Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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: 1-13782

 

 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware    25-1615902

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

1001 Air Brake Avenue

Wilmerding, PA

   15148
(Address of principal executive offices)    (Zip Code)

 

 

412-825-1000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x     Accelerated filer  ¨     Non-accelerated filer    ¨     Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at October 26, 2012

Common Stock, $.01 par value per share    47,887,404 shares

 

 

 


Table of Contents

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

September 30, 2012

FORM 10-Q

TABLE OF CONTENTS

 

        Page  
  PART I—FINANCIAL INFORMATION  

Item 1.

  Financial Statements  
 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

    3   
 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011

    4   
 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

    5   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September  30, 2012 and 2011

    6   
 

Notes to Condensed Consolidated Financial Statements

    7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     27   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk     38   

Item 4.

  Controls and Procedures     38   
  PART II—OTHER INFORMATION  

Item 1.

  Legal Proceedings     39   

Item 1A.

  Risk Factors     39   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     39   

Item 4.

  Mine Safety Disclosures     39   

Item 6.

  Exhibits     40   
  Signatures     41   

 

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PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except shares and par value

   Unaudited
September 30,
2012
    December 31,
2011
 
Assets     

Current Assets

    

Cash and cash equivalents

   $ 282,055      $ 285,615   

Accounts receivable

     430,230        346,281   

Inventories

     391,592        348,174   

Deferred income taxes

     58,592        57,339   

Other

     21,580        18,373   
  

 

 

   

 

 

 

Total current assets

     1,184,049        1,055,782   

Property, plant and equipment

     534,687        513,113   

Accumulated depreciation

     (305,540     (291,091
  

 

 

   

 

 

 

Property, plant and equipment, net

     229,147        222,022   

Other Assets

    

Goodwill

     656,933        587,531   

Other intangibles, net

     284,889        257,355   

Other noncurrent assets

     41,024        36,263   
  

 

 

   

 

 

 

Total other assets

     982,846        881,149   
  

 

 

   

 

 

 

Total Assets

   $ 2,396,042      $ 2,158,953   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities

    

Accounts payable

   $ 235,568      $ 244,649   

Customer deposits

     104,404        72,811   

Accrued compensation

     49,443        48,564   

Accrued warranty

     38,555        29,416   

Current portion of long-term debt

     43        68   

Other accrued liabilities

     112,679        145,877   
  

 

 

   

 

 

 

Total current liabilities

     540,692        541,385   

Long-term debt

     432,854        395,805   

Accrued postretirement and pension benefits

     59,855        63,837   

Deferred income taxes

     91,281        74,217   

Accrued warranty

     18,942        21,224   

Other long-term liabilities

     21,401        14,841   
  

 

 

   

 

 

 

Total liabilities

     1,165,025        1,111,309   

Shareholders’ Equity

    

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

     —          —     

Common stock, $.01 par value; 100,000,000 shares authorized: 66,174,767 shares issued and 47,887,204 and 47,946,360 outstanding at September 30, 2012 and December 31, 2011, respectively

     662        662   

Additional paid-in capital

     375,975        360,914   

Treasury stock, at cost, 18,287,563 and 18,228,407 shares, at September 30, 2012 and December 31, 2011, respectively

     (331,708     (309,196

Retained earnings

     1,235,417        1,053,706   

Accumulated other comprehensive loss

     (55,080     (60,897
  

 

 

   

 

 

 

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

     1,225,266        1,045,189   

Non-controlling interest

     5,751        2,455   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,231,017        1,047,644   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,396,042      $ 2,158,953   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Unaudited
Three Months Ended
September 30,
    Unaudited
Nine Months Ended
September 30,
 

In thousands, except per share data

   2012     2011     2012     2011  

Net sales

   $ 587,593      $ 498,840      $ 1,780,722      $ 1,432,998   

Cost of sales

     (416,314     (351,689     (1,266,635     (1,009,908
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     171,279        147,151        514,087        423,090   

Selling, general and administrative expense

     (59,743     (57,676     (180,935     (186,435

Engineering expense

     (10,753     (9,894     (31,047     (27,914

Amortization expense

     (3,941     (4,128     (10,288     (10,549
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (74,437     (71,698     (222,270     (224,898

Income from operations

     96,842        75,453        291,817        198,192   

Other income and expenses

        

Interest expense, net

     (3,070     (3,764     (10,303     (11,241

Other (expense) income, net

     (1,393     (1,529     (1,284     (1,479
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     92,379        70,160        280,230        185,472   

Income tax expense

     (29,385     (23,560     (93,263     (61,586
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Wabtec shareholders

   $ 62,994      $ 46,600      $ 186,967      $ 123,886   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Common Share

        

Basic

        

Net income attributable to Wabtec shareholders

   $ 1.32      $ 0.97      $ 3.90      $ 2.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net income attributable to Wabtec shareholders

   $ 1.30      $ 0.96      $ 3.85      $ 2.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     47,643        47,874        47,732        47,827   

Diluted

     48,271        48,366        48,360        48,327   

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

     Unaudited
Three Months Ended
September 30,
    Unaudited
Nine Months Ended
September 30,
 

In thousands

   2012     2011     2012     2011  

Net income attributable to Wabtec shareholders

   $ 62,994      $ 46,600      $ 186,967      $ 123,886   

Foreign currency translation gain (loss)

     11,916        (37,792     6,298        (10,696

Unrealized gain on foreign exchange contracts

     —          200        —          251   

Unrealized (loss) gain on interest rate swap contracts

     (903     376        (3,064     604   

Pension benefit plans and post-retirement benefit plans

     (128     2,571        2,158        3,273   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income before income taxes

     73,879        11,955        192,359        117,318   

Income tax benefit (expense) related to components of other comprehensive income

     333        (959     425        (1,351
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Wabtec shareholders

   $ 74,212      $ 10,996      $ 192,784      $ 115,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Unaudited
Nine Months Ended
September 30,
 

In thousands

   2012     2011  

Operating Activities

    

Net income attributable to Wabtec shareholders

   $ 186,967      $ 123,886   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     31,488        33,678   

Stock-based compensation expense

     15,007        13,222   

Loss on disposal of property, plant and equipment

     674        689   

Excess income tax benefits from exercise of stock options

     (2,518     (3,689

Changes in operating assets and liabilities, net of acquisitions

    

Accounts receivable

     (71,430     (80,285

Inventories

     (26,599     (63,389

Accounts payable

     (18,569     3,696   

Accrued income taxes

     (17,378     4,257   

Accrued liabilities and customer deposits

     37,700        80,848   

Other assets and liabilities

     (21,817     (12,893
  

 

 

   

 

 

 

Net cash provided by operating activities

     113,525        100,020   

Investing Activities

    

Purchase of property, plant and equipment

     (24,694     (22,226

Proceeds from disposal of property, plant and equipment

     931        300   

Acquisitions of business, net of cash acquired

     (102,144     (51,777

Acquisition purchase price adjustment

     (160     40   
  

 

 

   

 

 

 

Net cash used for investing activities

     (126,067     (73,663

Financing Activities

    

Proceeds from debt

     211,000        124,000   

Payments of debt

     (173,992     (139,920

Proceeds from exercise of stock options and other benefit plans

     3,021        4,577   

Stock repurchase

     (27,997     (23,803

Excess income tax benefits from exercise of stock options

     2,518        3,689   

Cash dividends ($0.11 and $0.05 per share for the nine months ended September 30, 2012 and 2011, respectively)

     (5,256     (2,407
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     9,294        (33,864

Effect of changes in currency exchange rates

     (312     (8,298
  

 

 

   

 

 

 

Decrease in cash

     (3,560     (15,805

Cash, beginning of year

     285,615        236,941   
  

 

 

   

 

 

 

Cash, end of period

   $ 282,055      $ 221,136   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012 (UNAUDITED)

1. BUSINESS

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 20 countries. In the first nine months of 2012, about 50% of the Company’s revenues came from customers outside the U.S.

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In Management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.

The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30 and December 31.

The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2011. The December 31, 2011 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Reclassifications Certain prior year amounts have been reclassified where necessary to conform to the current year presentation.

Revenue Recognition Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”. Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined.

In general, the Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $92.5 million and $58.9, customer deposits were $104.4 million and $72.8, and provisions for loss contracts were $9.9 million and $9.3 million at September 30, 2012 and December 31, 2011, respectively.

Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $16.4 million and $15.4 million at September 30, 2012 and December 31, 2011, respectively.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported

 

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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.

Stock-Based Compensation The Company recognizes compensation expense for stock-based compensation based on the grant date fair value amortized ratably over the requisite service period following the date of grant.

Financial Derivatives and Hedging Activities The Company has periodically entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counter-party to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis. At September 30, 2012, the Company had no forward contracts.

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. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions with excellent credit ratings and history of performance. The Company currently believes the risk of nonperformance is negligible. The Company concluded that these interest rate swap agreements qualify for cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreements and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet.

Effective September 30, 2012, the Company had interest rate swap agreements with a notional amount of $107.0 million and which effectively changed the Company’s interest rate on bank debt at September 30, 2012 from a variable rate to a fixed rate of 1.82%. The interest rate swap agreements mature on December 31, 2012. As of September 30, 2012, the Company has recorded a current liability of $0.4 million and a corresponding offset in accumulated other comprehensive loss of $0.3 million, net of tax, related to these agreements. Also, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. Effective July 31, 2013, with a termination date of November 7, 2016, this interest rate swap agreement will convert a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. As of September 30, 2012, the Company has recorded a current liability of $4.1 million and a corresponding offset in accumulated other comprehensive loss of $2.5 million, net of tax, related to this agreement.

Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the year. Foreign currency gains and losses resulting from transactions, and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings. Foreign exchange transaction losses recognized in other income (expense), net were $1.4 million and $1.8 million for the three months ended September 30, 2012 and 2011, respectively. Foreign exchange transaction losses recognized in other income (expense), net were $0.4 million and $2.1 million for the nine months ended September 30, 2012 and 2011, respectively.

 

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Non-controlling Interests In accordance with ASC 810, the Company has classified non-controlling interests as equity on our condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011. Net income attributable to non-controlling interests for the three and nine months ended September 30, 2012 and 2011 was not material.

Other Comprehensive Income Comprehensive income is defined as net income and all other non-owner changes in shareholders’ equity.

The components of accumulated other comprehensive loss were:

 

In thousands

   September 30,
2012
    December 31,
2011
 

Foreign currency translation gain (loss)

   $ 3,851      $ (2,447

Unrealized loss on interest rate swap contracts, net of tax

     (2,722     (871

Pension benefit plans and post retirement benefit plans, net of tax

     (56,209     (57,579
  

 

 

   

 

 

 

Total accumulated comprehensive loss

   $ (55,080   $ (60,897
  

 

 

   

 

 

 

3. ACQUISITIONS

The Company made the following acquisitions within the Transit Segment:

 

   

On October 1, 2012, subsequent to the close of our accounting quarter, the Company acquired LH Group (“LH”), a UK-based provider of maintenance and overhaul services for the passenger transit market, for a net purchase price of approximately $47.8 million, net of cash.

 

   

On July 13, 2012, the Company acquired Tec Tran Corp. and its affiliates (“Tec Tran”), the only U.S.-owned manufacturer of hydraulic braking systems for transit cars, based in North Carolina, for a net purchase price of approximately $8.5 million, net of cash, resulting in preliminary additional goodwill of $6.8 million, which will be deductible for tax purposes.

 

   

On June 14, 2012, the Company acquired Mors Smitt Holding (“Mors Smitt”), a leading manufacturer of electronic components for rail and industrial markets with operations in the Netherlands, the United Kingdom, the U.S., France, China and Hong-Kong, for a net purchase price of approximately $90.0 million, net of cash, resulting in preliminary additional goodwill of $50.0 million, none of which will be deductible for tax purposes.

 

   

On November 18, 2011, the Company acquired Fulmer Company (“Fulmer”), a leading manufacturer of motor components for rail, power generation and other industrial markets, for a net purchase price of $13.6 million, resulting in preliminary additional goodwill of $2.0 million, which will be deductible for tax purposes.

 

   

On June 29, 2011, the Company acquired an aftermarket transit parts business (“ATP”) from GE Transportation, a parts supply business for propulsion and control systems for the passenger transit car aftermarket in North America for a net purchase price of $21.1 million, resulting in no additional goodwill.

 

   

On February 25, 2011, the Company acquired Brush Traction Group (“Brush Traction”), a UK-based provider of locomotive overhauls, services and aftermarket components for a net purchase price of approximately $30.7 million, resulting in additional goodwill of $20.5 million, which will be deductible for tax purposes.

The Company made the following acquisitions within the Freight Segment:

 

   

On July 31, 2012, the Company acquired Winco Equipamentos Ferroviarios Ltda. (“Winco”), an established marketing and sales company with capabilities including value-added engineering and

 

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assembly, service, technical support and logistics, based in Brazil, for an initial net payment of approximately $3.7 million, net of cash, resulting in preliminary additional goodwill of $4.8 million, none of which will be deductible for tax purposes. In addition to the $3.7 million, the purchase agreement includes contingent consideration to be paid in future periods based on the achievement of certain financial results.

 

   

On November 3, 2011, the Company acquired Bearward Engineering (“Bearward”), a UK-based manufacturer of cooling systems and related equipment for power generation and other industrial markets, for a net purchase price of approximately $43.8 million, net of cash, resulting in preliminary additional goodwill of $24.2 million, none of which will be deductible for tax purposes.

The acquisitions listed above, excluding LH, include escrow deposits of $15.3 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

For the Bearward, Fulmer, Mors Smitt, Tec Tran and Winco acquisitions, the following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition. For the Brush Traction and ATP acquisitions, the following table summarizes the final fair value of the assets acquired and liabilities assumed at the date of acquisition.

 

    Brush Traction     ATP     Bearward     Fulmer     Mors Smitt     Tec Tran     Winco  

In thousands

  February 25,
2011
    June 29,
2011
    November 3,
2011
    November 18,
2011
    June 14,
2012
    July 13,
2012
    July 31,
2012
 

Current assets

  $ 19,558      $ —        $ 14,777      $ 4,203      $ 23,787      $ 1,955      $ 1,584   

Property, plant & equipment

    8,862        —          4,498        1,636        6,960        116        47   

Goodwill and other intangible assets

    30,816        21,100        43,990        8,409        85,354        6,811        7,401   

Other assets

    —          —          53        —          944        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets acquired

    59,236        21,100        63,318        14,248        117,045        8,882        9,032   

Total liabilities assumed

    (28,559     —          (19,532     (657     (27,057     (382     (5,376
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net assets acquired

  $ 30,677      $ 21,100      $ 43,786      $ 13,591      $ 89,988      $ 8,500      $ 3,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Of the allocation of $94.8 million of acquired intangible assets for the companies listed in the above table exclusive of goodwill, $63.1 million was assigned to customer relationships, $23.0 million was assigned to trade names, $2.1 million was assigned to a license agreement, $1.0 million was assigned to non-compete agreements and $5.6 million was assigned to customer backlog. The trade names are considered to have an indefinite useful life while the customer relationships’ average useful life is 19 years, the license agreement’s useful life is 20 years, and the non-compete agreements average useful life is two years.

The following unaudited pro forma financial information presents income statement results as if the acquisitions listed above, excluding LH, had occurred on January 1, 2011:

 

In thousands

   Three Months Ended
September 30, 2012
     Three Months Ended
September 30, 2011
     Nine Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2011
 

Net sales

   $ 588,939       $ 546,413       $ 1,820,046       $ 1,574,359   

Gross profit

     171,818         163,340         529,695         469,767   

Net income attributable to Wabtec shareholders

     63,263         53,278         188,655         139,987   

Diluted earnings per share

           

As Reported

   $ 1.30       $ 0.96       $ 3.85       $ 2.56   

Pro forma

   $ 1.31       $ 1.10       $ 3.90       $ 2.90   

 

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4. INVENTORIES

The components of inventory, net of reserves, were:

 

In thousands

   September 30,
2012
     December 31,
2011
 

Raw materials

   $ 165,139       $ 154,885   

Work-in-process

     135,152         110,179   

Finished goods

     91,301         83,110   
  

 

 

    

 

 

 

Total inventories

   $ 391,592       $ 348,174   
  

 

 

    

 

 

 

5. INTANGIBLES

Goodwill was $656.9 million and $587.5 million at September 30, 2012 and December 31, 2011, respectively. The change in the carrying amount of goodwill by segment for the nine months ended September 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Total  

Balance at December 31, 2011

   $ 388,221       $ 199,310       $ 587,531   

Acquisition

     4,781         56,778         61,559   

Adjustment to preliminary purchase allocation

     2,754         1,154         3,908   

Foreign currency impact

     2,116         1,819         3,935   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

   $ 397,872       $ 259,061       $ 656,933   
  

 

 

    

 

 

    

 

 

 

As of September 30, 2012 and December 31, 2011, the Company’s trademarks had a net carrying amount of $126.1 million and $114.6 million, respectively, and the Company believes these intangibles have an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following:

 

In thousands

   September 30,
2012
     December 31,
2011
 

Patents and other, net of accumulated amortization of $34,650 and $32,316

   $ 11,799       $ 14,849   

Customer relationships, net of accumulated amortization of $28,509 and $21,295

     146,973         127,960   
  

 

 

    

 

 

 

Total

   $ 158,772       $ 142,809   
  

 

 

    

 

 

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were five years, 16 years and 17 years, respectively. Amortization expense for intangible assets was $3.9 million and $10.3 million for the three and nine months ended September 30, 2012, respectively and $4.1 million and $10.5 million for the three and nine months ended September 30, 2011, respectively.

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

 

Remainder of 2012

   $ 4,521   

2013

     13,467   

2014

     12,630   

2015

     11,872   

2016

     11,715   

 

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6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

In thousands

   September 30,
2012
     December 31,
2011
 

6.875% Senior Notes, due 2013

   $ 150,000       $ 150,000   

Revolving Credit Facility

     282,000         245,000   

Capital Leases

     897         873   
  

 

 

    

 

 

 

Total

     432,897         395,873   

Less—current portion

     43         68   
  

 

 

    

 

 

 

Long-term portion

   $ 432,854       $ 395,805   
  

 

 

    

 

 

 

2011 Refinancing Credit Agreement

On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility with a consortium of commercial banks. This “2011 Refinancing Credit Agreement” provides the Company with a $600 million, five-year revolving credit facility. The Company incurred approximately $2.0 million of deferred financing cost related to the 2011 Refinancing Credit Agreement. The facility expires on November 7, 2016. The 2011 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At September 30, 2012, the Company had available bank borrowing capacity of approximately $264.6 million, net of $53.4 million of letters of credit, subject to certain financial covenant restrictions.

