Controller from January 2012 until November 2013.   He originally joined Wabtec in 2003 as Vice President, Corporate Controller. Prior to joining Wabtec, Mr. Dugan served as Vice President and Chief Financial Officer of CWI International, Inc. from December 1996 to November 2003. Prior to 1996, Mr. Dugan was a Manager with PricewaterhouseCoopers.
Guillaume Bouhours was named Senior Vice President and Chief Financial Officer - Transit Segment effective December 2016. Prior to that, Mr. Bouhours served as Chief Financial Officer for Faiveley Transport since September 2010 and as a member of the Faiveley Transport Management Board since April 2011.

R. Mark Cox was named Executive Vice President, Corporate Development effective December 2016. Previously, Mr. Cox served as Sr. Vice President Corporate Development from January 2012, and has been with Wabtec since September 2006 as Vice President, Corporate Development. Prior to joining Wabtec, Mr. Cox served as Director of Business Development for the Electrical Group of Eaton Corporation since 2002. Prior to joining Eaton, Mr. Cox was an investment banker with UBS Warburg, Prudential and Stephens.

David L. DeNinno was named Executive Vice President, General Counsel and Secretary of the Company effective December 2016. Previously, Mr. DeNinno served as Sr. Vice President, General Counsel and Secretary since February 2012. Previously, Mr. DeNinno served as a partner at K&L Gates LLP since May 2011 and prior to that with Reed Smith LLP.


18


Scott E. Wahlstrom was named Executive Vice President, Human Resources effective December 2016. Previously, Mr. Wahlstrom served as Senior Vice President, Human Resources since January 2012. Prior to that, Mr. Wahlstrom has been Vice President, Human Resources, since November 1999. Previously, Mr. Wahlstrom was Vice President, Human Resources & Administration of MotivePower Industries, Inc. from August 1996 until November 1999.
John A. Mastalerz was named Vice President of Finance, Corporate Controller and Principal Accounting Officer in January 2016.  Mr. Mastalerz served as Vice President and Corporate Controller from January 2014 to January 2016. Prior to joining Wabtec, Mr. Mastalerz served in various executive management roles with the H.J. Heinz Company from January 2001 to December 2013, most recently as Corporate Controller and Principal Accounting Officer.  Prior to 2001, Mr. Mastalerz was a Senior Manager with PricewaterhouseCoopers.
Timothy R. Wesley was named Vice President, Investor Relations and Corporate Communications in November 1999. Previously, Mr. Wesley was Vice President, Investor and Public Relations of MotivePower Industries, Inc. from August 1996 until November 1999.

19


PART II
Item  5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Common Stock of the Company is listed on the New York Stock Exchange under the symbol “WAB”. As of February 17, 2017, there were 95,786,017 shares of Common Stock outstanding held by 491 holders of record. The high and low sales price of the shares and dividends declared per share were as follows:
2016
 
High
 
Low
 
Dividends
First Quarter
 
$
80.61

 
$
60.28

 
$
0.080

Second Quarter
 
$
88.46

 
$
66.14

 
$
0.080

Third Quarter
 
$
82.00

 
$
65.54

 
$
0.100

Fourth Quarter
 
$
89.18

 
$
74.32

 
$
0.100

2015
 
High
 
Low
 
Dividends
First Quarter
 
$
97.16

 
$
81.21

 
$
0.060

Second Quarter
 
$
105.10

 
$
93.49

 
$
0.060

Third Quarter
 
$
103.07

 
$
87.95

 
$
0.080

Fourth Quarter
 
$
94.61

 
$
67.96

 
$
0.080


The Company’s 2016 Refinancing Credit Agreement restricts the ability to make dividend payments, with certain exceptions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and see Note 8 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
At the close of business on February 17, 2017, the Company’s Common Stock traded at $87.77 per share.
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference to any future filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended, except to the extent that Wabtec specifically incorporates it by reference into such filing. The graph below compares the total stockholder return through December 31, 2016, of Wabtec’s common stock to (i) the S&P 500, (ii) our former peer group of manufacturing companies which consisted of the following publicly traded companies: The Greenbrier Companies, Trinity Industries, AMETEK, Regal Beloit, Harsco, Valmont, Lincoln Electric, Kennametal, Pall, Crane, Donaldson, WABCO, ITT, Briggs & Stratton, IDEX, Woodward, Titan Wheel, Actuant and Koppers; and (iii) our new peer group of manufacturing companies which consists of the following publicly traded companies: AGCO, AMETEK, Colfax, Dana, Dover, Flowserve, The Greenbrier Companies, Navistar, Oshkosh, Regal Beloit, Rockwell Automation, Rockwell Collins, Terex, Trinity Industries, Snap-On, WABCO and Xylem.  The peer group was revised to better match the operations and products of Wabtec.
a2016stockpricegraph.jpg

20


On November 9, 2015, the Board of Directors amended its stock repurchase authorization to $350 million of the Company’s outstanding shares. Through December 31, 2015, 4,042,123 shares had been repurchased under this authorization totaling $316.7 million leaving $33.3 million remaining under the authorization. All purchases were made on the open market.
On February 9, 2016 the Board of Directors amended its stock repurchase authorization to $350 million of the Company's outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $350 million of which $33.3 million remained. During the twelve months ended December 31, 2016, the Company repurchased 3,046,408 shares, leaving $137.8 million under the authorization. During the quarter ended December 31, 2016, the Company did not repurchase any shares.
The Company intends to purchase shares on the open market or in negotiated or block trades. No time limit was set for the completion of the programs which conform to the requirements under the 2016 Refinancing Credit Agreement, as well as the senior notes currently outstanding.
    



21


Item 6.
SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information of the Company and has been derived from audited financial statements. This financial information should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Form 10-K.
 
 
Year Ended December 31,
In thousands, except per share amounts
 
2016
 
2015
 
2014
 
2013
 
2012
Income Statement Data
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,931,188

 
$
3,307,998

 
$
3,044,454

 
$
2,566,392

 
$
2,391,122

Gross profit
 
924,239

 
1,047,816

 
935,982

 
764,027

 
694,567

Operating expenses
 
(465,878
)
 
(440,249
)
 
(408,873
)
 
(326,717
)
 
(302,288
)
Income from operations
 
$
458,361

 
$
607,567

 
$
527,109

 
$
437,310

 
$
392,279

Interest expense, net
 
$
(42,561
)
 
$
(16,888
)
 
$
(17,574
)
 
$
(15,341
)
 
$
(14,251
)
Other (expense) income, net
 
(2,963
)
 
(5,311
)
 
(1,680
)
 
(882
)
 
(670
)
Net income attributable to Wabtec shareholders
 
$
304,887

 
$
398,628

 
$
351,680

 
$
292,235

 
$
251,732

Diluted Earnings per Common Share
 
 
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders (1)
 
$
3.34

 
$
4.10

 
$
3.62

 
$
3.01

 
$
2.60

Cash dividends declared per share (1)
 
$
0.36

 
$
0.28

 
$
0.20

 
$
0.13

 
$
0.08

Fully diluted shares outstanding (1)
 
91,141

 
97,006

 
96,885

 
96,832

 
96,742

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
6,581,018

 
$
3,229,513

 
$
3,303,841

 
$
2,821,997

 
$
2,351,542

Cash
 
398,484

 
226,191

 
425,849

 
285,760

 
215,766

Total debt
 
1,892,776

 
692,238

 
521,195

 
450,709

 
317,896

Shareholder' equity
 
2,976,825

 
1,701,339

 
1,808,298

 
1,587,167

 
1,282,017


(1)
Information above for net income attributable to Wabtec shareholders, cash dividends declared per share and fully diluted shares outstanding for all periods presented reflects the two-for-one split of the Company’s common stock, which occurred on May 14, 2013.


