10-Q 1 wab-20180331x10q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 033-90866
____________________________________
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________
Delaware
25-1615902
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1001 Air Brake Avenue
Wilmerding, PA
15148
(Address of principal executive offices)
(Zip code)
412-825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if smaller reporting company)
Emerging growth company
¨

Smaller reporting company
¨

 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 26, 2018
Common Stock, $.01 par value per share
 
96,282,234 shares
 




WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
March 31, 2018
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
PART I—FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

2


PART I—FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
In thousands, except shares and par value
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
249,886

 
$
233,401

Accounts receivable
885,917

 
800,619

Unbilled accounts receivable
382,780

 
366,168

Inventories
829,276

 
742,634

Other current assets
117,955

 
122,291

Total current assets
2,465,814

 
2,265,113

Property, plant and equipment
1,027,944

 
1,026,046

Accumulated depreciation
(454,543
)
 
(452,074
)
Property, plant and equipment, net
573,401

 
573,972

Other Assets
 
 
 
Goodwill
2,528,819

 
2,460,103

Other intangibles, net
1,231,727

 
1,204,432

Other noncurrent assets
76,020

 
76,360

Total other assets
3,836,566

 
3,740,895

Total Assets
$
6,875,781

 
$
6,579,980

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
608,316

 
$
552,525

Customer deposits
378,158

 
369,716

Accrued compensation
170,511

 
164,210

Accrued warranty
140,620

 
137,542

Current portion of long-term debt
49,557

 
47,225

Other accrued liabilities
300,886

 
302,112

Total current liabilities
1,648,048

 
1,573,330

Long-term debt
1,871,076

 
1,823,303

Accrued postretirement and pension benefits
105,556

 
103,734

Deferred income taxes
182,780

 
175,902

Accrued warranty
16,951

 
15,521

Other long-term liabilities
63,141

 
59,658

Total Liabilities
3,887,552

 
3,751,448

Commitments and contingencies (Note 15)

 

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

 

Common stock, $0.01 par value; 200,000,000 shares authorized:
 
 
 
132,349,534 shares issued and 96,227,365 and 96,034,352 outstanding
 
 
 
at March 31, 2018 and December 31, 2017, respectively
1,323

 
1,323

Additional paid-in capital
907,801

 
906,616

Treasury stock, at cost, 36,122,169 and 36,315,182 shares,
 
 
 
at March 31, 2018 and December 31, 2017, respectively
(824,157
)
 
(827,379
)
Retained earnings
2,850,135

 
2,773,300

Accumulated other comprehensive income (loss)
34,016

 
(44,992
)
Total Westinghouse Air Brake Technologies Corporation shareholders' equity
2,969,118

 
2,808,868

Noncontrolling interest
19,111

 
19,664

Total Equity
2,988,229

 
2,828,532

Total Liabilities and Equity
$
6,875,781

 
$
6,579,980

The accompanying notes are an integral part of these statements.

3


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Unaudited
 
Three Months Ended
March 31,
In thousands, except per share data
2018
 
2017
 
 
 
 
Net sales
$
1,056,177

 
$
916,034

Cost of sales
(745,296
)
 
(646,327
)
Gross profit
310,881

 
269,707

Selling, general and administrative expenses
(147,201
)
 
(122,687
)
Engineering expenses
(22,049
)
 
(23,464
)
Amortization expense
(10,352
)
 
(9,044
)
Total operating expenses
(179,602
)
 
(155,195
)
Income from operations
131,279

 
114,512

Other income and expenses
 
 
 
Interest expense, net
(20,284
)
 
(19,858
)
Other income (expense), net
2,586

 
4,811

Income from operations before income taxes
113,581

 
99,465

Income tax expense
(26,124
)
 
(27,461
)
Net income
87,457

 
72,004

Less: Net loss attributable to noncontrolling interest
909

 
1,885

  Net income attributable to Wabtec shareholders
$
88,366

 
$
73,889

 
 
 
 
Earnings Per Common Share
 
 
 
Basic
 
 
 
Net income attributable to Wabtec shareholders
$
0.92

 
$
0.77

Diluted
 
 
 
Net income attributable to Wabtec shareholders
$
0.92

 
$
0.77

 
 
 
 
Weighted average shares outstanding
 
 
 
Basic
95,810

 
95,243

Diluted
96,371

 
95,991

 
The accompanying notes are an integral part of these statements.

4


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Unaudited
 
 
Three Months Ended
March 31,
 
In thousands
2018
 
2017
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
88,366

 
$
73,889

 
Foreign currency translation gain
77,967

 
49,395

 
Unrealized gain on derivative contracts
2,066

 
1,693

 
Unrealized loss on pension benefit plans and post-retirement benefit plans
(430
)
 
(3,074
)
 
Other comprehensive income before tax
79,603

 
48,014

 
Income tax expense related to components of
 
 
 
 
other comprehensive income
(595
)
 
(61
)
 
Other comprehensive income (loss), net of tax
79,008

 
47,953

 
Comprehensive income attributable to Wabtec shareholders
$
167,374

 
$
121,842

 
 
The accompanying notes are an integral part of these statements.


