XNYS:WAB Westinghouse Air Brake Technologies Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 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 July 27, 2012

Common Stock, $.01 par value per share    47,890,299 shares

 

 

 


Table of Contents

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

June 30, 2012

FORM 10-Q

TABLE OF CONTENTS

 

        Page  
  PART I—FINANCIAL INFORMATION  

Item 1.

  Financial Statements  
 

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

    3   
 

Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2012 and 2011

    4   
 

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

    5   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 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     37   

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   

 

2


Table of Contents

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
June 30,
2012
    December 31,
2011
 
Assets     

Current Assets

    

Cash and cash equivalents

   $ 234,105      $ 285,615   

Accounts receivable

     442,141        346,281   

Inventories

     388,798        348,174   

Deferred income taxes

     58,812        57,339   

Other

     19,608        18,373   
  

 

 

   

 

 

 

Total current assets

     1,143,464        1,055,782   

Property, plant and equipment

     526,648        513,113   

Accumulated depreciation

     (299,941     (291,091
  

 

 

   

 

 

 

Property, plant and equipment, net

     226,707        222,022   

Other Assets

    

Goodwill

     623,931        587,531   

Other intangibles, net

     297,686        257,355   

Other noncurrent assets

     40,109        36,263   
  

 

 

   

 

 

 

Total other assets

     961,726        881,149   
  

 

 

   

 

 

 

Total Assets

   $ 2,331,897      $ 2,158,953   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities

    

Accounts payable

   $ 249,455      $ 244,649   

Customer deposits

     84,068        72,811   

Accrued compensation

     44,236        48,564   

Accrued warranty

     37,353        29,416   

Current portion of long-term debt

     43        68   

Other accrued liabilities

     135,159        145,877   
  

 

 

   

 

 

 

Total current liabilities

     550,314        541,385   

Long-term debt

     443,088        395,805   

Accrued postretirement and pension benefits

     60,497        63,837   

Deferred income taxes

     90,421        74,217   

Accrued warranty

     18,694        21,224   

Other long-term liabilities

     14,730        14,841   
  

 

 

   

 

 

 

Total liabilities

     1,177,744        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 47,885,466 and 47,946,360 outstanding at June 30, 2012 and December 31, 2011, respectively

     662        662   

Additional paid-in capital

     368,917        360,914   

Treasury stock, at cost, 18,289,301 and 18,228,407 shares, at June 30, 2012 and December 31, 2011, respectively

     (327,016     (309,196

Retained earnings

     1,174,801        1,053,706   

Accumulated other comprehensive loss

     (66,298     (60,897
  

 

 

   

 

 

 

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

     1,151,066        1,045,189   

Non-controlling interest

     3,087        2,455   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,154,153        1,047,644   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,331,897      $ 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
June 30,
    Unaudited
Six Months Ended
June 30,
 

In thousands, except per share data

   2012     2011     2012     2011  

Net sales

   $ 609,820      $ 478,899      $ 1,193,129      $ 934,158   

Cost of sales

     (436,393     (336,155     (850,321     (658,219
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     173,427        142,744        342,808        275,939   

Selling, general and administrative expense

     (59,163     (73,943     (121,192     (128,759

Engineering expense

     (10,145     (9,132     (20,294     (18,020

Amortization expense

     (3,254     (3,307     (6,347     (6,421
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (72,562     (86,382     (147,833     (153,200

Income from operations

     100,865        56,362        194,975        122,739   

Other income and expenses

        

Interest expense, net

     (3,509     (3,793     (7,233     (7,477

Other income (expense), net

     223        (410     109        50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     97,579        52,159        187,851        115,312   

Income tax expense

     (32,867     (15,825     (63,878     (38,026
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Wabtec shareholders

   $ 64,712      $ 36,334      $ 123,973      $ 77,286   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Common Share

        

Basic

        

Net income attributable to Wabtec shareholders

   $ 1.35      $ 0.75      $ 2.58      $ 1.61   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net income attributable to Wabtec shareholders

   $ 1.33      $ 0.75      $ 2.56      $ 1.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     47,835        47,950        47,740        47,805   

Diluted

     48,422        48,463        48,333        48,303   

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
June 30,
    Unaudited
Six Months Ended
June 30,
 

In thousands

   2012     2011     2012     2011  

Net income attributable to Wabtec shareholders

   $ 64,712      $ 36,334      $ 123,973      $ 77,286   

Foreign currency translation (loss) gain

     (16,519     6,676        (5,618     27,095   

Unrealized gain on foreign exchange contracts

     —          15        —          51   

Unrealized (loss) gain on interest rate swap contracts

     (2,378     (111     (2,161     228   

Pension benefit plans and post-retirement benefit plans

     1,920        861        2,286        702   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income before income taxes

     47,735        43,775        118,480        105,362   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense related to components of other comprehensive income

     351        (238     92        (392
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Wabtec shareholders

   $ 48,086      $ 43,537      $ 118,572      $ 104,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
Six Months Ended
June 30,
 

In thousands

   2012     2011  

Operating Activities

    

Net income attributable to Wabtec shareholders

   $ 123,973      $ 77,286   

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

    

Depreciation and amortization

     20,194        20,774   

Stock-based compensation expense

     9,920        9,370   

Loss on disposal of property, plant and equipment

     1,498        122   

Excess income tax benefits from exercise of stock options

     (725     (3,689

Changes in operating assets and liabilities, net of acquisitions

    

Accounts receivable

     (87,079     (65,579

Inventories

     (28,373     (46,806

Accounts payable

     (2,205     6,462   

Accrued income taxes

     (16,158     3,823   

Accrued liabilities and customer deposits

     12,286        76,538   

Other assets and liabilities

     (2,795     (12,255
  

 

 

   

 

 

 

Net cash provided by operating activities

     30,536        66,046   

Investing Activities

    

Purchase of property, plant and equipment

     (16,461     (12,816

Proceeds from disposal of property, plant and equipment

     93        291   

Acquisitions of business, net of cash acquired

     (88,370     (51,777

Acquisition purchase price adjustment

     —          40   
  

 

 

   

 

 

 

Net cash used for investing activities

     (104,738     (64,262

Financing Activities

    

Proceeds from debt

     172,400        79,000   

Payments of debt

     (125,135     (104,817

Proceeds from exercise of stock options and other benefit plans

     1,465        4,168   

Stock repurchase

     (21,927     (6,187

Excess income tax benefits from exercise of stock options

     725        3,689   

Cash dividends ($0.06 and $0.02 per share for the six months ended June 30, 2012 and 2011, respectively)

     (2,880     (965
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     24,648        (25,112

Effect of changes in currency exchange rates

     (1,956     7,862   
  

 

 

   

 

 

 

Decrease in cash

     (51,510     (15,466

Cash, beginning of year

     285,615        236,941   
  

 

 

   

 

 

 

Cash, end of period

   $ 234,105      $ 221,475   
  

 

 

   

 

 

 

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 JUNE 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 19 countries. In the first six months of 2012, about 51% 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.