22


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 30 countries. In 2016, about 54% of the Company’s revenues came from customers outside the U.S.
Management Review and Future Outlook
Wabtec’s long-term financial goals are to generate cash flow from operations in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Excellence Program, and increase revenues through a focused growth strategy, including product innovation and new technologies, global and market expansion, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company’s current operational performance through measures such as quality and on-time delivery.
The Company monitors a variety of factors and statistics to gauge market activity. Freight rail markets around the world are driven primarily by overall economic conditions and activity, while Transit markets are driven primarily by government funding and passenger ridership.  Changes in these market drivers can cause fluctuations in demand for Wabtec’s product and services.  In its 2016 study, UNIFE estimates the accessible global market for railway products and services is more than $100 billion, and it is expected to grow at about 3.2% annually through 2021, with the highest expected growth rates in Asia Pacific and Europe.
In North America, the AAR compiles statistics that gauge the level of activity in the freight rail industry, including carloadings, which is generally referred to as “rail traffic”.  Based on changes in rail traffic trends, railroads can increase or decrease purchases of new locomotives and freight cars.  In 2016, North American carloadings decreased 4.5%, including a 7.2% decrease in commodity carloadings and a 1.5% decrease in intermodal carloadings. Deliveries of new locomotives decreased 20%, and deliveries of new freight cars decreased 27%. In 2017, we expect locomotive and freight car deliveries to be lower than in 2016. UNIFE projects an annual growth rate of about 2.3% in North America, but the actual figure depends on the growth of the economy.
In North America, the American Public Transportation Association ("APTA") compiles ridership statistics and trends.  Based on preliminary figures for 2016, ridership decreased about 1.0% in the U.S. and was about flat in Canada.  Ridership provides fare box revenues to transit authorities, which use these funds, along with state and local money, primarily, for equipment maintenance.  In 2015, the U.S. Congress passed a new, five-year transportation funding bill, which includes annual spending increases.  A majority of the money that transit agencies spend to purchase new equipment or infrastructure comes from the federal government.
Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe and Asia Pacific. To gauge activity in these markets, we monitor trends in rail traffic and the spending plans of our customers.  In Europe, the majority of the rail system serves the passenger transit market, which is significantly larger than the transit market in the U.S. Our presence in the U.K. and continental Europe, and especially the acquisition of a majority ownership of Faiveley Transport, has positioned the Company to take advantage of this market. UNIFE projects the Western European rail market to grow annually by about 3.6% during the next five years, with France and Germany expected to invest in new rolling stock.  UNIFE projects the market in Asia-Pacific, the world’s second largest according to the study, to grow annually by about 5.4%, primarily reflecting strong spending in China.  Other growth markets around the world, according to UNIFE, include Latin America, projected to grow at about 2.1%; Africa/Middle East, projected to grow at about 1.9%; and Russia-CIS, projected to grow at about 1.5%.  Actual growth rates will be affected by the general global economic conditions and specific economic conditions in each market. Through wholly owned subsidiaries and joint ventures, Wabtec has a presence in every key freight rail and passenger transit market around the world.
In 2016 and beyond, general economic and market conditions in the United States and internationally will have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies

23


developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.
ACQUISITION OF FAIVELEY TRANSPORT S.A.
On July 27, 2015, the Company announced plans to acquire all of the issued and outstanding shares of Faiveley Transport S.A. ("Faiveley Transport") under the terms of a Share Purchase Agreement (the "Share Purchase Agreement") and a Tender Offer Agreement (the "Tender Offer Agreement"). On October 24, 2016, the Company entered into amendments to the Share Purchase Agreement and the Tender Offer Agreement. Faiveley Transport is a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries. Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of valued-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes and Safety (braking systems and couplers).
The transaction has been structured in three steps:
Wabtec made an irrevocable offer to the owners of approximately 51% of Faiveley Transport's shares for a purchase price of €100 per share, payable between 25% and 45% in cash at the election of those shareholders with the remainder in common stock.
Upon completion of required labor group consultations, on October 6, 2015, the 51% shareholders entered into a definitive Share Purchase Agreement, which was amended on October 24, 2016, and Faiveley Transport entered into the Tender Offer Agreement with Wabtec which was also amended on October 24, 2016.
Upon completing the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders will have the option to elect to receive €100 per share in cash or Wabtec common stock. The common stock portion of the consideration is subject to a cap on issuance of Faiveley common shares that will be equivalent to the rates of cash and stock elected by the 51% owners. Wabtec intends to delist Faiveley Transport from Euronext after the tender offer if minority interests represent less than 5%.
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest, which represented approximately 51% of outstanding share capital and approximately 49% of the outstanding voting shares of Faiveley Transport. Under the variable interest entity model the Company concluded that it is the primary beneficiary of Faiveley Transport as it possesses the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it possesses the obligation and right to absorb losses and benefits from Faiveley Transport; therefore, Faiveley Transport was consolidated by Wabtec under the variable interest model at acquisition. Based on the Company’s $84.77 stock price on November 30, 2016, the aggregate value of consideration paid for the Faiveley Transport family’s ownership interest was $978.1 million, including $534.7 million in stock or approximately 6.3 million shares, $211.8 million in cash, $409.9 million in debt assumed, less $178.3 million in cash acquired. The Company launched a tender offer for the remaining publicly traded Faiveley Transport shares in December 2016. Through the tender offer, the public shareholders of Faiveley Transport will have the option to elect to receive €100 per share of Faiveley Transport in cash or 1.1538 Wabtec common shares per share of Faiveley Transport. On February 3, 2017, the initial cash tender offer was closed which resulted in the Company acquiring an additional 27.5% of outstanding share capital of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. The tender offer will be reopened with dates and duration to be determined by the French regulator. The total purchase price for 100% of the shares of Faiveley Transport is approximately $1.7 billion, including assumed debt and net of cash acquired. The approximate $1.0 billion cash portion of the transaction is being funded from cash on hand, the net proceeds from a recent $750 million senior notes offering and the company’s existing revolving credit facility and term note.

24


RESULTS OF OPERATIONS
The following table shows our Consolidated Statements of Operations for the years indicated.
 