5


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
Three Months Ended
March 31,
In thousands, except per share data
2018
 
2017
 
 
 
 
Operating Activities
 
 
 
Net income
$
87,457

 
$
72,004

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
27,854

 
25,229

Stock-based compensation expense
5,696

 
5,692

(Gain) loss on disposal of property, plant and equipment
(24
)
 
153

Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable and unbilled accounts receivable
(66,347
)
 
(96,481
)
Inventories
(50,755
)
 
(32,145
)
Accounts payable
32,096

 
(24,690
)
Accrued income taxes
14,004

 
2,188

Accrued liabilities and customer deposits
(1,529
)
 
85,303

Other assets and liabilities
(24,252
)
 
(63,349
)
Net cash provided by (used for) operating activities
24,200

 
(26,096
)
Investing Activities
 
 
 
Purchase of property, plant and equipment
(17,466
)
 
(19,327
)
Proceeds from disposal of property, plant and equipment
7,898

 
284

Acquisitions of businesses, net of cash acquired
(34,297
)
 
(800,081
)
Net cash used for investing activities
(43,865
)
 
(819,124
)
Financing Activities
 
 
 
Proceeds from debt
306,610

 
458,273

Payments of debt
(266,347
)
 
(482,591
)
Proceeds from exercise of stock options and other benefit plans
2,873

 
1,259

Payment of income tax withholding on share-based compensation
(2,937
)
 
(6,842
)
Cash dividends ($0.12 and $0.10 per share for the three months
 
 
 
ended March 31, 2018 and 2017, respectively)
(11,531
)
 
(9,572
)
Net cash provided by (used for) financing activities
28,668

 
(39,473
)
Effect of changes in currency exchange rates
7,482

 
21,640

Increase (Decrease) in cash
16,485

 
(863,053
)
Cash, cash equivalents and restricted cash, beginning of period
233,401

 
1,143,232

Cash and cash equivalents, end of period
$
249,886

 
$
280,179

 
The accompanying notes are an integral part of these statements.
 


6


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018 (UNAUDITED)

1. BUSINESS
Westinghouse Air Brake Technologies Corporation (“Wabtec” or the "Company") is one of the world’s largest providers of value-added, technology-based equipment, systems and services for the global passenger transit and freight rail industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world 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 31 countries and our products can be found in more than 100 countries throughout the world. In the first three months of 2018, approximately 65% of the Company’s revenues came from customers outside the United States.

2. ACCOUNTING POLICIES
Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.
The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2017. The December 31, 2017 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Revenue Recognition On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.
Approximately 75% of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms. This approach is consistent with our revenue recognition approach in prior years.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. This approach is consistent with our revenue recognition approach in prior years. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract 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.
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” on the consolidated balance sheet. The Company has elected to use the practical expedient and not consider unbilled amounts anticipated to be paid within one year as significant financing components.


7


Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. Contract liabilities are classified as current liabilities under the caption “Customer Deposits” on the consolidated balance sheet. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract and revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were $86.1 million and $94.0 million at March 31, 2018 and December 31, 2017, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the consolidated balance sheet.
Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined quarterly estimate-at-completion process where management reviews the progress of long term-projects. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any quarterly adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration that the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.
Pre-Production Costs Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $17.9 million and $20.2 million at March 31, 2018 and December 31, 2017, respectively.
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Refer to Recently Adopted Accounting Pronouncements below.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Financial Derivatives and Hedging Activities As part of its risk management strategy, the Company utilizes derivative financial instruments to manage its exposure due to changes in foreign currencies and interest rates. For further information regarding financial derivatives and hedging activities, refer to Footnotes 13 and 14.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings.
Noncontrolling Interests In accordance with ASC 810 "Consolidation", the Company has classified noncontrolling interests as equity on the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017. Net income attributable to noncontrolling interests was a $0.9 million loss and a $1.9 million loss, for the three months ended March 31, 2018, and 2017, respectively. Other comprehensive income attributable to noncontrolling interests for the three months ended March 31, 2018 and 2017 was not material.

8


Recently Issued Accounting Pronouncements In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the the Tax Act related to items remaining in AOCI are recognized or at the beginning of the period of adoption. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this update eliminate the requirement to perform Step 2 of the goodwill impairment test. Instead, an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value up to the carrying amount of the goodwill. The ASU is effective for public companies in the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The impact of adopting this guidance could result in a change in the overall conclusion as to whether or not a reporting unit's goodwill is impaired and the amount of an impairment charge recognized in the event a reporting units' carrying value exceeds its fair value. All of the Company's reporting units had fair values that were substantially greater than the carrying value as of the Company's last quantitative goodwill impairment test, which was performed as of October 1, 2017.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. The ASU is effective for public companies in the fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
Recently Adopted Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contract with Customers.”  The ASU supersedes most of the previous revenue recognition requirements in U.S. GAAP and requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.  The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2017. The Company adopted this accounting standard update using the modified retrospective method. The impact of adopting the new standard was not material to the consolidated statement of income or the consolidated balance sheet.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in this update require the service cost component of net benefit costs to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside income from operations. This update also allows only the service cost component to be eligible for capitalization when applicable. The ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2017. In accordance with this update, the Company began recognizing the interest expense component of net periodic benefit cost in interest expense in the income statement and the expected return on plan assets, net amortization/deferrals, and curtailments in other income (expense), net in the income statement. This update has been applied retrospectively for presentation of the service cost component and other components of net benefit costs in accordance with the ASU and the impact of adoption resulted in increases of $0.3 million, $2.2 million and $2.5 million to selling, general, and administrative expense, interest expense, net and other income, net, respectively, in the income statement for the three months ended March 31, 2017. Also, the capitalization of the service cost component of net benefit cost has been adopted prospectively in accordance with the ASU.

9


In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash". The amendments in this update require a statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2017. This update has been applied retrospectively and as a result restricted cash related to the acquisition of Faiveley is included in the change in cash for the three months ended March 31, 2017.
Other Comprehensive Income (Loss) Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from nonowner sources.
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2018 are as follows:
In thousands
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2017
$
5,063

 
$
4,015

 
$
(54,070
)
 
$
(44,992
)
Other comprehensive income (loss) before reclassifications
77,967

 
920

 
(847
)
 
78,040

Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
448

 
520

 
968

Net current period other comprehensive income (loss)
77,967

 
1,368

 
(327
)
 
79,008

Balance at March 31, 2018
$
83,030

 
$
5,383

 
$
(54,397
)
 
$
34,016

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2018 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Income
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(375
)
 
Other income (expense), net
Amortization of net loss
1,093

 
Other income (expense), net
 
718

 
Other income (expense), net
 
(198
)
 