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 $95.3 million and $58.9, customer deposits were $84.1 million and $72.8, and provisions for loss contracts were $11.4 million and $9.3 million at June 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 June 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 amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and

 

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Table of Contents

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 June 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 June 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 June 30, 2012 from a variable rate to a fixed rate of 1.81%. The interest rate swap agreements mature on December 31, 2012. As of June 30, 2012, the Company has recorded a current liability of $0.8 million and a corresponding offset in accumulated other comprehensive loss of $0.5 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, 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 applicable borrowing margin. As of June 30, 2012, the Company has recorded a current liability of $2.8 million and a corresponding offset in accumulated other comprehensive loss of $1.7 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 gains recognized in other income (expense), net were $631,000 for the three months ended June 30, 2012. Foreign exchange transaction losses recognized in other income (expense), net were $589,000 for the three months ended June 30, 2011. Foreign exchange transaction gains recognized in other income (expense), net were $1.0 million for the six months ended June 30, 2012. Foreign exchange transaction losses recognized in other income (expense), net were $266,000 for the six months ended June 30, 2011.

 

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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 June 30, 2012 and December 31, 2011. Net income attributable to non-controlling interests for the three and six months ended June 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

   June 30,
2012
    December 31,
2011
 

Foreign currency translation loss

   $ (8,065   $ (2,447

Unrealized loss on interest rate swap contracts, net of tax

     (2,177     (871

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

     (56,056     (57,579
  

 

 

   

 

 

 

Total accumulated comprehensive loss

   $ (66,298   $ (60,897
  

 

 

   

 

 

 

3. ACQUISITIONS

The Company made the following acquisitions within the Transit Segment:

 

   

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.

 

   

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 $88.4 million, net of cash, resulting in preliminary additional goodwill of $35.0 million, none of which will be deductible for tax purposes.

 

   

On July 13, 2012, subsequent to the close of our accounting quarter, 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 $8.3 million, net of cash.

The Company made the following acquisition within the Freight Segment:

 

   

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 $43.6 million, net of cash, resulting in preliminary additional goodwill of $24.2 million, none of which will be deductible for tax purposes.

 

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The acquisitions listed above, excluding Tec Tran, include escrow deposits of $13.7 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

For the Bearward, Fulmer and Mors Smitt 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  

In thousands

   February 25,
2011
    June 29,
2011
     November 3,
2011
    November 18,
2011
    June 14,
2012
 

Current assets

   $ 19,558      $ —         $ 14,777      $ 4,203      $ 23,947   

Property, plant & equipment

     8,862        —           4,498        1,636        6,536   

Goodwill and other intangible assets

     30,816        21,100         43,200        8,409        84,000   

Other assets

     —          —           16        —          944  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets acquired

     59,236        21,100         62,491        14,248        115,427   

Total liabilities assumed

     (28,559     —           (18,865     (657     (27,057
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net assets acquired

   $ 30,677      $ 21,100       $ 43,626      $ 13,591      $ 88,370   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Of the allocation of $105.8 million of acquired intangible assets for the companies listed in the above table exclusive of goodwill, $74.4 million was assigned to customer relationships, $22.8 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 $5.5 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 20 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 Tec Tran, had occurred on January 1, 2011:

 

In thousands

  Three Months Ended
June 30, 2012
    Three Months Ended
June 30, 2011
    Six Months Ended
June 30, 2012
    Six Months Ended
June 30, 2011
 

Net sales

  $ 623,548      $ 517,481      $ 1,220,608      $ 1,013,673   

Gross profit

    179,124        154,090        354,212        299,717   

Net income attributable to Wabtec shareholders

    64,305        38,387        123,611        83,744   

Diluted earnings per share

       

As Reported

  $ 1.33      $ 0.75      $ 2.56      $ 1.60   

Pro forma

  $ 1.33      $ 0.79      $ 2.56      $ 1.73   

4. INVENTORIES

The components of inventory, net of reserves, were:

 

In thousands

   June 30,
2012
     December 31,
2011
 

Raw materials

   $ 162,982       $ 154,885   

Work-in-process

     131,128         110,179   

Finished goods

     94,688         83,110   
  

 

 

    

 

 

 

Total inventories

   $ 388,798       $ 348,174   
  

 

 

    

 

 

 

 

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5. INTANGIBLES

Goodwill was $623.9 million and $587.5 million at June 30, 2012 and December 31, 2011, respectively. The change in the carrying amount of goodwill by segment for the six months ended June 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
    Total  

Balance at December 31, 2011

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

Acquisition

     —           34,951        34,951   

Adjustment to preliminary purchase allocation

     1,901         992        2,893   

Foreign currency impact

     362         (1,806     (1,444
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

   $ 390,484       $ 233,447      $ 623,931   
  

 

 

    

 

 

   

 

 

 

As of June 30, 2012 and December 31, 2011, the Company’s trademarks had a net carrying amount of $124.7 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

   June 30,
2012
     December 31,
2011
 

Patents and other, net of accumulated amortization of $33,806 and $32,316

   $ 13,120       $ 14,849   

Customer relationships, net of accumulated amortization of $25,684 and $21,295

     159,851         127,960   
  

 

 

    

 

 

 

Total

   $ 172,971       $ 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 $3.3 million and $6.3 million for the three and six months ended June 30, 2012, respectively and $3.3 million and $6.4 million for the three and six months ended June 30, 2011, respectively.

