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, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 033-90866
____________________________________
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________
Delaware
25-1615902
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1001 Air Brake Avenue
Wilmerding, PA
15148
(Address of principal executive offices)
(Zip code)
412-825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 26, 2015
Common Stock, $.01 par value per share
 
96,478,074 shares



 




WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
September 30, 2015
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
PART I—FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

3


PART I—FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
In thousands, except shares and par value
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
208,241

 
$
425,849

Accounts receivable
474,213

 
443,464

Unbilled accounts receivable
151,131

 
187,762

Inventories
517,486

 
510,949

Deposit in escrow
209,128

 

Deferred income taxes
46,025

 
43,953

Other
43,867

 
25,887

Total current assets
1,650,091

 
1,637,864

Property, plant and equipment
707,925

 
683,034

Accumulated depreciation
(356,691
)
 
(343,923
)
Property, plant and equipment, net
351,234

 
339,111

Other Assets
 
 
 
Goodwill
852,995

 
862,338

Other intangibles, net
436,991

 
422,811

Other noncurrent assets
34,771

 
41,717

Total other assets
1,324,757

 
1,326,866

Total Assets
$
3,326,082

 
$
3,303,841

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
319,225

 
$
399,845

Customer deposits
106,889

 
111,797

Accrued compensation
71,478

 
70,857

Accrued warranty
72,693

 
68,031

Current portion of long-term debt
430

 
792

Other accrued liabilities
83,934

 
87,480

Total current liabilities
654,649

 
738,802

Long-term debt
450,589

 
520,403

Accrued postretirement and pension benefits
78,437

 
81,908

Deferred income taxes
113,758

 
112,915

Accrued warranty
22,257

 
19,818

Other long-term liabilities
20,951

 
21,697

Total liabilities
1,340,641

 
1,495,543

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

 

Common stock, $.01 par value; 200,000,000 shares authorized:
 
 
 
132,349,534 shares issued and 96,478,074 and 96,274,395 outstanding
 
 
 
at September 30, 2015 and December 31, 2014, respectively
1,323

 
1,323

Additional paid-in capital
463,151

 
448,531

Treasury stock, at cost, 35,871,460 and 36,075,139 shares, at
 
 
 
at September 30, 2015 and December 31, 2014, respectively
(409,792
)
 
(392,262
)
Retained earnings
2,186,673

 
1,909,136

Accumulated other comprehensive loss
(257,208
)
 
(159,486
)
Total Westinghouse Air Brake Technologies Corporation shareholders' equity
1,984,147

 
1,807,242

Non-controlling interest (minority interest)
1,294

 
1,056

Total shareholders’ equity
1,985,441

 
1,808,298

Total Liabilities and Shareholders’ Equity
$
3,326,082

 
$
3,303,841

The accompanying notes are an integral part of these statements.

3


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Unaudited
 
Unaudited
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except per share data
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net sales
$
809,527

 
$
797,271

 
$
2,475,149

 
$
2,223,588

Cost of sales
(552,458
)
 
(549,813
)
 
(1,694,961
)
 
(1,541,903
)
Gross profit
257,069

 
247,458

 
780,188

 
681,685

Selling, general and administrative expenses
(82,206
)
 
(88,359
)
 
(255,969
)
 
(231,422
)
Engineering expenses
(17,239
)
 
(16,391
)
 
(51,852
)
 
(43,558
)
Amortization expense
(5,546
)
 
(6,731
)
 
(16,009
)
 
(16,559
)
Total operating expenses
(104,991
)
 
(111,481
)
 
(323,830
)
 
(291,539
)
Income from operations
152,078

 
135,977

 
456,358

 
390,146

Other income and expenses
 
 
 
 
 
 
 
Interest expense, net
(4,351
)
 
(4,594
)
 
(12,698
)
 
(13,569
)
Other (expense) income, net
(2,937
)
 
(154
)
 
(7,690
)
 
72

Income from operations before income taxes
144,790

 
131,229

 
435,970

 
376,649

Income tax expense
(45,609
)
 
(41,074
)
 
(139,121
)
 
(117,655
)
Net income attributable to Wabtec shareholders
$
99,181

 
$
90,155

 
$
296,849

 
$
258,994

 
 
 
 
 
 
 
 
Earnings Per Common Share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
1.03

 
$
0.94

 
$
3.08

 
$
2.69

Diluted
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
1.02

 
$
0.93

 
$
3.05

 
$
2.67

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
96,369

 
95,935

 
96,135

 
95,745

Diluted
97,368

 
97,004

 
97,162

 
96,834

 
The accompanying notes are an integral part of these statements.

4


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Unaudited
 
Unaudited
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except per share data
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
99,181

 
$
90,155

 
$
296,849

 
$
258,994

Foreign currency translation loss
(48,474
)
 
(60,964
)
 
(100,323
)
 
(52,876
)
Unrealized (loss) gain on derivative contracts
(1,788
)
 
1,153

 
(2,544
)
 
560

Pension benefit plans and post-retirement benefit plans
2,586

 
2,553

 
5,586

 
4,335

Other comprehensive loss before tax
(47,676
)
 
(57,258
)
 
(97,281
)
 
(47,981
)
Income tax (expense) benefit related to components of
 
 
 
 
 
 
 
other comprehensive income (loss)
164

 
(1,067
)
 
(441
)
 
(1,448
)
Other comprehensive loss, net of tax
(47,512
)
 
(58,325
)
 
(97,722
)
 
(49,429
)
Comprehensive income attributable to Wabtec shareholders
$
51,669

 
$
31,830

 
$
199,127

 
$
209,565

 
The accompanying notes are an integral part of these statements.