Income tax expense
 
$
520

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
679

 
Interest expense, net
 
(231
)
 
Income tax expense
 
$
448

 
Net income

10


The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2017 are as follows:
 
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2016
$
(321,033
)
 
$
(2,957
)
 
$
(55,615
)
 
$
(379,605
)
Other comprehensive income (loss) before reclassifications
49,395

 
903

 
(3,363
)
 
46,935

Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
426

 
592

 
1,018

Net current period other comprehensive income (loss)
49,395

 
1,329

 
(2,771
)
 
47,953

Balance at March 31, 2017
$
(271,638
)
 
$
(1,628
)
 
$
(58,386
)
 
$
(331,652
)

    
Reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2017 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Operations
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(422
)
 
Other income (expense), net
Amortization of net loss
1,240

 
Other income (expense), net
 
818

 
Other income (expense), net
 
(226
)
 
Income tax expense
 
$
592

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
589

 
Interest expense, net
 
(163
)
 
Income tax expense
 
$
426

 
Net income
    

3. ACQUISITIONS
Faiveley Transport
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport S.A. (“Faiveley Transport”) under the terms of a Share Purchase Agreement (“Share Purchase 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 value-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 was structured as a step acquisition as follows:
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest under the terms of the Share Purchase Agreement, which directed the Company to pay €100 per share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately 49% of the outstanding voting shares of Faiveley Transport. Upon completion of the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to elect to receive €100 per share in cash or 1.1538

11


shares of Wabtec common stock per share of Faiveley Transport. The common stock portion of the consideration was subject to a cap on issuance of Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport.
The purchase price paid for 100% ownership of Faiveley Transport was $1,507.0 million. The $744.7 million included as deposits in escrow on the consolidated balance sheet at December 31, 2016 was cash designated for use as consideration for the tender offers.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The December 31, 2016 consolidated balance sheet includes the assets and liabilities of Faiveley Transport, which have been measured at fair value. The fair value of the noncontrolling interest was preliminarily determined using the market price of Faiveley Transport’s publicly traded common stock multiplied by the number of publicly traded common shares outstanding at the acquisition date and is considered Level 1. The acquisition of the noncontrolling interest during the three months ended March 31, 2017 resulted in a $8.9 million increase to additional paid-in capital on the consolidated balance sheet which represents the difference in consideration paid to acquire the noncontrolling interest and the carrying value of noncontrolling interest at acquisition.

















12


The following table summarizes the final fair values of the Faiveley Transport assets acquired and liabilities assumed:
In thousands
 
 
Assets acquired
 
 
Cash and cash equivalents
 
$
178,318

Accounts receivable
 
439,631

Inventories
 
205,649

Other current assets
 
70,930

Property, plant, and equipment
 
148,746

Goodwill
 
1,262,350

Trade names
 
346,328

Customer relationships
 
233,529

Patents
 
1,201

Other noncurrent assets
 
184,564

Total assets acquired
 
3,071,246

Liabilities assumed
 
 
Current liabilities
 
819,493

Debt
 
409,899

Other noncurrent liabilities
 
335,039

Total liabilities assumed
 
1,564,431

Net assets acquired
 
$
1,506,815


During the twelve months ended December 31, 2017, the estimated fair values for customer relationships and current
liabilities were adjusted by $21.8 million and $65.3 million, respectively, for changes to initial estimates based on information that existed at the date of acquisition. Additionally, the estimated fair values for accounts receivable and current liabilities were adjusted by $2.8 million and $36.2 million, respectively, to correct errors in the preliminary estimated fair values of the Faiveley Transport assets acquired and liabilities assumed. Other noncurrent assets were adjusted by $30.0 million to record the deferred tax impact of these adjustments. As a result of these adjustments and other immaterial adjustments related to changes to initial estimates based on information that existed at the date of acquisition, goodwill increased by $74.1 million. Accounts receivable and current liabilities were adjusted by $64.3 million to correct an error in the preliminary estimated fair values of Faiveley Transport assets and liabilities assumed related to a factoring arrangement with recourse.
Substantially all of the accounts receivable acquired are expected to be collectible. Included in current liabilities is $25.9 million of accrued compensation for acquired share-based stock plans that are obligated to be settled in cash. Contingent liabilities assumed as part of the transaction were not material. These contingent liabilities are related to environmental, legal and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits, including synergies and assembled workforce, the Company expects to achieve as a result of the acquisition. Purchased goodwill is not deductible for tax purposes. The goodwill allocated to the Freight segment is $72.0 million and the goodwill allocated to the Transit segment is $1,190.4 million.
Other Acquisitions
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment:
On December 4, 2017, the Company acquired Melett Limited ("Melett"), a leader in the design, manufacture, and supply of high-quality turbochargers and replacement parts to the turbocharger aftermarket, for a purchase price of approximately $74.0 million, net of cash acquired, resulting in preliminary goodwill of $28.8 million, none of which will be deductible for tax purposes.
On April 5, 2017, the Company acquired Thermal Transfer Corporation ("TTC"), a leading provider of heat transfer solutions for industrial applications, for a purchase price of approximately $32.5 million, net of cash acquired, resulting in preliminary goodwill of $14.1 million, all of which will be deductible for tax purposes.

13


On March 13, 2017, the Company acquired Aero Transportation Products ("ATP"), a manufacturer of engineered covering systems for hopper freight cars, for a purchase price of approximately $65.3 million, net of cash acquired, resulting in goodwill of $29.0 million, all of which will be deductible for tax purposes.
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment:
On March 22, 2018, the Company acquired Annax GmbH ("Annax"), a leading supplier of public address and passenger information systems for transit vehicles, for a purchase price of approximately $28.7 million, net of cash acquired, resulting in preliminary goodwill of $14.5 million, none of which will be deductible for tax purposes.
On October 2, 2017, the Company acquired AM General Contract ("AM General"), a manufacturer of safety systems, mainly for transit rail cars, for a purchase price of approximately $10.4 million, net of cash acquired, resulting in preliminary goodwill of $12.9 million, none of which will be deductible for tax purposes.
The acquisitions listed above include escrow deposits of $36.4 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition for Annax, Melett, AM General, and TTC. For the ATP acquisition, the following table summarizes the final fair value of the assets acquired and liabilities assumed at the date of acquisition.
 