 
Year Ended December 31,
In thousands
 
2016
 
2015
 
2014
Net sales
 
$
2,931,188

 
$
3,307,998

 
$
3,044,454

Cost of sales
 
(2,006,949
)
 
(2,260,182
)
 
(2,108,472
)
Gross profit
 
924,239

 
1,047,816

 
935,982

Selling, general and administrative expenses
 
(371,805
)
 
(347,373
)
 
(324,539
)
Engineering expenses
 
(71,375
)
 
(71,213
)
 
(61,886
)
Amortization expense
 
(22,698
)
 
(21,663
)
 
(22,448
)
Total operating expenses
 
(465,878
)
 
(440,249
)
 
(408,873
)
Income from operations
 
458,361

 
607,567

 
527,109

Interest expense, net
 
(42,561
)
 
(16,888
)
 
(17,574
)
Other (expense) income, net
 
(2,963
)
 
(5,311
)
 
(1,680
)
Income from operations before income taxes
 
412,837

 
585,368

 
507,855

Income tax expense
 
(99,433
)
 
(186,740
)
 
(156,175
)
Net income
 
313,404

 
398,628

 
351,680

Noncontrolling interest
 
(8,517
)
 

 

Net income attributable to Wabtec shareholders
 
$
304,887

 
$
398,628

 
$
351,680


2016 COMPARED TO 2015
The following table summarizes the results of operations for the period:
 
 
For the year ended December 31,
 
 
 
 
 
 
Percent
In thousands
 
2016
 
2015
 
Change
Freight Segment
 
$
1,543,098

 
$
2,054,715

 
(24.9
)%
Transit Segment
 
1,388,090

 
1,253,283

 
10.8
 %
Net sales
 
2,931,188

 
3,307,998

 
(11.4
)%
Income from operations
 
458,361

 
607,567

 
(24.6
)%
Net income
 
$
313,404

 
$
398,628

 
(21.4
)%

The following table shows the major components of the change in sales in 2016 from 2015:
 
 
Freight
 
Transit
 
 
In thousands
 
Segment
 
Segment
 
Total
2015 Net Sales
 
$
2,054,715

 
$
1,253,283

 
$
3,307,998

Acquisitions
 
55,097

 
134,095

 
189,192

Change in Sales by Product Line:
 
 
 
 
 
 
Specialty Products & Electronics
 
(438,285
)
 
35,611

 
(402,674
)
Brake Products
 
(50,665
)
 
(4,442
)
 
(55,107
)
Other
 
(26,908
)
 
57

 
(26,851
)
Remanufacturing, Overhaul & Build
 
(33,700
)
 
22,743

 
(10,957
)
Other Transit Products
 

 
656

 
656

Foreign exchange
 
(17,156
)
 
(53,913
)
 
(71,069
)
2016 Net Sales
 
$
1,543,098

 
$
1,388,090

 
$
2,931,188


Net sales decreased by $376.8 million to $2,931.2 million in 2016 from $3,308.0 million in 2015. The decrease is primarily due to lower sales for Specialty Products and Electronics of $402.7 million and lower Brake Products sales of $55.1 million due to decreased demand for freight products attributable to lower freight car and locomotive builds, and train control and signaling products and services, and lower Other Products sales of $26.9 million from decreased demand for freight spare part kits. Acquisitions increased sales $189.2 million and unfavorable foreign exchange decreased sales $71.1 million.
Freight Segment sales decreased by $511.6 million, or 24.9%, primarily due to a $438.3 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products and train control and signaling products attributable to lower freight car and locomotive builds, a decrease of $50.7 million for Brake Products sales from

25


lower demand for original equipment brakes and aftermarket services, a decrease of $33.7 million for Remanufacturing, Overhaul and Build sales due to a large locomotive rebuild contract that completed in 2016, and a decrease of $26.9 million for Other Product sales from decreased demand for freight spare part kits. Acquisitions increased sales by $55.1 million and unfavorable foreign exchange decreased sales by $17.2 million.
Transit Segment sales increased by $134.8 million, or 10.8%, primarily due to a $35.6 million increase for Specialty Products and Electronics from higher demand for original equipment conduction systems and current collectors, and an increase of $22.7 million for Remanufacturing, Overhaul and Build sales from higher demand for aftermarket locomotive builds. Acquisitions increased sales by $134.1 million and unfavorable foreign exchange decreased sales by $53.9 million.
Cost of Sales and Gross Profit The following table shows the major components of cost of sales for the periods indicated:
 
Twelve Months Ended December 31, 2016
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
590,876

 
38.3
%
 
$
587,516

 
42.3
%
 
$
1,178,392

 
40.2
%
Labor
176,518

 
11.4
%
 
170,481

 
12.3
%
 
346,999

 
11.8
%
Overhead
242,956

 
15.7
%
 
213,821

 
15.4
%
 
456,777

 
15.6
%
Other/Warranty
5,575

 
0.4
%
 
19,206

 
1.4
%
 
24,781

 
0.8
%
Total cost of sales
$
1,015,925

 
65.8
%
 
$
991,024

 
71.4
%
 
$
2,006,949

 
68.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31, 2015
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
854,728

 
41.6
%
 
$
531,152

 
42.4
%
 
$
1,385,880

 
41.9
%
Labor
219,495

 
10.7
%
 
156,357

 
12.5
%
 
375,852

 
11.4
%
Overhead
282,132

 
13.7
%
 
182,501

 
14.6
%
 
464,633

 
14.0
%
Other/Warranty
5,926

 
0.3
%
 
27,891

 
2.2
%
 
33,817

 
1.0
%
Total cost of sales
$
1,362,281

 
66.3
%
 
$
897,901

 
71.7
%
 
$
2,260,182

 
68.3
%
Cost of sales decreased by $253.2 million to $2,006.9 million in 2016 compared to $2,260.2 million in the same period of 2015.  For the twelve months ended 2016, cost of sales as a percentage of sales was 68.4% compared to 68.3% in the same period of 2015.
Freight Segment cost of sales decreased 0.5% as a percentage of sales to 65.8% in 2016 compared to 66.3% for the same period of 2015. The decrease as a percentage of sales is primarily related to sales with lower material content, lower overall material costs due to ongoing sourcing efforts, and decreases in various commodity prices partially offset by an increase in overhead costs as a percentage of sales which is primarily due to certain fixed overhead costs.
Transit Segment cost of sales decreased 0.3% as a percentage of sales to 71.4% in 2016 compared to 71.7% for the same period in 2015. The decrease is primarily due to better margin performance from prior year acquisitions and ongoing sourcing savings. These benefits were partially offset by $13.8 million of costs related to adjustments on certain long-term contracts.
Included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $28.9 million in 2016 compared to $35.4 million in 2015






26


Operating expenses The following table shows our operating expenses:
 
 
For the year ended December 31,
 
 
 
 
Percentage of
 
 
 
Percentage of
In thousands
 
2016
 
Sales
 
2015
 
Sales
Selling, general and administrative expenses
 
$
371,805

 
12.7
%
 
$
347,373

 
10.5
%
Engineering expenses
 
71,375

 
2.4
%
 
71,213

 
2.2
%
Amortization expense
 
22,698

 
0.8
%
 
21,663

 
0.7
%
Total operating expenses
 
$
465,878

 
15.9
%
 
$
440,249

 
13.4
%

Total operating expenses were 15.9% and 13.4% of sales for 2016 and 2015, respectively. Selling, general, and administrative expenses increased $24.4 million, or 7.0%, primarily due to $38.9 million of costs related to the Faiveley acquisition and $5.4 million in costs related to restructuring activity. These costs were partially offset by lower incentive and non-cash compensation expense and the effects of foreign exchange.  Engineering expense was consistent with the prior year.  Amortization expense increased $1.0 million due to amortization of intangibles associated with acquisitions.
The following table shows our segment operating expenses:
 
 
For the year ended December 31,
 
 
 
 
 