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

 

Remainder of 2012

   $ 8,402   

2013

     11,780   

2014

     11,132   

2015

     10,635   

2016

     10,478   

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

In thousands

   June 30,
2012
     December 31,
2011
 

6.875% Senior Notes, due 2013

   $ 150,000       $ 150,000   

Revolving Credit Facility

     292,000         245,000   

Capital Leases

     1,131         873   
  

 

 

    

 

 

 

Total

     443,131         395,873   

Less—current portion

     43         68   
  

 

 

    

 

 

 

Long-term portion

   $ 443,088       $ 395,805   
  

 

 

    

 

 

 

 

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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 June 30, 2012, the Company had available bank borrowing capacity of approximately $259.0 million, net of $49.0 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 June 30, 2012 the weighted average interest rate on the Company’s variable rate debt was 1.25%. 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 June 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 June 30, 2012 from a variable rate to a fixed rate of 1.81%. 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 applicable borrowing 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; 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 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

 

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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
June 30,
    Three months ended
June 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 95      $ 74      $ 491      $ 820   

Interest cost

     542        619        1,764        1,951   

Expected return on plan assets

     (775     (851     (2,021     (2,166

Net amortization/deferrals

     807        607        674        513   

Settlement loss recognized

     —          —          —          304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 669      $ 449      $ 908      $ 1,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     U.S.     International  
     Six months ended
June 30,
    Six months ended
June 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 191      $ 148      $ 986      $ 1,622   

Interest cost

     1,084        1,238        3,536        3,849   

Expected return on plan assets

     (1,550     (1,702     (4,050     (4,294

Net amortization/deferrals

     1,613        1,213        1,351        1,018   

Settlement loss recognized

     —          —          293        588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,338      $ 897      $ 2,116      $ 2,783   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 $1.7 million to the U.S. plans and $6.6 million to the international plans during 2012.

 

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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
June 30,
    Three months ended
June 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 10      $ 10      $ 11      $ 14   

Interest cost

     350        399        50        59   

Net amortization/deferrals

     (200     (245     (82     (98
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 160      $ 164      $ (21   $ (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     5.15     5.50

 

     U.S.     International  
     Six months ended
June 30,
    Six months ended
June 30,
 

In thousands, except percentages

       2012             2011             2012             2011      

Net periodic benefit cost

        

Service cost

   $ 19      $ 20      $ 22      $ 28   

Interest cost

     701        798        100        117   

Net amortization/deferrals

     (401     (489     (164     (195
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 319      $ 329      $ (42   $ (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions

        

Discount rate

     4.30     5.20     5.15     5.50

8. STOCK-BASED COMPENSATION

As of June 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 $10.1 million and $9.4 million for the six months ended June 30, 2012 and 2011, respectively. Included in the stock-based compensation expense for 2012 above is $1.3 million of expense related to stock options, $2.4 million related to restricted stock, $377,000 related to restricted units, $5.6 million related to incentive stock awards and $400,000 related to awards issued for Directors’ fees. At June 30, 2012, unamortized compensation expense related to stock options, restricted stock, restricted units and incentive stock awards expected to vest totaled $28.2 million and will be recognized over a weighted average period of 1.5 years.

 

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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 six months ended June 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

     74,698        70.63            551   

Exercised

     (58,883     24.88            (3,128

Canceled

     (26,717     34.46            (1,164
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     851,490      $ 38.58         6.4       $ 33,572   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2012

     562,786      $ 31.69         6.1       $ 26,070   

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     Six months ended
June 30,
 
         2012             2011      

Dividend yield

     .23     .07

Risk-free interest rate

     1.34     3.03

Stock price volatility

     44.95     45.58

Expected life (years)

     5.0        5.0   

The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.

Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006 the Company adopted a restricted stock program. As provided for under the 2011 and 2000 Plans, eligible employees are granted restricted stock or restricted units that generally vests 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 June 30, 2012, the Company estimates that it will achieve 200%, 200% and 100% 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.

 

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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 six months ended June 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

     105,647        118,660        70.71   

Vested

     (97,694     (122,079     35.63   

Adjustment for incentive stock awards expected to vest

     —          14,802        42.96   

Canceled

     (13,008     (2,219     39.72   
  

 

 

   

 

 

   

 

 

 

Outstanding at June 30, 2012

     269,554        655,526      $ 52.46   
  

 

 

   

 

 

   

 

 

 

9. INCOME TAXES

The overall effective income tax rate was 33.7% and 34.0% for the three and six months ended June 30, 2012, respectively, and 30.3% and 33.0% for the three and six months ended June 30, 2011, respectively. The increase in the effective tax rate is due to a $1.7 million benefit recorded in the second quarter of 2011 relating to settlements with taxing authorities and the expiration of statutory review periods in various jurisdictions.

As of June 30, 2012, the liability for income taxes associated with uncertain tax positions is $7.5 million, of which $1.6 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 June 30, 2012 the total accrued interest and penalties are $2.3 million and $1.2 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.

At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $0.1 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.

 

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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
June 30,
 

In thousands, except per share

   2012     2011  

Numerator

    

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

   $ 64,712      $ 36,334   

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

     (1,442     (484
  

 

 

   

 

 

 

Undistributed earnings

     63,270        35,850   

Percentage allocated to common shareholders(1)

     99.5     99.5
  

 

 

   

 

 

 
     62,954        35,671   

Add: dividends declared—common shares

     1,435        482   
  

 

 

   

 

 

 

Numerator for basic and diluted earnings per common share

   $ 64,389      $ 36,153   
  

 

 

   

 

 

 

Denominator

    

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

     47,835        47,950   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     587        513   
  

 

 

   

 

 

 

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

     48,422        48,463   
  

 

 

   

 

 

 

Net income per common share attributable to Wabtec shareholders

    

Basic

   $ 1.35      $ 0.75   

Diluted

   $ 1.33      $ 0.75   

(1) Basic weighted-average common shares outstanding

     47,835        47,950   

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

     48,066        48,191   

Percentage allocated to common shareholders

     99.5     99.5

 

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Table of Contents
     Six Months Ended
June 30,
 

In thousands, except per share

   2012     2011  

Numerator

    

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

   $ 123,973      $ 77,286   

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

     (2,880     (965
  

 

 

   

 

 

 

Undistributed earnings

     121,093        76,321   

Percentage allocated to common shareholders(1)

     99.5     99.5
  

 

 

   

 

 