Annax
 
Melett
 
AM General
 
TTC
 
ATP
In thousands
March 22,
2018
 
December 4,
2017
 
October 2,
2017
 
April 5,
2017
 
March 13,
2017
Current assets
$
34,037

 
$
35,258

 
$
6,610

 
$
3,744

 
$
11,666

Property, plant & equipment
674

 
5,917

 
4,140

 
5,413

 
5,354

Goodwill
14,507

 
28,801

 
12,944

 
14,095

 
29,034

Other intangible assets
23,998

 
30,479

 
12,097

 
12,300

 
25,000

Total assets acquired
73,216

 
100,455

 
35,791

 
35,552

 
71,054

Total liabilities assumed
(44,549
)
 
(26,499
)
 
(25,375
)
 
(3,041
)
 
(5,800
)
Net assets acquired
$
28,667

 
$
73,956

 
$
10,416

 
$
32,511

 
$
65,254

The total goodwill and other intangible assets for acquisitions listed in the tables above was $203.3 million, of which $99.4 million and $103.9 million was related to goodwill and other intangible assets, respectively. Of the allocation of $103.9 million of total acquired other intangible assets, $31.9 million was assigned to trade names and $67.6 million was assigned to customer relationships. The trade names were determined to have indefinite useful lives, while the customer relationships’ average useful lives are 20 years.
The Company also made smaller acquisitions not listed above which are individually and collectively immaterial.
The following unaudited pro forma consolidated financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2017:
In thousands
Three Months Ended
March 31, 2018
 
Three Months Ended
March 31, 2017
Net sales
$
1,069,602

 
$
954,268

Gross profit
312,817

 
280,966

Net income attributable to Wabtec shareholders
88,870

 
77,725

Diluted earnings per share
 
 
 
As Reported
$
0.92

 
$
0.77

Pro forma
$
0.92

 
$
0.81


14


    
4. INVENTORIES
The components of inventory, net of reserves, were:
In thousands
March 31,
2018
 
December 31,
2017
Raw materials
$
427,623

 
$
378,481

Work-in-progress
182,370

 
167,390

Finished goods
219,283

 
196,763

Total inventories
$
829,276

 
$
742,634



5. INTANGIBLES
The change in the carrying amount of goodwill by segment for the three months ended March 31, 2018 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
Balance at December 31, 2017
$
718,958

 
$
1,741,145

 
$
2,460,103

Additions
9,938

 
14,482

 
24,420

Foreign currency impact
1,402

 
42,894

 
44,296

Balance at March 31, 2018
$
730,298

 
$
1,798,521

 
$
2,528,819

As of March 31, 2018 and December 31, 2017, the Company’s trade names had a net carrying amount of $629.1 million and $603.4 million, respectively, and the Company believes these intangibles have indefinite lives.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
In thousands
March 31,
2018
 
December 31,
2017
Patents, non-compete and other intangibles, net of accumulated
 
 
 
amortization of $43,122 and $43,021
$
17,651

 
$
17,554

Customer relationships, net of accumulated amortization
 
 
 
of $137,308 and $126,824
584,968

 
583,459

Total
$
602,619

 
$
601,013

The weighted average remaining useful life of patents, customer relationships and other intangibles were 10 years, 17 years and 15 years, respectively. Amortization expense for intangible assets was $10.4 million for the three months ended March 31, 2018, and $9.0 million for the three months ended March 31, 2017, respectively.

Amortization expense for the five succeeding years is estimated to be as follows:

15


Remainder of 2018
$
31,031

2019
39,094

2020
36,829

2021
36,059

2022
35,771


6. CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract, advanced customer payments that are in excess of revenue recognized, and provisions for estimated losses from uncompleted contracts.
The change in the carrying amount of contract assets and contract liabilities for the three months ended March 31, 2018 is as follows:
In thousands
 
Contract Assets
Balance at beginning of year
 
$
366,168

Recognized in current year
 
49,414

Reclassified to accounts receivable
 
(39,375
)
Foreign currency impact
 
6,573

Balance at March 31, 2018
 
$
382,780

 
 
 
In thousands
 
Contract Liabilities
Balance at beginning of year
 
$
463,704

Recognized in current year
 
23,488

Amounts in beginning balance reclassified to revenue
 
(29,297
)
Current year amounts reclassified to revenue
 
(1,028
)
Foreign currency impact
 
7,424

Balance at March 31, 2018
 
$
464,291


7. LONG-TERM DEBT
Long-term debt consisted of the following:
In thousands
March 31,
2018
 
December 31,
2017
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $2,279 and $2,345
$
747,721

 
$
747,655

4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,369 and $1,433
248,631

 
248,567

Revolving Credit Facility, net of unamortized
debt issuance costs of $2,122 and $2,451
900,509

 
853,124

Schuldschein Loan
12,321

 
11,998

Other Borrowings
10,565

 
6,860

Capital Leases
886

 
2,324

Total
1,920,633

 
1,870,528

Less - current portion
49,557

 
47,225

Long-term portion
$
1,871,076

 
$
1,823,303


16


Wabtec's acquisition of the controlling stake of Faiveley Transport triggered the early repayment of a syndicated loan and the mandatory offer to investors to repay the U.S. and Schuldschein private placements. Both the syndicated loan and U.S. private placements were repaid in full in December 2016.
3.45% Senior Notes Due November 2026
On November 3, 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 $2.7 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 and restated its existing revolving credit facility with a consortium of commercial banks. The “2016 Refinancing Credit Agreement” provides the Company with a $1.2 billion, five years 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 costs related to the 2016 Refinancing Credit Agreement. The facility expires on June 22, 2021. The 2016 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At March 31, 2018, the Company had available bank borrowing capacity, net of $34.8 million of letters of credit, of approximately $622.5 million, subject to certain financial covenant restrictions.
The Term Loan was initially drawn on November 25, 2016. The Company incurred a 10 basis point commitment fee from June 22, 2016 until the initial draw.
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 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 175 basis points.
At March 31, 2018, the weighted average interest rate on the Company’s variable rate debt was 3.21%.  On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The