 
Percent
In thousands
 
2016
 
2015
 
Change
Freight Segment
 
$
182,718

 
$
208,773

 
(12.5
)%
Transit Segment
 
225,620

 
205,415

 
9.8
 %
Corporate
 
57,540

 
26,061

 
120.8
 %
Total operating expenses
 
$
465,878

 
$
440,249

 
5.8
 %

Freight Segment operating expenses decreased $26.1 million, or 12.5%, in 2016 and increased 160 basis points to 11.8% of sales.  The decrease is primarily attributable to reduced sales volumes and realized benefits associated with the cost saving initiatives undertaken in 2016 partially offset by $8.8 million of incremental operating expenses from acquisitions.    
Transit Segment operating expenses increased $20.2 million, or 9.8%, in 2016 and decreased 10 basis points to 16.3% of sales.  The increase is primarily related to $26.2 million of incremental operating expenses related to acquisitions and $7.1 million related to the Faiveley Transport transaction.  This increase is partially offset by lower operating expenses due to foreign exchange. 
Corporate non-allocated operating expenses increased $31.5 million in 2016 primarily due to $31.8 million of costs related to the Faiveley acquisition partially offset by realized benefits from cost saving initiatives in 2016.
Interest expense, net Overall interest expense, net, increased $25.7 million in 2016 due to a higher overall debt balance in 2016 compared to 2015, primarily related to the Faiveley Transport acquisition and $14.9 million of debt refinancing costs. Refer to Note 8 of the "Notes to Condensed Consolidated Financial Statements" for additional information on debt.
Other expense, net Other expense, net, decreased $2.3 million to $3.0 million for 2016, compared to 2015 primarily due to foreign exchange adjustments.  
Income taxes The effective income tax rate was 24.1% and 31.9% in 2016 and 2015, respectively. The decrease in the effective rate is primarily the result of an enacted tax rate change which reduces the corporate income tax rate in France and a higher earnings mix in lower tax rate jurisdictions, partially offset by 2016 transaction charges related to the acquisition of Faiveley Transport that are not deductible.






27


2015 COMPARED TO 2014
The following table summarizes the results of operations for the period:
 
 
For the year ended December 31,
 
 
 
 
 
 
Percent
In thousands
 
2015
 
2014
 
Change
Freight Segment
 
$
2,054,715

 
$
1,731,477

 
18.7
 %
Transit Segment
 
1,253,283

 
1,312,977

 
(4.5
)%
Net sales
 
3,307,998

 
3,044,454

 
8.7
 %
Income from operations
 
607,567

 
527,109

 
15.3
 %
Net income attributable to Wabtec shareholders
 
$
398,628

 
$
351,680

 
13.3
 %

The following table shows the major components of the change in sales in 2015 from 2014:
 
 
Freight
 
Transit
 
 
In thousands
 
Segment
 
Segment
 
Total
2014 Net Sales
 
$
1,731,477

 
$
1,312,977

 
$
3,044,454

Acquisition
 
145,529

 
117,291

 
262,820

Change in Sales by Product Line:
 
 
 
 
 
 
Specialty Products & Electronics
 
145,680

 
10,776

 
156,456

Remanufacturing, Overhaul & Build
 
80,443

 
(53,883
)
 
26,560

Brake Products
 
18,905

 
(23,094
)
 
(4,189
)
Other Transit Products
 

 
(10,408
)
 
(10,408
)
Other
 
(17,764
)
 
1,894

 
(15,870
)
Foreign exchange
 
(49,555
)
 
(102,270
)
 
(151,825
)
2015 Net Sales
 
$
2,054,715

 
$
1,253,283

 
$
3,307,998


Net sales increased by $263.5 million to $3,308.0 million in 2015 from $3,044.5 million in 2014. The increase is primarily due to a $156.5 million increase for Specialty Products and Electronics sales from higher demand for freight original equipment products and aftermarket electronic and PTC electronic products. Acquisitions increased sales $262.8 million and unfavorable foreign exchange decreased sales $151.8 million.

Freight Segment sales increased by $323.2 million, or 18.7%, primarily due to a $145.7 million increase for Specialty Products and Electronics sales from higher demand for freight original equipment rail products, PTC electronics, and aftermarket rail products and $80.4 million for Remanufacturing, Overhaul and Build products due to higher demand for aftermarket locomotive builds. Acquisitions increased sales by $145.5 million and unfavorable foreign exchange decreased sales by $49.6 million.

Transit Segment sales decreased by $59.7 million, or 4.5%, due to a decrease of $102.3 million related to unfavorable foreign exchange, a $53.9 million decrease in Remanufacturing, Overhaul and Build from lower demand for original transit locomotive because a multi-year project was substantially completed in 2014, and a $23.1 million decrease for Brake Products from lower demand for braking products in Europe and braking systems in North America. These decreases were partially offset by $117.3 million in sales from acquisitions.

28


Cost of Sales and Gross Profit The following table shows the major components of cost of sales for the periods indicated:
 
Twelve Months Ended December 31, 2015
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
854,728

 
41.6
%
 
$
531,152

 
42.4
%
 
$
1,385,880

 
41.9
%
Labor
219,495

 
10.7
%
 
156,357

 
12.5
%
 
375,852

 
11.4
%
Overhead
282,132

 
13.7
%
 
182,501

 
14.6
%
 
464,633

 
14.0
%
Other/Warranty
5,926

 
0.3
%
 
27,891

 
2.2
%
 
33,817

 
1.0
%
Total cost of sales
$
1,362,281

 
66.3
%
 
$
897,901

 
71.7
%
 
$
2,260,182

 
68.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31, 2014
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
730,395

 
42.2
%
 
$
586,571

 
44.7
%
 
$
1,316,966

 
43.3
%
Labor
178,309

 
10.3
%
 
165,260

 
12.6
%
 
343,569

 
11.3
%
Overhead
228,147

 
13.2
%
 
196,481

 
15.0
%
 
424,628

 
13.9
%
Other/Warranty
1,691

 
0.1
%
 
21,618

 
1.6
%
 
23,309

 
0.8
%
Total cost of sales
$
1,138,542

 
65.8
%
 
$
969,930

 
73.9
%
 
$
2,108,472

 
69.3
%

Cost of sales increased by $151.7 million to $2,260.2 million in 2015 compared to $2,108.5 million in the same period of 2014. For the twelve months ended 2015, cost of sales as a percentage of sales was 68.3% compared to 69.3% in the same period of 2014. The decrease of cost of sales as a percentage of sales is due to lower material costs primarily due to lower original equipment transit locomotive sales and higher specialty product and electronics sales.

Freight Segment cost of sales increased 0.5% as a percentage of sales to 66.3% in 2015 compared to 65.8% for the same period of 2014. The increase is primarily related to slightly lower margins related to recent acquisitions, and cost overruns on a project nearing completion, partially offset by higher Specialty Products and Electronics sales.
    
Transit Segment cost of sales decreased 2.2% as a percentage of sales to 71.7% in 2015 compared to 73.9% for the same period in 2014. The decrease in 2015 is primarily due to lower material costs associated with lower original equipment locomotive sales and lower original equipment and aftermarket brake product sales which carry higher raw material content, partially offset by additional costs incurred on the closeout of several projects.

Included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense for the twelve months ended December 31, 2015 increased $1.3 million to $35.4 million from $34.1 million in 2014 primarily due to increased sales.

