10-Q 1 wab-20180630x10q.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 June 30, 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 July 25, 2018
Common Stock, $.01 par value per share
 
96,386,379
 




WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
June 30, 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
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
245,574

 
$
233,401

Accounts receivable
835,150

 
800,619

Unbilled accounts receivable
378,084

 
366,168

Inventories
863,793

 
742,634

Other current assets
124,286

 
122,291

Total current assets
2,446,887

 
2,265,113

Property, plant and equipment
1,009,198

 
1,026,046

Accumulated depreciation
(453,364
)
 
(452,074
)
Property, plant and equipment, net
555,834

 
573,972

Other Assets
 
 
 
Goodwill
2,428,591

 
2,460,103

Other intangibles, net
1,174,400

 
1,204,432

Other noncurrent assets
71,894

 
76,360

Total other assets
3,674,885

 
3,740,895

Total Assets
$
6,677,606

 
$
6,579,980

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
615,677

 
$
552,525

Customer deposits
390,126

 
369,716

Accrued compensation
163,580

 
164,210

Accrued warranty
137,064

 
137,542

Current portion of long-term debt
27,115

 
47,225

Other accrued liabilities
272,906

 
302,112

Total current liabilities
1,606,468

 
1,573,330

Long-term debt
1,857,806

 
1,823,303

Accrued postretirement and pension benefits
98,742

 
103,734

Deferred income taxes
155,611

 
175,902

Accrued warranty
16,778

 
15,521

Other long-term liabilities
67,573

 
59,658

Total Liabilities
3,802,978

 
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 96,386,379 and 96,034,352 outstanding
 
 
 
at June 30, 2018 and December 31, 2017, respectively
1,323

 
1,323

Additional paid-in capital
910,350

 
906,616

Treasury stock, at cost, 35,963,155 and 36,315,182 shares,
 
 
 
at June 30, 2018 and December 31, 2017, respectively
(821,178
)
 
(827,379
)
Retained earnings
2,922,986

 
2,773,300

Accumulated other comprehensive loss
(156,201
)
 
(44,992
)
Total Westinghouse Air Brake Technologies Corporation shareholders' equity
2,857,280

 
2,808,868

Noncontrolling interest
17,348

 
19,664

Total Equity
2,874,628

 
2,828,532

Total Liabilities and Equity
$
6,677,606

 
$
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
 
Unaudited
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In thousands, except per share data
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net sales
$
1,111,680

 
$
932,253

 
$
2,167,857

 
$
1,848,287

Cost of sales
(787,713
)
 
(658,290
)
 
(1,533,009
)
 
(1,304,617
)
Gross profit
323,967

 
273,963

 
634,848

 
543,670

Selling, general and administrative expenses
(171,157
)
 
(127,918
)
 
(318,358
)
 
(250,605
)
Engineering expenses
(19,388
)
 
(23,338
)
 
(41,437
)
 
(46,802
)
Amortization expense
(9,899
)
 
(9,350
)
 
(20,251
)
 
(18,394
)
Total operating expenses
(200,444
)
 
(160,606
)
 
(380,046
)
 
(315,801
)
Income from operations
123,523

 
113,357

 
254,802

 
227,869

Other income and expenses
 
 
 
 
 
 
 
Interest expense, net
(31,920
)
 
(17,564
)
 
(52,204
)
 
(37,422
)
Other income (expense), net
2,171

 
936

 
4,757

 
5,747

Income from operations before income taxes
93,774

 
96,729

 
207,355

 
196,194

Income tax expense
(10,503
)
 
(24,569
)
 
(36,627
)
 
(52,030
)
Net income
83,271

 
72,160

 
170,728

 
144,164

Less: Net loss (gain) attributable to noncontrolling interest
1,145

 
(135
)
 
2,054

 
1,750

Net income attributable to Wabtec shareholders
$
84,416

 
$
72,025

 
$
172,782

 
$
145,914

 
 
 
 
 
 
 
 
Earnings Per Common Share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.88

 
$
0.75

 
$
1.80

 
$
1.52

Diluted
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.87

 
$
0.75

 
$
1.79

 
$
1.52

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
95,992

 
95,641

 
95,867

 
95,370

Diluted
96,575

 
96,284

 
96,471

 
96,071

 
The accompanying notes are an integral part of these statements.

4


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Unaudited
 
Unaudited
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In thousands
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
84,416

 
$
72,025

 
$
172,782

 
$
145,914

Foreign currency translation (loss) gain
(192,778
)
 
145,684

 
(114,811
)
 
195,079

Unrealized (loss) gain on derivative contracts
(7,567
)
 
1,686

 
(5,501
)
 
3,379

Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans
10,665

 
30

 
10,235

 
(3,044
)
Other comprehensive (loss) income before tax
(189,680
)
 
147,400

 
(110,077
)
 
195,414

Income tax expense related to components of
 
 
 
 
 
 
 
other comprehensive income
(537
)
 
(300
)
 
(1,132
)
 
(361
)
Other comprehensive (loss) income, net of tax
(190,217
)
 
147,100

 
(111,209
)
 
195,053

Comprehensive (loss) income attributable to Wabtec shareholders
$
(105,801
)
 
$
219,125

 
$
61,573

 
$
340,967

 
The accompanying notes are an integral part of these statements.


5


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
Six Months Ended
June 30,
In thousands, except per share data
2018
 
2017
 
 
 
 
Operating Activities
 
 
 
Net income
$
170,728

 
$
144,164

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
53,227

 
51,051

Stock-based compensation expense
13,983

 
11,879

Loss on disposal of property, plant and equipment
1,353

 
525

Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable and unbilled accounts receivable
(59,979
)
 
(66,544
)
Inventories
(116,131
)
 
(48,406
)
Accounts payable
59,411

 
(75,761
)
Accrued income taxes
(202
)
 
(23,025
)
Accrued liabilities and customer deposits
27,545

 
86,937

Other assets and liabilities
(82,031
)
 
(94,523
)
Net cash provided by (used for) operating activities
67,904

 
(13,703
)
Investing Activities
 
 
 
Purchase of property, plant and equipment
(39,723
)
 
(38,425
)
Proceeds from disposal of property, plant and equipment
8,900

 
471

Acquisitions of businesses, net of cash acquired
(38,277
)
 
(846,675
)
Net cash used for investing activities
(69,100
)
 
(884,629
)
Financing Activities
 
 
 
Proceeds from debt
591,890

 
745,035

Payments of debt
(546,394
)
 
(680,145
)
Proceeds from exercise of stock options and other benefit plans
6,867

 
2,679

Payment of income tax withholding on share-based compensation
(6,503
)
 
(6,802
)
Cash dividends ($0.24 and $0.20 per share for the six months
 
 
 
ended June 30, 2018 and 2017, respectively)
(23,096
)
 
(19,177
)
Net cash provided by financing activities
22,764

 
41,590

Effect of changes in currency exchange rates
(9,395
)
 
42,032

Increase (Decrease) in cash
12,173

 
(814,710
)
Cash, cash equivalents and restricted cash, beginning of period
233,401

 
1,143,232

Cash and cash equivalents, end of period
$
245,574

 
$
328,522

 
The accompanying notes are an integral part of these statements.
 


6


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 31 countries and our products can be found in more than 100 countries throughout the world. In the first six months of 2018, approximately 66% 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 which is generally at the time of shipment in accordance with agreed upon delivery terms. The remaining revenues are earned over time. 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. These 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 $81.2 million and $94.0 million at June 30, 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 $18.7 million and $20.2 million at June 30, 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 14 and 15.
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 June 30, 2018 and December 31, 2017. Net income attributable to noncontrolling interests was a loss of $1.1 million and income of $0.1 million, for the three months ended June 30, 2018 and 2017, respectively. Net income attributable to noncontrolling interests was a loss of $2.1 million and $1.8 million,

8


for the six months ended June 30, 2018 and 2017, respectively. Other comprehensive income attributable to noncontrolling interests for the three and six months ended June 30, 2018 and 2017 was not material.
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 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. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
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 guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt the requirements of the new standard effective January 1, 2019. The guidance requires the use of a modified retrospective approach. The Company is currently evaluating its lease portfolio to assess the impact to the Consolidated Finance Statements. The Company is in the process of implementing processes and information technology tools to assist in its ongoing lease data collection and analysis, and evaluating its accounting policies and internal controls that would be impacted by the new guidance, to ensure readiness for adoption in the first quarter of 2019.
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

9


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 June 30, 2017. The impact of adoption resulted in increases of $0.7 million, $4.3 million and $5.0 million to selling, general, and administrative expense, interest expense, net and other income, net, respectively, in the income statement for the six months ended June 30, 2017. Also, the capitalization of the service cost component of net benefit cost has been adopted prospectively in accordance with the ASU.
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 Transport is included in the change in cash for the six months ended June 30, 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 six months ended June 30, 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
(114,811
)
 
(4,760
)
 
6,744

 
(112,827
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
579

 
1,039

 
1,618

Net current period other comprehensive income (loss)
(114,811
)
 
(4,181
)
 
7,783

 
(111,209
)
Balance at June 30, 2018
$
(109,748
)
 
$
(166
)
 
$
(46,287
)
 
$
(156,201
)
Reclassifications out of accumulated other comprehensive income (loss) for the three months ended June 30, 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 gain on derivative contracts
$
176

 
Interest expense, net
 
(42
)
 
Income tax expense
 
$
134

 
Net income

10


Reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 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
$
(751
)
 
Other income (expense), net
Amortization of net loss
2,186

 
Other income (expense), net
 
1,435

 
Other income (expense), net
 
(396
)
 
Income tax expense
 
$
1,039

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized gain on derivative contracts
$
855

 
Interest expense, net
 
(276
)
 
Income tax expense
 
$
579

 
Net income

The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended June 30, 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
195,079

 
1,978

 
(4,029
)
 
193,028

Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
843

 
1,184

 
2,027

Net current period other comprehensive income (loss)
195,079

 
2,821

 
(2,845
)
 
195,055

Balance at June 30, 2017
$
(125,954
)
 
$
(136
)
 
$
(58,460
)
 
$
(184,550
)



















    

11


Reclassifications out of accumulated other comprehensive loss for the three months ended June 30, 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 gain on derivative contracts
$
566

 
Interest expense, net
 
(149
)
 
Income tax expense
 
$
417

 
Net income
    
Reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 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
$
(844
)
 
Other income (expense), net
Amortization of net loss
2,480

 
Other income (expense), net
 
1,636

 
Other income (expense), net
 
(452
)
 
Income tax expense
 
$
1,184

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized gain on derivative contracts
$
1,155

 
Interest expense, net
 
(312
)
 
Income tax expense
 
$
843

 
Net income

3. PROPOSED MERGER WITH GE TRANSPORTATION
On May 20, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with General Electric Company (“GE”), Transportation Systems Holdings Inc. (“SpinCo”), which is a newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc. (“Merger Sub”), which is a newly formed wholly owned subsidiary of the Company. In addition, on May 20, 2018, GE, SpinCo, the Company and Wabtec US Rail Holdings, Inc. (“Direct Sale Purchaser”), entered into the Separation, Distribution and Sale Agreement (the “Separation Agreement”). Together, the Merger Agreement and the Separation Agreement provide for the combination of the Company and GE’s realigned transportation business (“GE Transportation”) through a modified Reverse Morris Trust transaction structure. The transactions contemplated by the Merger Agreement and the Separation Agreement (the “Transactions”) have been approved by the Boards of Directors of both the Company and GE.
In connection with the separation of GE Transportation from the remaining business of GE, GE will conduct an internal reorganization in which the assets and liabilities of GE Transportation will be segregated from the assets and liabilities of GE’s remaining business to prepare for the Transactions. Following this internal reorganization, certain assets of GE

12


Transportation will be sold to Direct Sale Purchaser for a cash payment of $2.9 billion (the "Direct Sale"), and Direct Sale Purchaser will assume certain liabilities of GE Transportation in connection with this purchase. Thereafter, GE will transfer the remaining business and operations of GE Transportation (the “SpinCo Business”) to SpinCo and its subsidiaries (to the extent not already held by SpinCo and its subsidiaries) (the “SpinCo Transfer”), and SpinCo will issue to GE additional shares of SpinCo common stock. Following this issuance of additional SpinCo common stock to GE, GE will hold all of the outstanding SpinCo common stock.
Following the Direct Sale and the SpinCo Transfer and based on market conditions, GE will distribute certain of the shares of SpinCo’s common stock to GE’s stockholders by way of a spin-off or a split-off transaction (the “Distribution”), as determined in GE’s discretion.
In a spin-off, all GE stockholders would receive a pro rata number of shares of SpinCo common stock. In a split-off, GE would offer its stockholders the option to exchange all or a portion of their shares of GE common stock for shares of SpinCo common stock in an exchange offer, resulting in a reduction in GE’s outstanding shares. If the exchange offer is undertaken and consummated but the exchange offer is not fully subscribed because less than all shares of SpinCo common stock available for distribution by GE are exchanged, the remaining shares of SpinCo common stock available for distribution by GE would be distributed on a pro rata basis to GE stockholders whose shares of GE common stock remain outstanding after the consummation of the exchange offer.
Immediately after the Distribution and on the closing date of the merger, Merger Sub will merge with and into SpinCo, whereby the separate corporate existence of Merger Sub will cease and SpinCo will continue as the surviving company and a wholly owned subsidiary of the Company. In the Merger, subject to adjustment in accordance with the Merger Agreement, each share of SpinCo common stock will be converted into the right to receive a number of shares of the Company’s common stock based on the exchange ratio set forth in the Merger Agreement.
Immediately after the consummation of the Merger, 50.1% of the outstanding shares of the Company’s common stock on a fully diluted basis will be held collectively by GE and pre-Merger holders of GE common stock (with approximately 9.9% of the outstanding shares of the Company’s common stock expected to be held by GE) and 49.9% of the outstanding shares of the Company’s common stock on a fully diluted basis will be held by pre-Merger stockholders of the Company. Pursuant to certain agreements to be entered into in connection with the Transactions, GE will be obligated to sell a number of its shares of the Company’s common stock within two years of the date of the Distribution and, subject to limited exceptions, to sell all of its shares of the Company’s common stock within three years of the closing date of the Merger.
Subject to adjustment under certain circumstances as set forth in the Merger Agreement, the Company will issue the requisite shares of the Company’s common stock in the Merger. Based upon the reported closing sale price of $103.85 per share for the Company’s common stock on the NYSE on July 18, 2018, the total value of the shares of the Company’s common stock to be issued by the Company in the merger would be approximately $10,184 million and the cash to be received by GE in the transactions, including in respect of the Direct Sale, would be approximately $3,370 million. The actual value of the Company’s common stock to be issued in the Merger will depend on the market price of shares of the Company’s common stock at the time of the Merger.
After the Merger, the Company will own and operate the SpinCo Business and the assets acquired in the Direct Sale. It is anticipated that SpinCo, which will be the Company’s wholly owned subsidiary, will hold the SpinCo Business and Direct Sale Purchaser, which will also be the Company’s wholly owned subsidiary, will hold the assets purchased and the liabilities assumed in connection with the Direct Sale. Together, SpinCo and Direct Sale Purchaser will own and operate post-Transaction GE Transportation. The Company will also continue its current businesses. All shares of the Company’s common stock, including those issued in the Merger, will be listed on the NYSE under the Company’s current trading symbol “WAB.”
On the date of the Distribution, GE or its subsidiaries and SpinCo or the subsidiaries of GE that GE will contribute to SpinCo pursuant to the Separation Agreement will enter into additional agreements relating to, among other things, intellectual property, employee matters, tax matters, research and development, co-location services and transition services.
The value of the total consideration to be delivered by the Company in the Transactions would be approximately $13.5 billion based on the Company’s reported closing stock price on the NYSE on July 18, 2018; however, the final purchase price will depend on the market price of shares of the Company’s common stock at the time of the Merger. The transaction is expected to close by early 2019, subject to customary closing conditions, including certain approvals by the Company’s shareholders and regulatory approvals.


13


4. 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 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.





14


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 goodwill of $14.1 million, all of which will be deductible for tax purposes.

15


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 $32.7 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 and AM General. For the ATP and TTC acquisitions, 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

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
June 30, 2018
 
Three Months Ended
June 30, 2017
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Net sales
$
1,111,680

 
$
959,101

 
$
2,181,282

 
$
1,913,369

Gross profit
323,967

 
282,358

 
636,784

 
563,323

Net income attributable to Wabtec shareholders
84,416

 
75,128

 
173,286

 
152,853

Diluted earnings per share
 
 
 
 
 
 
 
As Reported
$
0.87

 
$
0.75

 
$
1.79

 
$
1.52

Pro forma
$
0.87

 
$
0.78

 
$
1.79

 
$
1.59

    


16


5. INVENTORIES
The components of inventory, net of reserves, were:
In thousands
June 30,
2018
 
December 31,
2017
Raw materials
$
454,678

 
$
378,481

Work-in-progress
187,870

 
167,390

Finished goods
221,245

 
196,763

Total inventories
$
863,793

 
$
742,634


6. INTANGIBLES
The change in the carrying amount of goodwill by segment for the six months ended June 30, 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
2,998

 
13,075

 
16,073

Foreign currency impact
(1,279
)
 
(46,306
)
 
(47,585
)
Balance at June 30, 2018
$
720,677

 
$
1,707,914

 
$
2,428,591

As of June 30, 2018 and December 31, 2017, the Company’s trade names had a net carrying amount of $602.8 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
June 30,
2018
 
December 31,
2017
Patents, non-compete and other intangibles, net of accumulated
 
 
 
amortization of $42,395 and $43,021
$
16,459

 
$
17,554

Customer relationships, net of accumulated amortization
 
 
 
of $142,623 and $126,824
555,149

 
583,459

Total
$
571,608

 
$
601,013

The weighted average remaining useful life of patents, customer relationships and other intangibles are 10 years, 16 years and 14 years, respectively. Amortization expense for intangible assets was $9.9 million and $20.3 million for the three and six months ended June 30, 2018, and $9.4 million and $18.4 million for the three and six months ended June 30, 2017, respectively.
Amortization expense for the five succeeding years is estimated to be as follows:
Remainder of 2018
$
20,718

2019
38,709

2020
36,459

2021
35,825

2022
35,537


7. 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.

17


The change in the carrying amount of contract assets and contract liabilities for the six months ended June 30, 2018 is as follows:
In thousands
 
Contract Assets
Balance at beginning of year
 
$
366,168

Recognized in current year
 
242,020

Reclassified to accounts receivable
 
(223,148
)
Foreign currency impact
 
(6,956
)
Balance at June 30, 2018
 
$
378,084

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

Recognized in current year
 
120,500

Amounts in beginning balance reclassified to revenue
 
(92,137
)
Current year amounts reclassified to revenue
 
(10,584
)
Foreign currency impact
 
(10,157
)
Balance at June 30, 2018
 
$
471,326


8. LONG-TERM DEBT
Long-term debt consisted of the following:
In thousands
June 30,
2018
 
December 31,
2017
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $2,212 and $2,345
$
747,788

 
$
747,655

4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,305 and $1,433
248,695

 
248,567

Revolving Credit Facility, net of unamortized
debt issuance costs of $3,254 and $2,451
865,165

 
853,124

Schuldschein Loan
11,681

 
11,998

Other Borrowings
9,740

 
6,860

Capital Leases
1,852

 
2,324

Total
1,884,921

 
1,870,528

Less - current portion
27,115

 
47,225

Long-term portion
$
1,857,806

 
$
1,823,303


3.45% Senior Notes Due November 2026
On November 3, 2016, the Company issued $750.0 million of Senior Notes due 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.

18


4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due 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.
2018 Refinancing Credit Agreement    
On June 8, 2018, the Company entered into a credit agreement (the “2018 Refinancing Credit Agreement”), which replaced the Company’s then-existing “2016 Refinancing Credit Agreement.” As part of the 2018 Refinancing Credit Agreement, the Company entered into (i) a $1.2 billion revolving credit facility (the “Revolving Credit Facility”), which replaced the Company’s revolving credit facility under the 2016 Refinancing Credit Agreement, and includes a letter of credit sub-facility of up to $450.0 million and a swing line sub-facility of $75.0 million, (ii) a $350.0 million term loan (the “Refinancing Term Loan”), which refinanced the term loan under the 2016 Refinancing Credit Agreement, and (iii) a new $400.0 million delayed draw term loan (the “Delayed Draw Term Loan”). The 2018 Refinancing Credit Agreement also provides for a bridge loan facility (the “Bridge Loan Facility”) in an amount not to exceed $2.5 billion, such facility to become effective at the Company’s request. Commitments in respect of the Bridge Loan Facility will be reduced by any alternative financing (including any other loans or any long-term notes) that the Company arranges prior to the Direct Sale, subject to customary exceptions. In addition, the 2018 Refinancing Credit Agreement contains an uncommitted accordion feature allowing the Company to request, in an aggregate amount not to exceed $600.0 million, increases to the borrowing commitments under the Revolving Credit Facility or a new incremental term loan commitment. At June 30, 2018, the Company had available bank borrowing capacity, net of $33.6 million of letters of credit, of approximately $647.9 million subject to certain financial covenant restrictions.
The Revolving Credit Facility matures on June 8, 2023 and is unsecured. The Refinancing Term Loan matures on June 8, 2021 and is unsecured. The Delayed Draw Term Loan matures on the third anniversary of the date on which it is borrowed and is unsecured. The Bridge Loan Facility, if used, will mature on the date set forth in the definitive documentation for the Bridge Loan Facility and is unsecured. The applicable interest rate for borrowings under the 2018 Refinancing Credit Agreement includes interest rate spreads based on the lower of the pricing corresponding to (i) the Company’s ratio of total debt (less unrestricted cash up to $300.0 million) to EBITDA (“Leverage Ratio”) or (ii) the Company’s public rating, in each case that range between 1.000% and 1.875% for LIBOR/CDOR-based borrowings and 0.000% and 0.875% for Alternate Base Rate based borrowings. The obligations of the Company under the 2018 Refinancing Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
The 2018 Refinancing Credit Agreement contains customary representations and warranties by the Company and its subsidiaries, including customary use of materiality, material adverse effect, and knowledge qualifiers. The Company and its subsidiaries are also subject to (i) customary affirmative covenants that impose certain reporting obligations on the Company and its subsidiaries and (ii) customary negative covenants, including limitations on: indebtedness; liens; restricted payments; fundamental changes; business activities; transactions with affiliates; restrictive agreements; changes in fiscal year; and use of proceeds. In addition, the Company is required to maintain (i) an Interest Coverage ratio at least 3.00 to 1.00 over each period of four consecutive fiscal quarters ending on the last day of a fiscal quarter and (ii) a Leverage Ratio, calculated as of the last day of a fiscal quarter for a period of four consecutive fiscal quarters, of 3.25 to 1.00 or less; provided that, in the event the Company completes the Direct Sale and the Merger or any other material acquisition in which the cash consideration paid exceeds $500.0 million, the maximum Leverage Ratio permitted will be (x) 3.75 to 1.00 at the end of the fiscal quarter in which such acquisition is consummated and each of the three fiscal quarters immediately following such fiscal quarter and (y) 3.50 to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of such acquisition. The Company is in compliance with the restrictions and covenants of the 2018 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.

19


At June 30, 2018, the weighted average interest rate on the Company’s variable rate debt was 3.03%.  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 this agreement, 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.
2016 Refinancing Credit Agreement
On June 22, 2016, the Company amended and restated its then existing revolving credit facility with a consortium of commercial banks. The “2016 Refinancing Credit Agreement” provided 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 2016 Refinancing Credit Agreement borrowings bore variable interest rates indexed as described below.
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 could 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 adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate was 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 were dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin was 0 basis points and the Alternate Rate margin was 175 basis points.
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 $11.7 million as of June 30, 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 June 30, 2018, the Company is in compliance with the undertakings and covenants contained in the loan agreement.



20


9. 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 June 30,
 
Three Months Ended June 30,
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


 
U.S.
 
International
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
In thousands, except percentages
2018
 
2017
 
2018
 
2017
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
174

 
$
172

 
$
1,382

 
$
1,228

Interest cost
666

 
712

 
$
3,668

 
3,354

Expected return on plan assets
(890
)
 
(866
)
 
$
(6,932
)
 
(5,820
)
Net amortization/deferrals
486

 
496

 
$
1,108

 
1,370

Net periodic benefit cost (credit)
$
436

 
$
514

 
$
(774
)
 
$
132


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 to the international plans during 2018. The company does not expect to contribute to the U.S. plans 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.


21


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 June 30,
 
Three Months Ended June 30,
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


 
U.S.
 
International
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
In thousands, except percentages
2018
 
2017
 
2018
 
2017
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
2

 
$
2

 
$
16

 
$
14

Interest cost
162

 
176

 
52

 
48

Net amortization/deferrals
(152
)
 
(146
)
 
(8
)
 
(14
)
Net periodic benefit cost
$
12

 
$
32

 
$
60

 
$
48


Assumptions
 
 
 
 
 
 
 
Discount Rate
3.43
%
 
3.76
%
 
3.21
%
 
3.46
%


10. STOCK-BASED COMPENSATION
As of June 30, 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 $8.3 million and $6.2 million for the three months ended June 30, 2018 and 2017, respectively. Included in stock-based compensation expense for the three months ended June 30, 2018 is $0.3 million of expense related to stock options, $2.0 million related to restricted stock, $3.2 million related to restricted stock units, $2.4 million related to incentive stock units and $0.4 million related to units issued for Directors' fees.
Stock-based compensation expense was $14.0 million and $11.9 million for the six months ended June 30, 2018 and 2017, respectively. Included in stock-based compensation expense for the six months ended June 30, 2018 is $0.7 million of expense related to stock options, $2.7 million related to restricted stock, $4.7 million related to restricted stock units, $5.1 million related to incentive stock units and $0.8 million related to units issued for Directors’ fees. At June 30, 2018, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled $45.0 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.

22


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 six months ended June 30, 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
82,580

 
77.54

 
 
 
1,737

Exercised
(293,034
)
 
22.94

 
 
 
22,165

Canceled
(16,137
)
 
65.32

 
 
 
537

Outstanding at June 30, 2018
756,921

 
47.84

 
4.9
 
38,406

Exercisable at June 30, 2018
579,744

 
42.09

 
4.1
 
32,750

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:
 
Six Months Ended
June 30,
 
2018
 
2017
Dividend yield
0.31
%
 
0.23
%
Risk-free interest rate
2.78
%
 
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 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 June 30, 2018, the Company estimates that it will achieve 73%, 90% and 100% of the goals 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.

23


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 six months ended June 30, 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
223,960

 
175,100

 
73.76

Vested
(133,092
)
 
(93,312
)
 
81.34

Adjustment for incentive stock awards expected to vest

 
26,864

 
75.69

Canceled
(14,509
)
 
(19,800
)
 
77.38

Outstanding at June 30, 2018
475,359

 
416,185

 
75.94


11. 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 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 included 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 evaluated these changes and recorded a provisional benefit to net deferred taxes of $24.6 million at December 31, 2017. The Company is still completing its calculation of the impact of these changes on its deferred tax balances. As of June 30, 2018, the Company has refined the estimate of the impact of the Tax Act on the deductibility of certain executive compensation which resulted in a current period benefit to net deferred taxes of $2.9 million.
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 recorded a provisional Transition Tax expense of $51.8 million at December 31, 2017. As of June 30, 2018, the Company has refined the estimate resulting in a current period benefit of $10.1 million. The Company is continuing to gather additional information to finalize the amount of the Transition Tax, to complete its calculation of E&P, and complete its determination of non-U.S. income taxes paid.
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

24


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 income tax rate was 11.2% and 17.7% for the three and six months ended June 30, 2018, respectively and 25.4% and 26.5% for the three and six months ended June 30, 2017, respectively. The reductions in the current year effective tax rate are due to the tax benefits related to the Tax Act as discussed above.
As of June 30, 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 June 30, 2018, the total accrued interest and penalties are $0.7 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.

12. 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
June 30,
In thousands, except per share data
2018
 
2017
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
84,416

 
$
72,025

Less: dividends declared - common shares
   and non-vested restricted stock
(11,565
)
 
(9,605
)
Undistributed earnings
72,851

 
62,420

Percentage allocated to common shareholders (1)
99.7
%
 
99.7
%
 
72,632

 
62,233

Add: dividends declared - common shares
11,531

 
9,576

Numerator for basic and diluted earnings per
   common share
$
84,163

 
$
71,809

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
95,992

 
95,641

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
583

 
643

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
96,575

 
96,284

Net income attributable to Wabtec
      shareholders per common share
 
 
 
Basic
$
0.88

 
$
0.75

Diluted
$
0.87

 
$
0.75

(1) Basic weighted-average common shares outstanding
95,992

 
95,641

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
96,276

 
95,917

Percentage allocated to common shareholders
99.7
%
 
99.7
%



25


 
Six Months Ended June 30,
In thousands, except per share data
2018
 
2017
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
172,782

 
$
145,914

Less: dividends declared - common shares
   and non-vested restricted stock
(23,096
)
 
(19,177
)
Undistributed earnings
149,686

 
126,737

Percentage allocated to common shareholders (1)
99.7
%
 
99.7
%
 
149,237

 
126,357

Add: dividends declared - common shares
23,027

 
19,120

Numerator for basic and diluted earnings per
   common share
$
172,264

 
$
145,477

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
95,867

 
95,370

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
604

 
701

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
96,471

 
96,071

Net income attributable to Wabtec
      shareholders per common share
 
 
 
Basic
$
1.80

 
$
1.52

Diluted
$
1.79

 
$
1.52

(1) Basic weighted-average common shares outstanding
95,867

 
95,370

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
96,153

 
95,666

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.

13. 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
27,475

 
15,961

Acquisitions
1,089

 
397

Warranty claim payments
(26,405
)
 
(16,479
)
Foreign currency impact/other
(1,380
)
 
5,887

Balance at June 30
$
153,842

 
$
144,758






26


14. 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 and six months ended June 30, 2018 and June 30, 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 $1.2 million for the three months ended June 30, 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 June 30, 2018.
In millions
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
794.9

 
$
458.0

 
$
1,252.9

 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
Other current assets
 
$

 
$
0.6

 
$
0.6

Other current liabilities
 
(6.1
)
 

 
(6.1
)
Total
 
$
(6.1
)
 
$
0.6

 
$
(5.5
)
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 15 for further information on interest rate swaps.
As of June 30, 2018, the Company has recorded a current liability of $0.3 million and an accumulated other comprehensive loss of $0.2 million, net of tax, related to these agreements.

15. 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

27


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 June 30, 2018, which are included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at June 30, 2018 Using
In thousands
Total Carrying
Value at
June 30,
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
$
253

 
$

 
$
253

 
$

Total
$
253

 
$

 
$
253

 
$

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 June 30, 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.

28


The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
 
June 30, 2018
 
December 31, 2017
In thousands
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Interest rate swap agreement
$
253

 
$
253

 
$
1,163

 
$
1,163

4.375% Senior Notes
248,695

 
254,303

 
248,567

 
262,033

3.45% Senior Notes
747,788

 
690,368

 
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.

16. 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 six 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. On, July 19, 2018, Siemens moved to amend its pleadings to add claims alleging violations of federal antitrust and state trade practices laws. 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 August 1, 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's process of certifying the crossings and eliminating the use of flaggers is proceeding and is expected to be completed during the third quarter of 2018. No formal claim has been filed against Xorail by Denver Transit. It is Xorail's understanding that Denver Transit and RTD have entered into a non-binding arbitration proceeding concerning, among other things, the flagger costs, and that proceeding is expected to be concluded by the end of 2018.

29


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 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. As of July 16, 2018, putative class action lawsuits have been filed in several different federal district courts 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 and is currently pending before a federal Multi-District Litigation panel to determine which federal district court will have jurisdiction over the matter.  The Company does not believe that it has diminished competition for talent in the marketplace and intends to contest these claims vigorously.

17. 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.

30


Segment financial information for the three months ended June 30, 2018 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
412,258

 
$
699,422

 
$

 
$
1,111,680

Intersegment sales/(elimination)
18,699

 
2,984

 
(21,683
)
 

Total sales
$
430,957

 
$
702,406

 
$
(21,683
)
 
$
1,111,680

Income (loss) from operations
$
84,347

 
$
57,975

 
$
(18,799
)
 
$
123,523

Interest expense and other, net

 

 
(29,749
)
 
(29,749
)
Income (loss) from operations before income taxes
$
84,347

 
$
57,975

 
$
(48,548
)
 
$
93,774

Segment financial information for the three months ended June 30, 2017 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
344,828

 
$
587,425

 
$

 
$
932,253

Intersegment sales/(elimination)
10,139

 
6,073

 
(16,212
)
 

Total sales
$
354,967

 
$
593,498

 
$
(16,212
)
 
$
932,253

Income (loss) from operations
$
63,165

 
$
59,050

 
$
(8,858
)
 
$
113,357

Interest expense and other, net

 

 
(16,628
)
 
(16,628
)
Income (loss) from operations before income taxes
$
63,165

 
$
59,050

 
$
(25,486
)
 
$
96,729


Segment financial information for the six months ended June 30, 2018 is as follows:    
In thousands
Freight Segment
 
Transit Segment
 
Corporate Activities and Elimination
 
Total
Sales to external customers
$
791,812


$
1,376,045

 
$

 
$
2,167,857

Intersegment sales/(elimination)
30,701

 
6,873

 
(37,574
)
 

Total sales
$
822,513

 
$
1,382,918

 
$
(37,574
)
 
$
2,167,857

Income (loss) from operations
$
153,969

 
$
126,059

 
$
(25,226
)
 
$
254,802

Interest expense and other, net

 

 
(47,447
)
 
(47,447
)
Income (loss) from operations before income taxes
$
153,969

 
$
126,059

 
$
(72,673
)
 
$
207,355


Segment financial information for the six months ended June 30, 2017 is as follows:    
In thousands
Freight Segment
 
Transit Segment
 
Corporate Activities and Elimination
 
Total
Sales to external customers
$
692,774

 
$
1,155,513

 
$

 
$
1,848,287

Intersegment sales/(elimination)
19,226

 
11,759

 
(30,985
)
 

Total sales
$
712,000

 
$
1,167,272

 
$
(30,985
)
 
$
1,848,287

Income (loss) from operations
$
134,387

 
$
108,025

 
$
(14,543
)
 
$
227,869

Interest expense and other, net

 

 
(31,675
)
 
(31,675
)
Income (loss) from operations before income taxes
$
134,387

 
$
108,025

 
$
(46,218
)
 
$
196,194


    








31


Sales by product line are as follows:
 
Three Months Ended
June 30,
In thousands
2018
 
2017
Specialty Products & Electronics
$
434,399

 
$
324,798

Transit Products
282,130

 
253,764

Brake Products
217,574

 
192,557

Remanufacturing, Overhaul & Build
127,202

 
126,556

Other
50,375

 
34,578

Total sales
$
1,111,680

 
$
932,253


 
Six Months Ended
June 30,
In thousands
2018
 
2017
Specialty Products & Electronics
$
820,947

 
$
639,863

Transit Products
556,409

 
512,182

Brake Products
433,192