17


effective date of the interest rate swap agreement was 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 was 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 its operating activities.
Schuldschein Loan, Due 2024
In conjunction with the acquisition of Faiveley Transport, Wabtec acquired $137.2 million of a Schuldschein 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 $125.8 million of the outstanding Schuldshein loan. The remaining balance of $12.3 million as of March 31, 2018 matures on March 5, 2024 and bears a fixed rate of 4.00%.
The Schuldschein loan is senior unsecured and ranks pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The Schuldshein 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 incurrence of liens. At March 31, 2018, the Company is in compliance with the undertakings and covenants contained in the loan agreement.



18


8. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.
The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.
 
U.S.
 
International
 
Three Months Ended March 31,
 
Three Months Ended March 31,
In thousands, except percentages
2018
 
2017
 
2018
 
2017
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
87

 
$
86

 
$
691

 
$
614

Interest cost
333

 
356

 
1,834

 
1,677

Expected return on plan assets
(445
)
 
(433
)
 
(3,466
)
 
(2,910
)
Net amortization/deferrals
243

 
248

 
554

 
685

Net periodic benefit cost (credit)
$
218

 
$
257

 
$
(387
)
 
$
66

Assumptions
 
 
 
 
 
 
 
Discount Rate
3.56
%
 
3.95
%
 
2.40
%
 
2.51
%
Expected long-term rate of return
5.15
%
 
4.95
%
 
5.10
%
 
4.93
%
Rate of compensation increase
3.00
%
 
3.00
%
 
2.60
%
 
2.54
%

The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $7.3 million and $0.0 million to the international and U.S. plans, respectively, during 2018.
Post Retirement Benefit Plans
In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.
The Company uses a December 31 measurement date for all post retirement plans.
The following tables provide information regarding the Company’s postretirement benefit plans summarized by U.S. and international components.
 
U.S.
 
International
 
Three Months Ended March 31,
 
Three Months Ended March 31,
In thousands, except percentages
2018
 
2017
 
2018
 
2017
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
8

 
$
7

Interest cost
81

 
88

 
26

 
24

Net amortization/deferrals
(76
)
 
(73
)
 
(4
)
 
(7
)
Net periodic benefit cost
$
6

 
$
16

 
$
30

 
$
24


Assumptions
 
 
 
 
 
 
 
Discount Rate
3.43
%
 
3.76
%
 
3.21
%
 
3.46
%

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9. STOCK-BASED COMPENSATION
As of March 31, 2018, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027 and provides a maximum of 3,800,000 shares for grants or awards, plus any shares which remain available under the 2000 Plan. The amendment and restatement of the 2011 Plan was approved by stockholders of Wabtec on May 10, 2017. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).
Stock-based compensation expense was $5.7 million and $5.7 million for the three months ended March 31, 2018 and 2017, respectively. Included in stock-based compensation expense for the three months ended March 31, 2018 is $0.4 million of expense related to stock options, $0.7 million related to restricted stock, $1.5 million related to restricted stock units, $2.7 million related to incentive stock units and $0.4 million related to units issued for Directors’ fees. At March 31, 2018, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled $46.2 million.
Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four-year vesting period and expire 10 years from the date of grant.
The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the three months ended March 31, 2018:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic value
(in thousands)
Outstanding at December 31, 2017
983,512

 
$
40.62

 
4.0
 
$
40,137

Granted
62,020

 
71.79

 
 
 
596

Exercised
(154,418
)
 
18.32

 
 
 
9,741

Canceled
(12,866
)
 
67.61

 
 
 
117

Outstanding at March 31, 2018
878,248

 
46.34

 
4.7
 
30,791

Exercisable at March 31, 2018
711,207

 
39.62

 
4.1
 
29,714

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
Three Months Ended
March 31,
 
2018
 
2017
Dividend yield
0.33
%
 
0.23
%
Risk-free interest rate
2.70
%
 
2.17
%
Stock price volatility
23.9
%
 
23.4
%
Expected life (years)
5.0

 
5.0

The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.
Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006, the Company adopted a restricted stock program. As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over four years from the date of grant. Under the Directors Plan, restricted stock units vest one year from the date of grant.
In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three-year period then ended, the

20


incentive stock units can vest, with underlying shares of common stock being awarded in an amount ranging from 0% to 200% of the amount of initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of March 31, 2018, the Company estimates that it will achieve 73%, 90% and 100% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2018, 2019, and 2020, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.
Compensation expense for the non-vested restricted stock and incentive stock units is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.
The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock units activity for the 2011 Plan and the 2000 Plan with related information for the three months ended March 31, 2018:
 
Restricted
Stock
and Units
 
Incentive
Stock
Units
 
Weighted
Average Grant
Date Fair
Value
Outstanding at December 31, 2017
399,000

 
327,333

 
$
78.76

Granted
188,570

 
172,400

 
71.79

Vested
(104,405
)
 
(93,312
)
 
81.61

Adjustment for incentive stock awards expected to vest

 
26,056

 
77.72

Canceled
(10,367
)
 
(13,600
)
 
76.92

Outstanding at March 31, 2018
472,798

 
418,877

 