Gross profit for the twelve months ended December 31, 2015 increased $111.8 million to $1,047.8 million from $936.0 million for the twelve months ended December 2014 and the gross profit margin increased 100 basis points to 31.7% from 30.7% at December 31, 2014. These increases are due to higher sales volume, favorable sales mix, and the reasons discussed above.
Operating expenses The following table shows our operating expenses:
 
 
For the year ended December 31,
 
 
 
 
Percentage of
 
 
 
Percentage of
In thousands
 
2015
 
Sales
 
2014
 
Sales
Selling, general and administrative expenses
 
$
347,373

 
10.7
%
 
$
324,539

 
10.7
%
Engineering expenses
 
71,213

 
2.0
%
 
61,886

 
2.0
%
Amortization expense
 
21,663

 
0.7
%
 
22,448

 
0.7
%
Total operating expenses
 
$
440,249

 
13.4
%
 
$
408,873

 
13.4
%

Total operating expenses were 13.4% for both the years ending December 31 2015, and 2014. Selling, general, and administrative expenses increased $22.8 million, or 7.0%, primarily due to $24.7 million of expenses from acquisitions partially offset by lower incentive and non-cash compensation expense and the effects of foreign exchange. Engineering

29


expense increased by $9.3 million, or 15.1%, primarily due to $3.5 million of expenses from acquisitions. The remainder of the increase can be attributed to the company concentrating resources on new product development, specifically in the electronics market. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense decreased $0.8 million due to lower amortization of intangibles associated with acquisitions.
The following table shows our segment operating expenses:
 
 
For the year ended December 31,
 
 
 
 
 
 
Percent
In thousands
 
2015
 
2014
 
Change
Freight Segment
 
$
208,773

 
$
188,929

 
10.5
%
Transit Segment
 
205,415

 
196,776

 
28.5
%
Corporate
 
26,061

 
23,168

 
49.9
%
Total operating expenses
 
$
440,249

 
$
408,873

 
25.1
%

Freight Segment operating expenses increased $19.8 million, or 10.5%, in 2015 but decreased 70 basis points to 10.2% of sales. The increase primarily relates to $8.4 million of incremental operating expenses from acquisitions and $7.9 million for engineering attributable to the Company concentrating resources on new product development.

Transit Segment operating expenses increased $8.6 million, or 4.4%, in 2015 and increased 140 basis points to 16.4% of sales. The increase is primarily related to $19.8 million of incremental operating expenses related to acquisitions. This increase is partially offset by lower operating expenses due to foreign exchange.

Corporate non-allocated operating expenses increased $2.9 million in 2015 primarily due to higher administrative and transaction costs associated with growing our business.

Income from operations Income from operations totaled $607.6 million or 18.4% of sales in 2015 compared to $527.1 million or 17.3% of sales in 2014. Income from operations increased due to higher sales volume, partially offset by increased operating expenses discussed above.

Interest expense, net Overall interest expense, net, decreased $0.7 million in 2015 due to lower average debt balances.

Other expense, net Other expense, net, increased $3.6 million to $5.3 million for 2015, compared to 2014 primarily due to foreign exchange adjustments.

Income taxes The effective income tax rate was 31.9% and 30.8% in 2015 and 2014, respectively. The increase in the effective rate is primarily the result of a higher earnings mix in higher tax rate jurisdictions.

Net income Net income for 2015 increased 13.3% or $46.9 million to $398.6 million, compared to 2014. The increase in net income is due to the reasons discussed above.    

30


Liquidity and Capital Resources
Liquidity is provided by operating cash flow and borrowings under the Company’s unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:
 
 
For the year ended
December 31,
In thousands
 
2016
 
2015
 
2014
Cash provided by (used for):
 
 
 
 
 
 
Operating activities
 
$
449,307

 
$
448,260

 
$
472,385

Investing activities
 
(775,065
)
 
(380,136
)
 
(347,678
)
Financing activities:
 
 
 
 
 
 
Proceeds from debt
 
1,875,000

 
787,400

 
563,400

Payments of debt
 
(1,102,748
)
 
(612,680
)
 
(493,819
)
Stock repurchase
 
(212,176
)
 
(387,787
)
 
(26,757
)
Cash dividends
 
(32,430
)
 
(26,963
)
 
(19,246
)
Other
 
(3,452
)
 
(8,884
)
 
1,928

 
Operating activities. Cash provided by operations in 2016 was $449.3 million compared with $448.3 million in 2015. In comparison to 2015, cash provided by operations in 2016 increased slightly due to positive changes in other assets and liabilities and net working capital, mostly offset by lower operating results (net income plus net-add back for non-cash transactions in earnings). Other assets and liabilities changed favorably by $49.5 million primarily due to an increase in other accrued liabilities. The favorable changes in working capital primarily related to a $57.7 million favorable change in accounts payable principally due to the timing of payments, $25.2 million favorable change in inventory driven by successful efforts to control the amount of inventory on hand. These favorable changes in working capital were partially offset by an unfavorable change in accrued income taxes of $33.5 million driven by lower income taxes owed at the end of 2016 given the decrease in pretax income.

Cash provided by operations in 2015 was $448.3 million compared with $472.4 million in 2014. In comparison to 2014, cash provided by operations in 2015 decreased due to unfavorable working capital requirements partially offset by higher operating results. The unfavorable working capital requirements primarily related to an unfavorable change in accounts payable and accrued liabilities of $132.0 million and $86.9 million, respectively. These cash outflows were partially offset by a favorable change in accounts receivable of $38.9 million driven by collections due to achieving certain project related milestones and a favorable change in inventory of $84.2 million due to successful efforts to control the amount of inventory on hand.
Investing activities. In 2016, 2015 and 2014, cash used in investing activities was $775.1 million, $380.1 million and $347.7 million, respectively. The major components of the cash outflow in 2016 were planned additions to property, plant, and equipment of $50.2 million for continued investments in our facilities and manufacturing processes and $183.1 million in net cash paid for acquisitions.  This compares to $49.4 million for property, plant, and equipment and $129.6 million in net cash paid for acquisitions in 2015.  Additionally, $744.7 million of cash was deposited into escrow to finance the pending tender offer for the purchase the noncontrolling interest of Faiveley Transport, which was partially offset by $202.9 million of cash deposited into escrow to finance the purchase of a controlling interest in Faiveley Transport in 2015 which was released from escrow in 2016. Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions.
Financing activities. In 2016, cash provided by financing activities was $524.2 million, which included $1,125.0 million in proceeds from the revolving credit facility debt, $770.0 million of repayments of debt on the revolving credit facility, $332.7 million in repayments of other debt, which was primarily driven by repayments of debt acquired from the purchase of Faiveley Transport, $750.0 million of new borrowings on the 2026 Senior Notes, $32.4 million of dividend payments and $212.2 million of Wabtec stock repurchases. In 2015, cash used for financing activities was $248.9 million, which included $787.4 million in proceeds from the revolving credit facility debt, $612.7 million of repayments of debt on the revolving credit facility, $27.0 million of dividend payments and $387.8 million of Wabtec stock repurchases.




31


The following table shows outstanding indebtedness at December 31, 2016 and 2015.
 