 
     120,488        75,939   

Add: dividends declared—common shares

     2,865        963   
  

 

 

   

 

 

 

Numerator for basic and diluted earnings per common share

   $ 123,353      $ 76,902   
  

 

 

   

 

 

 

Denominator

    

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

     47,740        47,805   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     593        498   
  

 

 

   

 

 

 

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

     48,333        48,303   
  

 

 

   

 

 

 

Net income per common share attributable to Wabtec shareholders

    

Basic

   $ 2.58      $ 1.61   

Diluted

   $ 2.56      $ 1.60   

(1) Basic weighted-average common shares outstanding

     47,740        47,805   

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

     47,989        48,041   

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:

 

     Six Months Ended
June 30,
 

In thousands

   2012     2011  

Balance at December 31, 2011 and 2010, respectively

   $ 50,640      $ 35,513   

Warranty expense

     12,914        9,384   

Acquisitions

     294        12,008   

Warranty claim payments

     (7,801     (8,927
  

 

 

   

 

 

 

Balance at June 30, 2012 and 2011, respectively

   $ 56,047      $ 47,978   
  

 

 

   

 

 

 

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 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.

 

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

The following table provides the liabilities carried at fair value measured on a recurring basis as of June 30, 2012, which are included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
June 30,
2012
     Fair Value Measurements at June 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

     3,603         —           3,603         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,603       $ —         $ 3,603       $ —     

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 six 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 six 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 six 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 June 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities  and
Elimination
    Total  

Sales to external customers

   $ 407,706       $ 202,114       $ —        $ 609,820   

Intersegment sales/(elimination)

     5,850         3,037         (8,887     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 413,556       $ 205,151       $ (8,887   $ 609,820   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 83,417       $ 21,934       $ (4,486   $ 100,865   

Interest expense and other, net

     —           —           (3,286     (3,286
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 83,417       $ 21,934       $ (7,772   $ 97,579   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 280,036       $ 198,863       $ —        $ 478,899   

Intersegment sales/(elimination)

     3,619         1,639         (5,258     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 283,655       $ 200,502       $ (5,258   $ 478,899   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 52,396       $ 26,052       $ (22,086   $ 56,362   

Interest expense and other, net

     —           —           (4,203     (4,203
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 52,396       $ 26,052       $ (26,289   $ 52,159   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment financial information for the six months ended June 30, 2012 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 804,994       $ 388,135       $ —        $ 1,193,129   

Intersegment sales/(elimination)

     11,552         5,428         (16,980     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 816,546       $ 393,563       $ (16,980   $ 1,193,129   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 159,032       $ 44,549       $ (8,606   $ 194,975   

Interest expense and other, net

     —           —           (7,124     (7,124
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 159,032       $ 44,549       $ (15,730   $ 187,851   
  

 

 

    

 

 

    

 

 

   

 

 

 

Segment financial information for the six months ended June 30, 2011 is as follows:

 

In thousands

   Freight
Segment
     Transit
Segment
     Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 544,892       $ 389,266       $ —        $ 934,158   

Intersegment sales/(elimination)

     7,910         2,034         (9,944     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales

   $ 552,802       $ 391,300       $ (9,944   $ 934,158   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 99,973       $ 50,173       $ (27,407   $ 122,739   

Interest expense and other, net

     —           —           (7,427     (7,427
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 99,973       $ 50,173       $ (34,834   $ 115,312   
  

 

 

    

 

 

    

 

 

   

 

 

 

Sales by product are as follows:

 

     Three Months Ended
June 30,
 

In thousands

   2012      2011  

Specialty Products & Electronics

   $ 298,447       $ 205,697   

Brake Products

     128,363         125,547   

Remanufacturing, Overhaul & Build

     109,933         82,223   

Other Transit Products

     54,902         48,994   

Other

     18,175         16,438   
  

 

 

    

 

 

 

Total sales

   $ 609,820       $ 478,899   
  

 

 

    

 

 

 

 

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Sales by product are as follows:

 

     Six Months Ended
June 30,
 

In thousands

   2012      2011  

Specialty Products & Electronics

   $ 577,288       $ 390,874   

Brake Products

     259,613         251,443   

Remanufacturing, Overhaul & Build

     218,655         161,657   

Other Transit Products

     100,800         99,884   

Other

     36,773         30,300   
  

 

 

    

 

 

 

Total sales

   $ 1,193,129       $ 934,158   
  

 

 

    

 

 

 

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 June 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors      Elimination     Consolidated  

Cash and cash equivalents

   $ 39,235      $ 8,435      $ 186,435       $ —        $ 234,105   

Accounts receivable

     135        254,486        187,520         —          442,141   

Inventories

     —          270,909        117,889         —          388,798   

Other current assets

     61,701        6,199        10,520         —          78,420   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     101,071        540,029        502,364         —          1,143,464   

Property, plant and equipment

     4,709        123,430        98,568         —          226,707   

Goodwill

     7,980        400,411        215,540         —          623,931   

Investment in subsidiaries

     2,946,989        185,782        —           (3,132,771     —     

Other intangibles

     —          168,939        128,747         —          297,686   

Other long term assets

     (10,045     3,037        47,117         —          40,109   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ 3,050,704      $ 1,421,628      $ 992,336       $ (3,132,771   $ 2,331,897   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 51,749      $ 309,141      $ 189,424       $ —        $ 550,314   

Inter-company

     1,328,838        (1,489,440     160,602         —          —     

Long-term debt

     442,000        183        905         —          443,088   

Other long term liabilities

     73,964        31,386        78,992         —          184,342   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,896,551        (1,148,730     429,923         —          1,177,744   

Stockholders’ equity

     1,154,153        2,570,358        562,413         (3,132,771     1,154,153   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,050,704      $ 1,421,628      $ 992,336       $ (3,132,771   $ 2,331,897   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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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 June 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 431,392      $ 223,556      $ (45,128   $ 609,820   

Cost of sales

     (293     (275,312     (177,492     16,704        (436,393
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (293     156,080        46,064        (28,424     173,427   

Operating expenses

     (15,571     (38,879     (18,112     —          (72,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (15,864     117,201        27,952        (28,424     100,865   

Interest (expense) income, net

     (5,370     1,006        855        —          (3,509

Other income (expense), net

     289        (1,791     1,725        —          223   

Equity earnings

     107,941        24,573        —          (132,514     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     86,996        140,989        30,532        (160,938     97,579   