5


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
Nine Months Ended
September 30,
In thousands, except per share data
2015
 
2014
 
 
 
 
Operating Activities
 
 
 
Net income attributable to Wabtec shareholders
$
296,849

 
$
258,994

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
48,167

 
44,977

Stock-based compensation expense
20,092

 
19,107

Loss on disposal of property, plant and equipment
1,804

 
114

Excess income tax benefits from exercise of stock options
(2,683
)
 
(2,739
)
Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable and unbilled accounts receivable
(881
)
 
(89,359
)
Inventories
(15,847
)
 
(33,958
)
Accounts payable
(80,701
)
 
40,971

Accrued income taxes
20,964

 
16,355

Accrued liabilities and customer deposits
(12,911
)
 
8,342

Other assets and liabilities
(19,547
)
 
(32,640
)
Net cash provided by operating activities
255,306

 
230,164

Investing Activities
 
 
 
Purchase of property, plant and equipment
(33,079
)
 
(30,977
)
Proceeds from disposal of property, plant and equipment
354

 
340

Acquisitions of businesses, net of cash acquired
(100,108
)
 
(299,661
)
Deposit in escrow
(209,128
)
 

Net cash used for investing activities
(341,961
)
 
(330,298
)
Financing Activities
 
 
 
Proceeds from debt
390,300

 
433,400

Payments of debt
(460,308
)
 
(362,965
)
Purchase of treasury stock
(22,336
)
 
(26,757
)
Proceeds from exercise of stock options and other benefit plans
2,708

 
3,044

Excess income tax benefits from exercise of stock options
2,683

 
2,739

Payment of income tax withholding on share-based compensation
(14,565
)
 

Earn-out settlement

 
(4,429
)
Cash dividends ($0.20 and $0.14 per share for the nine months
 
 
 
ended September 30, 2015 and 2014, respectively)
(19,315
)
 
(13,471
)
Net cash (used for) provided by financing activities
(120,833
)
 
31,561

Effect of changes in currency exchange rates
(10,120
)
 
(4,646
)
Decrease in cash
(217,608
)
 
(73,219
)
Cash, beginning of period
425,849

 
285,760

Cash, end of period
$
208,241

 
$
212,541

 
The accompanying notes are an integral part of these statements.
 


6


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015 (UNAUDITED)

1. BUSINESS
Westinghouse Air Brake Technologies Corporation (“Wabtec”) is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 20 countries. In the first nine months of 2015, about 48% of the Company’s revenues came from customers outside the U.S.

2. PROPOSED TRANSACTION WITH FAIVELEY TRANSPORT S.A.
On July 27, 2015, the Company announced plans to acquire Faiveley Transport S.A. ("Faiveley Transport"), a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries.  Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of valued-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes & Safety (braking systems and couplers).
The transaction has been structured in three steps:
Wabtec made an irrevocable offer to the owners of approximately 51% of Faiveley Transport’s shares for a purchase price of €100 per share, payable 25% in cash and 75% in Wabtec preferred stock.  The preferred stock will have a 1% annual dividend or, if greater, the annual dividend assuming full conversion into common shares, and must be converted after three years into Wabtec common shares at an implied ratio of one Faiveley Transport common share for 1.125 Wabtec common shares. Shareholders owning 51% of Faiveley Transport have entered into exclusive discussions with Wabtec.
Upon completion of required labor group consultations, on October 6, 2015 the 51% shareholders entered into a definitive share purchase agreement and Faiveley Transport entered into an acquisition agreement with Wabtec.
Upon completing the share purchase, Wabtec will commence a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders will have the option to elect to receive €100 per share in cash or Wabtec preferred stock. The preferred stock portion of the consideration is subject to a cap of 75% of Faiveley Transport’s common shares.  Wabtec intends to delist Faiveley Transport from Euronext after the tender offer if minority interests represent less than 5%.
The total purchase price offered is about $1.8 billion, including assumed debt.  Wabtec plans to fund the cash portion of the transaction with cash on hand, existing credit facilities and potentially other debt financing.  Prior to September 30, 2015 Wabtec set aside $209.1 million as an escrow deposit for the Faiveley Transport purchase. The combination of Wabtec and Faiveley Transport would create one of the world’s largest public rail equipment companies, with revenues of about $4.5 billion and a presence in all key freight rail and passenger transit geographies worldwide. 
Closing of the transaction is subject to various conditions, including completion of regulatory requirements. These steps are currently on-going and the timing of completion is unknown.


3. 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.

7


The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2014. The December 31, 2014 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Revenue Recognition Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition.” Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined.
In general, the Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $151.1 million and $187.8 million, customer deposits were $106.9 million and $111.8 million, and provisions for loss contracts were $8.9 million and $7.1 million at September 30, 2015 and December 31, 2014, respectively.
Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $30.1 million and $24.9 million at September 30, 2015 and December 31, 2014, respectively.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Financial Derivatives and Hedging Activities The Company periodically enters into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counter-party to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis.
To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company has entered into two forward starting interest rate swap agreements with notional values of $150.0 million. As of September 30, 2015, the Company has recorded a current liability of $5.8 million and a corresponding offset in accumulated other comprehensive loss of $3.5 million, net of tax, related to these agreements. For further information regarding the forward starting interest rate swap agreements, see Footnote 7.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings.
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, 2015 and December 31, 2014. Net income attributable to non-controlling interests for the three and nine months ended September 30, 2015 and 2014 was not material.
Recent Accounting Pronouncements In April 2015, the FASB issued Accounting Standards Update No. 2015-3, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-3”) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset.  ASU 2015-3 will become effective for public companies during interim and annual reporting periods beginning after December 15,