 
December 31,
In thousands
 
2016
 
2015
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $2,526 and $0
 
$
747,474

 
$

4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,690 and $1,947
 
248,310

 
248,053

Revolving Credit Facility and Term Loan, net of unamortized
debt issuance costs of $3,850 and $1,542
 
796,150

 
443,458

Schuldschein Loan
 
98,671

 

Other Borrowings
 
1,153

 

Capital Leases
 
1,018

 
727

Total
 
1,892,776

 
692,238

Less - current portion
 
129,809

 
433

Long-term portion
 
$
1,762,967

 
$
691,805


Cash balances at December 31, 2016 and 2015 were $398.5 million and $226.2 million, respectively.
3.45% Senior Notes Due November 2026
In October 2016, the Company issued $750.0 million of Senior Notes due in 2026 (the “2016 Notes”).  The 2016 Notes were issued at 99.965% of face value.  Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year.  The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport’s indebtedness, and for general corporate purposes.  The principal balance is due in full at maturity.  The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2016 Notes.  
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (the “2013 Notes”).  The 2013 Notes were issued at 99.879% of face value.  Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year.  The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.  The principal balance is due in full at maturity.  The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.  
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2016 Refinancing Credit Agreement
On June 22, 2016, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2016 Refinancing Credit Agreement” provides the Company with a $1.2 billion, 5 year revolving credit facility and a $400.0 million delayed draw term loan (the “Term Loan”). The Company incurred approximately $3.3 million of deferred financing cost related to the 2016 Refinancing Credit Agreement. The facility expires on June 22, 2021. The 2016 Refinancing

32


Credit Agreement borrowings bear variable interest rates indexed as described below. At December 31, 2016, the Company had available bank borrowing capacity, net of $20.2 million of letters of credit, of approximately $783.7 million, subject to certain financial covenant restrictions.
The Term Loan was drawn on November 25, 2016. The Company incurred a 10 basis point commitment fee from June 22, 2016 until the initial draw on November 25, 2016.
Under the 2016 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 0.50% 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 EBITDA ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 175 basis points.
At December 31, 2016, the weighted average interest rate on the Company’s variable rate debt was 2.51%.  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 was November 7, 2016. The impact of the interest rate swap agreement converted 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 was fixed at 1.415% plus the Alternate Rate margin. 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.  As for these agreements, the Company is exposed to credit risk in the event of nonperformance by the counterparties.  However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount.  The counterparties are large financial institutions with excellent credit ratings and history of performance.  The Company currently believes the risk of nonperformance is negligible.
The 2016 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 2016 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 EBITDA ratio of 3.25. The Company is in compliance with the restrictions and covenants of the 2016 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing our operating activities.
2013 Refinancing Credit Agreement
On December 19, 2013, the Company amended its then existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provided the Company with an $800.0 million, 5-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The 2013 Refinancing Credit Agreement was replaced by the 2016 Refinancing Credit Agreement.
Under the 2013 Refinancing Credit Agreement, the Company could have elected a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies,  an interest rate based on the LIBOR of interest, or other rates appropriate for such currencies  (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.5% 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 the quoted rates specific to the applicable currency, plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to EBITDA ratios.





33


Schuldschein Loan, Due 2016

In conjunction with the acquisition of Faiveley Transport, Wabtec acquired $137.2 million of a Schuldshein private placement loan which was originally issued by Faiveley Transport on March 5, 2014 in Germany, in which approximately 20 international investors participated. This loan is denominated in euros. Subsequent to the acquisition of Faiveley Transport, the Company repaid $38.5 million of the outstanding Schuldshein loan. The remaining balance of $98.7 million as of December 31, 2016 is divided into three tranches with original maturities of 5, 7 and 10 years bearing fixed or variable rates. A summary of the tranches as of December 31, 2016 are as follows:

Maturity
 
Rate
 
Amounts
March 2019
 
Euribor 6 months + 1.30%
 
$
15,831

March 2019
 
2.32%
 
2,630

December 2020
 
3.04%
 
21,110

March 2021
 
Euribor 6 months + 1.65%
 
23,220

March 2021
 
3.07%
 
14,770

March 2024
 
4.00%
 
21,110

Total
 
 
 
$
98,671


The Schuldschein loan is senior unsecured and ranks pari passu with all and future senior debt and senior to all existing and future subordinated indebtedness of Faiveley Transport. The Schuldschein loan agreement contains covenants and undertakings which limit among other things, the following: factoring of receivables, the incurrence of indebtedness, sale of assets, change of control, mergers and consolidations and the incurrence of liens. At December 31, 2016, Faiveley Transport is in compliance with the undertakings and covenants contained in the loan agreement.

In January 2017, the Company notified investors of its intention to repay the variable tranches of the private placement in full totaling $39.1 million on March 6, 2017 and its desire to repay the fixed tranches of the private placement in full. As of February 28, 2017, the Company has repaid $18.7 million of the private placement fixed tranches outstanding at December 31, 2016.




34


Contractual Obligations and Off-Balance Sheet Arrangements
The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and have certain contingent commitments such as debt guarantees. The Company has grouped these contractual obligations and off-balance sheet arrangements into operating activities, financing activities, and investing activities in the same manner as they are classified in the Statement of Consolidated Cash Flows to provide a better understanding of the nature of the obligations and arrangements and to provide a basis for comparison to historical information. The table below provides a summary of contractual obligations and off-balance sheet arrangements as of December 31, 2016:
 
 
 
 
 
Less than
 
1 - 3
 
3 - 5
 
More than
In thousands
 
Total
 
1 year
 
years
 
years
 
5 years
Operating activities:
 
 
 
 
 
 
 
 
 
 
Purchase obligations (1)
 
$
70,028

 
$
3,230

 
$
49,931

 
$
4,016

 
$
12,851

Operating leases (2)
 
138,581

 
26,372

 
41,457

 
29,691

 
41,061

Pension benefit payments (3)
 
158,655

 
14,920

 
29,222

 
31,248

 
83,265

Postretirement benefit payments (4)
 
11,537

 
1,269

 
2,463

 
2,384

 
5,421

Financing activities:
 
 
 
 
 
 
 
 
 
 
Interest payments (5)
 
374,688

 
47,231

 
91,369

 
91,262

 
144,826

Long-term debt (6)
 
1,892,776

 
129,809

 
274

 
766,206

 
996,487

Dividends to shareholders (7)
 
38,170

 
38,170

 

 

 

Investing activities:
 
 
 
 
 
 
 
 
 
 
Capital projects (8)
 
110,655

 
110,655

 

 

 

Other:
 
 
 
 
 
 
 
 
 
 
Standby letters of credit (9)
 
53,915

 
42,996

 
7,179

 
390

 
3,350

Total
 
$
2,849,005

 
$
414,652

 
$
221,895

 
$
925,197

 
$
1,287,261

 
(1)
Purchase obligations represent non-cancelable contractual obligations at December 31, 2016.  In addition, the Company had $243.2 million of open purchase orders for which the related goods or services had not been received.  Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
(2)
Future minimum payments for operating leases are disclosed by year in Note 14 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
(3)
Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted. Pension benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets and rate of compensation increases. The Company expects to contribute about $7.1 million to pension plan investments in 2016. See further disclosure in Note 9 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
(4)
Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted. Postretirement payments are based on actuarial estimates using current assumptions for discount rates and health care costs. See further disclosure in Note 9 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
(5)
Interest payments are payable May and November of each year at 3.45% of $750 million Senior Notes due in 2026. Interest payments are payable February and August of each year at 4.375% of $250 million Senior Notes due in 2023. Interest payments for the Revolving Credit Facility and Capital Leases are based on contractual terms and the Company’s current interest rates.
(6)
Scheduled principal repayments of outstanding loan balances are disclosed in Note 8 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
(7)
Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $38.2 million.
(8)
The annual capital expenditure budget is subject to approval by the Board of Directors. The 2016 budget amount was approved at the January 2017 Board of Directors meeting.
(9)
The $53.9 million of standby letters of credit is comprised of $53.1 million in outstanding letters of credit for performance and bid bond purposes and $0.8 million in interest, which expire in various dates through 2050. Amounts include interest payments based on contractual terms and the Company’s current interest rate.