Under the 2011 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points and an additional margin that ranges from 0 to 75 basis points. The Alternate Rate is based on quoted LIBOR rates plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The current Base Rate margin is 0 basis points and the Alternate Rate margin is 100 basis points.

At September 30, 2012 the weighted average interest rate on the Company’s variable rate debt was 1.23%. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swap agreements which effectively convert a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. On September 30, 2012, the notional value of the interest rate swaps outstanding was $107.0 million and effectively changed the Company’s interest rate on bank debt at September 30, 2012 from a variable rate to a fixed rate of 1.82%. The interest rate swap agreements mature on December 31, 2012. 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.

Also, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. Effective July 31, 2013, with a termination date of November 7, 2016, the interest rate swap agreement will convert a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin.

The 2011 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2011 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions;

 

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additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company does not expect that these measurements will limit the Company in executing our operating activities.

6.875% Senior Notes Due August 2013

In August 2003, the Company issued $150.0 million of Senior Notes due in 2013 (“the Notes”). The Notes were issued at par. Interest on the Notes accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company has both the intent and ability to refinance the Notes, maturing August 2013, on a long term basis utilizing capacity under the 2011 Refinancing Credit Agreement. The 2011 Refinancing Credit Agreement will provide available bank borrowing capacity sufficient to refinance the Notes on a long-term basis. The Notes are included in the long-term portion of debt as of September 30, 2012.

The 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 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.

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German, and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.

The Company uses a December 31 measurement date for the plans. The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.

 

     U.S.     International  
     Three months ended
September 30,
    Three months ended
September 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 94      $ 84      $ 493      $ 805   

Interest cost

     501        582        1,773        1,886   

Expected return on plan assets

     (771     (796     (2,035     (2,124

Net amortization/deferrals

     659        710        681        533   

Settlement loss recognized

     —          —          844        132   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 483      $ 580      $ 1,756      $ 1,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     4.96     5.43

Expected long-term rate of return

     7.50     8.00     6.12     6.72

Rate of compensation increase

     3.00     3.00     3.21     3.17

 

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     U.S.     International  
     Nine months ended
September 30,
    Nine months ended
September 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 285      $ 232      $ 1,479      $ 2,427   

Interest cost

     1,585        1,820        5,309        5,735   

Expected return on plan assets

     (2,321     (2,498     (6,085     (6,418

Net amortization/deferrals

     2,272        1,923        2,032        1,551   

Settlement loss recognized

     —          —          1,137        720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,821      $ 1,477      $ 3,872      $ 4,015   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     4.96     5.43

Expected long-term rate of return

     7.50     8.00     6.12     6.72

Rate of compensation increase

     3.00     3.00     3.21     3.17

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 $1.6 million to the U.S. plans and $6.4 million to the international plans during 2012.

Post Retirement Benefit Plans

In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.

The Company uses a December 31 measurement date for all post retirement plans. The following tables provide information regarding the Company’s post retirement benefit plans summarized by U.S. and international components.

 

     U.S.     International  
     Three months ended
September 30,
    Three months ended
September 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ (1   $ 4      $ 11      $ 14   

Interest cost

     339        410        51        58   

Net amortization/deferrals

     (212     (186     (83     (97
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 126      $ 228      $ (21   $ (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     5.15     5.50

 

     U.S.     International  
     Nine months ended
September 30,
    Nine months ended
September 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 18      $ 24      $ 33      $ 42   

Interest cost

     1,040        1,208        151        175   

Net amortization/deferrals

     (613     (675     (247     (292
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 445      $ 557      $ (63   $ (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     5.15     5.50

 

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8. STOCK-BASED COMPENSATION

As of September 30, 2012, the Company maintains employee stock-based compensation plans for stock options, restricted stock, restricted units, and incentive stock awards as governed by the 2011 Stock Incentive Compensation Plan (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011. The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (“Directors Plan”). No awards may be made under the 2000 Plan or the Directors Plan subsequent to October 31, 2016. The 2011 Plan has a 10-year term through March 27, 2021 and provides a maximum of 1,900,000 shares for grants or awards.

Stock-based compensation expense was $5.4 million and $3.9 million for the three months ended September 30, 2012 and 2011, respectively. Stock-based compensation expense was $15.4 million and $13.2 million for the nine months ended September 30, 2012 and 2011, respectively. Included in the stock-based compensation expense for the nine months ended September 30, 2012 above is $1.9 million of expense related to stock options, $3.6 million related to restricted stock, $388,000 related to restricted units, $8.9 million related to incentive stock awards and $600,000 related to awards issued for Directors’ fees. At September 30, 2012, unamortized compensation expense related to stock options, restricted stock, restricted units and incentive stock awards expected to vest totaled $25.5 million and will be recognized over a weighted average period of 1.2 years.

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. Under the Directors Plan, options become exercisable over a three-year vesting period and expire 10 years from the date of grant.

The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the nine months ended September 30, 2012:

 

     Options     Weighted
Average
Exercise
Price
     Weighted Average
Remaining
Contractual Life
     Aggregate
intrinsic value
(in thousands)
 

Outstanding at December 31, 2011

     862,392      $ 34.74         6.5       $ 30,362   

Granted

     75,698        70.71            725   

Exercised

     (125,788     24.01            (7,079

Canceled

     (26,717     34.46            (1,224
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2012

     785,585      $ 39.94         6.4       $ 31,701   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2012

     498,381      $ 32.95         6.2       $ 23,592   

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:

 

     Nine months ended
September 30,
 
         2012             2011      

Dividend yield

     .23     .08

Risk-free interest rate

     1.35     2.96

Stock price volatility

     44.95     45.6

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.

 

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Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006 the Company adopted a restricted stock program. As provided for under the 2011 and 2000 Plans, eligible employees are granted restricted stock or restricted units that generally vest over four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant.

In addition, the Company has annually issued incentive stock awards to eligible employees that vest, upon attainment of certain three year performance goals. Based on the Company’s performance for each three year period then ended, the incentive stock awards can vest and be awarded ranging from 0% to 200% of the initial incentive stock awards granted. The incentive stock awards included in the table below represent the number of shares that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of September 30, 2012, the Company estimates that it will achieve 200%, 200% and 126% for the incentive stock awards expected to vest based on performance for the three year periods ending December 31, 2012, 2013, and 2014, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these stock awards 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 restricted stock and incentive stock awards is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.

The following table summarizes the restricted stock and unit activity for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock awards activity for the 2011 Plan and the 2000 Plan with related information for the nine months ended September 30, 2012:

 

     Restricted
Stock
and Units
    Incentive
Stock
Awards
    Weighted
Average Grant
Date Fair
Value
 

Outstanding at December 31, 2011

     274,609        646,362      $ 44.04   

Granted

     110,980        118,660        70.85   

Vested

     (98,694     (122,079     35.73   

Adjustment for incentive stock awards expected to vest

     —          45,784        60.61   

Canceled

     (13,008     (2,219     42.96   
  

 

 

   

 

 

   

 

 

 

Outstanding at September 30, 2012

     273,887        686,508      $ 53.17   
  

 

 

   

 

 

   

 

 

 

9. INCOME TAXES

The overall effective income tax rate was 31.8% and 33.3% for the three and nine months ended September 30, 2012, respectively, and 33.6% and 33.2% for the three and nine months ended September 30, 2011, respectively. The decrease in the effective tax rate for the three months ended September 30, 2012 is primarily due to refund claims filed in the current quarter.

As of September 30, 2012, the liability for income taxes associated with uncertain tax positions is $9.7 million, of which $3.9 million, if recognized would favorably affect the Company’s effective tax rate. As of December 31, 2011 the liability associated with uncertain tax positions was $8.2 million, of which $2.1 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 September 30, 2012 the total accrued interest and penalties are $2.6 million and $1.4 million, respectively. As of December 31, 2011 the total accrued interest and penalties were $2.8 million and $1.5 million, respectively.

The Internal Revenue Service is currently auditing the 2009 and 2010 tax years. With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2009.

 

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At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $1.1 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.

10. 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
September 30,
 

In thousands, except per share

   2012     2011  

Numerator

    

Numerator for basic and diluted earnings per common share—net income attributable to Wabtec shareholders

   $ 62,994      $ 46,600   

Less: dividends declared—common shares and non-vested restricted stock

     (2,376     (1,442
  

 

 

   

 

 

 

Undistributed earnings

     60,618        45,158   

Percentage allocated to common shareholders(1)

     99.5     99.5
  

 

 

   

 

 

 
     60,315        44,932   

Add: dividends declared—common shares

     2,364        1,435   
  

 

 

   

 

 

 

Numerator for basic and diluted earnings per common share

   $ 62,679      $ 46,367   
  

 

 

   

 

 

 

Denominator

    

Denominator for basic earnings per common share—weighted-average shares

     47,643        47,874   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     628        492   
  

 

 

   

 

 

 

Denominator for diluted earnings per common share—adjusted weighted-average shares and assumed conversion

     48,271        48,366   
  

 

 

   

 

 

 

Net income per common share attributable to Wabtec shareholders

    

Basic

   $ 1.32      $ 0.97   

Diluted

   $ 1.30      $ 0.96   

(1) Basic weighted-average common shares outstanding

     47,643        47,874   

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

     47,874        48,123   

Percentage allocated to common shareholders

     99.5     99.5

 

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Table of Contents
     Nine Months Ended
September 30,
 

In thousands, except per share

   2012     2011  

Numerator

    

Numerator for basic and diluted earnings per common share—net income attributable to Wabtec shareholders

   $ 186,967      $ 123,886   

Less: dividends declared—common shares and non-vested restricted stock

     (5,256     (2,407
  

 

 

   

 

 

 

Undistributed earnings

     181,711        121,479   

Percentage allocated to common shareholders(1)

     99.5     99.5
  

 

 

   

 

 

 
     180,802        120,872   

Add: dividends declared—common shares

     5,229        2,395   
  

 

 

   

 

 

 

Numerator for basic and diluted earnings per common share

   $ 186,031      $ 123,267   
  

 

 

   

 

 

 

Denominator

    

Denominator for basic earnings per common share—weighted-average shares

     47,732        47,827   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     628        500   
  

 

 

   

 

 

 

Denominator for diluted earnings per common share—adjusted weighted-average shares and assumed conversion

     48,360        48,327   
  

 

 

   

 

 

 

Net income per common share attributable to Wabtec shareholders

    

Basic

   $ 3.90      $ 2.58   

Diluted

   $ 3.85      $ 2.56   

(1) Basic weighted-average common shares outstanding

     47,732        47,827   

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

     47,977        48,064   

Percentage allocated to common shareholders

     99.5     99.5

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.

11. WARRANTIES

The following table reconciles the changes in the Company’s product warranty reserve as follows:

 

     Nine Months Ended
September 30,
 

In thousands

   2012     2011  

Balance at December 31, 2011 and 2010, respectively

   $ 50,640      $ 35,513   

Warranty expense

     18,334        12,602   

Acquisitions

     494        12,008   

Warranty claim payments

     (11,971     (12,921
  

 

 

   

 

 

 

Balance at September 30, 2012 and 2011, respectively

   $ 57,497      $ 47,202   
  

 

 

   

 

 

 

12. FAIR VALUE MEASUREMENT

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

 

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principal market for the asset or liability or, in the 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 September 30, 2012, which are included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
September 30,
2012
     Fair Value Measurements at September 30, 2012 Using  

In thousands

      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

     4,507         —           4,507         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,507       $ —         $ 4,507       $ —     

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2011, which is included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
December 31,
2011
     Fair Value Measurements at December 31, 2011 Using  

In thousands

      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

     1,442         —           1,442         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,442       $ —         $ 1,442       $ —     

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.

13. 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, 2011, in Note 18 therein, filed on February 24, 2012. During the first nine months for 2012, there were no material changes to the information described in the Form 10-K.

The Company is also subject to litigation from time to time arising out of its 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, 2011, in Note 18 therein, filed on February 24, 2012. During the first nine months of 2012, there were no material changes to the information described in the Form 10-K.

 

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The Company is also subject to other commitments and contingencies arising from environmental conditions or regulations as described in its Annual Report on Form 10-K for the year ended December 31, 2011, in Note 18 therein, filed on February 24, 2012. During the first nine months of 2012, there were no material changes to the information described in the Form 10-K.

14. 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, friction products, 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 subway cars and buses, builds new commuter locomotives, friction products, and refurbishes subway cars. 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. 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 and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.

Segment financial information for the three months ended September 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 354,659       $ 232,934       $ —        $ 587,593   

Intersegment sales/(elimination)

     5,662         3,231         (8,893     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 360,321       $ 236,165       $ (8,893   $ 587,593   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 75,702       $ 24,385       $ (3,245   $ 96,842   

Interest expense and other, net

     —           —           (4,463     (4,463
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 75,702       $ 24,385       $ (7,708   $ 92,379   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment financial information for the three months ended September 30, 2011 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 315,837       $ 183,003       $ —        $ 498,840   

Intersegment sales/(elimination)

     4,626         2,955         (7,581     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 320,463       $ 185,958       $ (7,581   $ 498,840   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 60,709       $ 20,803       $ (6,059   $ 75,453   

Interest expense and other, net

     —           —           (5,293     (5,293
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 60,709       $ 20,803       $ (11,352   $ 70,160   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Segment financial information for the nine months ended September 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 1,159,653       $ 621,069       $ —        $ 1,780,722   

Intersegment sales/(elimination)

     17,214         8,659         (25,873     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 1,176,867       $ 629,728       $ (25,873   $ 1,780,722   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 234,734       $ 68,934       $ (11,851   $ 291,817   

Interest expense and other, net

     —           —           (11,587     (11,587
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 234,734       $ 68,934       $ (23,438   $ 280,230   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment financial information for the nine months ended September 30, 2011 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 860,729       $ 572,269       $ —        $ 1,432,998   

Intersegment sales/(elimination)

     12,536         4,989         (17,525     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 873,265       $ 577,258       $ (17,525   $ 1,432,998   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 160,682       $ 70,976       $ (33,466   $ 198,192   

Interest expense and other, net

     —           —           (12,720     (12,720
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 160,682       $ 70,976       $ (46,186   $ 185,472   
  

 

 

    

 

 

    

 

 

   

 

 

 

Sales by product are as follows:

 

     Three Months Ended
September 30,
 

In thousands

   2012      2011  

Specialty Products & Electronics

   $ 264,094       $ 231,983   

Remanufacturing, Overhaul & Build

     129,597         83,673   

Brake Products

     127,027         121,372   

Other Transit Products

     49,141         45,753   

Other

     17,734         16,059   
  

 

 

    

 

 

 

Total sales

   $ 587,593       $ 498,840   
  

 

 

    

 

 

 

Sales by product are as follows:

 

     Nine Months Ended
September 30,
 

In thousands

   2012      2011  

Specialty Products & Electronics

   $ 841,382       $ 622,857   

Brake Products

     386,640         372,815   

Remanufacturing, Overhaul & Build

     348,252         245,330   

Other Transit Products

     149,941         145,637   

Other

     54,507         46,359   
  

 

 

    

 

 

 

Total sales

   $ 1,780,722       $ 1,432,998   
  

 

 

    

 

 

 

 

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15. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

Effective August 2003, the Company issued $150 million of Senior Notes due in 2013 (“the Notes”). The obligations under the Notes are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.

Balance Sheet as of September 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors      Elimination     Consolidated  

Cash and cash equivalents

   $ 76,210      $ 5,622      $ 200,223       $ —        $ 282,055   

Accounts receivable

     75        243,220        186,935         —          430,230   

Inventories

     —          270,873        120,719         —          391,592   

Other current assets

     62,889        6,500        10,783         —          80,172   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     139,174        526,215        518,660         —          1,184,049   

Property, plant and equipment

     4,243        125,031        99,873         —          229,147   

Goodwill

     7,980        407,324        241,629         —          656,933   

Investment in subsidiaries

     3,070,357        193,978        —           (3,264,335 )     —     

Other intangibles

     —          166,620        118,269         —          284,889   

Other long term assets

     (10,340     3,377        47,987         —          41,024   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ 3,211,414      $ 1,422,545      $ 1,026,418       $ (3,264,335 )   $ 2,396,042   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 48,977      $ 326,916      $ 164,799       $ —        $ 540,692   

Inter-company

     1,427,896        (1,588,017     160,121         —          —     

Long-term debt

     432,000        175        679         —          432,854   

Other long term liabilities

     71,524        31,658        88,297         —          191,479   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,980,397        (1,229,268     413,896         —          1,165,025   

Stockholders’ equity

     1,231,017        2,651,813        612,522         (3,264,335 )     1,231,017   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,211,414      $ 1,422,545      $ 1,026,418       $ (3,264,335 )   $ 2,396,042   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Balance Sheet as of December 31, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors      Elimination     Consolidated  

Cash and cash equivalents

   $ 75,621      $ 14,024      $ 195,970       $ —        $ 285,615   

Accounts receivable

     186        196,909        149,186         —          346,281   

Inventories

     —          250,280        97,894         —          348,174   

Other current assets

     59,990        5,989        9,733         —          75,712   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     135,797        467,202        452,783         —          1,055,782   

Property, plant and equipment, net

     3,655        123,182        95,185         —          222,022   

Goodwill

     7,980        399,419        180,132         —          587,531   

Investment in subsidiaries

     2,675,378        183,357        —           (2,858,735     —     

Other intangibles, net

     —          174,351        83,004         —          257,355   

Other long term assets

     (9,946     5,640        40,569         —          36,263   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,812,864      $ 1,353,151      $ 851,673       $ (2,858,735   $ 2,158,953   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 72,396      $ 282,671      $ 186,318         —        $ 541,385   

Intercompany

     1,222,650        (1,303,441     80,791         —          —     

Long-term debt

     395,000        198        607         —          395,805   

Other long term liabilities

     75,174        33,790        65,155         —          174,119   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,765,220        (986,782     332,871         —          1,111,309   

Stockholders’ equity

     1,047,644        2,339,933        518,802         (2,858,735     1,047,644   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,812,864      $ 1,353,151      $ 851,673       $ (2,858,735   $ 2,158,953   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income Statement for the Three Months Ended September 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 405,624      $ 219,621      $ (37,652   $ 587,593   

Cost of sales

     (428     (264,211     (169,652     17,977        (416,314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (428     141,413        49,969        (19,675     171,279   

Operating expenses

     (14,584     (37,786     (22,067     —          (74,437
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (15,012     103,627        27,902        (19,675     96,842   

Interest (expense) income, net

     (5,459     3,305        (916     —          (3,070

Other income (expense), net

     100        (860     (633     —          (1,393

Equity earnings

     102,624        24,971        —          (127,595     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     82,253        131,043        26,353        (147,270     92,379   

Income tax expense

     (19,259     (3,428     (6,698     —          (29,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 62,994      $ 127,615      $ 19,655      $ (147,270   $ 62,994   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 62,296      $ 127,615      $ 31,571      $ (147,270   $ 74,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

 

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Table of Contents

Income Statement for the Three Months Ended September 30, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 352,493      $ 182,465      $ (36,118   $ 498,840   

Cost of sales

     (903     (216,913     (147,007     13,134        (351,689
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (903     135,580        35,458        (22,984     147,151   

Operating expenses

     (16,021     (37,922     (17,755     —          (71,698
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (16,924     97,658        17,703        (22,984     75,453   

Interest (expense) income, net

     (5,538     1,178        596        —          (3,764

Other income (expense), net

     173        211        (1,913     —          (1,529

Equity earnings

     82,561        21,337        —          (103,898     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     60,272        120,384        16,386        (126,882     70,160   

Income tax expense

     (13,672     (2,868     (7,020     —          (23,560
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 46,600      $ 117,516      $ 9,366      $ (126,882   $ 46,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 48,788      $ 117,516      $ (28,426   $ (126,882   $ 10,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

Income Statement for the Nine Months Ended September 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 1,251,666      $ 653,230      $ (124,174   $ 1,780,722   

Cost of sales

     (776     (810,101     (507,413     51,655        (1,266,635
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (776     441,565        145,817        (72,519     514,087   

Operating expenses

     (47,356     (115,649     (59,265     —          (222,270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (48,132     325,916        86,552        (72,519     291,817   

Interest (expense) income, net

     (16,291     5,489        499        —          (10,303

Other income (expense), net

     8,221        (6,954     (2,551     —          (1,284

Equity earnings

     304,263        61,931        —          (366,194     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     248,061        386,382        84,500        (438,713     280,230   

Income tax expense

     (61,094     (10,239     (21,930     —          (93,263
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 186,967      $ 376,143      $ 62,570      $ (438,713   $ 186,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 186,486      $ 376,143      $ 68,868      $ (438,713   $ 192,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

 

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Table of Contents

Income Statement for the Nine Months Ended September 30, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 1,006,000      $ 527,089      $ (100,091   $ 1,432,998   

Cost of sales

     (1,282     (645,743     (405,980     43,097        (1,009,908
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (1,282     360,257        121,109        (56,994     423,090   

Operating expenses

     (64,002     (106,670     (54,226     —          (224,898
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (65,284     253,587        66,883        (56,994     198,192   

Interest (expense) income, net

     (16,501     3,463        1,797        —          (11,241

Other income (expense), net

     7,567        (816     (8,230     —          (1,479

Equity earnings

     231,392        49,370        —          (280,762     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     157,174        305,604        60,450        (337,756     185,472   

Income tax expense

     (33,288     (9,897     (18,401     —          (61,586
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 123,866      $ 295,707      $ 42,049      $ (337,756   $ 123,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 126,663      $ 295,707      $ 31,353      $ (337,756   $ 115,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash (used for) provided by operating activities

   $ (4,856   $ 390,163      $ 166,931      $ (438,713   $ 113,525   

Net cash used for investing activities

     (3,841     (22,366     (99,860     —          (126,067

Net cash provided by (used for) financing activities

     9,286        (376,199     (62,506     438,713        9,294   

Effect of changes in currency exchange rates

     —          —          (312     —          (312
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

     589        (8,402     4,253        —          (3,560

Cash, beginning of year

     75,621        14,024        195,970        —          285,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 76,210      $ 5,622      $ 200,223      $ —        $ 282,055   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash provided by (used for) operating activities

   $ 9,543      $ 321,525      $ 106,708      $ (337,756   $ 100,020   

Net cash used for investing activities

     (4,082     (30,033     (39,548     —          (73,663

Net cash (used for) provided by financing activities

     (33,944     (295,753     (41,923     337,756        (33,864

Effect of changes in currency exchange rates

     —          —          (8,298     —          (8,298
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash

     (28,483     (4,261     16,939        —          (15,805

Cash, beginning of year

     42,714        13,226        181,001        —          236,941   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 14,231      $ 8,965      $ 197,940      $ —        $ 221,136   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

16. OTHER INCOME (EXPENSE), NET

The components of other income (expense) are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

In thousands

   2012     2011     2012     2011  

Foreign currency loss

   $ (1,468   $ (1,795   $ (427   $ (2,061

Other miscellaneous income (expense)

     75        266        (857     582   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

   $ (1,393   $ (1,529   $ (1,284   $ (1,479
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on February 24, 2012.

OVERVIEW

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 20 countries. In the first nine months of 2012, about 50% of the Company’s revenues came from customers outside the U.S.

Management Review and Future Outlook

Wabtec’s long-term financial goals are to generate cash flow in excess of net income, maintaining a strong credit profile while minimizing our overall cost of capital; increase margins through strict attention to cost controls and implementation of the Wabtec Performance System; and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company’s current operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge market activity. The North America freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. Based on those fluctuations, railroads can increase or decrease purchases of new locomotives and freight cars. In 2011 U.S. freight rail traffic increased due to the improving overall economy, which had a favorable effect on the Company’s Freight Segment, with increased demand for new locomotives and freight cars, and for aftermarket products and services. Through mid-October, 2012 compared to the previous year, according to the Association of American Railroads, carloadings decreased 2.7% and revenue ton-miles decreased 1.7%, while intermodal loadings increased 3.7%. Excluding coal, carloadings increased 3.1%. In 2012, the number of new locomotives delivered is expected to be about 1,200 compared to about 1,100 in 2011. The number of new freight cars delivered is expected to be about 60,000 compared to about 47,000 in 2011.

The North American transit rail industry is driven by government spending and ridership. According to the American Public Transportation Association, ridership increased 2.3% in 2011 and 2% in the second quarter of 2012. In June 2012, the U.S. federal government passed a two-year transportation funding bill, called MAP-21. As part of this bill, funding for transit programs is expected to be about $10.5 billion in each of the next two fiscal years, about the same as it was in the previous three years. Most government entities at all levels continue to face budget issues, which could have a negative effect on demand for the Company’s products and services.

In 2008, the U.S. government enacted rail safety legislation that requires certain freight and passenger railroads to equip certain locomotives with positive train control (“PTC”) technology by the end of 2015. This technology includes an on-board locomotive computer and related software, which are being developed by Wabtec. As the industry leader, Wabtec expects to benefit from increased sales of train control-related products and engineering services as the technology is deployed throughout the industry. Wabtec expects PTC revenue to exceed $200 million in 2012 compared to about $125 million in 2011.

 

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Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe, Asia-Pacific and South America. In Europe, the majority of the rail system serves the passenger transit market, which is larger than the transit market in the U.S. Our presence in the U.K., Germany, Italy and the Netherlands has positioned the Company to take advantage of this market. Asia-Pacific is a growth market and our various joint ventures and direct exports to China have positioned the Company to take advantage of this growth. Economic growth in Australia and Brazil led to growth for the Company in those markets as commodity suppliers use our products to meet the demands of their regional customers.

This year and beyond, general economic and market conditions in the United States and internationally could have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

RESULTS OF OPERATIONS

The following table shows our Consolidated Statements of Operations for the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

In millions

       2012             2011             2012             2011      

Net sales

   $ 587.6      $ 498.9      $ 1,780.7      $ 1,433.0   

Cost of sales

     (416.3     (351.7     (1,266.6     (1,009.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     171.3        147.2        514.1        423.1   

Selling, general and administrative expenses

     (59.8     (57.7     (180.9     (186.4

Engineering expenses

     (10.8     (9.9     (31.1     (27.9

Amortization expense

     (3.9     (4.1     (10.3     (10.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (74.5     (71.7     (222.3     (224.9

Income from operations

     96.8        75.5        291.8        198.2   

Interest expense, net

     (3.0     (3.8     (10.3     (11.2

Other income (expense), net

     (1.4     (1.5     (1.3     (1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     92.4        70.2        280.2        185.5   

Income tax expense

     (29.4     (23.6     (93.2     (61.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Wabtec shareholders

   $ 63.0      $ 46.6      $ 187.0      $ 123.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

THIRD QUARTER 2012 COMPARED TO THIRD QUARTER 2011

The following table summarizes the results of operations for the period:

 

     Three months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 354,659       $ 315,837         12.3

Transit Segment

     232,934         183,003         27.3
  

 

 

    

 

 

    

 

 

 

Net sales

     587,593         498,840         17.8

Income from operations

     96,842         75,453         28.3

Net income attributable to Wabtec shareholders

   $ 62,994       $ 46,600         35.2

 

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The following table shows the major components of the change in sales in the third quarter of 2012 from the third quarter of 2011:

 

In thousands

   Freight Segment     Transit Segment     Total  

Third Quarter 2011 Net Sales

   $ 315,837      $ 183,003      $ 498,840   

Acquisitions

     19,199        19,212        38,411   

Change in Sales by Product Line:

      

Remanufacturing, Overhaul & Build

     4,873        24,711        29,584   

Specialty Products & Electronics

     9,837        5,030        14,867   

Brake Products

     5,735        4,410        10,145   

Other Transit Products

     —          3,973        3,973   

Other

     1,001        (34     967   

Foreign Exchange

     (1,823     (7,371     (9,194
  

 

 

   

 

 

   

 

 

 

Third Quarter 2012 Net Sales

   $ 354,659      $ 232,934      $ 587,593   
  

 

 

   

 

 

   

 

 

 

Net sales increased by $88.7 million to $587.6 million from $498.9 million for the three months ended September 30, 2012 and 2011, respectively. The increase is due to sales from acquisitions of $38.4 million; $29.6 million for Remanufacturing, Overhaul and Build sales from increased demand for freight original equipment locomotives and aftermarket services for locomotives; $14.9 million for Specialty Products and Electronics sales from increased demand for freight original equipment rail products, positive train control electronics and aftermarket products; and $10.1 million for Brake Products sales due to higher demand for original equipment brakes. Company net sales decreased $9.2 million and income from operations decreased $1.1 million due to unfavorable effects of foreign exchange. Net income for the three months ended September 30, 2012 was $63.0 million or $1.30 per diluted share. Net income for the three months ended September 30, 2011 was $46.6 million or $0.96 per diluted share.

Freight Segment sales increased by $38.8 million, or 12.3%, due to $19.2 million from acquisitions; $9.8 million for Specialty Products and Electronics, primarily resulting from increased demand for original equipment rail products, positive train control electronics and aftermarket rail products; $5.7 million for Brake Products; and $4.9 million from demand for freight original equipment locomotives and aftermarket services for locomotives. For the Freight Segment, net sales decreased by $1.8 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $49.9 million, or 27.3%, due to higher sales of $24.7 million from increased demand for transit car rebuild and overhauls; $19.2 million from acquisitions; $5.0 million of electronic sales from increased demand for transit positive train control electronics; $4.4 million for Brake Products; and $4.0 million from certain transit car build contracts and demand for transit bus doors. For the Transit Segment, net sales decreased by $7.4 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit. Cost of Sales increased by $64.6 million to $416.3 million in the third quarter of 2012 compared to $351.7 million in the same period of 2011. In the third quarter of 2012, cost of sales, as a percentage of sales was 70.9% compared to 70.5% in the same period of 2011.

Raw material costs decreased as a percentage of sales to approximately 43% in the third quarter of 2012 from 45% in the same period of 2011. Labor costs increased as a percentage of sales to approximately 12% in the third quarter of 2012 from 11% in the same period of 2011. Overhead costs increased as a percentage of sales to approximately 16% in the third quarter of 2012 from 15% in the same period of 2011. Freight Segment raw material costs decreased as a percentage of sales to approximately 43% in the third quarter of 2012 from 46% in the same period of 2011. Freight Segment labor costs increased as a percentage of sales to approximately 11% in the third quarter of 2012 from 9% in the same period of 2011, and overhead costs increased as a percentage of sales to approximately 15% in the third quarter of 2012 from 14% in the same period of 2011. Transit Segment raw material costs increased as a percentage of sales to approximately 43% in the third quarter of 2012 from 42%

 

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in the same period of 2011. Transit Segment labor costs decreased as a percentage of sales to approximately 13% in the third quarter of 2012 from 14% in the same period of 2011, and overhead costs increased as a percentage of sales to approximately 19% in the third quarter of 2012 from 17% in the same period of 2011. Freight Segment material costs decreased as a percentage of sales due to favorable raw material pricing and product mix. Freight Segment labor costs increased as a percentage of sales due to higher service related sales, which carry high labor costs on a percentage basis.

In general, raw material costs decreased as a percentage of sales reflecting a higher mix of revenue generated from service related sales, which has a lower raw material component as cost of sales. Overhead costs vary as a percentage of sales depending on product mix and changes in sales volume.

In addition, included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $2.2 million higher in the third quarter of 2012 compared to the same period of 2011 due to increased sales and increases for certain transit contracts. As a percentage of sales, warranty expense was 0.9% for the third quarter of 2012 compared to 0.6% for the same period in the previous year.

Gross profit increased to $171.3 million in the third quarter of 2012 compared to $147.2 million in the same period of 2011, for the reasons discussed above. Accordingly, for the third quarter of 2012, gross profit, as a percentage of sales, was 29.1% compared to 29.5%, for the third quarter of 2011.

Operating expenses The following table shows our operating expenses:

 

     Three months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Selling, general and administrative expenses

   $ 59,743       $ 57,676         3.6

Engineering expenses

     10,753         9,894         8.7

Amortization expense

     3,941         4,128         (4.5 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 74,437       $ 71,698         3.8
  

 

 

    

 

 

    

 

 

 

Selling, general, and administrative expenses increased $2.1 million in the third quarter of 2012 compared to the same period of 2011 primarily due to $5.6 million of expenses from acquisitions and $1.6 million of incentive and non-cash compensation, partially offset by a decrease of $1.6 million for other legal costs and a $3.5 million decrease in selling, general and administrative expenses resulting from cost saving initiatives. Engineering expense increased by $0.9 million in the third quarter of 2012 compared to the same period of 2011 as the company focused engineering resources on product development. Costs related to engineering for specific customer contracts are included in cost of sales. Total operating expenses were 12.7% and 14.4% of sales for the third quarter of 2012 and 2011, respectively.

The following table shows our segment operating expense:

 

     Three months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 37,621       $ 36,589         2.8

Transit Segment

     33,571         29,050         15.6

Corporate

     3,245         6,059         (46.4 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 74,437       $ 71,698         3.8
  

 

 

    

 

 

    

 

 

 

 

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Segment operating expenses consist of specific segment costs such as, sales and marketing, information technology, insurance, and audit and tax fees, allocated corporate costs, and other segment specific discrete charges. Corporate costs are allocated to the freight and transit segments based on segment revenues. Certain corporate departmental expenses are not allocated.

Freight segment operating expenses increased $1.0 million in the third quarter of 2012 compared to the same period of 2011 because of $2.0 million of incremental expense from acquisitions, partially offset by a decrease in selling, general and administrative expenses realized from cost saving initiatives. Freight segment operating expenses were 10.4% and 11.4% of sales for the third quarter of 2012 and 2011, respectively.

Transit segment operating expenses increased $4.5 million in the third quarter of 2012 compared to the same period of 2011 because of $3.6 million of incremental expense from acquisitions and an increase of $0.9 million in the expenses allocated to the operating segments. Transit segment operating expenses were 14.5% and 15.6% of sales for the third quarter of 2012 and 2011, respectively.

Corporate non-allocated operating expenses decreased $2.8 million in the third quarter of 2012 compared to the same period of 2011 primarily due to other legal cost discussed above and decreases in other non-allocated departmental expenses.

Income from operations Income from operations totaled $96.8 million or 16.5% of sales in the third quarter of 2012 compared to $75.5 million or 15.1% of sales in the same period of 2011. Income from operations increased due to higher sales volume, partially offset by higher operating expenses discussed above.

Interest expense, net Overall interest expense, net, was comparable to the prior period.

Other income (expense), net The Company recorded foreign exchange losses of $1.5 million and $1.8 million, in the third quarter of 2012 and 2011, respectively, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 31.8% and 33.6% for the third quarter of 2012 and 2011, respectively. The decrease in the effective rate is primarily due to refund claims filed in the current quarter.

Net income Net income for the third quarter of 2012 increased $16.4 million, compared with the same period of 2011. The increase in net income is due to higher sales volume and lower effective tax rate, partially offset by higher operating expenses discussed above.

FIRST NINE MONTHS OF 2012 COMPARED TO FIRST NINE MONTHS OF 2011

The following table summarizes the results of operations for the period:

 

     Nine months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 1,159,653       $ 860,729         34.7

Transit Segment

     621,069         572,269         8.5
  

 

 

    

 

 

    

 

 

 

Net sales

     1,780,722         1,432,998         24.3

Income from operations

     291,817         198,192         47.2

Net income attributable to Wabtec shareholders

   $ 186,967       $ 123,886         50.9

 

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The following table shows the major components of the change in sales in the first nine months of 2012 from the first nine months of 2011:

 

In thousands

   Freight Segment     Transit Segment     Total  

First Nine Months of 2011 Net Sales

   $ 860,729      $ 572,269      $ 1,432,998   

Acquisitions

     59,775        36,836        96,611   

Change in Sales by Product Line:

      

Specialty Products & Electronics

     149,911        12,602        162,513   

Remanufacturing, Overhaul & Build

     52,256        18,748        71,004   

Brake Products

     34,321        (10,238     24,083   

Other Transit Products

     —          5,875        5,875   

Other

     7,758        835        8,593   

Foreign Exchange

     (5,097     (15,858     (20,955
  

 

 

   

 

 

   

 

 

 

First Nine Months of 2012 Net Sales

   $ 1,159,653      $ 621,069      $ 1,780,722   
  

 

 

   

 

 

   

 

 

 

Net sales increased by $347.7 million to $1,780.7 million from $1,433.0 million for the nine months ended September 30, 2012 and 2011, respectively. The increase is due to higher sales of $162.5 million for Specialty Products and Electronics from increased demand for freight original equipment rail products, positive train control electronics and aftermarket products; $96.6 million from acquisitions; $71.0 million for Remanufacturing, Overhaul Build sales from increased demand for freight original equipment locomotives and aftermarket services for locomotives; $24.1 million for Brake Products sales due to higher demand for original equipment brakes; and $8.6 million for other products primarily from increased international demand. Company net sales decreased $21.0 million and income from operations decreased $2.0 million due to unfavorable effects of foreign exchange. Net income for the nine months ended September 30, 2012 was $187.0 million or $3.85 per diluted share. Net income for the nine months ended September 30, 2011 was $123.9 million or $2.56 per diluted share. Net income increased due to higher sales volume and decreased operating expenses discussed below.

Freight Segment sales increased by $298.9 million, or 34.7%, due to higher sales of $149.9 million for Specialty Products and Electronics, primarily resulting from increased demand for original equipment rail products, positive train control electronics and aftermarket rail products; $59.8 million from acquisitions; $52.3 million from demand for freight original equipment locomotives and aftermarket services for locomotives; and $34.3 million for Brake Products. For the Freight Segment, net sales decreased by $5.1 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $48.8 million, or 8.5%, due to $36.8 million from acquisitions; higher sales of $18.7 million from demand for overhaul and aftermarket services; and $12.6 million of higher electronic sales from increased demand for transit positive train control electronics. Partially offsetting these increases was a decrease of $10.2 million from decreased demand for transit brake products and the completion of certain transit locomotive build contracts. For the Transit Segment, net sales decreased by $15.9 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit Cost of Sales increased by $256.7 million to $1,266.6 million in the first nine months of 2012 compared to $1,009.9 million in the same period of 2011. In the first nine months of 2012, cost of sales, as a percentage of sales was 71.1% compared to 70.5% in the same period of 2011.

Raw material costs as a percentage of sales were approximately 43% in the first nine months of 2012 and 2011. Labor costs as a percentage of sales were approximately 11% in the first nine months of 2012 and 2011. Overhead costs as a percentage of sales were approximately 17% in the first nine months of 2012 and 2011. Freight Segment raw material costs as a percentage of sales were approximately 44% in the first nine months of 2012 and 2011. Freight Segment labor costs increased as a percentage of sales to approximately 11% in the first nine months of 2012 from 10% in the same period of 2011, and overhead costs as a percentage of sales were approximately 15% in the first nine months of 2012 and 2011. Transit Segment raw material costs decreased as a percentage of sales to

 

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approximately 42% in the first nine months of 2012 from 43% in the same period of 2011. Transit Segment labor costs increased as a percentage of sales to approximately 13% in the first nine months of 2012 from 12% in the same period of 2011, and overhead costs increased as a percentage of sales to approximately 19% in the first nine months of 2012 from 18% in the same period of 2011. Transit Segment labor costs increased as a percentage of sales due to higher service related sales, which carry higher labor costs on a cost of sales percentage basis. Overhead costs vary as a percentage of sales depending on product mix and changes in sales volume.

In addition, included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $5.7 million higher in the first nine months of 2012 compared to the same period of 2011 due to increased sales and increases for certain transit contracts. As a percentage of sales, warranty expense was 1.0% for the first nine months of 2012 compared to 0.8% for the same period in the previous year.

Gross profit increased to $514.1 million in the first nine months of 2012 compared to $423.1 million in the same period of 2011, for the reasons discussed above. Accordingly, for the first nine months of 2012, gross profit, as a percentage of sales, was 28.9% compared to 29.5%, for the first nine months of 2011.

Operating expenses The following table shows our operating expenses:

 

     Nine months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Selling, general and administrative expenses

   $ 180,935       $ 186,435         (3.0 )% 

Engineering expenses

     31,047         27,914         11.2

Amortization expense

     10,288         10,549         (2.5 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 222,270       $ 224,898         (1.2 )% 
  

 

 

    

 

 

    

 

 

 

Selling, general, and administrative expenses decreased $5.5 million in the first nine months of 2012 compared to the same period of 2011. The decrease is due primarily due to an $18.1 million charge for a court ruling, partially offset by a benefit of $2.4 million for a settlement related to a prior acquisition which were both recorded in the second quarter of 2011. Increases include $10.8 million of expenses from acquisitions, and $4.3 million of incentive and non-cash compensation. Engineering expense increased by $3.1 million in the first nine months of 2012 compared to the same period of 2011 as the company focused engineering resources on product development. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense decreased slightly in the first nine months of 2012 compared to the same period in 2011 due to amortization of intangibles in 2011 associated with acquisitions. Total operating expenses were 12.5% and 15.7% of sales for the first nine months of 2012 and 2011, respectively.

The following table shows our segment operating expenses:

 

     Nine months ended September 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 118,661       $ 107,220         10.7

Transit Segment

     91,758         84,212         9.0

Corporate

     11,851         33,466         (64.6 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 222,270       $ 224,898         (1.2 )% 
  

 

 

    

 

 

    

 

 

 

Segment operating expenses consist of specific segment costs such as, sales and marketing, information technology, insurance, and audit and tax fees, allocated corporate costs, and other segment specific discrete charges. Corporate costs are allocated to the freight and transit segments based on segment revenues. Certain corporate departmental expenses are not allocated.

 

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Freight segment operating expenses increased $11.4 million in the first nine months of 2012 compared to the same period of 2011 because of $5.6 million of expenses from acquisitions, an increase of $3.4 million in expenses allocated to the operating segments and an increase in selling, general and administrative expense supporting higher sales volume. Freight segment operating expenses were 10.1% and 12.3% of sales for the first nine months of 2012 and 2011, respectively.

Transit segment operating expenses increased $7.5 million in the first nine months of 2012 compared to the same period of 2011 because of $5.2 million of expenses from acquisitions and a benefit of $2.4 million for a settlement related to a prior acquisition which was recorded in the second quarter of 2011, an increase of $0.3 million in the expenses allocated to the operating segments, partially offset by a decrease in other selling, general and administrative expenses from cost saving initiatives. Transit segment operating expenses were 14.7% and 14.6% of sales for the first nine months of 2012 and 2011, respectively.

Corporate non-allocated operating expenses decreased $21.6 million in the first nine months of 2012 compared to the same period of 2011 because of the charge for a court ruling discussed above and decreases in other non-allocated departmental expenses.

Income from operations Income from operations totaled $291.8 million or 16.4% of sales in the first nine months of 2012 compared to $198.2 million or 13.8% of sales in the same period of 2011. Income from operations increased due to higher sales volume and decreased operating expenses discussed above.

Interest expense, net Overall interest expense, net, was comparable to the prior period.

Other income (expense), net The Company recorded foreign exchange losses of $0.4 million and $2.1 million in the first nine months of 2012 and 2011, respectively, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 33.3% and 33.2% for the first nine months of 2012 and 2011, respectively.

Net income Net income for the first nine months of 2012 increased $63.1 million, compared with the same period of 2011. The increase in net income is due to higher sales volume and decreased operating expenses discussed above.

Liquidity and Capital Resources

Liquidity is provided primarily by operating cash flow and borrowings under the Company’s unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:

 

     Nine months ended
September 30,
 

In thousands

   2012     2011  

Cash provided by (used for):

    

Operating activities

   $ 113,525      $ 100,020   

Investing activities

     (126,067     (73,663

Financing activities

     9,294        (33,864

Decrease in cash

   $ (3,560   $ (15,805

Operating activities In the first nine months of 2012 and 2011, cash provided by operations was $113.5 million and $100.0 million, respectively. In comparison to the first nine months of 2011, cash provided by operations in 2012 resulted from higher net income and higher non-cash items, offset by a net increase in working capital. In 2012, accounts receivable increased by $71.4 million, due to higher sales, and inventory increased by $26.6 million from the prior year due to certain Transit Segment contracts and to support the higher

 

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sales volume. Accounts payable decreased by $18.6 million due to timing of payments and accrued income taxes decreased by $17.4 million due to payments. All other operating assets and liabilities, net, provided cash of $15.9 million due primarily to an increase of $30.3 million in customer deposits for certain contracts and the payment timing of certain accrued liabilities. In 2011, accounts receivable increased by $80.3 million and inventory increased by $63.4 million from the prior year. Accounts payable decreased by $3.7 million. All other operating assets and liabilities, net, provided cash of $72.2 million due primarily to the accrual of $18.1 million for a court ruling, a $44.3 million increase in customer deposits for certain contracts and the payment timing of certain accrued liabilities.

Investing activities In the first nine months of 2012 and 2011, cash used in investing activities was $126.1 million and $73.7 million, respectively. Net cash paid for acquisitions was $102.3 million and $51.8 million for the first nine months of 2012 and 2011, respectively. Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions. Capital expenditures were $24.7 million and $22.2 million in the first nine months of 2012 and 2011, respectively.

Financing activities In the first nine months of 2012, cash provided by financing activities was $9.2 million, which included $211.0 million in proceeds from debt and $174.0 million of repayments of debt on the revolving credit facility, $5.3 million of dividend payments and $28.0 million for the repurchase of 376,300 shares of stock. In the first nine months of 2011, cash used in financing activities was $33.9 million, which included $124.0 million in proceeds from debt and $110.0 million of repayments of debt on the revolving credit facility, $29.9 million of debt repayments on the term loan and other debt, $2.4 million of dividend payments and $23.8 million for the repurchase of 403,600 shares of stock.

The following table shows outstanding indebtedness at September 30, 2012 and December 31, 2011.

 

In thousands

   September 30,
2012
     December 31,
2011
 

6.875% Senior Notes, due 2013

   $ 150,000       $ 150,000   

Revolving Credit Facility

     282,000         245,000   

Capital Leases

     897         873   
  

 

 

    

 

 

 

Total

     432,897         395,873   

Less—current portion

     43         68   
  

 

 

    

 

 

 

Long-term portion

   $ 432,854       $ 395,805   
  

 

 

    

 

 

 

Cash balance at September 30, 2012 and December 31, 2011 was $282.1 million and $285.6 million, respectively.

2011 Refinancing Credit Agreement

On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility with a consortium of commercial banks. This “2011 Refinancing Credit Agreement” provides the company with a $600 million, five-year revolving credit facility. The Company incurred approximately $2.0 million of deferred financing cost related to the 2011 Refinancing Credit Agreement. The facility expires on November 7, 2016.

Refer to Note 6 of the “Notes to Condensed Consolidated Financial Statements” for additional information regarding the 2011 Refinancing Credit Agreement.

6.875% Senior Notes Due August 2013

In August 2003, the Company issued $150.0 million of Senior Notes due in 2013 (“the Notes”). The Notes were issued at par. Interest on the Notes accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement and for general corporate purposes. The principal balance is due in full at maturity. The Company has both the intent and ability to refinance the Notes, maturing August 2013, on a long term basis

 

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utilizing capacity under the 2011 Refinancing Credit Agreement. The 2011 Refinancing Credit Agreement will provide available bank borrowing capacity sufficient to refinance the Notes on a long-term basis. The Notes are included in the long-term portion of debt as of September 30, 2012. The Company is in compliance with the restrictions and covenants in the indenture under which the Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities. Refer to Note 6 of the “Notes to Condensed Consolidated Financial Statements” for additional information regarding the Notes.

Management believes that based on current levels of operations and forecasted earnings, cash flow and liquidity will be sufficient to fund working capital and capital equipment needs as well as meeting debt service requirements. If sources of funds were to fail to satisfy the Company’s cash requirements, the Company may need to refinance our existing debt or obtain additional financing. There is no assurance that such new financing alternatives would be available, and, in any case, such new financing, if available, may be more costly and burdensome than the debt agreements currently in place.

Company Stock Repurchase Plan

On May 11, 2011, the Board of Directors increased its stock repurchase authorization to $150 million of the Company’s outstanding shares. Through September 30, 2012, repurchases are $54.0 million, leaving $96.0 million under the authorization. This share repurchase authorization supersedes the previous authorization of $150 million of which $39.4 million was remaining.

The Company intends to purchase shares on the open market or in negotiated or block trades. No time limit was set for the completion of the programs which conforms to the requirements under the 2011 Refinancing Credit Agreement, as well as the Notes currently outstanding.

During the first nine months of 2012, the Company repurchased 376,300 shares of its stock at an average price of $74.40 per share. During 2011, the Company repurchased 438,600 shares of its stock at an average price of $59.33 per share. All purchases were on the open market.

Contractual Obligations and Off-Balance Sheet Arrangements

As of September 30, 2012, the Company has recognized a total liability of $9.7 million for unrecognized tax benefits related to uncertain tax positions. At this time, the Company is unable to make a reasonably reliable estimate of the timing of cash settlement for any of the unrecognized tax benefits due to the uncertainty of the timing and outcome of its audits and other factors.

Since December 31, 2011, there have been no other significant changes in the total amount of the Company’s contractual obligations or the timing of cash flows in accordance with those obligations, as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Forward Looking Statements

We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.

These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:

Economic and industry conditions

 

   

prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and South Africa;

 

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decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;

 

   

reliance on major original equipment manufacturer customers;

 

   

original equipment manufacturers’ program delays;

 

   

demand for services in the freight and passenger rail industry;

 

   

demand for our products and services;

 

   

orders either being delayed, cancelled, not returning to historical levels, or reduced or any combination of the foregoing;

 

   

consolidations in the rail industry;

 

   

continued outsourcing by our customers; industry demand for faster and more efficient braking equipment;

 

   

fluctuations in interest rates and foreign currency exchange rates; or

 

   

availability of credit;

Operating factors

 

   

supply disruptions;

 

   

technical difficulties;

 

   

changes in operating conditions and costs;

 

   

increases in raw material costs;

 

   

successful introduction of new products;

 

   

performance under material long-term contracts;

 

   

labor relations;

 

   

completion and integration of acquisitions; or

 

   

the development and use of new technology;

Competitive factors

 

   

the actions of competitors;

Political/governmental factors

 

   

political stability in relevant areas of the world;

 

   

future regulation/deregulation of our customers and/or the rail industry;

 

   

levels of governmental funding on transit projects, including for some of our customers;

 

   

political developments and laws and regulations, including those related to Positive Train Control;

 

   

federal and state income tax legislation; or

 

   

the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental, asbestos-related matters and pension liabilities; and

Transaction or commercial factors

 

   

the outcome of negotiations with partners, governments, suppliers, customers or others.

 

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Statements in this 10-Q apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Critical Accounting Policies

A summary of critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, warranty reserves, pensions and postretirement benefits, income taxes and revenue recognition. There have been no significant changes in accounting policies since December 31, 2011.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. The Company’s variable rate debt represents 40% and 35% of total long-term debt at September 30, 2012 and December 31, 2011, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at September 30, 2012 would increase or decrease interest expense by about $1.8 million. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swap agreements which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Condensed Consolidated Financial Statements” for additional information regarding interest rate risk.

Foreign Currency Exchange Risk

The Company is subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the first nine months of 2012, approximately 50% of Wabtec’s net sales were to customers in the United States, 10% in the United Kingdom, 9% in Australia, 8% in Canada, 6% in Mexico, 2% in Germany and 15% in other international locations. To reduce the impact of changes in currency exchange rates, the Company has periodically entered into foreign currency forward contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Condensed Consolidated Financial Statements” for more information regarding foreign currency exchange risk.

 

Item 4. CONTROLS AND PROCEDURES

Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2012. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2012, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

There have been no material changes regarding the Company’s commitments and contingencies as described in Note 18 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 11, 2011, the Board of Directors increased its stock repurchase authorization to $150 million of the Company’s outstanding shares. Through September 30, 2012 repurchases are $54.0 million, leaving $96.0 million under the authorization. This share repurchase authorization supersedes the previous authorization of $150 million, of which $39.4 million was remaining.

The Company intends to purchase shares on the open market or in negotiated or block trades. No time limit was set for the completion of the programs which conforms to the requirements under the 2011 Refinancing Credit Agreement, as well as the Notes currently outstanding.

During the first nine months of 2012, the Company repurchased 376,300 shares of its stock at an average price of $74.40 per share. All purchases were on the open market.

 

Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid per
Share
     Number of
Shares
Purchased
for
Announced
Program
     Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
 

July 1, 2012 to July 28, 2012

     —           —           —         $ 102,050,526   

July 29, 2012 to August 25, 2012

     10,000         78.22         10,000         101,268,318   

August 26, 2012 to September 29, 2012

     67,500         78.34         67,500         95,980,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     77,500       $ 78.32         77,500       $ 95,980,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 4. MINE SAFETY DISCLOSURES

Not Applicable

 

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Item 6. EXHIBITS

The following exhibits are being filed with this report:

 

  31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

By:   /S/    ALVARO GARCIA-TUNON
  Alvaro Garcia-Tunon,
  Executive Vice President,
  Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
DATE: November 2, 2012

 

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EXHIBIT INDEX

 

  31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

42

Exhibit 31.1

CERTIFICATION

I, Albert J. Neupaver, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2012

 

By:

 

/s/    ALBERT J. NEUPAVER        

Name:   Albert J. Neupaver
Title:   President, Chief Executive Officer and Director

Exhibit 31.2

CERTIFICATION

I, Alvaro Garcia-Tunon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2012

 

By:

 

/s/    ALVARO GARCIA-TUNON        

Name:   Alvaro Garcia-Tunon
Title:  

Executive Vice President,

Chief Financial Officer

Exhibit 32.1

CERTIFICATION

Pursuant to 18 U.S.C. § 1350, the undersigned officers of Westinghouse Air Brake Technologies Corporation (the “Company”), hereby certify, to the best of their knowledge, that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/S/    ALBERT J. NEUPAVER        

  Albert J. Neupaver
  President, Chief Executive Officer and Director

 

Date: November 2, 2012

By:

 

/S/    ALVARO GARCIA-TUNON        

 

Alvaro Garcia-Tunon,

Executive Vice President,

Chief Financial Officer

 

Date: November 2, 2012

v2.4.0.6
Accounting Policies - Additional Information (Detail) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Dec. 31, 2011
Fair Value, Option, Quantitative Disclosures [Line Items]          
Unbilled accounts receivables $ 92,500,000   $ 92,500,000   $ 58,900,000
Customer deposits 104,400,000   104,400,000   72,800,000
Provisions for loss contracts 9,900,000   9,900,000   9,300,000
Deferred pre-production costs 16,400,000   16,400,000   15,400,000