10. INCOME TAXES
The Company is responsible for filing consolidated U.S., foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"), a reduction of the U.S. federal corporate tax rate from 35% to 21%, repeals the Domestic Manufacturing Deduction, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, new provisions designed to tax global intangible low-taxed income ("GILTI"), tax certain deductible base erosion payments called base erosion and anti-abuse tax (“BEAT”), and new interest expense limitation provisions.
In relation to the initial analysis of the impact of the all tax law changes at December 31, 2017, the Company recorded a net tax expense of $4.3 million. This includes a provisional expense for the U.S tax reform bill of $55.0 million, as well as a net benefit for the revaluation of deferred tax assets and liabilities of $50.7 million.
The Company has not completed its accounting for the income tax effects of the Tax Act. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SEC Staff Accounting Bulletin No. 118. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.
The Company's accounting for the following impacted areas of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, has recorded provisional amounts as follows:
Revaluation of deferred tax assets and liabilities:    The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company has evaluated these changes and has recorded a provisional benefit to net deferred taxes of $24.6 million at December 31, 2017. The Company is still

21


completing its calculation of the impact of these changes on its deferred tax balances. No adjustment to this provision was made in the period ending March 31, 2018.
Transition Tax on unrepatriated foreign earnings:    The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and has recorded a provisional Transition Tax expense of $51.8 million at December 31, 2017. The Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax to complete its calculation of E&P as well as the final determination of non-U.S. income taxes paid. No adjustment to this provision was made in the period ending March 31, 2018.
Global intangible low taxed income: The Tax Act created a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has made the election to treat taxes due on future inclusions related to GILTI as current period expense. The Company was able to make reasonable estimates to calculate a provision that is included in the current period expense. The Company will continue to evaluate and update this provision and the application of ASC 740.
The overall effective tax rate was 23.0% and 27.6% for the three months ended March 31, 2018 and 2017.
As of March 31, 2018 and December 31, 2017, the liability for income taxes associated with uncertain tax positions was $6.9 million, of which $4.4 million, if recognized, would favorably affect the Company’s effective tax rate.
The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2018, the total accrued interest and penalties are $0.8 million and $0.1 million, respectively. As of December 31, 2017, the total accrued interest and penalties were $0.7 million and $0.1 million, respectively.
At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately $5.2 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.  With limited exceptions, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2014.

11. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:
 
Three Months Ended
March 31,
In thousands, except per share data
2018
 
2017
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
88,366

 
$
73,889

Less: dividends declared - common shares
   and non-vested restricted stock
(11,531
)
 
(9,572
)
Undistributed earnings
76,835

 
64,317

Percentage allocated to common shareholders (1)
99.7
%
 
99.7
%
 
76,604

 
64,124

Add: dividends declared - common shares
11,497

 
9,542

Numerator for basic and diluted earnings per
   common share
$
88,101

 
$
73,666

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
95,810

 
95,243

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
561

 
748

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
96,371

 
95,991

Net income attributable to Wabtec
      shareholders per common share
 
 
 
Basic
$
0.92

 
$
0.77

Diluted
$
0.92

 
$
0.77

(1) Basic weighted-average common shares outstanding
95,810

 
95,243

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
96,091

 
95,544

Percentage allocated to common shareholders
99.7
%
 
99.7
%

The Company’s non-vested restricted stock contains rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share. The calculation of earnings per share for common stock shown above excludes the income attributable to the non-vested restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator.

12. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
In thousands
2018
 
2017
Balance at beginning of year
$
153,063

 
$
138,992

Warranty expense
11,677

 
5,760

Acquisitions
1,975

 
62

Warranty claim payments
(11,282
)
 
(8,224
)
Foreign currency impact/other
2,138

 
1,076

Balance at March 31
$
157,571

 
$
137,666



22


13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Foreign Currency Hedging The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gain and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. The contracts are scheduled to mature within two years. For the three months ended March 31, 2018 and March 31, 2017, the amounts reclassified into income were not material.
Other Activities The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized gain related to these contracts was $0.2 million for the three months ended March 31, 2018. These contracts are scheduled to mature within one year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of March 31, 2018.
In millions
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
811.2

 
$
433.9

 
$
1,245.1

 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
Other current assets
 
$
2.2

 
$

 
$
2.2

Other current liabilities
 

 
(0.7
)
 
(0.7
)
Total
 
$
2.2

 
$
(0.7
)
 
$
1.5

The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2017.
In millions
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
805.1

 
$
379.7

 
$
1,184.8

 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
Other current assets
 
$
3.5

 
$
2.1

 
$
5.6

Other current liabilities
 

 

 

Total
 
$
3.5

 
$
2.1

 
$
5.6

Interest Rate Hedging The Company uses interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of debt obligations are recognized in current period earnings. Refer to footnote 14 for further information on interest rate swaps.
As of March 31, 2018, the Company has recorded a current liability of $0.5 million and an accumulated other comprehensive loss of $0.4 million, net of tax, related to these agreements.

14. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the

23


absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the liabilities carried at fair value measured on a recurring basis as of March 31, 2018, which are included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at March 31, 2018 Using
In thousands
Total Carrying
Value at
March 31,
2018
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest rate swap agreements
$
545

 
$

 
$
545

 
$

Total
$
545

 
$

 
$
545

 
$

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2017, which is included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at December 31, 2017 Using
In thousands
Total Carrying
Value at
December 31,
2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest rate swap agreements
$
1,163

 
$

 
$
1,163

 
$

Total
$
1,163

 
$

 
$
1,163

 
$

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at March 31, 2018 and December 31, 2017. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets.  Trusts are valued at the net asset value (“NAV”) as determined by their custodian.  NAV represent the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.  The 2013 and 2016 Notes are considered Level 2 based on the fair value valuation hierarchy.