35


The above table does not reflect uncertain tax positions of $8.4 million, the timing of which are uncertain except for $3.3 million that may become payable during 2017. Refer to Note 10 of the “Notes to Consolidated Financial Statements” for additional information on uncertain tax positions.
Obligations for operating activities. The Company has entered into $70.0 million of material long-term non-cancelable materials and supply purchase obligations. Operating leases represent multi-year obligations for rental of facilities and equipment. Estimated pension funding and post-retirement benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets, rate of compensation increases and health care cost trend rates. Benefits paid for pension obligations were $13.3 million and $11.7 million in 2016 and 2015, respectively. Benefits paid for post-retirement plans were $0.9 million and $1.6 million in 2016 and in 2015, respectively.
Obligations for financing activities. Cash requirements for financing activities consist primarily of long-term debt repayments, interest payments and dividend payments to shareholders. The Company has historically paid quarterly dividends to shareholders, subject to quarterly approval by our Board of Directors, currently at a rate of approximately $38.2 million annually.
The Company arranges for performance bonds to be issued by third party insurance companies to support certain long term customer contracts. At December 31, 2016 initial value of performance bonds issued on the Company’s behalf is about $210.3 million.
Obligations for investing activities. Including the recent acquisition of Faiveley Transport, the Company expects to spend approximately $100 million to $120 million a year for capital expenditures, primarily related to facility expansion efficiency and modernization, health and safety, and environmental control.
Forward Looking Statements
We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:
Economic and industry conditions
prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia, and South Africa;
decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;
reliance on major original equipment manufacturer customers;
original equipment manufacturers’ program delays;
demand for services in the freight and passenger rail industry;
demand for our products and services;
orders either being delayed, canceled, not returning to historical levels, or reduced or any combination of the foregoing;
consolidations in the rail industry;
continued outsourcing by our customers;
industry demand for faster and more efficient braking equipment;
fluctuations in interest rates and foreign currency exchange rates; or
availability of credit;
Operating factors
supply disruptions;
technical difficulties;
changes in operating conditions and costs;
increases in raw material costs;
successful introduction of new products;
performance under material long-term contracts;
labor relations;

36


the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities or intellectual property claims;
completion and integration of acquisitions, including the acquisition of Faiveley Transport; or
the development and use of new technology;
Competitive factors
the actions of competitors;
Political/governmental factors
political stability in relevant areas of the world;
future regulation/deregulation of our customers and/or the rail industry;
levels of governmental funding on transit projects, including for some of our customers;
political developments and laws and regulations, including those related to Positive Train Control; or
federal and state income tax legislation; and
Transaction or commercial factors
the outcome of negotiations with partners, governments, suppliers, customers or others.
Statements in this 10-K apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Critical Accounting Estimates
The preparation of the financial statements in accordance with generally accepted accounting principles requires Management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include the accounting for allowance for doubtful accounts, inventories, the testing of goodwill and other intangibles for impairment, warranty reserves, pensions and other postretirement benefits, stock based compensation and tax matters. Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, Management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company. A discussion of the judgments and uncertainties associated with accounting for derivatives and environmental matters can be found in Notes 2 and 17, respectively, in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.
A summary of the Company’s significant accounting policies is included in Note 2 in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report and is incorporated by reference herein. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.
Accounts Receivable and Allowance for Doubtful Accounts:
Description The Company provides an allowance for doubtful accounts to cover anticipated losses on uncollectible accounts receivable.
Judgments and Uncertainties  The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.
Effect if Actual Results Differ From Assumptions  If our estimates regarding the collectability of troubled accounts, and/or our actual losses within our receivable portfolio exceed our historical experience, we may be exposed to the expense of increasing our allowance for doubtful accounts.


37



Inventories:
Description Inventories are stated at the lower of cost or market and are reviewed to ensure that an adequate provision is recognized for excess, slow moving and obsolete inventories.
Judgments and Uncertainties Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The Company compares inventory components to prior year sales history and current backlog and anticipated future requirements. To the extent that inventory parts exceed estimated usage and demand, a reserve is recognized to reduce the carrying value of inventory. Also, specific reserves are established for known inventory obsolescence.
Effect if Actual Results Differ From Assumptions If the market value of our products were to decrease due to changing market conditions, the Company could be at risk of incurring write-downs to adjust inventory value to a market value lower than stated cost. If our estimates regarding sales and backlog requirements are inaccurate, we may be exposed to the expense of increasing our reserves for slow moving and obsolete inventory.
Goodwill and Indefinite-Lived Intangibles:
Description Goodwill and indefinite-lived intangibles are required to be tested for impairment at least annually. The Company performs its annual impairment test during the fourth quarter and more frequently when indicators of impairment are present. The Company reviews goodwill for impairment at the reporting unit level. The evaluation of impairment involves comparing the current fair value of the business to the recorded value (including goodwill).
Judgments and Uncertainties A number of significant assumptions and estimates are involved in the application of the impairment test, including the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Wabtec specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such amount.
Effect if Actual Results Differ From Assumptions Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations. For example, based on the quantitative analysis performed as of October 1, 2016, a decline in the terminal growth rate greater than 50 basis points would decrease fair market value by $477 million, or an increase in the weighted-average cost of capital by 100 basis points would result in a decrease in fair market value by $1,191 million. Even with such changes the fair value of the reporting units would be greater than their net book values, necessitating no Step 2 calculations. See Note 2 in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for additional discussion regarding impairment testing.
Warranty Reserves:
Description The Company provides warranty reserves to cover expected costs from repairing or replacing products with durability, quality or workmanship issues occurring during established warranty periods.
Judgments and Uncertainties In general, reserves are provided for as a percentage of sales, based on historical experience. In addition, specific reserves are established for known warranty issues and their estimable losses.
Effect if Actual Results Differ From Assumptions If actual results are not consistent with the assumptions and judgments used to calculate our warranty liability, the Company may be at risk of realizing material gains or losses.
Accounting for Pensions and Postretirement Benefits:
Description The Company provides pension and postretirement benefits for its employees.  These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality).