8


2015.  Early adoption is permitted.  The adoption of this standard is not expected to have a material impact to the financial statements. The Company will make the required changes in the first quarter of 2016.
In May 2014, the FASB issued ASU no. 2014-9, “Revenue from Contract with Customers.”  The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.  The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Board voted to propose that the standard would take effect for reporting periods beginning after December 15, 2017 and that early adoption would be allowed as of the original effective date. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
Other Comprehensive Income Comprehensive income is defined as net income and all other non-owner changes in shareholders’ equity.
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2015 are as follows:
In thousands
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2014
$
(94,450
)
 
$
(2,243
)
 
$
(62,793
)
 
$
(159,486
)
Other comprehensive (loss) income before reclassifications
(100,323
)
 
(2,503
)
 
2,783

 
(100,043
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
946

 
1,375

 
2,321

Net current period other comprehensive (loss) income
(100,323
)
 
(1,557
)
 
4,158

 
(97,722
)
Balance at September 30, 2015
$
(194,773
)
 
$
(3,800
)
 
$
(58,635
)
 
$
(257,208
)
Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2015 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Operations
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(522
)
 
Cost of sales
Amortization of net loss
1,191

 
Cost of sales
 
669

 
Income from Operations
 
(211
)
 
Income tax expense
 
$
458

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
467

 
Interest expense, net
 
(147
)
 
Income tax expense
 
$
320

 
Net income





9


Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2015 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Operations
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(1,565
)
 
Cost of sales
Amortization of net loss
3,585

 
Cost of sales
 
2,020

 
Income from Operations
 
(645
)
 
Income tax expense
 
$
1,375

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
1,390

 
Interest expense, net
 
(444
)
 
Income tax expense
 
$
946

 
Net income

4. ACQUISITIONS
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment:
On February 4, 2015, the Company acquired Railroad Controls L.P. (“RCL”), a provider of railway signal construction services, for a purchase price of approximately $76.4 million, net of cash acquired, resulting in preliminary goodwill of $12.8 million, none of which will be deductible for tax purposes.
On September 3, 2014, the Company acquired C2CE Pty Ltd. (“C2CE”), a provider of railway signal design services, for a purchase price of approximately $25.5 million, net of cash acquired, resulting in additional goodwill of $15.9 million, none of which will be deductible for tax purposes.
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment:
On June 17, 2015, the Company acquired Metalocaucho (“MTC”), a manufacturer of transit products, primarily rubber components for suspension and vibration control systems, for a purchase price of approximately $23.4 million, net of cash acquired, resulting in preliminary goodwill of $12.1 million, none of which will be deductible for tax purposes.
On August 21, 2014, the Company acquired Dia-Frag (“Dia-Frag”), a manufacturer of friction products for various markets with a focus on motorcycle braking, for a purchase price of approximately $70.6 million, net of cash acquired, resulting in additional goodwill of $35.9 million, none of which will be deductible for tax purposes.
On June 6, 2014, the Company acquired Fandstan Electric Group Ltd. (“Fandstan”), a leading rail and industrial equipment manufacturer for a variety of markets, including rail and tram transportation, industrial and energy, for a purchase price of approximately $199.4 million, net of cash acquired, resulting in additional goodwill of $64.7 million, none of which will be deductible for tax purposes.
The acquisitions listed above include escrow deposits of $40.8 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.




10


For the MTC and RCL 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 C2CE, Dia-Frag, and Fandstan acquisitions, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.
 
MTC
 
RCL
 
C2CE
 
Dia-Frag
 
Fandstan
In thousands
June 17,
2015
 
February 4,
2015
 
September 3,
2014
 
August 21,
2014
 
June 6,
2014
Current assets
$
10,906

 
$
16,445

 
$
9,812

 
$
12,158

 
$
124,280

Property, plant & equipment
1,510

 
11,983

 
1,853

 
13,749

 
67,948

Goodwill
12,141

 
12,840

 
15,896

 
35,850

 
64,713

Other intangible assets
7,649

 
40,403

 
3,654

 
26,150

 
50,598

Other assets
114

 

 

 
66

 
216

Total assets acquired
32,320

 
81,671

 
31,215

 
87,973

 
307,755

Total liabilities assumed
(8,960
)
 
(5,289
)
 
(5,736
)
 
(17,332
)
 
(108,351
)
Net assets acquired
$
23,360

 
$
76,382

 
$
25,479

 
$
70,641

 
$
199,404

Of the $128.5 million of total acquired intangible assets, $95.2 million was assigned to customer relationships, $25.6 million was assigned to trade names, $2.1 million was assigned to non-compete agreements and $5.6 million was assigned to customer backlog. The trade names were determined to have an indefinite useful life, while the customer relationships’ average useful life is 20 years, and the non-compete useful life is five years.
The following unaudited pro forma consolidated financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2014:
In thousands
Three Months Ended
September 30, 2015
 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2014
Net sales
$
809,527

 
$
835,231

 
$
2,499,388

 
$
2,358,518

Gross profit
257,069

 
260,669

 
787,198

 
726,388

Net income attributable to Wabtec shareholders
99,181

 
96,680

 
299,233

 
281,136

Diluted earnings per share
 
 
 
 
 
 
 
As Reported
$
1.02

 
$
0.93

 
$
3.05

 
$
2.67

Pro forma
$
1.02

 
$
0.99

 
$
3.08

 
$
2.89

    
5. INVENTORIES
The components of inventory, net of reserves, were:
In thousands
September 30,
2015
 
December 31,
2014
Raw materials
$
188,326

 
$
222,059

Work-in-progress
196,379

 
154,094

Finished goods
132,781

 
134,796

Total inventories
$
517,486

 
$
510,949


6. INTANGIBLES
The change in the carrying amount of goodwill by segment for the nine months ended September 30, 2015 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
Balance at December 31, 2014
$
515,067

 
$
347,271

 
$
862,338

Adjustment to preliminary purchase allocation
45

 
(4,140
)
 
(4,095
)
Acquisitions
12,840

 
12,141

 
24,981

Foreign currency impact
(9,006
)
 
(21,223
)
 
(30,229
)
Balance at September 30, 2015
$
518,946

 
$
334,049

 
$
852,995


11


As of September 30, 2015 and December 31, 2014, the Company’s trademarks had a net carrying amount of $167.6 million and $170.1 million, respectively, and the Company believes these intangibles have indefinite lives.
Intangible assets of the Company, other than goodwill and trademarks, consist of the following:
In thousands
September 30,
2015
 
December 31,
2014
Patents, non-compete and other intangibles, net of accumulated
 
 
 
amortization of $40,364 and $39,780
$
12,002

 
$
14,722

Customer relationships, net of accumulated amortization
 
 
 
of $67,285 and $56,684
257,384

 
237,983

Total
$
269,386

 
$
252,705

The weighted average remaining useful life of patents, customer relationships and intellectual property were 10 years, 16 years and 14 years, respectively. Amortization expense for intangible assets was $5.5 million and $16.0 million for the three and nine months ended September 30, 2015, and $6.7 million and $16.6 million for the three and nine months ended September 30, 2014.
Amortization expense for the five succeeding years is estimated to be as follows (in thousands):
Remainder of 2015
$
6,070

2016
21,005

2017
19,826

2018
18,848

2019
18,405


7. LONG-TERM DEBT
Long-term debt consisted of the following:
In thousands
September 30,
2015
 
December 31,
2014
4.375% Senior Notes, due 2023
$
250,000

 
$
250,000

Revolving Credit Facility
200,000

 
270,000

Capital Leases
1,019

 
1,195

Total
451,019

 
521,195

Less - current portion
430

 
792

Long-term portion
$
450,589

 
$
520,403

2013 Refinancing Credit Agreement
On December 19, 2013, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provides the Company with an $800.0 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The facility expires on December 19, 2018. The 2013 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At September 30, 2015, the Company had available bank borrowing capacity, net of $27.1 million of letters of credit, of approximately $572.9 million, subject to certain financial covenant restrictions.
Under the 2013 Refinancing Credit Agreement, the Company may elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies,  an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies  (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 75 basis points.

12


At September 30, 2015, the weighted average interest rate on the Company’s variable rate debt was 0.94%.  On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement is July 31, 2013, and the termination date is November 7, 2016. The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible.
On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million.  The effective date of the interest rate swap agreement is November 7, 2016, and the termination date is December 19, 2018.  The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing.  During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 2.56% plus the Alternate Rate margin.  The Company is exposed to credit risk in the event of nonperformance by the counterparty.  However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount.  The counterparty is a large financial institution with an excellent credit rating and history of performance.  The Company currently believes the risk of nonperformance is negligible.
The 2013 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2013 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company does not expect that these measurements will limit the Company in executing our operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (the “2013 Notes”).  The 2013 Notes were issued at 99.879% of face value.  Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year.  The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.  The principal balance is due in full at maturity.  The Company incurred $2.6 million of deferred financing costs related to the issuance.  
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.

8. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.
The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.

13


 
U.S.
 
International
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
In thousands, except percentages
2015
 
2014
 
2015
 
2014
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
95

 
54

 
506

 
659

Interest cost
479

 
488

 
1,801

 
2,271

Expected return on plan assets
(542
)
 
(617
)
 
(2,434
)
 
(2,655
)
Net amortization/deferrals
266

 
355

 
655

 
766

Net periodic benefit cost
298

 
280

 
528

 
1,041

 
U.S.
 
International
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except percentages
2015
 
2014
 
2015
 
2014
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
285

 
$
250

 
$
1,518

 
$
1,511

Interest cost
1,437

 
1,552

 
5,391

 
5,936

Expected return on plan assets
(1,626
)
 
(1,857
)
 
(7,284
)
 
(7,116
)
Net amortization/deferrals
798

 
1,665

 
1,962

 
2,292

Net periodic benefit cost
$
894

 
$
1,610

 
$
1,587

 
$
2,623


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 $6.7 million to the international plans and does not expect to make a contribution to the U.S. plans during 2015.

Post Retirement Benefit Plans
In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.
The Company uses a December 31 measurement date for all post retirement plans.
The following tables provide information regarding the Company’s postretirement benefit plans summarized by U.S. and international components.
 
U.S.
 
International
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
In thousands, except percentages
2015
 
2014
 
2015
 
2014
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
2

 
$
7

 
$
11

 
$
10

Interest cost
308

 
289

 
35

 
42

Net amortization/deferrals
(234
)
 
(350
)
 
(10
)
 
(16
)
Net periodic benefit (credit) cost
$
76

 
$
(54
)
 
$
36

 
$
36


14


 
U.S.
 
International
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except percentages
2015
 
2014
 
2015
 
2014
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
6

 
$
27

 
$
33

 
$
28

Interest cost
924

 
881

 
105

 
126

Net amortization/deferrals
(702
)
 
(1,003
)
 
(29
)
 
(46
)
Net periodic benefit (credit) cost
$
228

 
$
(95
)
 
$
109

 
$
108


9. STOCK-BASED COMPENSATION
As of September 30, 2015, 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 has a 10-year term through March 27, 2021 and provides a maximum of 3,800,000 shares for grants or awards. 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 (“the Directors Plan”). No awards may be made under the Directors Plan subsequent to October 31, 2016.
Stock-based compensation expense was $20.1 million and $19.1 million for the nine months ended September 30, 2015 and 2014, respectively. Included in stock-based compensation expense for the nine months ended September 30, 2015 is $1.7 million of expense related to stock options, $4.8 million related to restricted stock, $2.6 million related to restricted units, $10.2 million related to incentive stock awards and $0.8 million related to awards issued for Directors’ fees. At September 30, 2015, unamortized compensation expense related to stock options, restricted stock, restricted units and incentive stock awards expected to vest totaled $30.2 million and will be recognized over a weighted average period of 1.3 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.
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, 2015:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic value
(in thousands)
Outstanding at December 31, 2014
1,147,558

 
$
28.33

 
5.5
 
$
67,205

Granted
84,675

 
87.35

 
 
 
141

Exercised
(112,156
)
 
26.10

 
 
 
7,057

Canceled
(8,751
)
 
65.24

 
 
 
208

Outstanding at September 30, 2015
1,111,326

 
32.76

 
5.1
 
62,525

Exercisable at September 30, 2015
875,157

 
23.83

 
4.3
 
57,051

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,
 
2015
 
2014
Dividend yield
0.14
%
 
0.11
%
Risk-free interest rate
1.82
%
 
2.19
%
Stock price volatility
27.3
%
 
33.2
%
Expected life (years)
5.0

 
5.0


15


The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.
Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006 the Company adopted a restricted stock program. As provided for under the 2011 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 issued incentive stock awards to eligible employees that vest upon attainment of certain cumulative three year performance goals. Based on the Company’s performance for each three-year period then ended, the incentive stock 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, 2015, the Company estimates that it will achieve 121%, 132% and 100% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2015, 2016, and 2017, 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, 2015:
 
Restricted
Stock
and Units
 
Incentive
Stock
Awards
 
Weighted
Average Grant
Date Fair
Value
Outstanding at December 31, 2014
438,543

 
791,608

 
$
47.97

Granted
110,945

 
125,650

 
87.74

Vested
(182,776
)
 
(433,932
)
 
37.76

Adjustment for incentive stock awards expected to vest

 
61,654

 
57.60

Canceled
(9,284
)
 
(6,196
)
 
66.30

Outstanding at September 30, 2015
357,428

 
538,784

 
65.82


10. INCOME TAXES
The overall effective income tax rate was 31.5% and 31.9% for the three and nine months ended September 30, 2015, respectively, and 31.3% and 31.2% for the three and nine months ended September 30, 2014, respectively.  For the three and nine months ended September 30, 2015 the increase in the effective rate is primarily the result of a higher earnings mix in higher tax rate jurisdictions, partially offset by lower state income taxes.   
As of September 30, 2015, the liability for income taxes associated with uncertain tax positions was $13.7 million, of which $5.5 million, if recognized, would favorably affect the Company’s effective tax rate. As of December 31, 2014 the liability associated with uncertain tax positions was $12.6 million, of which $5.5 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, 2015 the total accrued interest and penalties are $2.4 million and $1.7 million, respectively.  As of December 31, 2014 the total accrued interest and penalties were $1.9 million and $1.3 million, respectively.  
At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $4.4 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.   The

16


Internal Revenue Service is currently auditing the 2012 tax year.  With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2011.

11. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:
 
Three Months Ended
September 30,
In thousands, except per share data
2015
 
2014
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
99,181

 
$
90,155

Less: dividends declared - common shares
   and non-vested restricted stock
(7,735
)
 
(5,780
)
Undistributed earnings
91,446

 
84,375

Percentage allocated to common shareholders (1)
99.7
%
 
99.6
%
 
91,172

 
84,038

Add: dividends declared - common shares
7,713

 
5,759

Numerator for basic and diluted earnings per
   common share
$
98,885

 
$
89,797

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
96,369

 
95,935

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
999

 
1,069

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
97,368

 
97,004

Net income per common share attributable to
   Wabtec shareholders
 
 
 
Basic
$
1.03

 
$
0.94

Diluted
$
1.02

 
$
0.93

(1) Basic weighted-average common shares outstanding
96,369

 
95,935

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
96,647

 
96,285

Percentage allocated to common shareholders
99.7
%
 
99.6
%

17


 
Nine Months Ended
September 30,
In thousands, except per share data
2015
 
2014
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
296,849

 
$
258,994

Less: dividends declared - common shares
   and non-vested restricted stock
(19,315
)
 
(13,471
)
Undistributed earnings
277,534

 
245,523

Percentage allocated to common shareholders (1)
99.7
%
 
99.6
%
 
276,701

 
244,541

Add: dividends declared - common shares
19,250

 
13,415

Numerator for basic and diluted earnings per
   common share
$
295,951

 
$
257,956

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
96,135

 
95,745

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
1,027

 
1,089

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
97,162

 
96,834

Net income per common share attributable to
   Wabtec shareholders
 
 
 
Basic
$
3.08

 
$
2.69

Diluted
$
3.05

 
$
2.67

(1) Basic weighted-average common shares outstanding
96,135

 
95,745

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
96,462

 
96,146

Percentage allocated to common shareholders
99.7
%
 
99.6
%
The Company’s non-vested restricted stock contains rights to receive nonforfeitable dividends, and thus, are participating securities requiring the two-class method of computing earnings per share. The calculation of earnings per share for common stock shown above excludes the income attributable to the non-vested restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator.

12. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
 
Nine Months Ended
September 30,
In thousands
2015
 
2014
Balance at December 31, 2014 and 2013 respectively
$
87,849

 
$
60,593

Warranty expense
21,615

 
22,104

Acquisitions
6,001

 
3,567

Warranty claim payments
(18,961
)
 
(14,572
)
Foreign currency impact/other
(1,554
)
 
(980
)
Balance at September 30, 2015 and 2014, respectively
$
94,950

 
$
70,712



18


13. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the 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, 2015, which are included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at September 30, 2015 Using
In thousands
Total Carrying
Value at
September 30,
2015
 
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
$
5,798

 
$

 
$
5,798

 
$

Total
$
5,798

 
$

 
$
5,798

 
$

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2014, which is included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at December 31, 2014 Using
In thousands
Total Carrying
Value at
December 31,
2014
 
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
$
3,351

 
$

 
$
3,351

 
$

Total
$
3,351

 
$

 
$
3,351

 
$

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at September 30, 2015 and December 31, 2014. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets.  Trusts are valued at the net asset value (“NAV”) as determined by their custodian.  NAV represent the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.  The 2013 Notes are considered Level 2 based on the fair value valuation hierarchy.