24


The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
 
March 31, 2018
 
December 31, 2017
In thousands
Carry
Value
 
Fair
Value
 
Carry
Value
 
Fair
Value
Interest rate swap agreement
$
545

 
$
545

 
$
1,163

 
$
1,163

4.375% Senior Notes
248,631

 
254,750

 
248,567

 
262,033

3.45% Senior Notes
747,721

 
720,638

 
747,655

 
741,113

The fair value of the Company’s interest rate swap agreements and the 2013 and 2016 Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement.
15. COMMITMENTS AND CONTINGENCIES
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. Further information and detail on these claims is described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, in Note 19 therein, filed on February 26, 2018. During the first three months of 2018, there were no material changes to the information described in the Form 10-K.
From time to time, the Company is involved in litigation related to claims arising out of the Company's operations in the ordinary course of business, including claims based on product liability, contracts, intellectual property, or other causes of action. Further information and detail on any potentially material litigation is as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, in Note 19 therein, filed on February 26, 2018. Except as described below, there have been no material changes to the information described in the Form 10-K.

On April 21, 2016, Siemens Industry, Inc. filed a lawsuit against the Company in federal district court in Delaware alleging that the Company has infringed seven patents owned by Siemens, all of which relate to Positive Train Control technology. On November 2, 2016, Siemens amended its complaint to add six additional patents they also claim are infringed by the Company’s Positive Train Control Products. The Company has filed Answers, and asserted counterclaims, in response to Siemens’ complaints. The US Patent & Trademark Office has granted Inter-Parties Review proceedings on ten (10) of the patents asserted by Siemens to assess their validity; the hearings began in April 2018 and continue through November 2018. Additionally, Wabtec’s counterclaim alleging that Siemens has violated three (3) of Wabtec’s patents has been severed from the initial case and is now a separate case pending in federal district court in Delaware. Wabtec has filed a motion to obtain a preliminary injunction against Siemens in that case and a hearing is scheduled for July 3, 2018.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed; Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, Denver Transit alleged that total damages were $36.8 million through July 31, 2017, and are continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. Denver Transit has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC; Xorail has denied Denver Transit's assertions. Denver Transit has also notified RTD that Denver Transit considers the constant warning approval requirements imposed by FRA and/or PUC to be a change in law, for which neither Denver Transit nor its subcontractors (including Xorail) would be liable. Xorail has worked with Denver Transit to modify its system to meet the FRA's and PUC's previously undefined approval requirements. On September 28, 2017, the FRA granted a 5 year approval of the modified wireless crossing system as currently implemented. On March 28, 2018, the PUC granted its approval of the modified wireless crossing system as currently implemented, consistent with the approval previously granted by the FRA. Denver Transit is now able to begin certification of the crossings and will eliminate the use of flaggers as the crossings are certified; this process is expected to take several months. No formal claim has been filed by Denver Transit.
On April 3, 2018 the United States Department of Justice entered into a proposed consent decree resolving allegations that the Company and Knorr-Bremse AG had maintained unlawful agreements not to compete for each other’s employees.  The allegations also related to Faiveley Transport S.A. before it was acquired by the Company in November 2016.  The proposed

25


consent decree is pending review and approval by the U.S. District Court for the District of Columbia.  No monetary fines or penalties have been imposed on the Company.  The Company elected to settle this matter with the Department of Justice to avoid the cost and distraction of litigation. Several putative class action lawsuits have been filed naming the Company and Knorr as defendants in connection with the allegations contained in the proposed consent decree.  The lawsuits seek unspecified damages on behalf of employees of the Company (including Faiveley Transport) and Knorr allegedly caused by the defendants’ actions.  The litigation is in its very early stages.  The Company does not believe that it has diminished competition for talent in the marketplace and intends to contest these claims vigorously.
16. SEGMENT INFORMATION
Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:
Freight Segment primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.
Transit Segment 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, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment, and doors for buses and subways. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
Segment financial information for the three months ended March 31, 2018 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
379,554

 
$
676,623

 
$

 
$
1,056,177

Intersegment sales/(elimination)
12,002

 
3,889

 
(15,891
)
 

Total sales
$
391,556

 
$
680,512

 
$
(15,891
)
 
$
1,056,177

Income (loss) from operations
$
69,623

 
$
68,083

 
$
(6,427
)
 
$
131,279

Interest expense and other, net

 

 
(17,698
)
 
(17,698
)
Income (loss) from operations before income taxes
$
69,623

 
$
68,083

 
$
(24,125
)
 
$
113,581

Segment financial information for the three months ended March 31, 2017 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
347,946

 
$
568,088

 
$

 
$
916,034

Intersegment sales/(elimination)
9,087

 
5,686

 
(14,773
)
 

Total sales
$
357,033

 
$
573,774

 
$
(14,773
)
 
$
916,034

Income (loss) from operations
$
71,222

 
$
48,975

 
$
(5,685
)
 
$
114,512

Interest expense and other, net

 

 
(15,047
)
 
(15,047
)
Income (loss) from operations before income taxes
$
71,222

 
$
48,975

 
$
(20,732
)
 
$
99,465



26


Sales by product line are as follows:
 
Three Months Ended
March 31,
In thousands
2018
 
2017
Specialty Products & Electronics
$
386,548

 
$
315,067

Transit Products
274,265

 
258,419

Brake Products
215,618

 
180,459

Remanufacturing, Overhaul & Build
135,713

 
129,058

Other
44,033

 
33,031

Total sales
$
1,056,177

 
$
916,034



17. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's 2016 Notes, 2013 Notes, and Revolving Credit Facility and Term Loan are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.
Balance Sheet for March 31, 2018:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Cash and cash equivalents
$
12,708

 
$
2,090

 
$
235,088

 
$

 
$
249,886

Receivables, net
93,175

 
280,184

 
895,338

 

 
1,268,697

Inventories
124,032

 
149,409

 
555,835

 

 
829,276

Current assets - other
3,259

 
5,154

 
109,542

 

 
117,955

Total current assets
233,174

 
436,837

 
1,795,803

 

 
2,465,814

Property, plant and equipment, net
47,898

 
136,904

 
388,599

 

 
573,401

Goodwill
25,275

 
544,313

 
1,959,231

 

 
2,528,819

Investment in subsidiaries
6,702,613

 
2,599,111

 

 
(9,301,724
)
 