38


Judgments and Uncertainties Significant judgments and estimates are used in determining the liabilities and expenses for pensions and other postretirement benefits. The rate used to discount future estimated liabilities is determined considering the rates available at year-end on debt instruments that could be used to settle the obligations of the plan. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations and is generally applied to a five-year average market value of assets.  The differences between actual and expected asset returns are recognized in expense using the normal amortization of gains and losses per ASC 715.
Effect if Actual Results Differ From Assumptions If assumptions used in determining the pension and other postretirement benefits change significantly, these costs can fluctuate materially from period to period. The key assumptions in determining the pension and other postretirement expense and obligation include the discount rate, expected return on assets and health care cost trend rate. For example, a 1% decrease or increase in the discount rate used in determining the pension and postretirement expense would increase expense $1.8 million or decrease expense $1.4 million, respectively. A 1% decrease or increase in the discount rate used in determining the pension and postretirement obligation would increase the obligation $63.4 million or decrease the obligation $49.8 million, respectively. A 1% decrease or increase in the expected return on assets used in determining the pension expense would increase or decrease expense $2.7 million. If the actual asset values at December 31, 2016 had been 1% lower, the amortization of losses in the following year would decrease $0.2 million. A 1% decrease or increase in the health care cost trend rate used in determining the postretirement expense would increase or decrease the expense less than $0.1 million. A 1% decrease or increase in the health care cost trend rate used in determining the postretirement obligation would increase or decrease the obligation $0.3 million.
Stock-based Compensation:
Description The Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. The program is structured as a rolling three-year plan; each year starts a new three-year performance cycle with the most recently completed cycle being 2014-2016. No incentive stock units will vest for performance below the three-year cumulative threshold.  The Company utilizes an economic profit measure for this performance goal.  Economic profit is a measure of the extent to which the Company produces financial results in excess of its cost of capital.  Based on the Company’s achievement of the threshold and three-year cumulative performance, the stock units vested can range from 0% to 200% of the shares granted.
Judgments and Uncertainties Significant judgments and estimates are used in determining the estimated three-year performance, which is then used to estimate the total shares expected to vest over the three year vesting cycle and corresponding expense based on the grant date fair value of the award.  When determining the estimated three-year performance, the Company utilizes a combination of historical actual results, budgeted results and forecasts.  In the initial grant year of a performance cycle, the Company estimates the three-year performance at 100%.  As actual performance results for a cycle begin to accumulate and the Company completes its budgeting and forecasting cycles the performance estimates are updated.  These judgments and estimates are reviewed and updated on a quarterly basis.
Effect if Actual Results Differ From Assumptions If assumptions used in determining the estimated three-year performance change significantly, stock-based compensation expense related to the unvested incentive stock awards can fluctuate materially from period to period.  For example a 10% decrease or increase in the estimated vesting percentage for incentive stock awards would decrease or increase stock-based compensation expense by approximately $0.8 million and $0.8 million, respectively.
Income Taxes:
Description Wabtec records an estimated liability or benefit for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates in accordance with ASC 740-10 Accounting for Income Taxes and Accounting for Uncertainty in Income Taxes.
Judgments and Uncertainties The estimate of our tax obligations are uncertain because Management must use judgment to estimate the exposures associated with our various filing positions, as well as realization of our deferred tax assets. ASC 740-10 establishes a recognition and measurement threshold to determine the amount of tax benefit that should be recognized related to uncertain tax positions.
Effect if Actual Results Differ From Assumptions Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs

39


from the recorded amount. A deferred tax valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Revenue Recognition:
Description Revenue is recognized in accordance with ASC-605 “Revenue Recognition.” 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. 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.
Judgments and Uncertainties Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined. Contract accounting involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated profit margin percentages. For each contract with revenue recognized using the percentage of completion method, the amount reported as revenues is determined by calculating cost incurred to date as a percentage of the total expected contract costs to determine the percentage of total contract revenue to be recognized in the current period. Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total contract sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, and price adjustment clauses (such as inflation or index-based clauses). Total contract cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. For long-term contracts, revenues and cost estimates are reviewed and revised quarterly at a minimum and adjustments are reflected in the accounting period as such amounts are determined. Pre-production costs are recognized over the expected life of the contract usually based on the Company’s progress toward the estimated number of units expected to be delivered under the production or supply contract.
Effect if Actual Results Differ From Assumptions Should market conditions and customer demands dictate changes to our standard shipping terms, the Company may be impacted by longer than typical revenue recognition cycles. The development of expected contract costs and contract profit margin percentages involves procedures and personnel in all areas that provide financial or production information on the status of contracts. Due to the significance of judgment in the estimation process, it is likely that materially different revenue amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods. If the combined profit margin for all contracts recognized on the percentage of completion method during 2016 had been estimated to be higher or lower by 1%, it would have increased or decreased revenue and gross profit for the year by approximately $12.1 million. A few of our contracts are expected to be completed in a loss position. Provisions are made currently for estimated losses on uncompleted contracts. A charge to expense for unrecognized portions of pre-production costs could be realized if the Company’s estimate of the number of units to be delivered changes or the underlying contract is cancelled.
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. The Company’s variable rate debt represents 36% and 42% of total long-term debt at December 31, 2016 and 2015, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at December 31, 2016 would increase or decrease interest expense by about $6.8 million.
To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swap agreements which effectively converted a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for additional information regarding interest rate risk.
Foreign Currency Exchange Risk
The Company is subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the year ended December 31, 2016, approximately 46%

40


of Wabtec’s net sales were in the United States, 11% in the United Kingdom, 7% in Canada, 6% in Mexico, 4% in China, 3% in Australia, 3% in Germany, 2% in Brazil, and 18% in other international locations. (See Note 20 of “Notes in Consolidated Financial Statements” included in Part IV, Item 15 of this report). To reduce the impact of changes in currency exchange rates, the Company has periodically entered into foreign currency forward contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for more information regarding foreign currency exchange risk.
Our market risk exposure is not substantially different from our exposure at December 31, 2015.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are set forth in Item 15 of Part IV hereof.
Item  9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with our independent registered public accountants.
Item  9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2016. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal finance officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting. Management’s annual report on internal control over financial reporting and the attestation report of the registered public accounting firm are included in Part IV, Item 15 of this report.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting appears on page 48 and is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Ernst & Young LLP's attestation report on internal control over financial reporting appears on page 51 and is incorporated herein by reference.

Item  9B.
OTHER INFORMATION

41



None.

42


PART III
Items 10 through 14.
In accordance with the provisions of General Instruction G(3) to Form 10-K, the information required by Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accounting Fees and Services) is incorporated herein by reference from the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 10, 2017, except for the Equity Compensation Plan Information required by Item 12, which is set forth in the table below. The definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2016. Information relating to the executive officers of the Company is set forth in Part I.
Wabtec has adopted a Code of Ethics for Senior Officers which is applicable to our executive officers. As described in Item 1 of this report the Code of Ethics for Senior Officers is posted on our website at www.wabtec.com. In the event that we make any amendments to or waivers from this code, we will disclose the amendment or waiver and the reasons for such on our website.
This table provides aggregate information as of December 31, 2016 concerning equity awards under Wabtec’s compensation plans and arrangements.
 
 
(a)
Number of securities to
be issued upon exercise
of outstanding options,
 
(b)
Weighted-average
exercise price of
outstanding
options warrants
 
(c)
Number of securities
remaining available for
future issuance
under equity compensation
plans (excluding securities
Plan Category
 
warrants and rights
 
and rights
 
reflected in column (a))
Equity compensation plans approved by shareholders
 
1,098,823

 
$
35.39

 
2,469,849

Equity compensation plans not approved by shareholders
 

 

 

Total
 
1,098,823

 
$
35.39

 
2,469,849


43


PART IV
Item  15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements, financial statement schedules and exhibits listed below are filed as part of this annual report: