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, 2013

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 22, 2013

Common Stock, $.01 par value per share

   

96,270,889 shares

   

      

      

   

   

   


WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

June 30, 2013

FORM 10-Q

TABLE OF CONTENTS

   

 

       

Page

   

PART I—FINANCIAL INFORMATION

   

   

   

   

Item 1.

Financial Statements

   

   

   

   

   

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012  

3

   

   

   

   

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012  

4

   

   

   

   

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012  

5

   

   

   

   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012  

6

   

   

   

   

Notes to Condensed Consolidated Financial Statements  

7

   

   

   

Item 2.

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

24

   

   

   

Item 3.

Quantitative and Qualitative Disclosures about Market Risk  

34

   

   

   

Item 4.

Controls and Procedures  

34

   

   

   

   

PART II—OTHER INFORMATION

   

   

   

   

Item 1.

Legal Proceedings  

35

   

   

   

Item 1A.

Risk Factors  

35

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds  

35

   

   

   

Item 4.

Mine Safety Disclosures  

35

   

   

   

Item 6.

Exhibits  

35

   

   

   

   

Signatures  

36

   

   

   

 

 2 

   


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,
2013

   

      

December 31,
2012

   

Assets

   

   

   

   

      

   

   

   

Current Assets

   

   

   

   

      

   

   

   

Cash and cash equivalents

   

$

214,505

      

      

$

215,766

      

Accounts receivable

   

   

488,449

      

      

   

389,915

      

Inventories

   

   

405,938

      

      

   

407,039

      

Deferred income taxes

   

   

60,376

      

      

   

60,894

      

Other

   

   

20,717

      

      

   

19,324

      

Total current assets

   

   

1,189,985

      

      

   

1,092,938

      

Property, plant and equipment

   

   

549,573

      

      

   

555,924

      

Accumulated depreciation

   

   

(308,607

      

   

(311,836

Property, plant and equipment, net

   

   

240,966

      

      

   

244,088

      

Other Assets

   

   

   

   

      

   

   

   

Goodwill

   

   

714,954

      

      

   

666,022

      

Other intangibles, net

   

   

329,834

      

      

   

308,321

      

Other noncurrent assets

   

   

40,651

      

      

   

40,173

      

Total other assets

   

   

1,085,439

      

      

   

1,014,516

      

Total Assets

   

$

2,516,390

      

      

$

2,351,542

      

Liabilities and Shareholders’ Equity

   

   

   

   

      

   

   

   

Current Liabilities

   

   

   

   

      

   

   

   

Accounts payable

   

$

272,519

      

      

$

248,593

      

Customer deposits

   

   

80,470

      

      

   

82,810

      

Accrued compensation

   

   

46,191

      

      

   

53,222

      

Accrued warranty

   

   

44,329

      

      

   

39,860

      

Current portion of long-term debt

   

   

43

      

      

   

43

      

Other accrued liabilities

   

   

80,720

      

      

   

128,531

      

Total current liabilities

   

   

524,272

      

      

   

553,059

      

Long-term debt

   

   

396,915

      

      

   

317,853

      

Accrued postretirement and pension benefits

   

   

62,990

      

      

   

66,388

      

Deferred income taxes

   

   

87,735

      

      

   

91,176

      

Accrued warranty

   

   

17,445

      

      

   

18,352

      

Other long-term liabilities

   

   

21,327

      

      

   

22,697

      

Total liabilities

   

   

1,110,684

      

      

   

1,069,525

      

Shareholders’ Equity

   

   

   

   

      

   

   

   

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

   

   

—  

      

      

   

—  

   

Common stock, $ .01 par value; 200,000,000 shares authorized: 132,349,534 shares issued and 96,270,889 and 95,407,368 outstanding at June 30, 2013 and December 31, 2012, respectively

   

   

1,323

      

      

   

1,323

      

Additional paid-in capital

   

   

390,797

      

      

   

381,348

      

Treasury stock, at cost, 36,078,645 and 36,942,166 shares, at June 30, 2013 and December 31, 2012, respectively

   

   

(341,313

      

   

(349,388

Retained earnings

   

   

1,436,566

      

      

   

1,297,111

      

Accumulated other comprehensive loss

   

   

(86,113

      

   

(53,564

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

   

   

1,401,260

      

      

   

1,276,830

      

Non-controlling interest

   

   

4,446

      

      

   

5,187

      

Total shareholders’ equity

   

   

1,405,706

      

      

   

1,282,017

      

Total Liabilities and Shareholders’ Equity

   

$

2,516,390

      

      

$

2,351,542

      

The accompanying notes are an integral part of these statements.

   

   

   

 

 3 

   


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

      

2013

   

      

2012

   

   

2013

   

      

2012

   

Net sales

      

$

638,002

      

      

$

609,820

      

   

$

1,253,512

      

      

$

1,193,129

      

Cost of sales

      

   

(445,121

      

   

(436,393

   

   

(877,743

      

   

(850,321

Gross profit

      

   

192,881

      

      

   

173,427

      

   

   

375,769

      

      

   

342,808

      

Selling, general and administrative expense

      

   

(63,874

      

   

(59,163

   

   

(128,174

      

   

(121,192

Engineering expense

      

   

(11,280

      

   

(10,145

   

   

(22,614

      

   

(20,294

Amortization expense

      

   

(5,173

      

   

(3,254

   

   

(8,760

      

   

(6,347

Total operating expenses

      

   

(80,327

      

   

(72,562

   

   

(159,548

      

   

(147,833

Income from operations

      

   

112,554

      

      

   

100,865

      

   

   

216,221

      

      

   

194,975

      

Other income and expenses

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Interest expense, net

      

   

(3,271

      

   

(3,509

   

   

(6,885

      

   

(7,233

Other income (expense) , net

      

   

406

      

      

   

223

      

   

   

(175

      

   

109

      

Income from operations before income taxes

      

   

109,689

      

      

   

97,579

      

   

   

209,161

      

      

   

187,851

      

Income tax expense

      

   

(35,051

      

   

(32,867

   

   

(64,910

      

   

(63,878

Net income attributable to Wabtec shareholders

      

$

74,638

      

      

$

64,712

      

   

$

144,251

      

      

$

123,973

      

Earnings Per Common Share

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

0.78

      

      

$

0.67

      

   

$

1.51

      

      

$

1.29

      

Diluted

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

0.77

      

      

$

0.67

      

   

$

1.49

      

      

$

1.28

      

Weighted average shares outstanding

      

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

      

   

95,762

      

      

   

95,671

      

   

   

95,243

      

      

   

95,479

      

Diluted

      

   

97,102

      

      

   

96,844

      

   

   

96,606

      

      

   

96,666

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 4 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   

 

   

      

Unaudited
Three Months Ended
June 30,

   

   

Unaudited
Six Months Ended
June 30,

   

In thousands

      

2013

   

      

2012

   

   

2013

   

      

2012

   

Net income attributable to Wabtec shareholders

      

$

74,638

      

      

$

64,712

      

   

$

144,251

      

      

$

123,973

      

Foreign currency translation loss

      

   

(9,037

      

   

(16,519

   

   

(36,978

      

   

(5,618

Unrealized gain (loss) on interest rate swap contracts

      

   

1,067

      

      

   

(2,378

   

   

1,010

      

      

   

(2,161

Pension benefit plans and post-retirement benefit plans

      

   

2,303

      

      

   

1,920

      

   

   

5,405

      

      

   

2,286

      

Other comprehensive loss before tax

      

   

(5,667

      

   

(16,977

   

   

(30,563

      

   

(5,493

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

      

   

(1,142

      

   

351

      

   

   

(1,986

      

   

92

   

Other comprehensive loss, net of tax

      

   

(6,809

      

   

(16,626

   

   

(32,549

      

   

(5,401

Comprehensive income attributable to Wabtec shareholders

      

$

67,829

      

      

$

48,086

      

   

$

111,702

      

      

$

118,572

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 5 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   

 

   

      

Unaudited
Six Months Ended
June 30,

   

In thousands

      

2013

   

      

2012

   

Operating Activities

      

   

   

   

      

   

   

   

Net income attributable to Wabtec shareholders

      

$

144,251

      

      

$

123,973

      

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

      

   

   

   

      

   

   

   

Depreciation and amortization

      

   

25,019

      

      

   

20,194

      

Stock-based compensation expense

      

   

11,090

      

      

   

9,920

      

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

      

   

(743

      

   

1,498

      

Excess income tax benefits from exercise of stock options

      

   

(4,162

      

   

(725

Changes in operating assets and liabilities, net of acquisitions

      

   

   

   

      

   

   

   

Accounts receivable

      

   

(103,155

      

   

(87,079

Inventories

      

   

7,003

      

      

   

(28,373

Accounts payable

      

   

21,308

      

      

   

(2,205

Accrued income taxes

      

   

(5,004

      

   

(16,158

Accrued liabilities and customer deposits

      

   

(44,316

      

   

12,286

      

Other assets and liabilities

      

   

(6,195

      

   

(2,795

Net cash provided by operating activities

      

   

45,096

      

      

   

30,536

      

Investing Activities

      

   

   

   

      

   

   

   

Purchase of property, plant and equipment

      

   

(14,608

      

   

(16,461

Proceeds from disposal of property, plant and equipment

      

   

5,832

      

      

   

93

      

Acquisitions of business, net of cash acquired

      

   

(115,071

      

   

(88,370

)

Net cash used for investing activities

      

   

(123,847

      

   

(104,738

Financing Activities

      

   

   

   

      

   

   

   

Proceeds from debt

      

   

244,800

      

      

   

172,400

      

Payments of debt

      

   

(165,744

      

   

(125,135

Proceeds from exercise of stock options and other benefit plans

      

   

2,649

      

      

   

1,465

      

Excess income tax benefits from exercise of stock options

      

   

4,162

      

      

   

725

      

Stock repurchase

      

   

—  

      

      

   

(21,927

)  

Cash dividends ($ 0.05 and $ 0.03 per share for the six months ended June 30, 2013 and 2012, respectively)

      

   

(4,796

      

   

(2,880

Net cash provided by financing activities

      

   

81,071

      

      

   

24,648

      

Effect of changes in currency exchange rates

      

   

(3,581

      

   

(1,956

Decrease in cash

      

   

(1,261

      

   

(51,510

Cash, beginning of year

      

   

215,766

      

      

   

285,615

      

Cash, end of period

   

 $

214,505

      

      

$

234,105

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 6 

   


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013 (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 2013, about 49% 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, 2012. The December 31, 2012 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Capital Structure On May 14, 2013, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 200.0 million shares.  In addition, on May 14, 2013, our Board of Directors approved a two-for-one split of the Company’s issued and outstanding common stock in the form of a 100% stock dividend.  The increase in the authorized shares and the stock split became effective on May 14, 2013 and June 11, 2013, respectively.  

The Company issued approximately 66.2 million shares of its common stock as a result of the two-for-one stock split. The par value of the Company’s common stock remained unchanged at $0.01 per share.

Information regarding shares of common stock (except par value per share), retained earnings, and net income per common share attributable to Wabtec shareholders for all periods presented reflects the two-for-one split of the Company’s common stock. The number of shares of the Company’s common stock issuable upon exercise of outstanding stock options and vesting of other stock-based awards was proportionally increased, and the exercise price per share thereof was proportionally decreased, in accordance with the terms of the stock incentive plans.

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

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

In general, the Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $152.3 million and $97.1 million, customer deposits were $80.5 million and $82.8 million, and provisions for loss contracts were $12.1 million and $14.2 million at June 30, 2013 and December 31, 2012, 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 $17.0 million and $20.5million at June 30, 2013 and December 31, 2012, respectively.

 

 7 

   


Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

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, 2013, the Company had no material foreign currency forward contracts.

To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. Effective July 31, 2013, with a termination date of November 7, 2016, this interest rate swap agreement will convert a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible. The Company concluded that the interest rate swap agreements qualify for special cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreement and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. As of June 30, 2013, the Company has recorded a current liability of $2.8million 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 losses recognized in other income (expense), net were $1.0 million and $1.9 million for the three and six months ended June 30, 2013, respectively. Foreign exchange transaction gains recognized in other income (expense), net were $0.6 million and $1.0 million for the three and six months ended June 30, 2012, respectively.

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, 2013 and December 31, 2012. Net income attributable to non-controlling interests for the three and six months ended June 30, 2013 and 2012 was not material.

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

The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended June 30, 2013 are as follows:

   

 

In thousands

Foreign
currency
translation

   

      

Interest
rate swap
contracts

   

   

Pension
and post
retirement
benefit
plans

   

   

Total

   

Balance at December 31, 2012

$

11,981

      

      

$

(2,459

   

$

(63,086

   

$

(53,564

Other comprehensive income before reclassifications

   

(36,978

)  

      

   

574

      

   

   

1,908

      

   

   

(34,496

Amounts reclassified from accumulated other comprehensive income

   

—  

      

      

   

—  

      

   

   

1,947

      

   

   

1,947

      

Net current period other comprehensive income

   

(36,978

      

   

574

      

   

   

3,855

      

   

   

(32,549

)  

Balance at June 30, 2013

$

(24,997

      

$

(1,885

   

$

(59,231

)  

   

$

(86,113

)  

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

 

 8 

   


Reclassifications out of accumulated other comprehensive loss for the three months ended June 30, 2013 are as follows:

   

 

In thousands

Amount reclassified from
accumulated other
comprehensive income

   

      

Affected line item in the
Condensed Consolidated
Statements of Operations

Amortization of defined pension and post retirement items

   

   

   

      

   

    Amortization of initial net obligation and prior service cost

$

(612)

      

      

Cost of sales

    Amortization of net loss

   

2,018

      

      

Cost of sales

   

   

1,406

      

      

Income from Operations

   

   

(450)

      

      

Income tax expense

   

$

956

      

      

Net income

Reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2013 are as follows:

   

 

In thousands

Amount reclassified from
accumulated other
comprehensive income

   

      

Affected line item in the
Condensed Consolidated
Statements of Operations

Amortization of defined pension and post retirement items

   

   

   

      

   

    Amortization of initial net obligation and prior service cost

$

(1,224)

      

      

Cost of sales

    Amortization of net loss

   

4,046

      

      

Cost of sales

   

   

2,822

      

      

Income from Operations

   

   

(875)

      

      

Income tax expense

   

$

1,947

      

      

Net income

   

3. ACQUISITIONS

The Company has made the following acquisitions within the Transit Segment:

 

·   On October 1, 2012, the Company acquired LH Group (“LH”), a UK-based provider of maintenance and overhaul services for the passenger transit market, for a net purchase price of approximately $48.1 million, net of cash, resulting in preliminary goodwill of $20.4 million, none of which will be deductible for tax purposes.

 

·   On July 13, 2012, the Company acquired Tec Tran Corp. and its affiliates (“Tec Tran”), the only U.S.-owned manufacturer of hydraulic braking systems for transit cars, based in North Carolina, for a net purchase price of approximately $8.3 million, net of cash, resulting in preliminary additional goodwill of $1.7 million, which will be deductible for tax purposes.

 

·   On June 14, 2012, the Company acquired Mors Smitt Holding (“Mors Smitt”), a leading manufacturer of electronic components for rail and industrial markets with operations in the Netherlands, the United Kingdom, the U.S., France, China and Hong-Kong, for a net purchase price of approximately $90.0 million, net of cash, resulting in additional goodwill of $42.9 million, none of which will be deductible for tax purposes.

   

 

 9 

   


The Company has made the following acquisitions within the Freight Segment:

 

·   On February 26, 2013, the Company acquired Transdyne (“Transdyne”), a distributor of wear-protection components and other hardware used primarily on railroad freight cars, for a net purchase price of approximately $2.4 million, net of cash, resulting in preliminary goodwill of $1.5 million, which will be deductible for tax purposes.

 

·   On January 31, 2013, the Company acquired Napier Turbochargers Ltd. (“Napier”), a UK-based provider of turbochargers and related parts for the worldwide power generation and marine markets, for a net purchase price of approximately $112.3 million, net of cash, resulting in preliminary goodwill of $59.6 million, none of which will be deductible for tax purposes.

 

·   On July 31, 2012, the Company acquired Winco Equipamentos Ferroviarios Ltda. (“Winco”), an established marketing and sales company and provider of freight car components with capabilities including value-added engineering and assembly, service, technical support and logistics, based in Brazil, for an initial net payment of approximately $3.7 million, net of cash, resulting in preliminary additional goodwill of $4.8 million, none of which will be deductible for tax purposes. In addition to the $3.7 million, the purchase agreement includes contingent consideration to be paid in future periods based on the achievement of certain financial results.

The acquisitions listed above include escrow deposits of $12.2 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.

For the Transdyne, Tec Tran, Winco, LH and Napier 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 Mors Smitt acquisition, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.

   

 

   

      

Transdyne

   

   

Napier

   

   

LH

   

   

Winco

   

   

Tec Tran

   

   

Mors Smitt

   

In thousands

      

February 26,
2013

   

   

January 31,
2013

   

   

October 1,
2012

   

   

July 31,
2012

   

   

July 13,
2012

   

   

June 14,
2012

   

Current assets

      

$

1,062

      

   

$

15,935

      

   

$

19,126

      

   

$

1,584

      

   

$

1,955

      

   

$

23,649

      

Property, plant & equipment

      

   

83

      

   

   

9,184

      

   

   

5,553

      

   

   

47

      

   

   

116

      

   

   

10,389

      

Goodwill and other intangible assets

      

   

1,483

      

   

   

97,652

      

   

   

39,033

      

   

   

7,401

      

   

   

6,717

      

   

   

79,730

      

Other assets

      

   

—  

      

   

   

—  

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

944

      

Total assets acquired

      

   

2,628

      

   

   

122,771

      

   

   

63,712

      

   

   

9,032

      

   

   

8,788

      

   

   

114,712

      

Total liabilities assumed

      

   

(226

   

   

(10,430

   

   

(15,592

   

   

(5,376

   

   

(470

   

   

(24,724

Net assets acquired

      

$

2,402

      

   

$

112,341

      

   

$

48,120

      

   

$

3,656

      

   

$

8,318

      

   

$

89,988

      

The total goodwill and other intangible assets for acquisitions listed in the table above was $232.0 million, of which $130.9 million and 101.1 million was related to goodwill and other intangible assets, respectively.  Of the allocation of $101.1 million of acquired intangible assets for the companies listed in the above table exclusive of goodwill, $68.8 million was assigned to customer relationships, $25.1 million was assigned to trade names, $2.6 million was assigned to patents, $0.6 million was assigned to non-compete agreements, $0.8 million was assigned to favorable leasehold interest and $3.2 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 patents’ useful life is eight years, the favorable leasehold interest useful life is five 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 had occurred on January 1, 2012:

   

 

In thousands

      

Three Months Ended
June 30, 2013

   

      

Three Months Ended
June 30, 2012

   

      

Six Months Ended
June 30, 2013

   

      

Six Months Ended
June 30, 2012

   

Net sales

      

$

638,002

      

      

$

659,482

      

      

$

1,258,327

      

      

$

1,296,406

      

Gross profit

      

   

192,881

      

      

   

189,267

      

      

   

377,404

      

      

   

375,374

      

Net income attributable to Wabtec shareholders

      

   

74,638

      

      

   

69,225

      

      

   

145,151

      

      

   

133,965

      

Diluted earnings per share

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

As Reported

      

$

0.77

      

      

$

0.67

      

      

$

1.49

      

      

$

1.28

      

Pro forma

      

$

0.77

      

      

$

0.71

      

      

$

1.50

      

      

$

1.39

      

   

 

 10 

   


4. INVENTORIES

The components of inventory, net of reserves, were:

   

 

In thousands

      

June 30,
2013

   

      

December 31,
2012

   

Raw materials

      

$

181,125

      

      

$

186,341

      

Work-in-process

      

   

128,881

      

      

   

129,605

      

Finished goods

      

   

95,932

      

      

   

91,093

      

Total inventories

      

$

405,938

      

      

$

407,039

      

   

5. INTANGIBLES

The change in the carrying amount of goodwill by segment for the six months ended June 30, 2013 is as follows:

   

 

In thousands

      

Freight
Segment

   

      

Transit
Segment

   

      

Total

   

Balance at December 31, 2012

      

$

397,184

      

      

$

268,838

      

      

$

666,022

      

Acquisition

      

   

60,115

      

      

   

—  

      

      

   

60,115

      

Adjustment to preliminary purchase allocation

      

   

(43

)  

      

   

912

      

      

   

869

      

Foreign currency impact

      

   

(7,340

)  

      

   

(4,712

)  

      

   

(12,052

)  

Balance at June 30, 2013

      

$

449,916

      

      

$

265,038

      

      

$

714,954

      

As of June 30, 2013 and December 31, 2012, the Company’s trademarks had a net carrying amount of $138.5 million and $131.3 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,
2013

   

      

December 31,
2012

   

Patents and other, net of accumulated amortization of $ 36,121 and  $35,556

      

$

12,250

      

      

$

11,835

      

Customer relationships, net of accumulated amortization of $ 37,571 and $31,572

      

   

179,059

      

      

   

165,160

      

Total

      

$

191,309

      

      

$

176,995

      

The weighted average remaining useful life of patents, customer relationships and intellectual property were six years, 16 years and 16 years, respectively. Amortization expense for intangible assets was $5.2 million and $8.8 million for the three and six months ended June 30, 2013, respectively, and $3.3 million and $6.3 million for the three and six months ended June 30, 2012, respectively.

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

   

 

Remainder of 2013

$

8,035

      

2014

   

15,295

      

2015

   

14,259

      

2016

   

14,106

      

2017

   

12,584

      

   

6. LONG-TERM DEBT

Long-term debt consisted of the following:

   

 

In thousands

      

June 30,
2013

   

      

December 31,
2012

   

6.875% Senior Notes, due 2013

      

$

150,000

      

      

$

150,000

      

Revolving Credit Facility

      

   

246,400

      

      

   

167,000

      

Capital Leases

      

   

558

      

      

   

896

      

Total

      

   

396,958

      

      

   

317,896

      

Less—current portion

      

   

43

      

      

   

43

      

Long-term portion

      

$

396,915

      

      

$

317,853

      

 

 11 

   


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 $600million, five-year revolving credit facility. The Company incurred approximately $1.9 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, 2013, the Company had available bank borrowing capacity, net of $58.0 million of letters of credit, of approximately $295.6 million, 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 plus a 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, 2013 the weighted average interest rate on the Company’s variable rate debt was 1.24%. On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. The effective date of the interest rate swap agreement is July 31, 2013, and the termination date is November 7, 2016. The impact of the interest rate swap agreement will be to convert a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible.

The 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 July 31, 2013

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

The Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.

   

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

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

The Company uses a December 31 measurement date for the plans.

 

 12 

   


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

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

106

      

   

$

95

      

   

$

506

      

   

$

491

      

Interest cost

      

   

491

      

   

   

542

      

   

   

1,656

      

   

   

1,764

      

Expected return on plan assets

      

   

(740

   

   

(775

   

   

(2,095

   

   

(2,021

Net amortization/deferrals

      

   

839

      

   

   

807

      

   

   

855

      

   

   

674

      

Net periodic benefit cost

      

$

696

      

   

$

669

      

   

$

922

      

   

$

908

      

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

4.96

%

Expected long-term rate of return

      

   

7.50

%

   

   

7.50

%

   

   

6.09

%

   

   

6.12

%

Rate of compensation increase

      

   

3.00

%

   

   

3.00

%

   

   

3.10

%

   

   

3.21

%

   

   

      

U.S.

   

   

International

   

   

      

Six months ended
June 30,

   

   

Six months ended
June 30,

   

In thousands, except percentages

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

212

      

   

$

191

      

   

$

1,019

      

   

$

986

      

Interest cost

      

   

982

      

   

   

1,084

      

   

   

3,333

      

   

   

3,536

      

Expected return on plan assets

      

   

(1,480

   

   

(1,550

   

   

(4,217

   

   

(4,050

Net amortization/deferrals

      

   

1,678

      

   

   

1,613

      

   

   

1,721

      

   

   

1,351

      

Settlement loss recognized

      

   

—  

      

   

   

—  

   

   

   

—  

      

   

   

293

      

Net periodic benefit cost

      

$

1,392

      

   

$

1,338

      

   

$

1,856

      

   

$

2,116

      

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

4.96

%

Expected long-term rate of return

      

   

7.50

%

   

   

7.50

%

   

   

6.09

%

   

   

6.12

%

Rate of compensation increase

      

   

3.00

%

   

   

3.00

%

   

   

3.10

%

   

   

3.21

%

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 $4.9 million to the international plans and does not expect to make a contribution to the U.S. plans during 2013.

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.

 

 13 

   


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

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

7

      

   

$

10

      

   

$

12

      

   

$

11

      

Interest cost

      

   

321

      

   

   

350

      

   

   

43

      

   

   

50

      

Net amortization/deferrals

      

   

(212

   

   

(200

   

   

(76

   

   

(82

Net periodic benefit cost

      

$

116

      

   

$

160

      

   

$

(21

   

$

(21

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

5.15

%

   

 

   

      

U.S.

   

   

International

   

   

      

Six months ended
June 30,

   

   

Six months ended
June 30,

   

In thousands, except percentages

      

2013

   

   

2012

   

   

2013

   

   

2012

   

Net periodic benefit cost

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Service cost

      

$

14

      

   

$

19

      

   

$

24

      

   

$

22

      

Interest cost

      

   

642

      

   

   

701

      

   

   

87

      

   

   

100

      

Net amortization/deferrals

      

   

(424

   

   

(401

   

   

(153

   

   

(164

Net periodic benefit cost

      

$

232

      

   

$

319

      

   

$

(42

   

$

(42

Assumptions

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Discount rate

      

   

3.90

%

   

   

4.30

%

   

   

4.30

%

   

   

5.15

%

   

8. STOCK-BASED COMPENSATION

As of June 30, 2013, the Company maintains employee stock-based compensation plans for stock options, restricted stock, restricted units, and incentive stock awards as governed by the 2011 Stock Incentive Compensation Plan (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a 10-year term through March 27, 2021 and provides a maximum of 3,800,000 shares for grants or awards. The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011. The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (“Directors Plan”). No awards may be made under the 2000 Plan or the Directors Plan subsequent to October 31, 2016.

Stock-based compensation expense was $11.5 million and $10.1 million for the six months ended June 30, 2013 and 2012, respectively. Included in the stock-based compensation expense for the six months ended June 30, 2013 above is $1.1 million of expense related to stock options, $2.8 million related to restricted stock, $0.8 million related to restricted units, $6.3 million related to incentive stock awards and $0.5 million related to awards issued for Directors’ fees. At June 30, 2013, unamortized compensation expense related to stock options, restricted stock, restricted units and incentive stock awards expected to vest totaled $30.4 million and will be recognized over a weighted average period of 1.5 years.

Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four-year vesting period and expire 10 years from the date of grant.

The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the six months ended June 30, 2013:

   

 

   

Options

   

      

Weighted
Average
Exercise
Price

   

      

Weighted Average
Remaining
Contractual Life

   

      

Aggregate
intrinsic value
(in thousands)

   

Outstanding at December 31, 2012

   

1,465,678

      

      

$

20.24

      

      

   

6.3

      

      

$

34,487

      

Granted

   

116,392

      

      

   

48.29

      

      

   

   

   

      

   

598

      

Exercised

   

(199,204

)  

      

   

13.30

      

      

   

   

   

      

   

(7,994

)  

Canceled

   

(3,052

      

   

17.49

      

      

   

   

   

      

   

(110

Outstanding at June 30, 2013

   

1,379,814

      

      

$

23.61

      

      

   

6.4

      

      

$

41,140

      

Exercisable at June 30, 2013

   

944,898

      

      

$

18.55

      

      

   

5.7

      

      

$

32,961

      

 

 14 

   


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,

   

   

2013

   

   

2012

   

Dividend yield

   

.21

%

   

   

.23

%

Risk-free interest rate

   

1.38

%

   

   

1.34

%

Stock price volatility

   

43.8

%

   

   

44.95

%

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 vest over four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant.

In addition, the Company has issued incentive stock awards to eligible employees that vest upon attainment of certain cumulative three year performance goals. Based on the Company’s performance for each three year period then ended, the incentive stock awards can vest and be awarded ranging from 0% to 200% of the initial incentive stock awards granted. The incentive stock awards included in the table below represent the number of shares that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of June 30, 2013, the Company estimates that it will achieve 200%, 159% and 100% for the incentive stock awards expected to vest based on performance for the three year periods ending December 31, 2013, 2014, and 2015, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these stock awards expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.

Compensation expense for the restricted stock and incentive stock awards is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.

The following table summarizes the restricted stock and unit activity for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock awards activity for the 2011 Plan and the 2000 Plan with related information for the six months ended June 30, 2013:

   

 

   

Restricted
Stock
and Units

   

      

Incentive
Stock
Awards

   

      

Weighted
Average Grant
Date Fair
Value

   

Outstanding at December 31, 2012

   

546,773

      

      

   

1,329,078

      

      

$

26.69

      

Granted

   

170,987

      

      

   

196,990

      

      

   

48.55

      

Vested

   

(204,042

)  

      

   

(570,918

)  

      

   

20.85

      

Adjustment for incentive stock awards expected to vest

   

—  

      

      

   

77,232

      

      

   

35.29

      

Canceled

   

(1,288

)  

      

   

(6,350

)  

      

   

20.50

      

Outstanding at June 30, 2013

   

512,430

      

      

   

1,026,032

      

      

$

35.32

      

   

9. INCOME TAXES

The overall effective income tax rate was 32.0% and 31.0% for the three and six months ended June 30, 2013, respectively and 33.7% and 34.0% for the three and six months ended June 30, 2012, respectively. For the three months ended June 30, 2013, the decrease in the effective rate is primarily due to an increase in foreign income taxed at lower statutory rates. For the six months ended June 30, 2013, the decrease in the effective rate is due to retroactive extension of the R&D tax credit and an increase in foreign income taxed at a lower statutory rates.

As of June 30, 2013, the liability for income taxes associated with uncertain tax positions is $10.7million, of which $3.8 million, if recognized would favorably affect the Company’s effective tax rate. As of December 31, 2012 the liability associated with uncertain tax positions was $11.3 million, of which $3.7 million, if recognized, would favorably affect the Company’s effective tax rate.

 

 15 

   


The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2013 the total accrued interest and penalties are $2.3 million and $1.3 million, respectively. As of December 31, 2012 the total accrued interest and penalties were $2.5 million and $1.4 million, respectively.

At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $1.6 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.  With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2011.

   

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

      

2013

   

   

2012

   

Numerator

      

   

   

   

   

   

   

   

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

      

$

74,638

      

   

$

64,712

      

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

      

   

(2,410

   

   

(1,442

Undistributed earnings

      

   

72,228

      

   

   

63,270

      

Percentage allocated to common shareholders(1)

      

   

99.6

%

   

   

99.5

   

      

   

71,939

      

   

   

62,954

      

Add: dividends declared—common shares

      

   

2,399

      

   

   

1,435

      

Numerator for basic and diluted earnings per common share

      

$

74,338

      

   

$

64,389

      

Denominator

      

   

   

   

   

   

   

   

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

      

   

95,762

      

   

   

95,671

      

Effect of dilutive securities:

      

   

   

   

   

   

   

   

Assumed conversion of dilutive stock-based compensation plans

      

   

1,340

      

   

   

1,173

      

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

      

   

97,102

      

   

   

96,844

      

Net income per common share attributable to Wabtec shareholders

      

   

   

   

   

   

   

   

Basic

      

$

0.78

      

   

$

0.67

      

Diluted

      

$

0.77

      

   

$

0.67

      

   

   

   

   

   

   

   

   

   

(1) Basic weighted-average common shares outstanding

      

   

95,762

      

   

   

95,671

      

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

      

   

96,193

      

   

   

96,132

      

Percentage allocated to common shareholders

      

   

99.6

%

   

   

99.5

%

 

 16 

   


   

 

   

      

Six Months Ended
June 30,

   

In thousands, except per share

      

2013

   

   

2012

   

Numerator

      

   

   

   

   

   

   

   

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

      

$

144,251

      

   

$

123,973

      

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

      

   

(4,796

   

   

(2,880

Undistributed earnings

      

   

139,455

      

   

   

121,093

      

Percentage allocated to common shareholders(1)

      

   

99.5

%

   

   

99.5

   

      

   

138,758

      

   

   

120,488

      

Add: dividends declared—common shares

      

   

4,772

      

   

   

2,865

      

Numerator for basic and diluted earnings per common share

      

$

143,530

      

   

$

123,353

      

Denominator

      

   

   

   

   

   

   

   

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

      

   

95,243

      

   

   

95,479

      

Effect of dilutive securities:

      

   

   

   

   

   

   

   

Assumed conversion of dilutive stock-based compensation plans

      

   

1,363

      

   

   

1,187

      

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

      

   

96,606

      

   

   

96,666

      

Net income per common share attributable to Wabtec shareholders

      

   

   

   

   

   

   

   

Basic

      

$

1.51

      

   

$

1.29

      

Diluted

      

$

1.49

      

   

$

1.28

      

   

 

(1) Basic weighted-average common shares outstanding

      

   

95,243

      

   

   

95,479

      

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

      

   

95,724

      

   

   

95,978

      

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

2013

   

      

2012

   

Balance at December 31, 2012 and 2011, respectively

$

58,212

   

      

$

50,640

   

Warranty expense

   

13,851

   

      

   

12,938

   

Acquisitions

   

1,776

   

      

   

294

   

Warranty claim payments

   

(10,665

)

      

   

(7,801

)

Foreign currency impact/other

   

(1,400

)

      

   

(24

)

Balance at June 30, 2013 and 2012, respectively

$

61,774

   

      

$

56,047

   

   

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.

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.

 

 17 

   


The following table provides the liabilities carried at fair value measured on a recurring basis as of June 30, 2013, which are included in other current liabilities on the Condensed Consolidated Balance sheet:

   

 

   

   

Total Carrying
Value at
June 30,
2013

   

      

Fair Value Measurements at June 30, 2013 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

   

   

2,785

   

      

   

—  

   

   

   

2,785

   

      

   

—  

   

Total

   

$

2,785

   

      

$

—  

   

   

$

2,785

   

      

$

—  

   

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2012, which is included in other current liabilities on the Condensed Consolidated Balance sheet:

   

 

   

   

Total Carrying
Value at
December 31,
2012

   

      

Fair Value Measurements at December 31, 2012 Using

   

In thousands

   

      

Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)

   

      

Significant Other
Observable Inputs
(Level 2)

   

      

Significant
Unobservable
Inputs
(Level 3)

   

Interest rate swap agreements

   

   

4,070

      

      

   

—  

   

      

   

4,070

      

      

   

—  

   

Total

   

$

4,070

      

      

$

—  

   

      

$

4,070

      

      

$

—  

   

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, 2012, in Note 18 therein, filed on February 22, 2013. During the first six months for 2013, there were no material changes to the information described in the Form 10-K, except as regarding the disclosure related to the claim by Faiveley Transport USA.  The Faiveley plaintiffs agreed to reduce the damage award to $15.0 million, plus interest, in lieu of a new trial on damages.  In accordance with the decision entered by the appellete court, Wabtec paid the Faiveley plaintiffs a total of approximately $15.8 million, and the case is closed.

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, 2012, in Note 18 therein, filed on February 22, 2013. During the first six months of 2013, 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

 

 18 

   


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, 2013 is as follows:

   

 

In thousands

      

Freight
Segment

   

      

Transit
Segment

   

      

Corporate
Activities and
Elimination

   

      

Total

   

Sales to external customers

      

$

354,857

   

      

$

283,145

      

      

$

—  

      

      

$

638,002

      

Intersegment sales/(elimination)

      

   

7,914

   

      

   

1,405

      

      

   

(9,319

)

      

   

—  

      

Total sales

      

$

362,771

   

      

$

284,550

      

      

$

(9,319

)

      

$

638,002

      

Income (loss) from operations

      

$

78,601

   

      

$

35,893

      

      

$

(1,940

)

      

$

112,554

      

Interest expense and other, net

      

   

—  

   

      

   

—  

      

      

   

(2,865

)

      

   

(2,865

)

Income (loss) from operations before income taxes

      

$

78,601

   

      

$

35,893

      

      

$

(4,805

)

      

$

109,689

      

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

   

Segment financial information for the six months ended June 30, 2013 is as follows:

   

 

In thousands

      

Freight
Segment

   

      

Transit
Segment

   

      

Corporate
Activities and
Elimination

   

      

Total

   

Sales to external customers

      

$

668,536

      

      

$

584,976

      

      

$

—  

      

      

$

1,253,512

      

Intersegment sales/(elimination)

      

   

14,974

      

      

   

2,765

      

      

   

(17,739

)

      

   

—  

      

Total sales

      

$

683,510

      

      

$

587,741

      

      

$

(17,739

)

      

$

1,253,512

      

Income (loss) from operations

      

$

148,436

      

      

$

74,474

      

      

$

(6,689

)

      

$

216,221

      

Interest expense and other, net

      

   

—  

      

      

   

—  

      

      

   

(7,060

)

      

   

(7,060

)

Income (loss) from operations before income taxes

      

$

148,436

      

      

$

74,474

      

      

$

(13,749

)

      

$

209,161

      

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

   

 

 19 

   


Sales by product are as follows:

   

 

   

      

Three Months Ended
June 30,

   

In thousands

      

2013

   

      

2012

   

Specialty Products & Electronics

      

$

284,166

      

      

$

298,447

      

Brake Products

      

   

139,410

      

      

   

128,363

      

Remanufacturing, Overhaul & Build

      

   

141,199

      

      

   

109,933

      

Other Transit Products

      

   

52,379

      

      

   

54,902

      

Other

      

   

20,848

      

      

   

18,175

      

Total sales

      

$

638,002

      

      

$

609,820

      

Sales by product are as follows:

   

 

   

      

Six Months Ended
June 30,

   

In thousands

      

2013

   

      

2012

   

Specialty Products & Electronics

      

$

523,368

      

      

$

577,288

      

Brake Products

      

   

280,732

      

      

   

259,613

      

Remanufacturing, Overhaul & Build

      

   

304,793

      

      

   

218,655

      

Other Transit Products

      

   

103,428

      

      

   

100,800

      

Other

      

   

41,191

      

      

   

36,773

      

Total sales

      

$

1,253,512

      

      

$

1,193,129

      

   

15. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

Effective August 2003, the Company issued $150 million of Senior Notes due in 2013 (“the Notes”). On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility due in 2016 (“the Bank Debt”). The obligations under the Note and the Bank Debt 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, 2013:

   

 

In thousands

      

Parent

   

      

Guarantors

   

      

Non-Guarantors

   

      

Elimination

   

      

Consolidated

   

Cash and cash equivalents

      

$

3,984

   

      

$

5,232

      

      

$

205,289

      

      

$

—  

      

      

$

214,505

      

Accounts receivable

      

   

486

   

      

   

289,807

      

      

   

198,156

      

      

   

—  

      

      

   

488,449

      

Inventories

      

   

—  

   

      

   

266,879

      

      

   

139,059

      

      

   

—  

      

      

   

405,938

      

Other current assets

      

   

62,915

   

      

   

4,937

      

      

   

13,241

      

      

   

—  

      

      

   

81,093

      

Total current assets

      

   

67,385

   

      

   

566,855

      

      

   

555,745

      

      

   

—  

      

      

   

1,189,985

      

Property, plant and equipment

      

   

5,018

   

      

   

124,322

      

      

   

111,626

      

      

   

—  

      

      

   

240,966

      

Goodwill

      

   

7,980

   

      

   

402,995

      

      

   

303,979

      

      

   

—  

      

      

   

714,954

      

Investment in subsidiaries

      

   

3,423,789

   

      

   

380,494

      

      

   

—  

      

      

   

(3,804,283

)

      

   

—  

      

Other intangibles

      

   

—  

   

      

   

166,413

      

      

   

163,421

      

      

   

—  

      

      

   

329,834

      

Other long term assets

      

   

(11,248

)

      

   

7,797

      

      

   

44,102

      

      

   

—  

      

      

   

40,651

      

Total Assets

      

$

3,492,924

   

      

$

1,648,876

      

      

$

1,178,873

      

      

$

(3,804,283

)

      

$

2,516,390

      

Current liabilities

      

$

17,042

   

      

$

331,997

      

      

$

175,233

      

      

$

—  

      

      

$

524,272

      

Inter-company

      

   

1,606,493

   

      

   

(1,697,841

)

      

   

91,348

      

      

   

—  

      

      

   

—  

      

Long-term debt

      

   

396,400

   

      

   

153

      

      

   

362

      

      

   

—  

      

      

   

396,915

      

Other long term liabilities

      

   

67,283

   

      

   

34,570

      

      

   

87,644

      

      

   

—  

      

      

   

189,497

      

Total liabilities

      

   

2,087,218

   

      

   

(1,331,121

)

      

   

354,587

      

      

   

—  

      

      

   

1,110,684

      

Stockholders’ equity

      

   

1,405,706

   

      

   

2,979,997

      

      

   

824,286

      

      

   

(3,804,283

)

      

   

1,405,706

      

Total Liabilities and Stockholders’ Equity

      

$

3,492,924

   

      

$

1,648,876

      

      

$

1,178,873

      

      

$

(3,804,283

)

      

$

2,516,390

      

 

 20 

   


Balance Sheet as of December 31, 2012:

   

 

In thousands

      

Parent

   

   

Guarantors

   

   

Non-Guarantors

   

      

Elimination

   

   

Consolidated

   

Cash and cash equivalents

      

$

22,335

   

   

$

5,473

      

   

$

187,958

      

      

$

—  

      

   

$

215,766

      

Accounts receivable

      

   

1,210

   

   

   

213,895

      

   

   

174,810

      

      

   

—  

      

   

   

389,915

      

Inventories

      

   

—  

   

   

   

278,610

      

   

   

128,429

      

      

   

—  

      

   

   

407,039

      

Other current assets

      

   

63,496

   

   

   

5,400

      

   

   

11,322

      

      

   

—  

      

   

   

80,218

      

Total current assets

      

   

87,041

   

   

   

503,378

      

   

   

502,519

      

      

   

—  

      

   

   

1,092,938

      

Property, plant and equipment, net

      

   

4,685

   

   

   

127,165

      

   

   

112,238

      

      

   

—  

      

   

   

244,088

      

Goodwill

      

   

7,980

   

   

   

402,510

      

   

   

255,532

      

      

   

—  

      

   

   

666,022

      

Investment in subsidiaries

      

   

3,146,931

   

   

   

279,731

      

   

   

—  

      

      

   

(3,426,662

   

   

—  

      

Other intangibles, net

      

   

—  

   

   

   

169,374

      

   

   

138,947

      

      

   

—  

      

   

   

308,321

      

Other long term assets

      

   

(10,491

)

   

   

4,309

      

   

   

46,355

      

      

   

—  

      

   

   

40,173

      

Total Assets

      

$

3,236,146

   

   

$

1,486,467

      

   

$

1,055,591

      

      

$

(3,426,662

   

$

2,351,542

      

Current liabilities

      

$

64,404

   

   

$

321,675

      

   

$

166,980

      

      

$

—  

      

   

$

553,059

      

Intercompany

      

   

1,506,541

   

   

   

(1,598,419

   

   

91,878

      

      

   

—  

      

   

   

—  

      

Long-term debt

      

   

317,000

   

   

   

168

      

   

   

685

      

      

   

—  

      

   

   

317,853

      

Other long term liabilities

      

   

66,184

   

   

   

37,845

      

   

   

94,584

      

      

   

—  

      

   

   

198,613

      

Total liabilities

      

   

1,954,129

   

   

   

(1,238,731

   

   

354,127

      

      

   

—  

      

   

   

1,069,525

      

Stockholders’ equity

      

   

1,282,017

   

   

   

2,725,198

      

   

   

701,464

      

      

   

(3,426,662

   

   

1,282,017

      

Total Liabilities and Stockholders’ Equity

      

$

3,236,146

   

   

$

1,486,467

      

   

$

1,055,591

      

      

$

(3,426,662

   

$

2,351,542

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income Statement for the Three Months Ended June 30, 2013:

   

 

In thousands

      

Parent

   

      

Guarantors

   

      

Non-Guarantors

   

      

Elimination(1)

   

      

Consolidated

   

Net sales

      

$

—  

   

      

$

436,000

   

      

$

260,310

   

      

$

(58,308

)

      

$

638,002

   

Cost of sales

      

   

614

   

      

   

(262,311

)

      

   

(208,402

)

      

   

24,978

   

      

   

(445,121

)

Gross profit

      

   

614

   

      

   

173,689

   

      

   

51,908

   

      

   

(33,330

)

      

   

192,881

   

Operating expenses

      

   

(12,535

)

      

   

(39,554

)

      

   

(28,238

)

      

   

—  

   

      

   

(80,327

)

Operating (loss) profit

      

   

(11,921

)

      

   

134,135

   

      

   

23,670

   

      

   

(33,330

)

      

   

112,554

   

Interest (expense) income, net

      

   

(4,928

)

      

   

1,547

   

      

   

110

   

      

   

—  

   

      

   

(3,271

)

Other income (expense), net

      

   

2,771

   

      

   

490

   

      

   

(2,855

)

      

   

—  

   

      

   

406

   

Equity earnings

      

   

112,430

   

      

   

26,894

   

      

   

—  

   

      

   

(139,324

)

      

   

—  

   

Income (loss) from operations before income tax

      

   

98,352

   

      

   

163,066

   

      

   

20,925

   

      

   

(172,654

)

      

   

109,689

   

Income tax expense

      

   

(23,714

)

      

   

(3,355

)

      

   

(7,982

)

      

   

—  

   

      

   

(35,051

)

Net income (loss) attributable to Wabtec shareholders

      

$

74,638

   

      

$

159,711

   

      

$

12,943

   

      

$

(172,654

)

      

$

74,638

   

Comprehensive income (loss) attributable to Wabtec shareholders

      

$

77,084

   

      

$

159,711

   

      

$

3,688

   

      

$

(172,654

)

      

$

67,829

   

 

(1)

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

 

 21 

   


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.

Income Statement for the Six Months Ended June 30, 2013:

   

 

In thousands

      

Parent

   

      

Guarantors

   

      

Non-Guarantors

   

      

Elimination(1)

   

      

Consolidated

   

Net sales

      

$

—  

      

      

$

854,035

      

      

$

497,470

      

      

$

(97,993

)

      

$

1,253,512

      

Cost of sales

      

   

1,101

      

      

   

(532,856

)

      

   

(390,544

)

      

   

44,556

      

      

   

(877,743

)

Gross profit

      

   

1,101

      

      

   

321,179

      

      

   

106,926

      

      

   

(53,437

)

      

   

375,769

      

Operating expenses

      

   

(27,709

)

      

   

(77,873

)

      

   

(53,966

)

      

   

—  

      

      

   

(159,548

)

Operating (loss) profit

      

   

(26,608

)

      

   

243,306

      

      

   

52,960

      

      

   

(53,437

)

      

   

216,221

      

Interest (expense) income, net

      

   

(9,844

)

      

   

2,831

      

      

   

128

      

      

   

—  

      

      

   

(6,885

)

Other income (expense), net

      

   

13,667

      

      

   

(3,286

)

      

   

(10,556

)

      

   

—  

      

      

   

(175

)

Equity earnings

      

   

213,845

      

      

   

44,594

      

      

   

—  

      

      

   

(258,439

)

      

   

—  

      

Income (loss) from operations before income tax

      

   

191,060

      

      

   

287,445

      

      

   

42,532

      

      

   

(311,876

)

      

   

209,161

      

Income tax expense

      

   

(46,809

)

      

   

(6,781

)

      

   

(11,320

)

      

   

—  

      

      

   

(64,910

)

Net income (loss) attributable to Wabtec shareholders

      

$

144,251

      

      

$

280,664

      

      

$

31,212

      

      

$

(311,876

)

      

$

144,251

      

Comprehensive income (loss) attributable to Wabtec shareholders

      

$

148,883

      

      

$

280,664

      

      

$

(5,969

)

      

$

(311,876

)

      

$

111,702

      

 

(1)

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

 

 22 

   


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 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.

Condensed Statement of Cash Flows for the Six Months Ended June 30, 2013:

   

 

In thousands

   

Parent

   

      

Guarantors

   

      

Non-Guarantors

   

      

Elimination

   

      

Consolidated

   

Net cash (used for) provided by operating activities

   

$

(96,588

)

      

$

288,443

   

      

$

165,117

   

      

$

(311,876

)

      

$

45,096

   

Net cash used for investing activities

   

   

(3,178

)

      

   

(8,008

)

      

   

(112,661

)

      

   

—  

   

      

   

(123,847

)

Net cash provided by (used for) financing activities

   

   

81,415

   

      

   

(280,676

)

      

   

(31,544

)

      

   

311,876

   

      

   

81,071

   

Effect of changes in currency exchange rates

   

   

—  

   

      

   

—  

   

      

   

(3,581

)

      

   

—  

   

      

   

(3,581

)

(Decrease) increase in cash

   

   

(18,351

)

      

   

(241

)

      

   

17,331

   

      

   

—  

   

      

   

(1,261

)

Cash, beginning of year

   

   

22,335

   

      

   

5,473

   

      

   

187,958

   

      

   

—  

   

      

   

215,766

   

Cash, end of period

   

$

3,984

   

      

$

5,232

   

      

$

205,289

   

      

$

—  

   

      

$

214,505

   

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

   

 

In thousands

      

Parent

   

   

Guarantors

   

   

Non-Guarantors

   

   

Elimination

   

   

Consolidated

   

Net cash provided by (used for) 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 provided by (used for) 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

   

   

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

         

2013

   

      

2012

   

      

2013

   

      

2012

   

Foreign currency (loss) gain

         

$

(1,004

      

$

631

      

      

$

(1,931

      

$

1,041

      

Other miscellaneous income (expense)

         

   

1,410

      

      

   

(408

      

   

1,756

      

      

   

(932

Total other income (expense), net

         

$

406

      

      

$

223

      

      

$

(175

      

$

109

      

   

 

 23 

   


 

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, 2012, filed with the Securities and Exchange Commission on February 22, 2013.

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 2013, about 49% 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, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Performance System, and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, management evaluates the Company’s current operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge activity in key freight rail and passenger transit markets such as North and South America, Europe and the United Kingdom, and Asia-Pacific. In these and other markets, the freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic and the level of investment spending by railroads and governments to expand, upgrade, and modernize their networks. Based on those fluctuations, railroads and governments can increase or decrease purchases of new locomotives and freight cars, and spending on rail-related infrastructure. The passenger transit industry is driven mainly by the spending of government agencies and authorities as they maintain, expand and modernize their transit systems. In doing so, they will increase or decrease spending on new locomotives, transit/subway cars, buses and related infrastructure. Farebox revenues, the fees paid by riders to use public transit, also provide funding for maintaining and operating the systems. Many government entities at all levels are facing budget issues, which could have a negative effect on demand for the Company’s products and services.

In North America, the AAR compiles freight rail industry statistics such as carloadings, generally referred to as “rail traffic,” and the Railway Supply Institute (RSI) releases data on freight car orders, deliveries, and backlog. Through July 13, 2013 carloadings in North America increased 1.3%, including a 0.4% decrease in general merchandise traffic and a 3.5% increase in intermodal traffic. The decrease in general merchandise traffic was mainly due to a 3.9% decrease in coal carloadings. According to the RSI, in the second quarter of 2013, the industry multi-year backlog of freight cars on order increased to about 74,000, the highest since the fourth quarter of 2007. In 2013, with some carbuilders already at capacity, we expect deliveries of new locomotives and new freight cars to be slightly lower than in 2012. Future demand depends largely on the strength in the overall economy and in rail traffic volumes.

The American Public Transportation Association (APTA) provides quarterly transit ridership statistics for the U.S. and Canada. In its most recent report, APTA said first quarter 2013 ridership decreased 1.9% in the U.S. and 2.6% in Canada. In 2012, the U.S. Congress passed a new, two-year transportation funding bill, which maintained transit spending at about the same level, about $10.7 billion, as in prior years. Spending in 2013 is expected to remain at about the same level. The Company also expects deliveries of new subway cars and buses in 2013 to remain about the same as in 2012.

In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of PTC technology, which includes on-board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With our Electronic Train Management System®, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the December 31, 2015 deadline set in the rail safety bill. In 2012, the U.S. Congress discussed extending the deadline but did not do so. An extension of the deadline could affect the rate of industry spending on this technology. Wabtec’s PTC revenue was about $109 million for the six months ended June 30, 2013.

Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe, Asia-Pacific and South America. In Europe, the majority of the rail system serves the passenger transit market, which is larger than the transit market in the U.S. Our presence in the U.K., Germany and Italy has positioned the Company to take advantage of this market.

 

 24 

   


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 has been an area of expansion for the Company as commodity suppliers use our products to meet the demands of their regional customers. In Brazil, the Company is delivering on a PTC contract, has expanded locations and has completed two acquisitions, allowing us to increase our sales in that market.

Current conditions in these international markets vary based on general economic factors and specific freight rail and passenger transit drivers, as mentioned above. In its most recent quarterly data, the Office of Rail Regulation in the U.K. reported an increase in passenger ridership of 3.9% and a 0.9% increase in freight moved. In Germany, the government statistics bureau reported an increase of 0.7% for bus and rail ridership in 2012, and a decrease in rail freight transport of 2.4% for the same period. In France, SNCF, the country’s largest rail system operator, announced a 5.3% increase in regional train ridership in 2012. Brazil’s National Association of Rail Transport reported a 1.3% increase in freight rail traffic in 2012, and a 6.6% increase in spending on new infrastructure and equipment. In China, spending on rolling stock increased about 3% in 2012, and earlier this year the government established China Railway Corp. to manage its rail system. Russian Railways announced an increase of 6.1% in passenger ridership in the first quarter of 2013 compared to the year-ago quarter, and a decrease of 4.1% in freight tons loaded.

In 2013 and beyond, general economic and market conditions in our key markets could have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

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

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Net sales

   

$

638.0

   

   

$

609.8

   

   

$

1,253.5

   

   

$

1,193.1

   

Cost of sales

   

   

(445.1

)

   

   

(436.4

)

   

   

(877.7

)

   

   

(850.3

)

Gross profit

   

   

192.9

   

   

   

173.4

   

   

   

375.8

   

   

   

342.8

   

Selling, general and administrative expenses

   

   

(63.9

)

   

   

(59.2

)

   

   

(128.2

)

   

   

(121.2

)

Engineering expenses

   

   

(11.3

)

   

   

(10.1

)

   

   

(22.6

)

   

   

(20.3

)

Amortization expense

   

   

(5.1

)

   

   

(3.2

)

   

   

(8.8

)

   

   

(6.3

)

Total operating expenses

   

   

(80.3

)

   

   

(72.5

)

   

   

(159.6

)

   

   

(147.8

)

Income from operations

   

   

112.6

   

   

   

100.9

   

   

   

216.2

   

   

   

195.0

   

Interest expense, net

   

   

(3.3

)

   

   

(3.5

)

   

   

(6.9

)

   

   

(7.2

)

Other income (expense), net

   

   

0.4

   

   

   

0.2

   

   

   

(0.1

)

   

   

0.1

   

Income from operations before income taxes

   

   

109.7

   

   

   

97.6

   

   

   

209.2

   

   

   

187.9

   

Income tax expense

   

   

(35.1

)

   

   

(32.9

)

   

   

(64.9

)

   

   

(63.9

)

Net income attributable to Wabtec shareholders

   

$

74.6

   

   

$

64.7

   

   

$

144.3

   

   

$

124.0

   

SECOND QUARTER 2013 COMPARED TO SECOND QUARTER 2012

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

   

 

   

      

Three months ended June 30,

   

In thousands

      

2013

   

      

2012

   

      

Percent
Change

   

Freight Segment

      

$

354,857

      

      

$

407,706

      

      

   

(13.0

)%

Transit Segment

      

   

283,145

      

      

   

202,114

      

      

   

40.1

 %

Net sales

      

   

638,002

      

      

   

609,820

      

      

   

4.6

 %

Income from operations

      

   

112,554

      

      

   

100,865

      

      

   

11.6

 %

Net income attributable to Wabtec shareholders

      

$

74,638

      

      

$

64,712

      

      

   

15.3

 %

 

 25 

   


The following table shows the major components of the change in sales in the second quarter of 2013 from the second quarter of 2012:

   

 

In thousands

      

Freight Segment

   

   

Transit Segment

   

   

Total

   

Second Quarter 2012 Net Sales

      

$

407,706

      

   

$

202,114

      

   

$

609,820

      

Acquisitions

      

   

14,980

      

   

   

34,000

      

   

   

48,980

      

Change in Sales by Product Line:

      

   

   

   

   

   

   

   

   

   

   

   

Brake Products

      

   

(9,443

)

   

   

19,670

      

   

   

10,227

   

Specialty Products & Electronics

      

   

(25,208

)

   

   

1,782

      

   

   

(23,426

Other Transit Products

      

   

—  

      

   

   

(2,596

   

   

(2,596

Remanufacturing, Overhaul & Build

      

   

(29,671

)

   

   

28,561

      

   

   

(1,110

)

Other

      

   

(520

)

   

   

361

      

   

   

(159

Foreign Exchange

      

   

(2,987

)

   

   

(747

)

   

   

(3,734

)

Second Quarter 2013 Net Sales

      

$

354,857

      

   

$

283,145

      

   

$

638,002

      

Net sales increased by $28.2 million to $638.0 million from $609.8 million for the three months ended June 30, 2013 and 2012, respectively. The increase is due to sales from acquisitions of $49.0 million; and $10.2 million for Brake Products sales due to higher demand for original equipment brakes from certain transit contracts.  These increases were partially offset by a $23.4 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products; a $2.6 million decrease in Other Transit Products; and a $1.1 million decrease in Remanufacturing, Overhaul & Build from completion of certain freight locomotives contracts. Company net sales decreased $3.7 million and income from operations decreased $0.2 million due to unfavorable effects of foreign exchange. Net income for the three months ended June 30, 2013 was $74.6 million or $0.77 per diluted share. Net income for the three months ended June 30, 2012 was $64.7 million or $0.67 per diluted share. Net income increased due to higher sales volume and a decrease in the effective income tax rate discussed below.

Freight Segment sales decreased by $52.8 million, or 13.0%, due to a decrease of $29.7 million for freight original equipment locomotives as contract mix shifted to transit locomotives; $25.2 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products; and $9.4 million from decreased demand for original equipment brake products. These decreases were partially offset by $15.0 million in sales from acquisitions. For the Freight Segment, net sales decreased by $3.0 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $81.0 million, or 40.1%, due to $34.0 million from acquisitions; higher sales of $28.6 million for original equipment transit locomotives as contract mix shifted from freight locomotives; $19.7 million from increased demand for original equipment brakes; partially offset by a decrease of $2.6 million from certain transit car build contracts. For the Transit Segment, net sales decreased by $0.7 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit. Cost of Sales increased by $8.7 million to $445.1 million in the second quarter of 2013 compared to $436.4 million in the same period of 2012. In the second quarter of 2013, cost of sales, as a percentage of sales was 69.8% compared to 71.6% in the same period of 2012.

Raw material costs decreased as a percentage of sales to approximately 42% in the second quarter of 2013 from approximately 45% in the same period of 2012. Labor costs increased as a percentage of sales to approximately 12% in the second quarter of 2013 from approximately 11% in the same period of 2012. Overhead costs as a percentage of sales were approximately 16% in the second quarter of 2013 and 2012. Freight Segment raw material costs decreased as a percentage of sales to approximately 41% in the second quarter of 2013 from 46% in the same period of 2012. Freight Segment labor costs increased as a percentage of sales to approximately 11% in the second quarter of 2013 from approximately 10% in the same period of 2012, and overhead costs increased as a percentage of sales to approximately 15% in the second quarter of 2013 from approximately 14% in the same period of 2012. Transit Segment raw material costs increased as a percentage of sales to approximately 43% in the second quarter of 2013 from approximately 42% in the same period of 2012. Transit Segment labor costs decreased as a percentage of sales to approximately 13% in the second quarter of 2013 from approximately 14% in the same period of 2012, and overhead costs decreased as a percentage of sales to approximately 17% in the second quarter of 2013 from approximately 18% in the same period of 2012. Freight Segment material costs decreased as a percentage of sales and transit material costs increased as a percentage of sales due to a shift in contract mix for original equipment locomotives from freight in the second quarter of 2012 to transit in the second quarter of 2013. Freight Segment labor costs increased as a percentage of sales due to certain long term contracts, which carry higher labor costs on a percentage basis.

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

 

 26 

   


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 $2.4 million higher in the second quarter of 2013 compared to the same period of 2012 due to increased sales and increased provision for certain transit contracts. As a percentage of sales, warranty expense was 1.4% for the second quarter of 2013 compared to 1.1% for the same period in the previous year.

Gross profit increased to $192.9 million in the second quarter of 2013 compared to $173.4 million in the same period of 2012, due to higher sales volume and the reasons discussed above. For the second quarter of 2013, gross profit, as a percentage of sales, was 30.2% compared to 28.4%, for the second quarter of 2012.

Operating expenses The following table shows our operating expenses:

   

 

   

      

Three months ended June 30,

   

In thousands

      

2013

   

      

2012

   

      

Percent
Change

   

Selling, general and administrative expenses

      

$

63,874

      

      

$

59,163

      

      

   

8.0

Engineering expenses

      

   

11,280

      

      

   

10,145

      

      

   

11.2

Amortization expense

      

   

5,173

      

      

   

3,254

      

      

   

59.0

Total operating expenses

      

$

80,327

      

      

$

72,562

      

      

   

10.7

Selling, general, and administrative expenses increased $4.7 million in the second quarter of 2013 compared to the same period of 2012 primarily due to $6.5 million of expenses from acquisitions, partially offset by a release of $2.8 million of certain legal reserves for a court ruling. Engineering expense increased by $1.1 million in the second quarter of 2013 compared to the same period of 2012 due to $1.3 million of engineering expense from acquisitions. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense increased in the second quarter of 2013 compared to the same period in 2012 due to amortization of intangibles associated with acquisitions. Total operating expenses were 12.6% of sales for the second quarter of 2013 compared to 11.9% for the same period in the previous year.

The following table shows our segment operating expense:

   

 

   

      

Three months ended June 30,

   

In thousands

      

2013

   

      

2012

   

      

Percent
Change

   

Freight Segment

      

$

39,066

      

      

$

38,249

      

      

   

2.1

 %

Transit Segment

      

   

39,321

      

      

   

29,827

      

      

   

31.8

 %

Corporate

      

   

1,940

      

      

   

4,486

      

      

   

(56.8

)%

Total operating expenses

      

$

80,327

      

      

$

72,562

      

      

   

10.7

 %

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

Freight Segment operating expenses increased $0.8 million in the second quarter of 2013 compared to the same period of 2012 because of $0.9 million of incremental selling, general and administrative expense from acquisitions and $0.7 million of incremental engineering expense from acquisitions, partially offset by a $1.0 million decrease in allocated operating expenses. Freight Segment operating expenses were 10.8% and 9.2% of Freight Segment sales for the second quarter of 2013 and 2012, respectively.

Transit Segment operating expenses increased $9.5 million in the second quarter of 2013 compared to the same period of 2012 because of $5.6 million of incremental selling, general and administrative expense from acquisitions and $0.6 million of incremental engineering expense from acquisitions and higher amortization expense related to acquisitions. Allocated operating expenses increased $0.6 million. Transit Segment operating expenses were 13.8% and 14.5% of Transit Segment sales for the second quarter of 2013 and 2012, respectively.

Corporate non-allocated operating expenses decreased $2.5 million in the second quarter of 2013 compared to the same period of 2012 primarily due to a release of certain legal reserves for a court ruling.

Income from operations Income from operations totaled $112.6 million or 17.6% of sales in the second quarter of 2013 compared to $100.9 million or 16.5% of sales in the same period of 2012. Income from operations increased due to higher sales volume, partially offset by higher operating expenses discussed above.

 

 27 

   


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

Other income (expense), net The Company recorded foreign exchange losses of $1.0 million and gains of $0.6 million, in the second quarter of 2013 and 2012, respectively, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 32.0% and 33.7% for the second quarter of 2013 and 2012, respectively. The decrease in the effective rate is primarily due to an increase in foreign income taxed at lower statutory rates.

Net income Net income for the second quarter of 2013 increased $9.9 million, compared with the same period of 2012. The increase in net income is due to higher sales volume and lower effective tax rate, partially offset by higher operating expenses discussed above.

FIRST SIX MONTHS OF 2013 COMPARED TO FIRST SIX MONTHS OF 2012

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

   

 

   

Six months ended June 30,

   

   

2013

   

   

2012

   

Percent
Change

   

Freight Segment

$

668,536

   

   

$

804,994

   

   

   

(17.0

)%

Transit Segment

   

584,976

   

   

   

388,135

   

   

   

50.7

%

Net sales

   

1,253,512

   

   

   

1,193,129

   

   

   

5.1

%

Income from operations

   

216,221

   

   

   

194,975

   

   

   

10.9

%

Net income attributable to Wabtec shareholders

$

144,251

   

   

$

123,973

   

   

   

16.4

%

The following table shows the major components of the change in sales in the first six months of 2013 from the first six months of 2012:

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

In thousands 

   

Freight Segment

   

   

Transit Segment

   

   

Total

   

First Six Months of 2012 Net Sales

   

$

804,994

   

   

$

388,135

   

   

$

1,193,129

   

Acquisitions

   

   

24,919

   

   

   

65,446

   

   

   

90,365

   

Change in Sales by Product Line:

   

   

   

   

   

   

   

   

   

   

   

   

Brake Products

   

   

(16,064

)

   

   

36,176

   

   

   

20,112

   

Specialty Products & Electronics

   

   

(79,172

)

   

   

10,739

   

   

   

(68,433

)

Other Transit Products

   

   

—  

   

   

   

2,515

   

   

   

2,515

   

Remanufacturing, Overhaul & Build

   

   

(58,814

)

   

   

81,927

   

   

   

23,113

   

Other

   

   

(1,057

)

   

   

1,280

   

   

   

223

   

Foreign Exchange

   

   

(6,270

)

   

   

(1,242

)

   

   

(7,512

)

First Six Months of 2013 Net Sales

   

$

668,536

   

   

$

584,976

   

   

$

1,253,512

   

Net sales increased by $60.4 million to $1,253.5 million from $1,193.1 million for the six months ended June 30, 2013 and 2012, respectively. The increase is due to sales related to acquisitions of $90.4 million; higher Remanufacturing, Overhaul and Build sales of $23.1 million from increased demand for transit original equipment locomotives and aftermarket services for locomotives; higher Brake Products sales of $20.1 million due to higher demand for transit original equipment brakes; and an increase in Other Transit Products of $2.5 million.  These increases were partially offset by a $68.4 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products. Company net sales decreased $7.5 million and income from operations decreased $0.6 million due to unfavorable effects of foreign exchange. Net income for the six months ended June 30, 2013 was $144.3 million or $1.49 per diluted share. Net income for the six months ended June 30, 2012 was $124.0 million or $1.28 per diluted share. Net income increased due to higher sales volume and a decrease in the effective income tax rate discussed below.

Freight Segment sales decreased by $136.5 million, or 17.0%, due to a decrease of $79.2 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products; $58.8 million decrease for freight original equipment locomotives as contract mix shifted to transit locomotives; and $16.1 million from decreased demand for original equipment brake products. These decreases were partially offset by $24.9 million in sales from acquisitions. For the Freight Segment, net sales decreased by $6.3 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $196.8 million, or 50.7%, due to higher sales of $81.9 million for original equipment transit locomotives as contract mix shifted from freight locomotives; $65.4 million from acquisitions; $36.2 million from increased demand

 

 28 

   


for original equipment brakes; $10.7 million from increased demand for positive train control electronics; and a increase of $2.5 million from certain transit car build contracts. For the Transit Segment, net sales decreased by $1.2 million due to unfavorable effects of foreign exchange.

Cost of Sales and Gross Profit Cost of Sales increased by $27.4 million to $877.7 million in the first six months of 2013 compared to $850.3 million in the same period of 2012. In the first six months of 2013, cost of sales, as a percentage of sales was 70.0% compared to 71.3% in the same period of 2012.

Raw material costs decreased as a percentage of sales to approximately 42% in the first six months of 2013 from approximately 44% in the same period of 2012. Labor costs increased as a percentage of sales to approximately 12% in the first six months of 2013 from approximately 11% in the same period of 2012. Overhead costs as a percentage of sales were approximately 16% in the first six months of 2013 and 2012. Freight Segment raw material costs decreased as a percentage of sales to approximately 41% in the first six months of 2013 from approximately 45% in the same period of 2012. Freight Segment labor costs increased as a percentage of sales to approximately 11% in the first six months of 2013 from approximately 10% in the same period of 2012, and overhead costs as a percentage of sales were approximately 15% in the first six months of 2013 and 2012. Transit Segment raw material costs increased as a percentage of sales to approximately 44% in the first six months of 2013 from 42% in the same period of 2012. Transit Segment labor costs as a percentage of sales were approximately 13% in the first six months of 2013 and 2012, and overhead costs decreased as a percentage of sales to approximately 17% in the first six months of 2013 from 18% in the same period of 2012. Freight Segment material costs decreased as a percentage of sales and transit material costs increased as a percentage of sales due to a shift in contract mix for original equipment locomotives from freight in the second quarter of 2012 to transit in the second quarter of 2013. Freight Segment labor costs increased as a percentage of sales due to certain long term contracts, which carry higher labor costs on a percentage basis.

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

In addition, included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense for the first six month of 2013 was $0.9 million higher compared to the same period of 2012, due to increased sales. As a percentage of sales, warranty expense was 1.1% for the first six months of 2013 and 2012.

Gross profit increased to $375.8 million in the first six months of 2013 compared to $342.8 million in the same period of 2012, for the reasons discussed above. Accordingly, for the first six months of 2013, gross profit, as a percentage of sales, was 30.0% compared to 28.7%, for the first six months of 2012.

Operating expenses The following table shows our operating expenses:

   

 

   

   

   

   

   

Six months ended June 30,

      

In thousands

      

2013

      

2012

      

Percent
Change

      

Selling, general and administrative expenses

  $

128,174

  $

121,192

5.8

%

Engineering expenses

22,614

20,294

11.4

%

Amortization expense

8,760

6,347

38.0

%

      

   

      

      

   

      

      

   

      

Total operating expenses

  $

159,548

  $

147,833

7.9

%

Selling, general, and administrative expenses increased $7.0 million in the first six months of 2013 compared to the same period of 2012 primarily due to $12.7 million of expenses from acquisitions, partially offset by a release of $3.9 million of certain legal reserves for a court ruling and a decrease of $2.0 million for incentive and non-cash compensation. Engineering expense increased by $2.3 million in the first six months of 2013 compared to the same period of 2012 due to engineering expense from acquisitions. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense increased in the first six months of 2013 compared to the same period in 2012 due to amortization of intangibles associated with acquisitions. Total operating expenses were 12.7% and 12.4% of sales for the first six months of 2013 and 2012, respectively.

 

 29 

   


The following table shows our segment operating expense:

   

 

   

      

Six months ended June 30,

   

In thousands

      

2013

   

      

2012

   

      

Percent
Change

   

Freight Segment

      

$

76,051

      

      

$

81,040

      

      

   

(6.2

)%

Transit Segment

      

   

76,808

      

      

   

58,187

      

      

   

32.0

 %

Corporate

      

   

6,689

      

      

   

8,606

      

      

   

(22.3

)%

Total operating expenses

      

$

159,548

      

      

$

147,833

      

      

   

7.9

 %

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.  Allocated operating expenses decreased $3.4 million for the first six months of 2013 compared to the same period of the prior year, primarily due to a decrease of incentive and non-cash compensation and a decrease in allocated legal expenses.

Freight Segment operating expenses decreased $5.0 million in the first six months of 2013 compared to the same period of 2012 because of a decrease of $4.3 million in allocated operating expenses and a $1.4 million decrease in other segment specific discrete charges. Freight Segment operating expenses were 11.1% and 9.9% of Freight Segment sales for the first six months of 2013 and 2012, respectively.

Transit Segment operating expenses increased $18.6 million in the first six months of 2013 compared to the same period of 2012 because of $11.1 million of incremental selling, general and administrative expense from acquisitions and $1.1 million of incremental engineering expense from acquisitions, higher amortization expense related to acquisitions, and $0.9 million increase in allocated operating expenses.  In addition, operating expenses increased to support the higher sales volume. Transit Segment operating expenses were 13.1% and 14.8% of Transit Segment sales for the first six months of 2013 and 2012, respectively.

Corporate non-allocated operating expenses decreased $1.9 million in the first six months of 2013 compared to the same period of 2012 primarily due to a release of $2.8 million of certain legal reserves for a court ruling, partially offset by an increase in certain non-allocated administrative expenses.

Income from operations Income from operations totaled $216.2 million or 17.2% of sales in the first six months of 2013 compared to $195.0 million or 16.3% of sales in the same period of 2012. Income from operations increased due to higher sales volume, partially offset by higher operating expenses discussed above.

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

Other income (expense), net The Company recorded foreign exchange losses of $1.9 million in the first six months of 2013 and foreign exchange gain of $1.0 million in the first six months of 2012 due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 31.0% and 34.0% for the first six months of 2013 and 2012, respectively. The decrease in the effective rate is due to retroactive extension of the R&D tax credit and an increase in foreign income taxed at a lower statutory rates.

Net income Net income for the first six months of 2013 increased $20.3 million, compared with the same period of 2012. The increase in net income is due to higher sales volume and lower effective tax rate, partially offset by higher 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:

   

 

   

      

Three months ended
June 30,

   

In thousands

      

2013

   

   

2012

   

Cash provided by (used for):

      

   

   

   

   

   

   

   

Operating activities

      

$

45,096

      

   

$

30,536

      

Investing activities

      

   

(123,847

   

   

(104,738

Financing activities

      

   

81,071

      

   

   

24,648

   

Decrease in cash

      

$

(1,261

   

$

(51,510

 

 30 

   


Operating activities In the first six months of 2013 and 2012, cash provided by operations was $45.1 million and $30.5 million, respectively. In comparison to the first six months of 2012, cash provided by operations in 2013 resulted from higher operating results and lower cash outflows for working capital.  The major components of the lower cash outflows were as follows: a favorable change or decrease of $35.4 million in inventory, as our days’ supply of inventory (DSI) decreased to 67 days from 72 days during the first six months of 2013 due to the completion of certain original equipment contracts; a favorable change in accounts payable of $23.5 million due to payment timing; a negative change in accounts receivable of $16.1 million as the number of days to collect cash remained relatively stable and sales increased; a $15.8 million payment in the second quarter of 2013 for a court ruling; and an increase in income taxes paid of $10.1 million due to increased pre-tax income.  

Investing activities In the first six months of 2013 and 2012, cash used in investing activities was $123.8 million and $104.7 million, respectively. The major components of the cash outflow are as follows: planned additions to property, plant and equipment of $14.6 million for continued investments in our facilities and manufacturing processes and acquisitions of $115.1 million.  This compares to $16.5 million in property, plant, and equipment and $88.4 million in net cash paid for acquisitions in 2012.  Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions.

Financing activities In the first six months of 2013, cash provided by financing activities was $81.1 million, which included $244.8 million in proceeds from debt and $165.7 million of repayments of debt on the revolving credit facility and $4.8 million of dividend payments.  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 and $2.9 million of dividend payments and $21.9 million for the repurchase of 298,800 shares of stock.

The following table shows outstanding indebtedness at June 30, 2013 and December 31, 2012.

   

 

In thousands

      

June 30,
2013

   

      

December 31,
2012

   

6.875% Senior Notes, due 2013

      

$

150,000

      

      

$

150,000

      

Revolving Credit Facility

      

   

246,400

      

      

   

167,000

      

Capital Leases

      

   

558

      

      

   

896

      

Total

      

   

396,958

      

      

   

317,896

      

Less—current portion

      

   

43

      

      

   

43

      

Long-term portion

      

$

396,915

      

      

$

317,853

      

Cash balance at June 30, 2013 and December 31, 2012 was $214.5 million and $215.8 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 $1.9 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 July 31 2013

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

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

 

 31 

   


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, 2013, repurchases are $72.6 million, leaving $77.4 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 2013, the Company did not repurchase any shares. During 2012, the Company repurchased 1,214,800 shares of its stock at an average price of $38.33 per share. All purchases were on the open market.

Capital Structure

On May 14, 2013, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 200.0 million shares.  In addition, on May 14, 2013, our Board of Directors approved a two-for-one split of the Company’s issued and outstanding common stock in the form of a 100% stock dividend.  The increase in the authorized shares and the stock split became effective on May 14, 2013 and June 11, 2013, respectively.  

The Company issued approximately 66.2 million shares of its common stock as a result of the two-for-one stock split. The par value of the Company’s common stock remained unchanged at $0.01 per share.

Information regarding shares of common stock (except par value per share), retained earnings, and net income per common share attributable to Wabtec shareholders for all periods presented reflects the two-for-one split of the Company’s common stock. The number of shares of the Company’s common stock issuable upon exercise of outstanding stock options and vesting of other stock-based awards was proportionally increased, and the exercise price per share thereof was proportionally decreased, in accordance with the terms of the stock incentive plans.

Contractual Obligations and Off-Balance Sheet Arrangements

As of June 30, 2013, the Company has recognized a total liability of $10.7 million for unrecognized tax benefits related to uncertain tax positions. At this time, the Company is unable to make a reasonably reliable estimate of the timing of cash settlement for any of the unrecognized tax benefits due to the uncertainty of the timing and outcome of its audits and other factors.

Since December 31, 2012, 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, 2012.

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, power generation equipment and related products and services;

 

·   reliance on major original equipment manufacturer customers;

 

·   original equipment manufacturers’ program delays;

 

 32 

   


   

 

·   demand for services in the freight and passenger rail industry;

 

·   demand for our products and services;

 

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

 

·   consolidations in the rail industry;

 

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

 

·   fluctuations in interest rates and foreign currency exchange rates; or

 

·   availability of credit;

Operating factors

 

·   supply disruptions;

 

·   technical difficulties;

 

·   changes in operating conditions and costs;

 

·   increases in raw material costs;

 

·   successful introduction of new products;

 

·   performance under material long-term contracts;

 

·   labor relations;

 

·   completion and integration of acquisitions; or

 

·   the development and use of new technology;

Competitive factors

 

·   the actions of competitors;

Political/governmental factors

 

·   political stability in relevant areas of the world;

 

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

 

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

 

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

 

·   federal and state income tax legislation; or

 

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

Transaction or commercial factors

 

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

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, 2012.

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, 2012. 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, 2012.

   

 

 33 

   


 

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 62% and 53% of total long-term debt at June 30, 2013 and December 31, 2012, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at June 30, 2013 would increase or decrease interest expense by about $2.5 million. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward interest rate swap agreements which will effectively convert 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 2013, approximately 51% of Wabtec’s net sales were to customers in the United States, 11% in the United Kingdom, 8% in Canada, 6% in Australia, 4% in Mexico, 3% in Brazil, 2% in Germany and 15% in other international locations. To reduce the impact of changes in currency exchange rates, the Company has periodically entered into foreign currency forward contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Condensed Consolidated Financial Statements” for more information regarding foreign currency exchange risk.

   

 

Item  4.

CONTROLS AND PROCEDURES

Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2013. 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, 2013, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

   

 

 34 

   


   

PART II—OTHER INFORMATION

   

 

Item 1.

LEGAL PROCEEDINGS

There have been no material changes regarding the Company’s commitments and contingencies as described in Note 18 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, except as regarding the disclosure related to the claim by Faiveley Transport USA.  The Faiveley plaintiffs agreed to reduce the damage award to $15.0 million, plus interest, in lieu of a new trial on damages.  In accordance with the decision entered by the appellate court, Wabtec paid the Faiveley plaintiffs a total of approximately $15.8 million, and the case is closed.

   

 

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, 2012.

   

 

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, 2013 repurchases are $72.6 million, leaving $77.4 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 2013, the Company did not repurchase any shares of its stock.

   

 

Item 4.

MINE SAFETY DISCLOSURES

Not Applicable

   

 

Item 6.

EXHIBITS

The following exhibits are being filed with this report:

   

 

   

   

31.1

      

Rule 13a-14(a) Certification of Chief Executive Officer.

   

   

31.2

      

Rule 13a-14(a) Certification of Chief Financial Officer.

   

   

32.1

      

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.

   

   

101.INS*

      

XBRL Instance Document.

   

   

101.SCH*

      

XBRL Taxonomy Extension Schema Document.

   

   

101.CAL*

      

XBRL Taxonomy Extension Calculation Linkbase Document.

   

   

101.DEF*

      

XBRL Taxonomy Extension Definition Linkbase Document.

   

   

101.LAB*

      

XBRL Taxonomy Extension Label Linkbase Document.

   

   

101.PRE*

      

XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

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

   

 

 35 

   


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:

July 26, 2013

   

   

 

 36 

   


EXHIBIT INDEX

   

 

   

   

31.1

      

Rule 13a-14(a) Certification of Chief Executive Officer.

   

   

31.2

      

Rule 13a-14(a) Certification of Chief Financial Officer.

   

   

32.1

      

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.

   

   

101.INS*

      

XBRL Instance Document.

   

   

101.SCH*

      

XBRL Taxonomy Extension Schema Document.

   

   

101.CAL*

      

XBRL Taxonomy Extension Calculation Linkbase Document.

   

   

101.DEF*

      

XBRL Taxonomy Extension Definition Linkbase Document.

   

   

101.LAB*

      

XBRL Taxonomy Extension Label Linkbase Document.

   

   

101.PRE*

      

XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

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

   

   

 

 37