19


The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
 
September 30, 2015
 
December 31, 2014
In thousands
Carry
Value
 
Fair
Value
 
Carry
Value
 
Fair
Value
Interest rate swap agreement
$
5,798

 
$
5,798

 
$
3,351

 
$
3,351

4.375% Senior Notes
250,000

 
257,503

 
250,000

 
260,000

The fair value of the Company’s interest rate swap agreements and the 2013 Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement.

14. 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, 2014, in Note 18 therein, filed on February 20, 2015. During the first nine months of 2015, 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, 2014, in Note 18 therein, filed on February 20, 2015. During the first nine months of 2015, there were no material changes to the information described in the Form 10-K.

15. 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.

20


Segment financial information for the three months ended September 30, 2015 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
507,173

 
$
302,354

 
$

 
$
809,527

Intersegment sales/(elimination)
9,025

 
7,111

 
(16,136
)
 

Total sales
$
516,198

 
$
309,465

 
$
(16,136
)
 
$
809,527

Income (loss) from operations
$
119,930

 
$
38,772

 
$
(6,624
)
 
$
152,078

Interest expense and other, net

 

 
(7,288
)
 
(7,288
)
Income (loss) from operations before income taxes
$
119,930

 
$
38,772

 
$
(13,912
)
 
$
144,790

Segment financial information for the three months ended September 30, 2014 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
453,329

 
$
343,942

 
$

 
$
797,271

Intersegment sales/(elimination)
9,781

 
1,822

 
(11,603
)
 

Total sales
$
463,110

 
$
345,764

 
$
(11,603
)
 
$
797,271

Income (loss) from operations
$
102,182

 
$
40,734

 
$
(6,939
)
 
$
135,977

Interest expense and other, net

 

 
(4,748
)
 
(4,748
)
Income (loss) from operations before income taxes
$
102,182

 
$
40,734

 
$
(11,687
)
 
$
131,229

Segment financial information for the nine months ended September 30, 2015 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
1,553,734

 
$
921,415

 
$

 
$
2,475,149

Intersegment sales/(elimination)
26,982

 
8,227

 
(35,209
)
 

Total sales
$
1,580,716

 
$
929,642

 
$
(35,209
)
 
$
2,475,149

Income (loss) from operations
$
356,731

 
$
117,709

 
$
(18,082
)
 
$
456,358

Interest expense and other, net

 

 
(20,388
)
 
(20,388
)
Income (loss) from operations before income taxes
$
356,731

 
$
117,709

 
$
(38,470
)
 
$
435,970

Segment financial information for the nine months ended September 30, 2014 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
1,250,337

 
$
973,251

 
$

 
$
2,223,588

Intersegment sales/(elimination)
27,074

 
6,096

 
(33,170
)
 

Total sales
$
1,277,411

 
$
979,347

 
$
(33,170
)
 
$
2,223,588

Income (loss) from operations
$
294,396

 
$
112,009

 
$
(16,259
)
 
$
390,146

Interest expense and other, net

 

 
(13,497
)
 
(13,497
)
Income (loss) from operations before income taxes
$
294,396

 
$
112,009

 
$
(29,756
)
 
$
376,649


21


Sales by product are as follows:
 
Three Months Ended
September 30,
In thousands
2015
 
2014
Specialty Products & Electronics
$
433,260

 
$
390,038

Brake Products
148,552

 
142,620

Remanufacturing, Overhaul & Build
146,424

 
170,826

Other Transit Products
45,547

 
51,607

Other
35,744

 
42,180

Total sales
$
809,527

 
$
797,271

 
Nine Months Ended
September 30,
In thousands
2015
 
2014
Specialty Products & Electronics
$
1,307,089

 
$
980,897

Brake Products
472,855

 
487,095

Remanufacturing, Overhaul & Build
437,101

 
474,444

Other Transit Products
143,214

 
155,144

Other
114,890

 
126,008

Total sales
$
2,475,149

 
$
2,223,588


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
2015
 
2014
 
2015
 
2014
Foreign currency (loss)
$
(3,058
)
 
$
(455
)
 
$
(6,993
)
 
$
(554
)
Other miscellaneous income (expense)
121

 
301

 
(697
)
 
626

Total other (expense) income, net
$
(2,937
)
 
$
(154
)
 
$
(7,690
)
 
$
72



22


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, 2014, filed with the Securities and Exchange Commission on February 20, 2015.
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 2015, about 48% of the Company’s revenues came from customers outside the U.S.
Management Review and Future Outlook
Wabtec’s long-term financial goals are to generate cash flow from operations in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec 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 activity in key freight rail and passenger transit markets such as North and South America, Europe and Asia-Pacific. In these and other markets, the freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic and the level of investment spending by railroads and governments to expand, upgrade, and modernize their networks. Based on those fluctuations, railroads and governments can increase or decrease purchases of new locomotives and freight cars, and spending on rail-related infrastructure. The passenger transit industry is driven mainly by the spending of government agencies and authorities as they maintain, expand and modernize their transit systems. In doing so, they will increase or decrease spending on new locomotives, transit/subway cars, buses and related infrastructure. Fare box revenues, the fees paid by riders to use public transit, also provide funding for maintaining and operating the systems. Many government entities at all levels are facing budget issues, which could have a negative effect on demand for the Company’s products and services.
In North America, the Association of American Railroads (AAR) compiles freight rail industry statistics such as carloadings, generally referred to as “rail traffic,” and the Railway Supply Institute (RSI) releases data on freight car orders, deliveries, and backlog. Through the third quarter of 2015, rail traffic in North America was about the same as in 2014, including a 3.5% increase in intermodal traffic. According to the RSI, at the end of the third quarter of 2015, the industry multi-year backlog of freight cars on order was about 123,000, slightly lower than at the end of the second quarter. In 2015, we expect deliveries of new locomotives to be lower and deliveries of new freight cars to be higher than in 2014. Future demand depends largely on the strength in the overall economy and in rail traffic volumes.
The American Public Transportation Association (APTA) provides quarterly transit ridership statistics for the U.S. and Canada. In the first quarter of 2015 ridership was flat. In 2012, the U.S. Congress passed a new, two-year transportation funding bill, which maintained transit spending at about the same level, about $10.7 billion, as in prior years. Subsequent extensions to the bill continued to fund transit spending at about the same level. The Company expects deliveries of new subway cars to increase in 2015, while bus deliveries are expected to be about the same compared to 2014.
In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of Positive Train Control ("PTC") technology, which includes on-board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With our Electronic Train Management System®, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the December 31, 2015 deadline set in the rail safety bill. The railroads and commuter rail authorities have said they cannot complete full implementation by the deadline, and the U.S. Congress is considering an extension. An extension of the deadline could affect the rate of industry spending on this technology. Wabtec’s PTC revenue was about $290 million for the nine months ended September 30, 2015.

23


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 and Italy 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. Australia has also been an area of expansion for the Company as commodity suppliers use our products to meet the demands of their regional customers. In Brazil, the Company is completing a PTC contract, has expanded locations and has completed three acquisitions, allowing us to increase our sales in that market.
Current conditions in these international markets vary based on general economic factors and specific freight rail and passenger transit drivers, as mentioned above. In its most recent quarterly data, the Office of Rail Regulation in the U.K. reported an increase in passenger ridership of 4.7% and an 18% decrease in freight moved. In Germany, the government statistics bureau reported an increase of 0.1% for passenger rail and bus ridership, and a decrease in rail freight transport of 3.0% in the first half of 2015. Russian Railways announced a decrease of 4.7% in passenger ridership in the first eight months of 2015 compared to the year-ago period, and it said freight tons loaded were 1.4% lower than the year-ago period.
In 2015 and beyond, general economic and market conditions in our key markets 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.

PROPOSED TRANSACTION WITH FAIVELEY TRANSPORT S.A.
On July 27, 2015, the Company announced plans to acquire Faiveley Transport S.A. ("Faiveley Transport"), a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries.  Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of valued-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes & Safety (braking systems and couplers).
The transaction has been structured in three steps:
Wabtec made an irrevocable offer to the owners of approximately 51% of Faiveley Transport’s shares for a purchase price of €100 per share, payable 25% in cash and 75% in Wabtec preferred stock.  The preferred stock will have a 1% annual dividend or, if greater, the annual dividend assuming full conversion into common shares, and must be converted after three years into Wabtec common shares at an implied ratio of one Faiveley Transport common share for 1.125 Wabtec common shares. Shareholders owning 51% of Faiveley Transport have entered into exclusive discussions with Wabtec.
Upon completion of required labor group consultations, on October 6, 2015 the 51% shareholders entered into a definitive share purchase agreement and Faiveley Transport entered into an acquisition agreement with Wabtec.
Upon completing the share purchase, Wabtec will commence a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders will have the option to elect to receive €100 per share in cash or Wabtec preferred stock. The preferred stock portion of the consideration is subject to a cap of 75% of Faiveley Transport’s common shares.  Wabtec intends to delist Faiveley Transport from Euronext after the tender offer if minority interests represent less than 5%.
The total purchase price offered is about $1.8 billion, including assumed debt.  Wabtec plans to fund the cash portion of the transaction with cash on hand, existing credit facilities and potentially other debt financing.  Prior to September 30, 2015, Wabtec set aside $209.1 million as an escrow deposit for the Faiveley Transport purchase. The combination of Wabtec and Faiveley Transport would create one of the world’s largest public rail equipment companies, with revenues of about $4.5 billion and a presence in all key freight rail and passenger transit geographies worldwide. 
Closing of the transaction is subject to various conditions, including completion of regulatory requirements. These steps are currently on-going and the timinig of completion is unknown.


24



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
2015
 
2014
 
2015
 
2014
Net sales
$
809,527

 
$
797,271

 
$
2,475,149

 
$
2,223,588

Cost of sales
(552,458
)
 
(549,813
)
 
(1,694,961
)
 
(1,541,903
)
Gross profit
257,069

 
247,458

 
780,188

 
681,685

Selling, general and administrative expenses
(82,206
)
 
(88,359
)
 
(255,969
)
 
(231,422
)
Engineering expenses
(17,239
)
 
(16,391
)
 
(51,852
)
 
(43,558
)
Amortization expense
(5,546
)
 
(6,731
)
 
(16,009
)
 
(16,559
)
Total operating expenses
(104,991
)
 
(111,481
)
 
(323,830
)
 
(291,539
)
Income from operations
152,078

 
135,977

 
456,358

 
390,146

Interest expense, net
(4,351
)
 
(4,594
)
 
(12,698
)
 
(13,569
)
Other income (expense), net
(2,937
)
 
(154
)
 
(7,690
)
 
72

Income from operations before income taxes
144,790

 
131,229

 
435,970

 
376,649

Income tax expense
(45,609
)
 
(41,074
)
 
(139,121
)
 
(117,655
)
Net income attributable to Wabtec shareholders
$
99,181

 
$
90,155

 
$
296,849

 
$
258,994

THIRD QUARTER 2015 COMPARED TO THIRD QUARTER 2014
The following table summarizes our results of operations for the periods indicated:
 
Three Months Ended September 30,
In thousands
2015
 
2014
 
Percent
Change
Freight Segment
$
507,173

 
$
453,329

 
11.9
 %
Transit Segment
302,354

 
343,942

 
(12.1
)%
Net sales
809,527

 
797,271

 
1.5
 %
Income from operations
152,078

 
135,977

 
11.8
 %
Net income attributable to Wabtec shareholders
$
99,181

 
$
90,155

 
10.0
 %
The following table shows the major components of the change in sales in the third quarter of 2015 from the third quarter of 2014:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
Third Quarter 2014 Net Sales
$
453,329

 
$
343,942

 
$
797,271

Acquisitions
34,009

 
8,740

 
42,749

Change in Sales by Product Line:
 
 
 
 
 
Specialty Products & Electronics
23,588

 
32

 
23,620

Brake Products
(1,326
)
 
(15,027
)
 
(16,353
)
Remanufacturing, Overhaul & Build
21,214

 
(6,195
)
 
15,019

Other Transit Products

 
(5,687
)
 
(5,687
)
Other
(9,454
)
 
1,167

 
(8,287
)
Foreign exchange
(14,187
)
 
(24,618
)
 
(38,805
)
Third Quarter 2015 Net Sales
$
507,173

 
$
302,354

 
$
809,527


25


Net sales for the three months ended September 30, 2015 increased by $12.2 million or 1.5% to $809.5 million from $797.3 million. The increase is primarily due to sales from acquisitions of $42.7 million, $23.6 million for Specialty Products and Electronics sales from higher demand for freight original equipment products, aftermarket electronic and PTC products, and $15.0 million for Remanufacturing, Overhaul & Build sales from higher demand for aftermarket freight locomotive rebuilds. These increases were partially offset by unfavorable foreign exchange rates which decreased sales $38.8 million and a decrease in sales from Brake Products of $16.4 million due to lower demand for original equipment and aftermarket braking equipment.
Freight Segment sales increased by $53.8 million, or 11.9%, primarily due to an increase of $23.6 million for Specialty Products and Electronics sales from higher demand for freight original equipment rail products, PTC electronics, and aftermarket rail products, and $21.2 million for Remanufacturing, Overhaul and Build products due to higher sales for aftermarket freight locomotive rebuilds. Acquisitions increased sales by $34.0 million, while unfavorable foreign exchange decreased sales by $14.2 million.
Transit Segment sales decreased by $41.6 million, or 12.1%, primarily due to unfavorable foreign exchange rates of $24.6 million and a decrease of $15.0 million for Brake Products from lower demand for braking products in Europe and braking systems in the U.S.  These decreases were partially offset by $8.7 million of sales from acquisitions.
Cost of Sales and Gross Profit. The following table shows the major components of cost of sales for the periods indicated:
 
Three Months Ended September 30, 2015
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
212,341

 
41.9
%
 
$
125,387

 
41.5
%
 
$
337,728

 
41.7
%
Labor
53,111

 
10.5
%
 
38,080

 
12.6
%
 
91,191

 
11.3
%
Overhead
71,948

 
14.2
%
 
43,227

 
14.3
%
 
115,175

 
14.2
%
Other/Warranty
22

 
0.0
%
 
8,342

 
2.8
%
 
8,364

 
1.0
%
Total cost of sales
$
337,422

 
66.6
%
 
$
215,036

 
71.2
%
 
$
552,458

 
68.2
%
 
Three Months Ended September 30, 2014
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
189,607

 
41.8
%
 
$
149,704

 
43.5
%
 
$
339,311

 
42.6
%
Labor
49,593

 
10.9
%
 
42,471

 
12.3
%
 
92,064

 
11.5
%
Overhead
58,758

 
13.0
%
 
51,664

 
15.0
%
 
110,422

 
13.8
%
Other/Warranty
3,832

 
0.8
%
 
4,184

 
1.2
%
 
8,016

 
1.0
%
Total cost of sales
$
301,790

 
66.5
%
 
$
248,023

 
72.0
%
 
$
549,813

 
68.9
%
Cost of Sales increased by $2.7 million to $552.5 million in the third quarter of 2015 compared to $549.8 million in the same period of 2014. In the third quarter of 2015, cost of sales as a percentage of sales was 68.2% compared to 68.9% in the same period of 2014.  The decrease as a percentage of sales is due to lower raw material costs primarily due to reduced demand for original equipment and aftermarket braking products which carry a higher raw material component.
Freight Segment cost of sales remained consistent as a percentage of sales in the third quarter of 2015 compared to the third quarter of 2014. Transit Segment cost of sales decreased 0.8% as a percentage of sales to approximately 71.2% in the third quarter of 2015 from 72.0% in the third quarter of 2014.  The primary reason for the decrease is a 2.0% reduction in raw material as a percentage of sales due to lower original equipment and aftermarket braking products which have higher raw material content.
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 $7.6 million in the third quarter of 2015 compared to $6.6 million in the third quarter of 2014.

26


Gross profit for the three months ended September 30, 2015 increased $9.6 million to $257.1 million from $247.5 million in the previous year's quarter and the gross profit margin increased 80 basis points to 31.8% from 31.0% at September 30, 2014. These increases are due to higher sales volume, favorable sales mix, and the reasons discussed above.
Operating expenses The following table shows our operating expenses for the periods indicated:
 
Three Months Ended September 30,
In thousands
2015
 
Percentage of
Sales
 
2014
 
Percentage of
Sales
Selling, general and administrative expenses
$
82,206

 
10.2
%
 
$
88,359

 
11.1
%
Engineering expenses
17,239

 
2.1
%
 
16,391

 
2.1
%
Amortization expense
5,546

 
0.7
%
 
6,731

 
0.8
%
Total operating expenses
$
104,991