Other intangibles, net
30,245

 
248,356

 
953,126

 

 
1,231,727

Other long-term assets
17,165

 
295

 
58,560

 

 
76,020

Total assets
$
7,056,370

 
$
3,965,816

 
$
5,155,319

 
$
(9,301,724
)
 
$
6,875,781

Current liabilities
$
216,496

 
$
229,871

 
$
1,201,681

 
$

 
$
1,648,048

Inter-company
2,157,875

 
(2,045,578
)
 
(112,297
)
 

 

Long-term debt
1,659,730

 
10

 
211,336

 

 
1,871,076

Long-term liabilities - other
53,151

 
66,356

 
248,921

 

 
368,428

Total liabilities
4,087,252

 
(1,749,341
)
 
1,549,641

 

 
3,887,552

Shareholders' equity
2,969,118

 
5,716,834

 
3,584,890

 
(9,301,724
)
 
2,969,118

Non-controlling interest

 
(1,677
)
 
20,788

 

 
19,111

Total shareholders' equity
$
2,969,118

 
$
5,715,157

 
$
3,605,678

 
$
(9,301,724
)
 
$
2,988,229

Total Liabilities and Shareholders' Equity
$
7,056,370

 
$
3,965,816

 
$
5,155,319

 
$
(9,301,724
)
 
$
6,875,781

 





27


Balance Sheet for December 31, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Cash and cash equivalents
$
933

 
$
4,802

 
$
227,666

 
$

 
$
233,401

Receivables, net
77,046

 
237,360

 
852,381

 

 
1,166,787

Inventories
120,937

 
137,972

 
483,725

 

 
742,634

Current assets - other
1,142

 
4,507

 
116,642

 

 
122,291

Total current assets
200,058

 
384,641

 
1,680,414

 

 
2,265,113

Property, plant and equipment, net
52,532

 
136,382

 
385,058

 

 
573,972

Goodwill
25,274

 
546,527

 
1,888,302

 

 
2,460,103

Investment in subsidiaries
6,517,205

 
2,570,391

 

 
(9,087,596
)
 

Other intangibles, net
30,575

 
251,347

 
922,510

 

 
1,204,432

Other long-term assets
17,414

 
295

 
58,651

 

 
76,360

Total assets
$
6,843,058

 
$
3,889,583

 
$
4,934,935

 
$
(9,087,596
)
 
$
6,579,980

Current liabilities
$
196,827

 
$
217,176

 
$
1,159,327

 
$

 
$
1,573,330

Inter-company
2,121,546

 
(2,026,634
)
 
(94,912
)
 

 

Long-term debt
1,661,771

 
14

 
161,518

 

 
1,823,303

Long-term liabilities - other
54,046

 
67,824

 
232,945

 

 
354,815

Total liabilities
4,034,190

 
(1,741,620
)
 
1,458,878

 

 
3,751,448

Shareholders' equity
2,808,868

 
5,632,665

 
3,454,931

 
(9,087,596
)
 
2,808,868

Non-controlling interest

 
(1,462
)
 
21,126

 

 
19,664

Total shareholders' equity
$
2,808,868

 
$
5,631,203

 
$
3,476,057

 
$
(9,087,596
)
 
$
2,828,532

Total Liabilities and Shareholders' Equity
$
6,843,058

 
$
3,889,583

 
$
4,934,935

 
$
(9,087,596
)
 
$
6,579,980

    
Income Statement for the Three Months Ended March 31, 2018:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
161,301

 
$
301,706

 
$
641,663

 
$
(48,493
)
 
$
1,056,177

Cost of sales
(118,658
)
 
(179,090
)
 
(488,233
)
 
40,685

 
(745,296
)
Gross profit
42,643

 
122,616

 
153,430

 
(7,808
)
 
310,881

Total operating expenses
(35,627
)
 
(37,327
)
 
(106,648
)
 

 
(179,602
)
Income from operations
7,016

 
85,289

 
46,782

 
(7,808
)
 
131,279

Interest (expense) income, net
(20,394
)
 
2,301

 
(2,191
)
 

 
(20,284
)
Other income (expense), net
8,729

 
(2,469
)
 
(3,674
)
 

 
2,586

Equity earnings
106,698

 
28,720

 

 
(135,418
)
 

Pretax income
102,049

 
113,841

 
40,917

 
(143,226
)
 
113,581

Income tax (expense) benefit
(13,682
)
 
1,194

 
(13,636
)
 

 
(26,124
)
Net income
88,367

 
115,035

 
27,281

 
(143,226
)
 
87,457

Less: Net income attributable to noncontrolling interest

 
215

 
694

 

 
909

Net income attributable to Wabtec shareholders
$
88,367

 
$
115,250

 
$
27,975

 
$
(143,226
)
 
$
88,366

 
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Wabtec shareholders
$
88,649

 
$
115,250

 
$
106,701

 
$
(143,226
)
 
$
167,374

    


28


Income Statement for the Three Months Ended March 31, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
144,544

 
$
258,712

 
$
544,388

 
$
(31,610
)
 
$
916,034

Cost of sales
(98,950
)
 
(167,607
)
 
(403,966
)
 
24,196

 
(646,327
)
Gross profit
45,594

 
91,105

 
140,422

 
(7,414
)
 
269,707

Total operating expenses
(24,463
)
 
(29,871
)
 
(100,861
)
 

 
(155,195
)
Income from operations
21,131

 
61,234

 
39,561

 
(7,414
)
 
114,512

Interest (expense) income, net
(14,966
)
 
2,160

 
(7,052
)
 

 
(19,858
)
Other income (expense), net
13,266

 
(1,260
)
 
(7,195
)
 

 
4,811

Equity earnings
68,285

 
11,942

 

 
(80,227
)
 

Pretax income
87,716

 
74,076

 
25,314

 
(87,641
)
 
99,465

Income tax expense
(14,165
)
 
(141
)
 
(13,155
)
 

 
(27,461