Income tax expense

     (22,284     (3,218     (7,365     —          (32,867
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 64,712      $ 137,771      $ 23,167      $ (160,938   $ 64,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 64,605      $ 137,771      $ 6,648      $ (160,938   $ 48,086   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 326,248      $ 190,868      $ (38,217   $ 478,899   

Cost of sales

     (380     (211,286     (139,706     15,217        (336,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (380     114,962        51,162        (23,000     142,744   

Operating expenses

     (33,899     (32,754     (19,729     —          (86,382
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (34,279     82,208        31,433        (23,000     56,362   

Interest (expense) income, net

     (5,593     1,132        668        —          (3,793

Other income (expense), net

     173        214        (797     —          (410

Equity earnings

     80,047        21,624        —          (101,671     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     40,348        105,178        31,304        (124,671     52,159   

Income tax expense

     (4,014     (3,379     (8,432     —          (15,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 36,334      $ 101,799      $ 22,872      $ (124,671   $ 36,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 36,861      $ 101,799      $ 29,548      $ (124,671   $ 43,537   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Income Statement for the Six Months Ended June 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 846,042      $ 433,609      $ (86,522   $ 1,193,129   

Cost of sales

     (348     (545,890     (337,761     33,678        (850,321
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (348     300,152        95,848        (52,844     342,808   

Operating expenses

     (32,772     (77,863     (37,198     —          (147,833
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (33,120     222,289        58,650        (52,844     194,975   

Interest (expense) income, net

     (10,832     2,184        1,415        —          (7,233

Other income (expense), net

     8,121        (6,094     (1,918     —          109   

Equity earnings

     201,639        36,960        —          (238,599     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     165,808        255,339        58,147        (291,443     187,851   

Income tax expense

     (41,835     (6,811     (15,232     —          (63,878
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 123,973      $ 248,528      $ 42,915      $ (291,443   $ 123,973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 124,190      $ 248,528      $ 37,297      $ (291,443   $ 118,572   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Six Months Ended June 30, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 653,507      $ 344,624      $ (63,973   $ 934,158   

Cost of sales

     (379     (428,830     (258,973     29,963        (658,219
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (379     224,677        85,651        (34,010     275,939   

Operating expenses

     (47,981     (68,748     (36,471     —          (153,200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     (48,360     155,929        49,180        (34,010     122,739   

Interest (expense) income, net

     (10,963     2,285        1,201        —          (7,477

Other income (expense), net

     7,394        (1,027     (6,317     —          50   

Equity earnings

     148,831        28,033        —          (176,864     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income tax

     96,902        185,220        44,064        (210,874     115,312   

Income tax expense

     (19,616     (7,029     (11,381     —          (38,026
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Wabtec shareholders

   $ 77,286      $ 178,191      $ 32,683      $ (210,874   $ 77,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Wabtec shareholders

   $ 77,875      $ 178,191      $ 59,779      $ (210,874   $ 104,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Condensed Statement of Cash Flows for the Six Months Ended June 30, 2012:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash (used for) provided by operating activities

   $ 30,954      $ 251,959      $ 39,066      $ (291,443   $ 30,536   

Net cash used for investing activities

     (91,723     (9,220     (3,795     —          (104,738

Net cash (used for) provided by financing activities

     24,383        (248,328     (42,850     291,443        24,648   

Effect of changes in currency exchange rates

     —          —          (1,956     —          (1,956
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Decrease in cash

     (36,386     (5,589     (9,535     —          (51,510

Cash, beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 39,235      $ 8,435      $ 186,435      $ —        $ 234,105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Statement of Cash Flows for the Six Months Ended June 30, 2011:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash (used for) provided by operating activities

   $ (11,754   $ 199,900      $ 88,774      $ (210,874   $ 66,046   

Net cash used for investing activities

     (1,209     (26,498     (36,555     —          (64,262

Net cash (used for) provided by financing activities

     (25,295     (178,221     (32,470     210,874        (25,112

Effect of changes in currency exchange rates

     —          —          7,862        —          7,862   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash

     (38,258     (4,819     27,611        —          (15,466

Cash, beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 4,456      $ 8,407      $ 208,612      $ —        $ 221,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

16. OTHER INCOME (EXPENSE), NET

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

In thousands

       2012             2011             2012             2011      

Foreign currency gain (loss)

   $ 631      $ (589   $ 1,041      $ (266

Other miscellaneous (expense) income

     (408     179        (932     316   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ 223      $ (410   $ 109      $ 50   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 19 countries. In the first six months of 2012, about 51% 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. Whether demand continues to improve will depend largely on the overall economy and in rail traffic volumes. Through June 30, 2012 compared to the previous year, according to the Association of American Railroads, carloadings decreased 2.8% and revenue ton-miles decreased 2.0%, while intermodal loadings increased 3.4%. Excluding coal, carloadings increased 3.3%.

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 5% in the first 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.

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

 

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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. 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
June 30,
    Six Months Ended
June 30,
 

In millions

   2012     2011     2012     2011  

Net sales

   $ 609.8      $ 478.9      $ 1,193.1      $ 934.1   

Cost of sales

     (436.4     (336.2     (850.3     (658.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     173.4        142.7        342.8        275.9   

Selling, general and administrative expenses

     (59.2     (73.9     (121.2     (128.8

Engineering expenses

     (10.1     (9.1     (20.3     (18.0

Amortization expense

     (3.2     (3.3     (6.3     (6.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (72.5     (86.3     (147.8     (153.2

Income from operations

     100.9        56.4        195.0        122.7   

Interest expense, net

     (3.5     (3.8     (7.2     (7.5

Other income (expense), net

     0.2        (0.4     0.1        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     97.6        52.2        187.9        115.3   

Income tax expense

     (32.9     (15.8     (63.9     (38.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Wabtec shareholders

   $ 64.7      $ 36.4      $ 124.0      $ 77.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

SECOND QUARTER 2012 COMPARED TO SECOND QUARTER 2011

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

 

     Three months ended June 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 407,706       $ 280,036         45.6

Transit Segment

     202,114         198,863         1.6
  

 

 

    

 

 

    

 

 

 

Net sales

     609,820         478,899         27.3

Income from operations

     100,865         56,362         79.0

Net income attributable to Wabtec shareholders

   $ 64,712       $ 36,334         78.1

 

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

 

In thousands

   Freight Segment     Transit Segment     Total  

Second Quarter 2011 Net Sales

   $ 280,036      $ 198,863      $ 478,899   

Acquisitions

     20,561        4,540        25,101   

Change in Sales by Product Line:

      

Specialty Products & Electronics

     72,366        2,364        74,730   

Remanufacturing, Overhaul & Build

     21,785        2,959        24,744   

Brake Products

     14,865        (7,608     7,257   

Other Transit Products

     —          6,623        6,623   

Foreign Exchange and Other

     (1,907     (5,627     (7,534
  

 

 

   

 

 

   

 

 

 

Second Quarter 2012 Net Sales

   $ 407,706      $ 202,114      $ 609,820   
  

 

 

   

 

 

   

 

 

 

Net sales increased by $130.9 million to $609.8 million from $478.9 million for the three months ended June 30, 2012 and 2011, respectively. The increase is due to higher Specialty Products and Electronics sales of $74.7 million primarily from increased demand for freight original equipment rail products, positive train control electronics and aftermarket products; higher Remanufacturing, Overhaul and Build sales of $24.7 million from increased demand for freight original equipment locomotives and aftermarket services for locomotives; and sales from acquisitions of $25.1 million. Company net sales decreased $10.0 million due to unfavorable effects of foreign exchange, but income from operations was generally not impacted by foreign exchange. Net income for the three months ended June 30, 2012 was $64.7 million or $1.33 per diluted share. Net income for the three months ended June 30, 2011 was $36.4 million or $0.75 per diluted share. Net income increased due to higher sales volume and decreased operating expenses discussed below.

Freight Segment sales increased by $127.7 million, or 45.6%, due to higher sales of $72.4 million for Specialty Products and Electronics, primarily resulting from increased demand for original equipment rail products, positive train control electronics and aftermarket rail products; $21.8 million from demand for freight original equipment locomotives and aftermarket services for locomotives; $20.6 million from acquisitions and $14.9 million for Brake Products. For the Freight Segment, net sales decreased by $3.9 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $3.2 million, or 1.6%, due to higher sales of $6.6 million primarily from certain transit car build contracts and demand for transit bus doors, $4.5 million from acquisitions, and $3.0 million from increased demand for transit car rebuild and overhauls. Partially offsetting these increases were lower sales of $7.6 million from decreased demand for transit brake products. For the Transit Segment, net sales decreased by $6.1 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit. Cost of Sales increased by $100.2 million to $436.4 million in the second quarter of 2012 compared to $336.2 million in the same period of 2011. In the second quarter of 2012, cost of sales, as a percentage of sales was 71.6% compared to 70.2% in the same period of 2011.

Raw material costs increased as a percentage of sales to approximately 45% in the second quarter of 2012 from 43% in the same period of 2011. Labor costs as a percentage of sales were approximately 11% in the second quarter of 2012 and 2011. Overhead costs as a percentage of sales were approximately 16% in the second quarter of 2012 and 2011. Freight Segment raw material costs increased as a percentage of sales to approximately 46% in the second quarter of 2012 from 44% in the same period of 2011. Freight Segment labor costs as a percentage of sales were approximately 10% in the second quarter of 2012 and 2011, and overhead costs decreased as a percentage of sales to approximately 14% in the second quarter of 2012 from 15% in the same period of 2011. Transit Segment raw material costs decreased as a percentage of sales to approximately 42% in the second quarter of 2012 from 43% in the same period of 2011. Transit Segment labor costs increased as a

 

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percentage of sales to approximately 14% in the second quarter of 2012 from 11% in the same period of 2011, and overhead costs as a percentage of sales were approximately 18% in the second quarter of 2012 and 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.

In general, raw material costs increased as a percentage of sales reflecting the higher mix of revenue generated from freight original equipment sales, which has a higher raw material component as cost of sales, partially offset by lower transit raw material costs. 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 $2.8 million higher in the second quarter of 2012 compared to the same period of 2011 due to increased sales and increases for certain transit contracts.

Gross profit increased to $173.4 million in the second quarter of 2012 compared to $142.7 million in the same period of 2011, for the reasons discussed above. Accordingly, for the second quarter of 2012, gross profit, as a percentage of sales, was 28.4% compared to 29.8%, for the second quarter of 2011.

Operating expenses The following table shows our operating expenses:

 

     Three months ended June 30,  

In thousands

   2012      2011      Percent
Change
 

Selling, general and administrative expenses

   $ 59,163       $ 73,943         (20.0 )% 

Engineering expenses

     10,145         9,132         11.1

Amortization expense

     3,254         3,307         (1.6 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 72,562       $ 86,382         (16.0 )% 
  

 

 

    

 

 

    

 

 

 

Selling, general, and administrative expenses decreased $14.8 million in the second quarter of 2012 compared to the same period of 2011 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. Engineering expense increased by $1.0 million in the second 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 11.9% and 18.0% of sales for the second quarter of 2012 and 2011, respectively.

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. Corporate non-allocated operating expenses decreased $17.6 million because of the charge for a court ruling discussed above, partially offset by increases in other non-allocated departmental expenses.

Freight segment operating expenses increased $2.7 million in the second quarter of 2012 compared to the same period of 2011 because of $2.0 million of incremental expense from acquisitions and an increase in selling, general and administrative expense supporting higher sales volume. Freight segment operating expenses were 9.2% and 12.5% of sales for the second quarter of 2012 and 2011, respectively.

Transit segment operating expenses increased $1.1 million in the second quarter of 2012 compared to the same period of 2011 because of $0.9 million of incremental expense 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,

 

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partially offset by a decrease of $1.1 million in the expenses allocated to the operating segments and a decrease in other selling, general and administrative expenses from cost saving initiatives. Transit segment operating expenses were 14.5% and 14.3% of sales for the second quarter of 2012 and 2011, respectively.

Income from operations Income from operations totaled $100.9 million or 16.5% of sales in the second quarter of 2012 compared to $56.4 million or 11.8% 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 gains of $0.6 million in the second quarter of 2012 and foreign exchange losses of $0.6 million in the second quarter of 2011 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 33.7% and 30.3% for the second quarter of 2012 and 2011, respectively. The increase in the effective rate is due to a $1.7 million benefit recorded in the second quarter of 2011 relating to settlements with taxing authorities and the expiration of statutory review periods in various jurisdictions.

Net income Net income for the second quarter of 2012 increased $28.4 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.

FIRST SIX MONTHS OF 2012 COMPARED TO FIRST SIX MONTHS OF 2011

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

 

     Six months ended June 30,  

In thousands

   2012      2011      Percent
Change
 

Freight Segment

   $ 804,994       $ 544,892         47.7

Transit Segment

     388,135         389,266         (0.3 )% 
  

 

 

    

 

 

    

 

 

 

Net sales

     1,193,129         934,158         27.7

Income from operations

     194,975         122,739         58.9

Net income attributable to Wabtec shareholders

   $ 123,973       $ 77,286         60.4

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

 

In thousands

   Freight Segment      Transit Segment     Total  

First Six Months of 2011 Net Sales

   $ 544,892       $ 389,266      $ 934,158   

Acquisitions

     40,576         17,624        58,200   

Change in Sales by Product Line:

       

Specialty Products & Electronics

     140,077         7,572        147,649   

Remanufacturing, Overhaul & Build

     47,383         (5,507     41,876   

Brake Products

     28,627         (14,668     13,959   

Other Transit Products

     —           1,873        1,873   

Foreign Exchange and Other

     3,439         (8,025     (4,586
  

 

 

    

 

 

   

 

 

 

First Six Months of 2012 Net Sales

   $ 804,994       $ 388,135      $ 1,193,129   
  

 

 

    

 

 

   

 

 

 

 

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Net sales increased by $259.0 million to $1,193.1 million from $934.1 million for the six months ended June 30, 2012 and 2011, respectively. The increase is due to higher Specialty Products and Electronics sales of $147.6 million primarily from increased demand for freight original equipment rail products, positive train control electronics and aftermarket products; sales related to acquisitions of $58.2 million; higher Remanufacturing, Overhaul and Build sales of $41.9 million from increased demand for freight original equipment locomotives and aftermarket services for locomotives; and higher Brake Products sales of $14.0 million due to higher demand for original equipment brakes. Company net sales decreased $12.2 million and income from operations decreased $1.0 million due to unfavorable effects of foreign exchange. Net income for the six months ended June 30, 2012 was $124.0 million or $2.56 per diluted share. Net income for the six months ended June 30, 2011 was $77.3 million or $1.60 per diluted share. Net income increased due to higher sales volume and decreased operating expenses discussed below.

Freight Segment sales increased by $260.1 million, or 47.7%, due to higher sales of $140.1 million for Specialty Products and Electronics, primarily resulting from increased demand for original equipment rail products, positive train control electronics and aftermarket rail products; $47.4 million from demand for freight original equipment locomotives and aftermarket services for locomotives; $40.6 million from acquisitions and $28.6 million for Brake Products. For the Freight Segment, net sales decreased by $3.3 million due to unfavorable effects of foreign exchange.

Transit Segment sales decreased by $1.1 million, or 0.3%, due to lower sales of $20.2 million primarily from decreased demand for transit brake products and the completion of certain transit locomotive build contracts. Partially offsetting this decrease was $17.6 million of sales from acquisitions and $7.6 million of higher electronic sales from increased demand for transit positive train control electronics. For the Transit Segment, net sales decreased by $8.9 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit Cost of Sales increased by $192.1 million to $850.3 million in the first six months of 2012 compared to $658.2 million in the same period of 2011. In the first six months of 2012, cost of sales, as a percentage of sales was 71.3% compared to 70.5% in the same period of 2011.

Raw material costs increased as a percentage of sales to approximately 44% in the first six months of 2012 from 43% in the same period of 2011. Labor costs as a percentage of sales were approximately 11% in the first six months of 2012 and 2011. Overhead costs decreased as a percentage of sales to approximately 16% in the first six months of 2012 from 17% in the same period of 2011. Freight Segment raw material costs increased as a percentage of sales to approximately 45% in the first six months of 2012 from 43% in the same period of 2011. Freight Segment labor costs as a percentage of sales were approximately 10% in the first six months of 2012 and 2011, and overhead costs decreased as a percentage of sales to approximately 15% in the first six months of 2012 from 16% in the same period of 2011. Transit Segment raw material costs decreased as a percentage of sales to approximately 42% in the first six 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 six months of 2012 from 11% in the same period of 2011, and overhead costs decreased as a percentage of sales to approximately 18% in the first six months of 2012 from 19% 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.

In general, raw material costs increased as a percentage of sales reflecting the higher mix of revenue generated from freight original equipment sales, which has a higher raw material component as cost of sales, partially offset by lower transit raw material costs. 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 $3.5 million higher in the first six months of 2012 compared to the same period of 2011 due to increased sales and increases for certain transit contracts.

 

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Gross profit increased to $342.8 million in the first six months of 2012 compared to $275.9 million in the same period of 2011, for the reasons discussed above. Accordingly, for the first six months of 2012, gross profit, as a percentage of sales, was 28.7% compared to 29.5%, for the first six months of 2011.

Operating expenses The following table shows our operating expenses:

 

     Six months ended June 30,  

In thousands

   2012      2011      Percent
Change
 

Selling, general and administrative expenses

   $ 121,192       $ 128,759         (5.9 )% 

Engineering expenses

     20,294         18,020         12.6

Amortization expense

     6,347         6,421         (1.2 )% 
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 147,833       $ 153,200         (3.5 )% 
  

 

 

    

 

 

    

 

 

 

Selling, general, and administrative expenses decreased $7.6 million in the first six 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, $5.4 million of expenses from acquisitions, and $2.5 million of incentive and non-cash compensation. Engineering expense increased by $2.3 million in the first six 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 six months of 2012 compared to the same period in 2011 due to amortization of intangibles in 2011 associated with acquisitions. Total operating expenses were 12.4% and 16.4% of sales for the first six months of 2012 and 2011, respectively.

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. Corporate non-allocated operating expenses decreased $18.8 million because of the charge for a court ruling discussed above and decreases in other non-allocated departmental expenses.

Freight segment operating expenses increased $10.4 million in the first six months of 2012 compared to the same period of 2011 because of $3.9 million of expenses from acquisitions, an increase of $2.9 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 9.9% and 12.8% of sales for the first six months of 2012 and 2011, respectively.

Transit segment operating expenses increased $3.0 million in the first six months of 2012 compared to the same period of 2011 because of $1.7 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, partially offset by a decrease of $0.6 million in the expenses allocated to the operating segments and a decrease in other selling, general and administrative expenses from cost saving initiatives. Transit segment operating expenses were 14.8% and 14.1% of sales for the first six months of 2012 and 2011, respectively.

Income from operations Income from operations totaled $195.0 million or 16.3% of sales in the first six months of 2012 compared to $122.7 million or 13.1% 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.

 

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Other income (expense), net The Company recorded foreign exchange gains of $1.0 million in the first six months of 2012 and foreign exchange losses of $0.3 million in the first six months of 2011 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 34.0% and 33.0% for the first six months of 2012 and 2011, respectively. The increase in the effective rate is due to a $1.7 million benefit recorded in the second quarter of 2011 relating to settlements with taxing authorities and the expiration of statutory review periods in various jurisdictions.

Net income Net income for the first six months of 2012 increased $46.7 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:

 

     Six months ended
June 30,
 

In thousands

   2012     2011  

Cash provided by (used for):

    

Operating activities

   $ 30,536      $ 66,046   

Investing activities

     (104,738     (64,262

Financing activities

     26,648        (25,112

Decrease in cash

   $ (51,510   $ (15,466

Operating activities In the first six months of 2012 and 2011, cash provided by operations was $30.5 million and $66.0 million, respectively. In comparison to the first six 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 $87.1 million, due to higher sales, and inventory increased by $28.4 million from the prior year due to certain Transit Segment contracts and to support the higher sales volume. Accounts payable decreased by $2.2 million due to timing of payments and accrued income taxes decreased by $16.2 million due to payments. All other operating assets and liabilities, net, provided cash of $9.5 million. In 2011, accounts receivable increased by $65.6 million and inventory increased by $46.8 million from the prior year. Accounts payable decreased by $6.5 million. All other operating assets and liabilities, net, used cash of $68.1 million due primarily to the payment timing of certain accrued liabilities. The accrual of $18.1 million for a court ruling and a $47.1 million increase in customer deposits for certain contracts.

Investing activities In the first six months of 2012 and 2011, cash used in investing activities was $104.7 million and $64.3 million, respectively. Net cash paid for acquisitions was $88.4 million and $51.8 million for the first six 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 $16.5 million and $12.8 million in the first six months of 2012 and 2011, respectively.

Financing activities In the first six months of 2012, cash provided by financing activities was $24.7 million, which included $172.4 million in proceeds from debt and $125.4 million of repayments of debt on the revolving credit facility, $2.9 million of dividend payments and $21.9 million for the repurchase of 298,800 shares of stock. In the first six months of 2011, cash used in financing activities was $25.1 million, which included $79.0 million in proceeds from debt and $75.0 million of repayments of debt on the revolving credit facility, $29.8 million of debt repayments on the term loan and other debt, $1.0 million of dividend payments and $6.2 million for the repurchase of 95,000 shares of stock.

 

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Table of Contents

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

 

In thousands

   June 30,
2012
     December 31,
2011
 

6.875% Senior Notes, due 2013

   $ 150,000       $ 150,000   

Revolving Credit Facility

     292,000         245,000   

Capital Leases

     1,131         873   
  

 

 

    

 

 

 

Total

     443,131         395,873   

Less—current portion

     43         68   
  

 

 

    

 

 

 

Long-term portion

   $ 443,088       $ 395,805   
  

 

 

    

 

 

 

Cash balance at June 30, 2012 and December 31, 2011 was $234.1 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 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 June 30, 2012, repurchases are $47.9 million, leaving $102.1 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.

 

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Table of Contents

During the first six months of 2012, the Company repurchased 298,800 shares of its stock at an average price of $73.38 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 June 30, 2012, the Company has recognized a total liability of $7.5 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;

 

   

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;

 

36


Table of Contents
   

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.

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 42% and 35% of total long-term debt at June 30, 2012 and December 31, 2011, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at June 30, 2012 would increase or decrease interest expense by about $1.9 million. To reduce the impact of interest rate changes on a portion of this variable-rate

 

37


Table of Contents

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 six months of 2012, approximately 49% of Wabtec’s net sales were to customers in the United States, 10% in the United Kingdom, 10% in Australia, 9% in Canada, 6% in Mexico, 2% in Germany and 14% 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 June 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 June 30, 2012, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

 

38


Table of Contents

PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

Except as described in Note 13 of the “Notes to Condensed Consolidated Financial Statements”, 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 June 30, 2012 repurchases are $47.9 million, leaving $102.1 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 six months of 2012, the Company repurchased 298,800 shares of its stock at an average price of $73.38 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
 

April 1, 2012 to April 28, 2012

     —           —           —         $ 123,977,547   

April 29, 2012 to May 26, 2012

     243,800         73.65         243,800       $ 106,021,073   

May 27, 2012 to June 30, 2012

     55,000         72.19         55,000       $ 102,050,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     298,800       $ 73.38         298,800       $ 102,050,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 4. MINE SAFETY DISCLOSURES

Not Applicable

 

39


Table of Contents
Item 6. EXHIBITS

The following exhibits are being filed with this report:

 

    3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended December 31, 2003.
    3.2    Amended and Restated By-Laws of the Company, effective February 15, 2011.
  10.1    2011 Stock Incentive Plan. **
  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.

 

** Management contract or compensatory plan.

 

40


Table of Contents

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: August 2, 2012

 

41


Table of Contents

EXHIBIT INDEX

 

    3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended December 31, 2003, filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K
(File No. 033-90866) for the period ended December 31, 2010, and incorporated herein by reference.
    3.2    Amended and Restated By-Laws of the Company, effective February 15, 2011, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 033-90866), dated February 22, 2011, and incorporated herein by reference.
  10.1    2011 Stock Incentive Plan., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 033-90866), dated May 16, 2011, and incorporated herein by reference. **
  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.

 

** Management contract or compensatory plan.

 

42

XNYS:WAB Westinghouse Air Brake Technologies Corp Quarterly Report 10-Q Filling

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