Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 033-90866
____________________________________
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________
Delaware
25-1615902
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1001 Air Brake Avenue
Wilmerding, PA
15148
(Address of principal executive offices)
(Zip code)
412-825-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if smaller reporting company)
Emerging growth company
¨

Smaller reporting company
¨

 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 27, 2017
Common Stock, $.01 par value per share
 
95,999,248 shares
 




WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
September 30, 2017
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
PART I—FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

2


PART I—FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
In thousands, except shares and par value
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
228,080

 
$
398,484

Accounts receivable
792,726

 
667,596

Unbilled accounts receivable
351,613

 
274,912

Inventories
764,781

 
658,510

Deposit in escrow

 
744,748

Other current assets
139,925

 
123,381

Total current assets
2,277,125

 
2,867,631

Property, plant and equipment
988,223

 
912,230

Accumulated depreciation
(437,856
)
 
(393,854
)
Property, plant and equipment, net
550,367

 
518,376

Other Assets
 
 
 
Goodwill
2,384,758

 
2,078,765

Other intangibles, net
1,140,387

 
1,053,860

Other noncurrent assets
97,013

 
62,386

Total other assets
3,622,158

 
3,195,011

Total Assets
$
6,449,650

 
$
6,581,018

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
512,905

 
$
530,211

Customer deposits
373,815

 
256,591

Accrued compensation
151,952

 
145,324

Accrued warranty
134,964

 
123,190

Current portion of long-term debt
49,748

 
129,809

Other accrued liabilities
242,056

 
261,514

Total current liabilities
1,465,440

 
1,446,639

Long-term debt
1,824,156

 
1,762,967

Accrued postretirement and pension benefits
108,182

 
110,597

Deferred income taxes
282,557

 
245,680

Accrued warranty
13,800

 
15,802

Other long-term liabilities
19,146

 
22,508

Total Liabilities
3,713,281

 
3,604,193

Commitments and contingent liabilities (Note 14)

 

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

 

Common stock, $0.01 par value; 200,000,000 shares authorized:
 
 
 
132,349,534 shares issued and 95,999,582 and 95,425,432 outstanding
 
 
 
at September 30, 2017 and December 31, 2016, respectively
1,323

 
1,323

Additional paid-in capital
900,536

 
869,951

Treasury stock, at cost, 36,349,952 and 36,924,102 shares,
 
 
 
at September 30, 2017 and December 31, 2016, respectively
(828,103
)
 
(838,950
)
Retained earnings
2,735,876

 
2,553,258

Accumulated other comprehensive loss
(91,930
)
 
(379,605
)
Total Westinghouse Air Brake Technologies Corporation shareholders' equity
2,717,702

 
2,205,977

Noncontrolling interest
18,667

 
770,848

Total Equity
2,736,369

 
2,976,825

Total Liabilities and Equity
$
6,449,650

 
$
6,581,018

The accompanying notes are an integral part of these statements.

3


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Unaudited
 
Unaudited
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
In thousands, except per share data
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
Net sales
$
957,931

 
$
675,574

 
$
2,806,218

 
$
2,171,206

 
Cost of sales
(704,728
)
 
(463,093
)
 
(2,009,345
)
 
(1,466,156
)
 
Gross profit
253,203

 
212,481

 
796,873

 
705,050

 
Selling, general and administrative expenses
(117,838
)
 
(70,757
)
 
(367,753
)
 
(241,118
)
 
Engineering expenses
(24,709
)
 
(16,289
)
 
(71,511
)
 
(52,271
)
 
Amortization expense
(8,645
)
 
(5,339
)
 
(27,039
)
 
(16,100
)
 
Total operating expenses
(151,192
)
 
(92,385
)
 
(466,303
)
 
(309,489
)
 
Income from operations
102,011

 
120,096

 
330,570

 
395,561

 
Other income and expenses
 
 
 
 
 
 
 
 
Interest expense, net
(17,893
)
 
(6,057
)
 
(51,025
)
 
(15,897
)
 
Other income (expense), net
(2,933
)
 
1,188

 
(2,166
)
 
113

 
Income from operations before income taxes
81,185

 
115,227

 
277,379

 
379,777

 
Income tax expense
(12,746
)
 
(32,799
)
 
(64,776
)
 
(112,701
)
 
Net income
68,439

 
82,428

 
212,603

 
267,076

 
Less: Net (Gain) Loss attributable to noncontrolling interest
(1,040
)
 

 
710

 

 
  Net income attributable to Wabtec shareholders
$
67,399

 
$
82,428

 
$
213,313

 
$
267,076

 
 
 
 
 
 
 
 
 
 
Earnings Per Common Share
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.70

 
$
0.92

 
$
2.23

 
$
2.94

 
Diluted
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.70

 
$
0.91

 
$
2.22

 
$
2.92

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
 
Basic
95,709

 
89,589

 
95,163

 
90,546

 
Diluted
96,316

 
90,293

 
95,808

 
91,316

 
 
The accompanying notes are an integral part of these statements.

4


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Unaudited
 
Unaudited
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
In thousands
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
67,399

 
$
82,428

 
$
213,313

 
$
267,076

 
Foreign currency translation gain (loss)
82,905

 
2,734

 
277,984

 
(7,385
)
 
Unrealized gain (loss) on derivative contracts
15,021

 
1,169

 
18,400

 
(1,740
)
 
Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans
27

 
982

 
(3,017
)
 
(652
)
 
Other comprehensive income (loss) before tax
97,953

 
4,885

 
293,367

 
(9,777
)
 
Income tax (expense) benefit related to components of
 
 
 
 
 
 
 
 
other comprehensive income
(5,333
)
 
(594
)
 
(5,692
)
 
441

 
Other comprehensive income (loss), net of tax
92,620

 
4,291

 
287,675

 
(9,336
)
 
Comprehensive income attributable to Wabtec shareholders
$
160,019

 
$
86,719

 
$
500,988

 
$
257,740

 
 
The accompanying notes are an integral part of these statements.


5


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
Nine Months Ended
September 30,
In thousands, except per share data
2017
 
2016
 
 
 
 
Operating Activities
 
 
 
Net income
$
212,603

 
$
267,076

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
76,970

 
49,375

Stock-based compensation expense
14,539

 
14,788

Loss on disposal of property, plant and equipment
1,633

 
151

Excess income tax benefits from exercise of stock options

 
(446
)
Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable and unbilled accounts receivable
(60,246
)
 
(38,362
)
Inventories
(53,365
)
 
2,301

Accounts payable
(121,389
)
 
(43,777
)
Accrued income taxes
(35,942
)
 
5,952

Accrued liabilities and customer deposits
81,270

 
(8,353
)
Other assets and liabilities
(89,562
)
 
(1,812
)
Net cash provided by operating activities
26,511

 
246,893

Investing Activities
 
 
 
Purchase of property, plant and equipment
(60,263
)
 
(31,676
)
Proceeds from disposal of property, plant and equipment
1,066

 
140

Acquisitions of businesses, net of cash acquired
(114,175
)
 
(84,355
)
Release of deposit in escrow
23,548

 

Net cash used for investing activities
(149,824
)
 
(115,891
)
Financing Activities
 
 
 
Proceeds from debt
883,473

 
346,000

Payments of debt
(918,919
)
 
(215,850
)
Purchase of treasury stock

 
(212,176
)
Proceeds from exercise of stock options and other benefit plans
2,888

 
1,773

Payment of income tax withholding on share-based compensation
(6,798
)
 
(9,006
)
Excess income tax benefits from exercise of equity options

 
446

Cash dividends ($0.32 and $0.26 per share for the nine months
 
 
 
ended September 30, 2017 and 2016, respectively)
(30,693
)
 
(23,523
)
Net cash used for financing activities
(70,049
)
 
(112,336
)
Effect of changes in currency exchange rates
22,958

 
5,525

(Decrease) Increase in cash
(170,404
)
 
24,191

Cash, beginning of period
398,484

 
226,191

Cash, end of period
$
228,080

 
$
250,382

 
The accompanying notes are an integral part of these statements.
 


6


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017 (UNAUDITED)

1. BUSINESS
Westinghouse Air Brake Technologies Corporation (“Wabtec” or the "Company") is one of the world’s largest providers of value-added, technology-based 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 31 countries. In the first nine months of 2017, approximately 65% of the Company’s revenues came from customers outside the United States.

2. ACCOUNTING POLICIES
Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.
The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2016. The December 31, 2016 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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 revenue from 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 quarterly at a minimum 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 $351.6 million and $274.9 million, customer deposits were $373.8 million and $256.6 million, and provisions for loss contracts were $93.8 million and $60.5 million at September 30, 2017 and December 31, 2016, respectively.
Pre-Production Costs Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $28.8 million and $29.4 million at September 30, 2017 and December 31, 2016, respectively.
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Refer to Recently Adopted Accounting Pronouncements below.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Financial Derivatives and Hedging Activities As part of its risk management strategy, the Company utilizes derivative financial instruments to manage its exposure due to changes in foreign currencies and interest rates. For further information regarding financial derivatives and hedging activities, refer to Footnotes 12 and 13.

7


Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the period. Foreign currency gains and losses resulting from transactions and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings.
Noncontrolling Interests In accordance with ASC 810 "Consolidation", the Company has classified noncontrolling interests as equity on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016. Net income attributable to noncontrolling interests for the three and nine months ended September 30, 2017 was a $1.0 million gain and a $0.7 million loss, respectively, and was not material for the three and nine months ended September 30, 2016. Other comprehensive income attributable to noncontrolling interests for the three and nine months ended September 30, 2017 and 2016 was not material.
Recently Issued Accounting Pronouncements In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in this update require the service cost component of net benefit costs to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside income from operations. This update also allows the service cost component to be eligible for capitalization when applicable. The ASU is effective for public companies in the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption was permitted as of the beginning of an annual period. The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company does not expect the adoption of this guidance in 2018 to have a material impact on the Company's financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this update eliminate the requirement to perform Step 2 of the goodwill impairment test. Instead, an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value up to the carrying amount of the goodwill. The ASU is effective for public companies in the fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The impact of adopting this guidance could result in a change in the overall conclusion as to whether or not a reporting units' goodwill is impaired and the amount of an impairment charge recognized in the event a reporting units' carrying value exceeds its fair value. All of the Company's reporting units had fair values that were substantially greater than the carrying value as of the Company's last quantitative goodwill impairment test, which was performed as of October 1, 2016.
In November 2016, the FASB issued ASU No. 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash". The amendments in this update require a statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for public companies in the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 814)" which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with terms less than 12 months, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. The ASU is effective for public companies in the fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

8


In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contract with Customers.”  The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.  The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Board voted to propose that the standard would take effect for reporting periods beginning after December 15, 2017 and that early adoption would be allowed as of the original effective date. The impact of adopting the new standard on net sales and operating income for the three and nine months ended September 30, 2017 and 2016 is not expected to be material. The Company also does not expect a material impact to the consolidated balance sheet. The impact to results is not anticipated to be material because the analysis of the Company's current contracts under the new revenue recognition standard supports how the Company is currently recognizing revenue over time and at a point in time; however, the Company's conclusions may evolve as management completes its contract reviews and evaluation. The Company plans to adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. The Company is in the process of drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance. The Company believes it is following an appropriate timeline to appropriately adopt this new standard on January 1, 2018.
Recently Adopted Accounting Pronouncements In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The ASU simplifies several aspects for the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU became effective for public companies during interim and annual reporting periods beginning after December 15, 2016. In accordance with this update, the Company began recognizing all excess tax deficiencies and tax benefits from share-based payment awards as a benefit or expense to income tax in the income statement. This update has been adopted prospectively in accordance with the ASU and the impact of adoption on the income statement was not material. Additionally in accordance with this update, the Company began classifying excess income tax benefits from exercise of stock options as an operating activity on the consolidated statement of cash flows. The Company elected to adopt this amendment retrospectively and the impact of the adoption on operating and financing cash flows for the three and nine months ended September 30, 2016 was not material.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company elected to early adopt this ASU as of December 31, 2016; therefore, all deferred income tax assets and liabilities are classified in the noncurrent deferred income taxes line-items on the consolidated balance sheets.
Other Comprehensive Income Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from nonowner sources.
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2017 are as follows:
In thousands
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2016
$
(321,033
)
 
$
(2,957
)
 
$
(55,615
)
 
$
(379,605
)
Other comprehensive income (loss) before reclassifications
277,984

 
11,424

 
(4,715
)
 
284,693

Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
1,206

 
1,776

 
2,982

Net current period other comprehensive income (loss)
277,984

 
12,630

 
(2,939
)
 
287,675

Balance at September 30, 2017
$
(43,049
)
 
$
9,673

 
$
(58,554
)
 
$
(91,930
)

9


Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2017 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Income
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(422
)
 
Cost of sales
Amortization of net loss
1,240

 
Cost of sales
 
818

 
Income from Operations
 
(226
)
 
Income tax expense
 
$
592

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
497

 
Interest expense, net
 
(131
)
 
Income tax expense
 
$
366

 
Net income
Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2017 are as follows:
In thousands
Amount reclassified from
accumulated other
comprehensive income
 
Affected line item in the
Condensed Consolidated
Statements of Income
Amortization of defined pension and post retirement items
 
 
 
Amortization of initial net obligation and prior service cost
$
(1,266
)
 
Cost of sales
Amortization of net loss
3,720

 
Cost of sales
 
2,454

 
Income from Operations
 
(678
)
 
Income tax expense
 
$
1,776

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
1,653

 
Interest expense, net
 
(447
)
 
Income tax expense
 
$
1,206

 
Net income
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2016 are as follows:
 
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2015
$
(227,349
)
 
$
(2,987
)
 
$
(46,383
)
 
$
(276,719
)
Other comprehensive income (loss) before reclassifications
(7,385
)
 
(2,192
)
 
(1,969
)
 
(11,546
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
883

 
1,327

 
2,210

Net current period other comprehensive (loss)
(7,385
)
 
(1,309
)
 
(642
)
 
(9,336
)
Balance at September 30, 2016
$
(234,734
)
 
$
(4,296
)
 
$
(47,025
)
 
$
(286,055
)

    

10


Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2016 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
$
6

 
Cost of sales
Amortization of net loss
611

 
Cost of sales
 
617

 
Income from Operations
 
(175
)
 
Income tax expense
 
$
442

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
338

 
Interest expense, net
 
(96
)
 
Income tax expense
 
$
242

 
Net income
    
Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2016 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
$
(801
)
 
Cost of sales
Amortization of net loss
2,702

 
Cost of sales
 
1,901

 
Income from Operations
 
(574
)
 
Income tax expense
 
$
1,327

 
Net income
 
 
 
 
Derivative contracts
 
 
 
Realized loss on derivative contracts
$
1,265

 
Interest expense, net
 
(382
)
 
Income tax expense
 
$
883

 
Net income


3. ACQUISITIONS
Faiveley Transport
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport S.A. (“Faiveley Transport”) under the terms of a Share Purchase Agreement (“Share Purchase Agreement”). Faiveley Transport is a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries. Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of value-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access & Mobility (passenger access systems and platform doors), and Brakes and Safety (braking systems and couplers). The transaction was structured as a step acquisition as follows:
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest under the terms of the Share Purchase Agreement, which directed the Company to pay €100 per share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately

11


49% of the outstanding voting shares of Faiveley Transport. Upon completion of the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to elect to receive €100 per share in cash or 1.1538 shares of Wabtec common stock per share of Faiveley Transport. The common stock portion of the consideration was subject to a cap on issuance of Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport.
The aggregate value of consideration paid for 100% ownership of Faiveley Transport was $1,736.1 million including $944.3 million in cash, $560.2 million in stock or approximately 6.6 million shares, $409.9 million in debt assumed, less $178.3 million in cash acquired. The $744.7 million included as deposits in escrow on the consolidated balance sheet at December 31, 2016 was cash designated for use as consideration for the tender offers.
The fair values of the assets acquired and liabilities assumed are preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. The December 31, 2016 consolidated balance sheet includes the assets and liabilities of Faiveley Transport, which have been measured at fair value. The fair value of the noncontrolling interest was preliminarily determined using the market price of Faiveley Transport’s publicly traded common stock multiplied by the number of publicly traded common shares outstanding at the acquisition date and is considered Level 1. The acquisition of the noncontrolling interest in the three months ended March 31, 2017 resulted in a $8.9 million increase to additional paid-in capital on the consolidated balance sheet which represents the difference in consideration paid to acquire the noncontrolling interest and the carrying value of noncontrolling interest at acquisition.














12


The following table summarizes the preliminary estimated fair values of the Faiveley Transport assets acquired and liabilities assumed:
In thousands
 
 
Assets acquired
 
 
Cash and cash equivalents
 
$
178,318

Accounts receivable
 
444,741

Inventories
 
205,649

Other current assets
 
70,930

Property, plant, and equipment
 
148,746

Goodwill
 
1,257,360

Trade names
 
346,328

Customer relationships
 
233,529

Patents
 
1,201

Other noncurrent assets
 
183,252

Total assets acquired
 
3,070,054

Liabilities assumed
 
 
Current liabilities
 
805,992

Debt
 
409,899

Other noncurrent liabilities
 
347,348

Total liabilities assumed
 
1,563,239

Net assets acquired
 
$
1,506,815

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. During the nine months ended September 30, 2017, the estimated fair values for customer relationships and current liabilities were adjusted by $21.8 million and $51.8 million, respectively, for changes to initial estimates based on information that existed at the date of acquisition. Additionally, the estimated fair values for accounts receivable and current liabilities were adjusted by $2.8 million and $36.2 million, respectively, to correct errors in the preliminary estimated fair values of the Faiveley Transport assets acquired and liabilities assumed. Other noncurrent assets were adjusted by $29.0 million to record the deferred tax impact of these adjustments. As a result of these adjustments and other immaterial adjustments related to changes to initial estimates based on information that existed at the date of acquisition, goodwill increased by $69.1 million. Accounts receivable and current liabilities were adjusted by $64.3 million to correct an error in the preliminary estimated fair values of Faiveley Transport assets and liabilities assumed related to a factoring arrangement with recourse.
Substantially all of the accounts receivable acquired are expected to be collectible. Included in current liabilities is $25.9 million of accrued compensation for acquired share-based stock plans that are obligated to be settled in cash. Contingent liabilities assumed as part of the transaction were not material. These contingent liabilities are related to contract disputes, environmental, legal and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which is an exception to the fair value basis of accounting.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits, including synergies and assembled workforce, the Company expects to achieve as a result of the acquisition. Purchased goodwill is not expected to be deductible for tax purposes. The goodwill has been preliminarily allocated to the Transit segment.
For the three and nine months ended September 30, 2017, the Company’s consolidated statement of income included $294.4 million and $851.8 million of revenues, respectively, from Faiveley Transport.
Other Acquisitions
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment:

13


On April 5, 2017, the Company acquired Thermal Transfer Corporation ("TTC"), a leading provider of heat transfer solutions for industrial applications, for a purchase price of approximately $32.5 million, net of cash acquired, resulting in preliminary goodwill of $16.3 million, all of which will be deductible for tax purposes.
On March 14, 2017, the Company acquired Aero Transportation Products ("ATP"), a manufacturer of engineered covering systems for hopper freight cars, for a purchase price of approximately $65.3 million, net of cash acquired, resulting in preliminary goodwill of $31.9 million, all of which will be deductible for tax purposes.
On December 14, 2016, the Company acquired Workhorse Rail LLC ("Workhorse"), a supplier of engineered freight car components mainly for the aftermarket, for a purchase price of approximately $43.8 million, net of cash acquired, resulting in preliminary goodwill of $24.4 million, 37.8% of which will be deductible for tax purposes.
On November 17, 2016, the Company acquired the assets of Precision Turbo & Engine ("Precision Turbo"), a designer and manufacturer of high-performance, aftermarket turbochargers, wastegates, and heat exchangers for the automotive performance market, for a purchase price of approximately $13.8 million, net of cash acquired, resulting in preliminary goodwill of $4.0 million, all of which will be deductible for tax purposes.
On May 5, 2016, the Company acquired Unitrac Railroad Materials ("Unitrac"), a leading designer and manufacturer of railroad products and track work services, for a purchase price of approximately $14.8 million, net of cash acquired, resulting in goodwill of $2.4 million, all of which will be deductible for tax purposes.
The Company has made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment:
On October 2, 2017, subsequent to the close of our accounting quarter, the Company acquired AM General Contractor ("AM"), a manufacturer of safety systems, mainly for transit rail cars with annual sales of about $25.0 million.
On August 1, 2016, the Company acquired Gerken Group SA ("Gerken"), a manufacturer of specialty carbon and graphite products for rail and other industrial applications, for a purchase price of approximately $62.8 million, net of cash acquired, resulting in goodwill of $17.5 million, none of which will be deductible for tax purposes.
The acquisitions listed above include escrow deposits of $38.4 million, which act as security for indemnity and other claims in accordance with the purchase and related escrow agreements.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition for TTC, ATP, Workhorse, and Precision Turbo. For the Unitrac and Gerken acquisitions, the following table summarizes the final fair value of the assets acquired and liabilities assumed at the date of acquisition.
 
TTC
 
ATP
 
Workhorse
 
Precision Turbo
 
Gerken
 
Unitrac
In thousands
April 5,
2017
 
March 14,
2017
 
December 14,
2016
 
November 17,
2016
 
August 1,
2016
 
May 5,
2016
Current assets
$
3,746

 
$
11,666

 
$
9,137

 
$
4,145

 
$
32,706

 
$
11,476

Property, plant & equipment
5,909

 
5,354

 

 
1,346

 
7,667

 
1,768

Goodwill
16,309

 
31,934

 
24,373

 
4,019

 
17,470

 
2,442

Other intangible assets
12,300

 
22,100

 
19,400

 
5,200

 
30,560

 
1,230

Other assets

 

 

 

 
1,706

 

Total assets acquired
38,264

 
71,054

 
52,910

 
14,710

 
90,109

 
16,916

Total liabilities assumed
(5,753
)
 
(5,800
)
 
(9,083
)
 
(884
)
 
(27,262
)
 
(2,145
)
Net assets acquired
$
32,511

 
$
65,254

 
$
43,827

 
$
13,826

 
$
62,847

 
$
14,771

Of the $671.8 million of total acquired other intangible assets, $367.6 million was assigned to trade names, $296.7 million was assigned to customer relationships, and $5.0 million was assigned to intellectual property. The trade names were determined to have indefinite useful lives, while the intellectual property and customer relationships’ average useful lives are 20 years, and the non-compete agreements' useful life is five years.
The Company also made smaller acquisitions not listed above which are individually and collectively immaterial.

14


The following unaudited pro forma consolidated financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2016:
In thousands
Three Months Ended
September 30, 2017
 
Three Months Ended
September 30, 2016
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
Net sales
$
957,931

 
$
995,869

 
$
2,817,550

 
$
3,168,195

Gross profit
253,203

 
301,554

 
799,695

 
977,743

Net income attributable to Wabtec shareholders
67,399

 
99,085

 
214,370

 
323,878

Diluted earnings per share
 
 
 
 
 
 
 
As Reported
$
0.70

 
$
0.91

 
$
2.22

 
$
2.92

Pro forma
$
0.70

 
$
1.02

 
$
2.23

 
$
3.30

    
4. INVENTORIES
The components of inventory, net of reserves, were:
In thousands
September 30,
2017
 
December 31,
2016
Raw materials
$
391,207

 
$
331,465

Work-in-progress
196,319

 
145,462

Finished goods
177,255

 
181,583

Total inventories
$
764,781

 
$
658,510



5. INTANGIBLES
The change in the carrying amount of goodwill by segment for the nine months ended September 30, 2017 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
Balance at December 31, 2016
$
550,902

 
$
1,527,863

 
$
2,078,765

Adjustment to preliminary purchase allocation
(13,395
)
 
77,302

 
63,907

Acquisitions
62,158

 
4,999

 
67,157

Foreign currency impact
9,407

 
165,522

 
174,929

Balance at September 30, 2017
$
609,072

 
$
1,775,686

 
$
2,384,758

As of September 30, 2017 and December 31, 2016, the Company’s trade names had a net carrying amount of $583.7 million and $510.5 million, respectively, and the Company believes these intangibles have indefinite lives.
Intangible assets of the Company, other than goodwill and trade names, consist of the following:
In thousands
September 30,
2017
 
December 31,
2016
Patents, non-compete and other intangibles, net of accumulated
 
 
 
amortization of $42,237 and $42,538
$
15,001

 
$
15,360

Customer relationships, net of accumulated amortization
 
 
 
of $117,676 and $87,334
541,705

 
528,068

Total
$
556,706

 
$
543,428

The weighted average remaining useful life of patents, customer relationships and other intangibles were 10 years, 17 years and 15 years, respectively. Amortization expense for intangible assets was $8.6 million and $27.0 million for the three and nine months ended September 30, 2017, and $5.3 million and $16.1 million for the three and nine months ended September 30, 2016, respectively.

15


Amortization expense for the five succeeding years is estimated to be as follows:
Remainder of 2017
$
8,873

2018
34,794

2019
33,537

2020
32,014

2021
31,827


6. LONG-TERM DEBT
Long-term debt consisted of the following:
In thousands
September 30,
2017
 
December 31,
2016
3.45% Senior Notes, due 2026, net of unamortized debt
issuance costs of $2,410 and $2,526
$
747,590

 
$
747,474

4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $1,498 and $1,690
248,502

 
248,310

Revolving Credit Facility, net of unamortized
debt issuance costs of $2,801 and $3,850
855,321

 
796,150

Schuldschein Loan
11,812

 
98,671

Other Borrowings
9,150

 
1,153

Capital Leases
1,529

 
1,018

Total
1,873,904

 
1,892,776

Less - current portion
49,748

 
129,809

Long-term portion
$
1,824,156

 
$
1,762,967

Wabtec's acquisition of the controlling stake of Faiveley Transport triggered the early repayment of a syndicated loan and the mandatory offer to investors to repay the U.S. and Schuldschein private placements. Both the syndicated loan and U.S. private placements were repaid in full in December 2016.
3.45% Senior Notes Due November 2026
On November 3 2016, the Company issued $750.0 million of Senior Notes due in 2026 (the "2016 Notes"). The 2016 Notes were issued at 99.965% of face value. Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year. The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.7 million of deferred financing costs related to the issuance of the 2016 Notes.
The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
4.375% Senior Notes Due August 2023
In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (the “2013 Notes”).  The 2013 Notes were issued at 99.879% of face value.  Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year.  The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.  The principal balance is due in full at maturity.  The Company incurred $2.6 million of deferred financing costs related to the issuance of the 2013 Notes.  
The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness,

16


payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.
The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
2016 Refinancing Credit Agreement
On June 22, 2016, the Company amended and restated its existing revolving credit facility with a consortium of commercial banks. The “2016 Refinancing Credit Agreement” provides the Company with a $1.2 billion, five years revolving credit facility and a $400.0 million delayed draw term loan (the “Term Loan”). The Company incurred approximately $3.3 million of deferred financing costs related to the 2016 Refinancing Credit Agreement. The facility expires on June 22, 2021. The 2016 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At September 30, 2017, the Company had available bank borrowing capacity, net of $35.4 million of letters of credit, of approximately $686.7 million, subject to certain financial covenant restrictions.
The Term Loan was initially drawn on November 25, 2016. The Company incurred 10 basis point commitment fee from June 22, 2016 until the initial draw.
Under the 2016 Refinancing Credit Agreement, the Company may elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies,  an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to EBITDA ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 175 basis points.
At September 30, 2017, the weighted average interest rate on the Company’s variable rate debt was 2.89%.  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 was July 31, 2013, and the termination date was November 7, 2016. The impact of the interest rate swap agreement converted a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value was fixed at 1.415% plus the Alternate Rate margin. On June 5, 2014, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million.  The effective date of the interest rate swap agreement was November 7, 2016, and the termination date is December 19, 2018.  The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing.  During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 2.56% plus the Alternate Rate margin.  As for these agreements, the Company is exposed to credit risk in the event of nonperformance by the counterparties.  However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount.  The counterparties are large financial institutions with excellent credit ratings and history of performance.  The Company currently believes the risk of nonperformance is negligible.
The 2016 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 2016 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 EBITDA ratio of 3.25. The Company is in compliance with the restrictions and covenants of the 2016 Refinancing Credit Agreement and does not expect that these measurements will limit the Company in executing its operating activities.
2013 Refinancing Credit Agreement
On December 19, 2013, the Company amended its then existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provided the Company with an $800.0 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The 2013 Refinancing Credit Agreement was replaced by the 2016 Refinancing Credit Agreement.
Under the 2013 Refinancing Credit Agreement, the Company could have elected a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies,  an interest rate based on the LIBOR of interest, or other rates appropriate for such currencies  (in any case, “the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds

17


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 ranged from 0 to 75 basis points. The Alternate Rate was based on the quoted rates specific to the applicable currency, plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to EBITDA ratios.
Schuldschein Loan, Due 2024
In conjunction with the acquisition of Faiveley Transport, Wabtec acquired $137.2 million of a Schuldschein private placement loan which was originally issued by Faiveley Transport on March 5, 2014 in Germany, in which approximately 20 international investors participated. This loan is denominated in euros. Subsequent to the acquisition of Faiveley Transport, the Company repaid $125.8 million of the outstanding Schuldshein loan. The remaining balance of $11.8 million as of September 30, 2017 has a maturity of seven years and bears a fixed rate of 4.00%.
The Schuldschein loan is senior unsecured and ranks pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The Schuldshein loan agreement contains covenants and undertakings which limit, among other things, the following: factoring of receivables, the incurrence of indebtedness, sale of assets, change of control, mergers and consolidations and incurrence of liens. At September 30, 2017, the Company is in compliance with the undertakings and covenants contained in the loan agreement.



18


7. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.
The Company uses a December 31 measurement date for the plans.
The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.
 
U.S.
 
International
 
Three Months Ended September 30,
 
Three Months Ended September 30,
In thousands, except percentages
2017
 
2016
 
2017
 
2016
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
86

 
$
84

 
$
614

 
$
258

Interest cost
356

 
369

 
1,677

 
1,257

Expected return on plan assets
(433
)
 
(519
)
 
(2,910
)
 
(2,437
)
Net amortization/deferrals
248

 
229

 
685

 
397

Net periodic benefit cost
$
257

 
$
163

 
$
66

 
$
(525
)


 
U.S.
 
International
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except percentages
2017
 
2016
 
2017
 
2016
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
258

 
$
252

 
$
1,842

 
$
986

Interest cost
1,068

 
1,107

 
5,031

 
4,193

Expected return on plan assets
(1,299
)
 
(1,557
)
 
(8,730
)
 
(7,723
)
Net amortization/deferrals
744

 
687

 
2,055

 
1,452

Curtailment loss recognized

 

 

 
240

Net periodic benefit (credit) cost
$
771

 
$
489

 
$
198

 
$
(852
)


Assumptions
 
 
 
 
 
 
 
Discount Rate
3.95
%
 
4.21
%
 
2.51
%
 
3.56
%
Expected long-term rate of return
4.95
%
 
5.70
%
 
4.93
%
 
5.81
%
Rate of compensation increase
3.00
%
 
3.00
%
 
2.54
%
 
3.10
%

The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $7.1 million and $0.5 million to the international and U.S. plans, respectively, during 2017.
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.

19


The following tables provide information regarding the Company’s postretirement benefit plans summarized by U.S. and international components.
 
U.S.
 
International
 
Three Months Ended September 30,
 
Three Months Ended September 30,
In thousands, except percentages
2017
 
2016
 
2017
 
2016
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
7

 
$
7

Interest cost
88

 
97

 
24

 
25

Net amortization/deferrals
(73
)
 
(105
)
 
(7
)
 
(9
)
Net periodic benefit (credit) cost
$
16

 
$
(7
)
 
$
24

 
$
23


 
U.S.
 
International
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
In thousands, except percentages
2017
 
2016
 
2017
 
2016
Net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
21

 
$
21

Interest cost
264

 
291

 
72

 
75

Net amortization/deferrals
(219
)
 
(315
)
 
(21
)
 
(27
)
Net periodic (credit) benefit cost
$
48

 
$
(21
)
 
$
72

 
$
69


Assumptions
 
 
 
 
 
 
 
Discount Rate
3.76
%
 
3.95
%
 
3.46
%
 
3.90
%

8. STOCK-BASED COMPENSATION
As of September 30, 2017, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027 and provides a maximum of 3,800,000 shares for grants or awards, plus any shares which remain available under the 2000 Plan. The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011, and an amendment and restatement of the 2011 Plan was approved by the Stockholders of Wabtec on May 10, 2017. The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (“the Directors Plan”).
Stock-based compensation expense was $14.5 million and $14.8 million for the nine months ended September 30, 2017 and 2016, respectively. Included in stock-based compensation expense for the nine months ended September 30, 2017 is $1.2 million of expense related to stock options, $5.3 million related to restricted stock, $3.2 million related to restricted stock units, $3.7 million related to incentive stock units and $1.1 million related to units issued for Directors’ fees. At September 30, 2017, unamortized compensation expense related to stock options, non-vested restricted shares units and incentive stock units expected to vest totaled $29.7 million and will be recognized over a weighted average period of 1.4 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.

20


The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the nine months ended September 30, 2017:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic value
(in thousands)
Outstanding at December 31, 2016
1,098,823

 
$
35.39

 
4.3
 
$
52,332

Granted
65,522

 
87.09

 
 
 
0

Exercised
(133,927
)
 
21.84

 
 
 
7,220

Canceled
(4,266
)
 
72.91

 
 
 
13

Outstanding at September 30, 2017
1,026,152

 
40.30

 
4.1
 
36,377

Exercisable at September 30, 2017
838,004

 
32.15

 
3.4
 
36,537

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
Nine Months Ended
September 30,
 
2017
 
2016
Dividend yield
0.23
%
 
0.26
%
Risk-free interest rate
2.17
%
 
1.47
%
Stock price volatility
23.4
%
 
26.9
%
Expected life (years)
5.0

 
5.0

The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.
Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006, the Company adopted a restricted stock program. As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over four years from the date of grant. Under the Directors Plan, restricted stock units vest one year from the date of grant.
In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three-year period then ended, the incentive stock units can vest, with underlying shares of common stock being awarded in an amount ranging from 0% to 200% of the amount of initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of September 30, 2017, the Company estimates that it will achieve 73%, 68% and 80% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2017, 2018, and 2019, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.
Compensation expense for the non-vested restricted stock and incentive stock units is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.

21


The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan, and incentive stock units activity for the 2011 Plan and the 2000 Plan with related information for the nine months ended September 30, 2017:
 
Restricted
Stock
and Units
 
Incentive
Stock
Units
 
Weighted
Average Grant
Date Fair
Value
Outstanding at December 31, 2016
396,295

 
424,750

 
$
72.18

Granted
153,571

 
157,025

 
86.11

Vested
(131,553
)
 
(153,271
)
 
70.02

Adjustment for incentive stock awards expected to vest

 
(100,424
)
 
75.43

Canceled
(6,590
)
 
(5,158
)
 
74.99

Outstanding at September 30, 2017
411,723

 
322,922

 


9. INCOME TAXES
The overall effective income tax rate was 15.7% and 23.4% for the three and nine months ended September 30, 2017, respectively, and 28.5% and 29.7% for the three and nine months ended September 30, 2016, respectively.  For the three and nine months ended September 30, 2017, the decrease in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related to the adjustment of deferred tax liabilities which had originally been established in prior periods in several foreign jurisdictions. These adjustments were not material to the current year-to-date financial statements or prior years annual financial statements.
As of September 30, 2017 and December 31, 2016, the liability for income taxes associated with uncertain tax positions was $5.7 million, of which $3.2 million, if recognized, would favorably affect the Company’s effective tax rate.
The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2017, the total accrued interest and penalties were $0.6 million and $0.3 million, respectively. As of December 31, 2016, the total accrued interest and penalties were $0.8 million and $0.3 million, respectively.
At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately $3.6 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.  With limited exceptions, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2013.


22


10. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:
 
Three Months Ended
September 30,
In thousands, except per share data
2017
 
2016
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
67,399

 
$
82,428

Less: dividends declared - common shares
   and non-vested restricted stock
(11,518
)
 
(8,958
)
Undistributed earnings
55,881

 
73,470

Percentage allocated to common shareholders (1)
99.7
%
 
99.7
%
 
55,713

 
73,250

Add: dividends declared - common shares
11,485

 
8,933

Numerator for basic and diluted earnings per
   common share
$
67,198

 
$
82,183

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
95,709

 
89,589

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
607

 
704

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
96,316

 
90,293

Net income attributable to Wabtec
      shareholders per common share
 
 
 
Basic
$
0.70

 
$
0.92

Diluted
$
0.70

 
$
0.91

(1) Basic weighted-average common shares outstanding
95,709

 
89,589

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
95,983

 
89,838

Percentage allocated to common shareholders
99.7
%
 
99.7
%


23


 
Nine Months Ended
September 30,
In thousands, except per share data
2017
 
2016
Numerator
 
 
 
Numerator for basic and diluted earnings per common
   share - net income attributable
 
 
 
to Wabtec shareholders
$
213,313

 
$
267,076

Less: dividends declared - common shares
   and non-vested restricted stock
(30,693
)
 
(23,523
)
Undistributed earnings
182,620

 
243,553

Percentage allocated to common shareholders (1)
99.4
%
 
99.7
%
 
181,524

 
242,822

Add: dividends declared - common shares
30,508

 
23,452

Numerator for basic and diluted earnings per
   common share
$
212,032

 
$
266,274

Denominator
 
 
 
Denominator for basic earnings per common
   share - weighted average shares
95,163

 
90,546

Effect of dilutive securities:
 
 
 
Assumed conversion of dilutive stock-based
   compensation plans
645

 
770

Denominator for diluted earnings per common share -
 
 
 
adjusted weighted average shares and assumed conversion
95,808

 
91,316

Net income attributable to Wabtec
      shareholders per common share
 
 
 
Basic
$
2.23

 
$
2.94

Diluted
$
2.22

 
$
2.92

(1) Basic weighted-average common shares outstanding
95,163

 
90,546

Basic weighted-average common shares outstanding and
   non-vested restricted stock expected to vest
95,740

 
90,819

Percentage allocated to common shareholders
99.4
%
 
99.7
%

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

11. WARRANTIES
The following table reconciles the changes in the Company’s product warranty reserve as follows:
In thousands
2017
 
2016
Balance at beginning of year
$
138,992

 
$
92,064

Warranty expense
33,108

 
22,788

Acquisitions
3,412

 
7,571

Warranty claim payments
(33,492
)
 
(27,693
)
Foreign currency impact/other
6,744

 
(620
)
Balance at September 30
$
148,764

 
$
94,110





24



12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Foreign Currency Hedging The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gain and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. The contracts are scheduled to mature within two years. For the three and nine months ended September 30, 2017 and September 30, 2016, the amounts reclassified into income were not material.
Other Activities The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of other expense, net. The net unrealized gain related to these contracts was $0.2 million for the three months ended September 30, 2017. These contracts are scheduled to mature within one year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of September 30, 2017.
In millions
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
728.7

 
$
406.4

 
$
1,135.1

 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
Other current assets
 
4.4

 
0.2

 
4.6

Other current liabilities
 

 

 

Total
 
$
4.4

 
$
0.2

 
$
4.6

The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2016.
In millions
 
Designated
 
Non-Designated
 
Total
Gross notional amount
 
$
911.0

 
$
490.0

 
$
1,401.0

 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
Other current assets
 
1.1

 
0.4

 
1.5

Other current liabilities
 
(0.5
)
 
(0.2
)
 
(0.7
)
Total
 
$
0.6

 
$
0.2

 
$
0.8

Interest Rate Hedging The Company uses interest rate swaps to manage interest rate exposures. The Company is exposed to interest rate volatility with regard to existing floating rate debt. Primary exposure includes the London Interbank Offered Rates (LIBOR). Derivatives used to hedge risk associated with changes in the fair value of certain variable-rate debt are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of debt obligations are recognized in current period earnings. Refer to footnote 13 for further information on interest rate swaps.
As of September 30, 2017, the Company has recorded a current liability of $2.0 million and an accumulated other comprehensive loss of $1.2 million, net of tax, related to these agreements.

13. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


25


The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2017, which are included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at September 30, 2017 Using
In thousands
Total Carrying
Value at
September 30,
2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest rate swap agreements
$
1,952

 
$

 
$
1,952

 
$

Total
$
1,952

 
$

 
$
1,952

 
$

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2016, which is included in other current liabilities on the Condensed Consolidated Balance sheet:
 
 
 
Fair Value Measurements at December 31, 2016 Using
In thousands
Total Carrying
Value at
December 31,
2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest rate swap agreements
$
3,888

 
$

 
$
3,888

 
$

Total
$
3,888

 
$

 
$
3,888

 
$

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at September 30, 2017 and December 31, 2016. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets.  Trusts are valued at the net asset value (“NAV”) as determined by their custodian.  NAV represent the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.  The 2013 and 2016 Notes are considered Level 2 based on the fair value valuation hierarchy.
The estimated fair values and related carrying values of the Company’s financial instruments are as follows:
 
September 30, 2017
 
December 31, 2016
In thousands
Carry
Value
 
Fair
Value
 
Carry
Value
 
Fair
Value
Interest rate swap agreement
$
1,952

 
$
1,952

 
$
3,888

 
$
3,888

4.375% Senior Notes
248,502

 
264,000

 
248,310

 
260,265

3.45% Senior Notes
747,590

 
739,050

 
747,474

 
719,273

The fair value of the Company’s interest rate swap agreements and the 2013 and 2016 Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement.

26


14. COMMITMENTS AND CONTINGENCIES
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Further information and detail on these claims is described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, in Note 19 therein, filed on February 28, 2017. During the first nine months of 2017, there were no material changes to the information described in the Form 10-K.
From time to time, the Company is involved in litigation related to claims arising out of the Company's operations in the ordinary course of business, including claims based on product liability, contracts, intellectual property, or other causes of action. Further information and detail on any potentially material litigation is as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, in Note 19 therein, filed on February 28, 2017. Except as described below, there have been no material changes to the information described in the Form 10-K, including with respect to the litigation with Siemens described therein.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossings, as of September 8, 2017, Denver Transit alleged that total damages were $36.8 million through July 31, 2017, and are continuing to accumulate. The crossings have not been certified for use without flaggers, which Denver Transit alleges is due to Xorail's failure to achieve constant warning times satisfactory to the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"). No claims have been filed by Denver Transit with regard to either issue. Xorail has denied Denver Transit’s assertions regarding the wireless crossings, and Denver Transit has also notified RTD that Denver Transit considers the new certification requirements imposed by FRA and/or PUC as a change in law, for which neither Denver Transit nor its subcontractors are liable. Xorail has worked with Denver Transit to modify its system to meet the FRA’s and PUC's previously undefined, and evolving, certification requirements. On September 28, 2017, the FRA granted a 5 year approval of the modified wireless crossing system as currently implemented; however, the PUC has not granted approval of the modified system and therefore the crossings are still not certified for use without flaggers. Denver Transit and RTD are continuing to seek approval from PUC. The Company does not believe that it has any liability with respect to the wireless crossing issue.

15. SEGMENT INFORMATION
Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:
Freight Segment primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.
Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment, and doors for buses and subways. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.

27


Segment financial information for the three months ended September 30, 2017 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
340,185

 
$
617,746

 
$

 
$
957,931

Intersegment sales/(elimination)
8,376

 
4,494

 
(12,870
)
 

Total sales
$
348,561

 
$
622,240

 
$
(12,870
)
 
$
957,931

Income (loss) from operations
$
61,596

 
$
47,531

 
$
(7,116
)
 
$
102,011

Interest expense and other, net

 

 
(20,826
)
 
(20,826
)
Income (loss) from operations before income taxes
$
61,596

 
$
47,531

 
$
(27,942
)
 
$
81,185

Segment financial information for the three months ended September 30, 2016 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
361,998

 
$
313,576

 
$

 
$
675,574

Intersegment sales/(elimination)
10,341

 
1,823

 
(12,164
)
 

Total sales
$
372,339

 
$
315,399

 
$
(12,164
)
 
$
675,574

Income (loss) from operations
$
77,999

 
$
51,164

 
$
(9,067
)
 
$
120,096

Interest expense and other, net

 

 
(4,869
)
 
(4,869
)
Income (loss) from operations before income taxes
$
77,999

 
$
51,164

 
$
(13,936
)
 
$
115,227

Segment financial information for the nine months ended September 30, 2017 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
1,032,959

 
$
1,773,259

 
$

 
$
2,806,218

Intersegment sales/(elimination)
27,602

 
16,253

 
(43,855
)
 

Total sales
$
1,060,561

 
$
1,789,512

 
$
(43,855
)
 
$
2,806,218

Income (loss) from operations
$
196,328

 
$
155,901

 
$
(21,659
)
 
$
330,570

Interest expense and other, net

 

 
(53,191
)
 
(53,191
)
Income (loss) from operations before income taxes
$
196,328

 
$
155,901

 
$
(74,850
)
 
$
277,379

Segment financial information for the nine months ended September 30, 2016 is as follows:
In thousands
Freight
Segment
 
Transit
Segment
 
Corporate
Activities and
Elimination
 
Total
Sales to external customers
$
1,201,734

 
$
969,472

 
$

 
$
2,171,206

Intersegment sales/(elimination)
29,765

 
7,606

 
(37,371
)
 

Total sales
$
1,231,499

 
$
977,078

 
$
(37,371
)
 
$
2,171,206

Income (loss) from operations
$
276,990

 
$
148,321

 
$
(29,750
)
 
$
395,561

Interest expense and other, net

 

 
(15,784
)
 
(15,784
)
Income (loss) from operations before income taxes
$
276,990

 
$
148,321

 
$
(45,534
)
 
$
379,777


28


Sales by product line are as follows:
 
Three Months Ended September 30,
In thousands
2017
 
2016
Specialty Products & Electronics
$
335,143

 
$
334,349

Transit Products
276,913

 
44,996

Brake Products
177,165

 
134,900

Remanufacturing, Overhaul & Build
132,018

 
129,264

Other
36,692

 
32,065

Total sales
$
957,931

 
$
675,574


 
Nine Months Ended
September 30,
In thousands
2017
 
2016
Specialty Products & Electronics
$
975,006

 
$
1,051,806

Transit Products
789,096

 
143,434

Brake Products
550,181

 
428,785

Remanufacturing, Overhaul & Build
387,634

 
444,278

Other
104,301

 
102,903

Total sales
$
2,806,218

 
$
2,171,206






29


16. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
The obligations under the Company's 2016 Notes, 2013 Notes, and Revolving Credit Facility and Term Loan are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. Each guarantor is 100% owned by the parent company. 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 for September 30, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Cash and cash equivalents
$
3,049

 
$
6,082

 
$
218,949

 
$

 
$
228,080

Receivables, net
75,123

 
232,060

 
837,156

 

 
1,144,339

Inventories
132,044

 
140,745

 
491,992

 

 
764,781

Current assets - other
39,216

 
4,283

 
96,426

 

 
139,925

Total current assets
249,432

 
383,170

 
1,644,523

 

 
2,277,125

Property, plant and equipment, net
51,196

 
134,397

 
364,774

 

 
550,367

Goodwill
25,276

 
549,198

 
1,810,284

 

 
2,384,758

Investment in subsidiaries
6,304,037

 
2,508,725

 

 
(8,812,762
)
 

Other intangibles, net
30,905

 
251,485

 
857,997

 

 
1,140,387

Other long term assets
29,724

 
6,273

 
61,016

 

 
97,013

Total assets
$
6,690,570

 
$
3,833,248

 
$
4,738,594

 
$
(8,812,762
)
 
$
6,449,650

Current liabilities
$
162,470

 
199,511

 
$
1,103,459

 

 
$
1,465,440

Inter-company
2,031,256

 
(1,942,433
)
 
(88,823
)
 

 

Long-term debt
1,740,541

 
25

 
83,590

 

 
1,824,156

Long-term liabilities - other
38,601

 
87,935

 
297,149

 

 
423,685

Total liabilities
3,972,868

 
(1,654,962
)
 
1,395,375

 

 
3,713,281

Shareholders' equity
2,717,702

 
5,489,597

 
3,323,165

 
(8,812,762
)
 
2,717,702

Non-controlling interest

 
(1,387
)
 
20,054

 

 
18,667

Total shareholders' equity
$
2,717,702

 
$
5,488,210

 
$
3,343,219

 
$
(8,812,762
)
 
$
2,736,369

Total Liabilities and Shareholders' Equity
$
6,690,570

 
$
3,833,248

 
$
4,738,594

 
$
(8,812,762
)
 
$
6,449,650

 














30


Balance Sheet for December 31, 2016:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Cash and cash equivalents
$
2,522

 
$
9,496

 
$
386,466

 
$

 
$
398,484

Receivables, net
79,041

 
202,779

 
660,688

 

 
942,508

Inventories
120,042

 
128,076

 
410,392

 

 
658,510

Current assets - other
52,576

 
(17,844
)
 
833,397

 

 
868,129

Total current assets
254,181

 
322,507

 
2,290,943

 

 
2,867,631

Property, plant and equipment, net
49,031

 
126,661

 
342,684

 

 
518,376

Goodwill
25,275

 
477,472

 
1,576,018

 

 
2,078,765

Investment in subsidiaries
5,388,613

 
1,325,150

 

 
(6,713,763
)
 

Other intangibles, net
31,897

 
204,512

 
817,451

 

 
1,053,860

Other long term assets
9,592

 
(1,914
)
 
54,708

 

 
62,386

Total assets
$
5,758,589

 
$
2,454,388

 
$
5,081,804

 
$
(6,713,763
)
 
$
6,581,018

Current liabilities
$
194,983

 
196,956

 
$
1,054,700

 

 
$
1,446,639

Inter-company
1,562,399

 
(1,848,777
)
 
286,378

 

 

Long-term debt
1,761,933

 
58

 
976

 

 
1,762,967

Long-term liabilities - other
33,298

 
74,977

 
286,312

 

 
394,587

Total liabilities
3,552,613

 
(1,576,786
)
 
1,628,366

 

 
3,604,193

Shareholders' equity
2,205,976

 
4,032,250

 
2,681,514

 
(6,713,763
)
 
2,205,977

Non-controlling interest

 
(1,076
)
 
771,924

 

 
770,848

Total shareholders' equity
$
2,205,976

 
$
4,031,174

 
$
3,453,438

 
$
(6,713,763
)
 
$
2,976,825

Total Liabilities and Shareholders' Equity
$
5,758,589

 
$
2,454,388

 
$
5,081,804

 
$
(6,713,763
)
 
$
6,581,018

    
Income Statement for the Three Months Ended September 30, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
134,906

 
$
270,116

 
$
587,289

 
$
(34,380
)
 
$
957,931

Cost of sales
(111,775
)
 
(176,291
)
 
(444,704
)
 
28,042

 
(704,728
)
Gross profit (loss)
23,131

 
93,825

 
142,585

 
(6,338
)
 
253,203

Total operating expenses
(22,714
)
 
(29,991
)
 
(98,487
)
 

 
(151,192
)
Income (loss) from operations
417

 
63,834

 
44,098

 
(6,338
)
 
102,011

Interest (expense) income, net
(19,222
)
 
1,143

 
186

 

 
(17,893
)
Other income (expense), net
274

 
(356
)
 
(2,851
)
 

 
(2,933
)
Equity earnings (loss)
80,874

 
19,806

 

 
(100,680
)
 

Pretax income (loss)
62,343

 
84,427

 
41,433

 
(107,018
)
 
81,185

Income tax expense
5,056

 
(5
)
 
(17,797
)
 

 
(12,746
)
Net income (loss)
67,399

 
84,422

 
23,636

 
(107,018
)
 
68,439

Less: Net income attributable to noncontrolling interest

 
155

 
(1,195
)
 

 
(1,040
)
Net income (loss) attributable to Wabtec shareholders
$
67,399

 
$
84,577

 
$
22,441

 
$
(107,018
)
 
$
67,399

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Wabtec shareholders
$
66,813

 
$
84,577

 
$
115,647

 
$
(107,018
)
 
$
160,019

    


31


Income Statement for the Three Months Ended September 30, 2016:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
155,731

 
$
259,174

 
$
295,336

 
$
(34,667
)
 
$
675,574

Cost of sales
(109,414
)
 
(186,546
)
 
(211,392
)
 
44,259

 
(463,093
)
Gross profit (loss)
46,317

 
72,628

 
83,944

 
9,592

 
212,481

Total operating expenses
(21,979
)
 
(29,019
)
 
(41,387
)
 

 
(92,385
)
(Loss) income from operations
24,338

 
43,609

 
42,557

 
9,592

 
120,096

Interest (expense) income, net
(7,854
)
 
1,728

 
69

 

 
(6,057
)
Other income (expense), net
6,600

 
(86
)
 
(5,326
)
 

 
1,188

Equity earnings (loss)
86,731

 
27,099

 

 
(113,830
)
 

Pretax income (loss)
109,815

 
72,350

 
37,300

 
(104,238
)
 
115,227

Income tax expense
(27,387
)
 
1,567

 
(6,979
)
 

 
(32,799
)
Net income (loss)
82,428

 
73,917

 
30,321

 
(104,238
)
 
82,428

Less: Net income attributable to noncontrolling interest

 

 

 

 

Net income attributable to Wabtec shareholders
$
82,428

 
$
73,917

 
$
30,321

 
$
(104,238
)
 
$
82,428

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Wabtec shareholders
$
82,987

 
$
73,916

 
$
34,054

 
$
(104,238
)
 
$
86,719

    
Income Statement for the Nine Months Ended September 30, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
417,156

 
$
778,893

 
$
1,708,646

 
$
(98,477
)
 
$
2,806,218

Cost of sales
(311,037
)
 
(503,686
)
 
(1,270,668
)
 
76,046

 
(2,009,345
)
Gross profit (loss)
106,119

 
275,207

 
437,978

 
(22,431
)
 
796,873

Total operating expenses
(79,960
)
 
(89,935
)
 
(296,408
)
 

 
(466,303
)
Income (loss) from operations
26,159

 
185,272

 
141,570

 
(22,431
)
 
330,570

Interest (expense) income, net
(52,565
)
 
5,554

 
(4,014
)
 

 
(51,025
)
Other income (expense), net
3,127

 
(2,233
)
 
(3,060
)
 

 
(2,166
)
Equity earnings (loss)
246,103

 
69,954

 

 
(316,057
)
 

Pretax income (loss)
222,824

 
258,547

 
134,496

 
(338,488
)
 
277,379

Income tax expense
(9,511
)
 
(22
)
 
(55,243
)
 

 
(64,776
)
Net income (loss)
213,313

 
258,525

 
79,253

 
(338,488
)
 
212,603

Less: Net income attributable to noncontrolling interest

 
311

 
399

 

 
710

Net income (loss) attributable to Wabtec shareholders
$
213,313

 
$
258,836

 
$
79,652

 
$
(338,488
)
 
$
213,313

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Wabtec shareholders
$
214,482

 
$
258,838

 
$
366,156

 
$
(338,488
)
 
$
500,988








32


Income Statement for the Nine Months Ended September 30, 2016:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net Sales
$
494,350

 
$
865,850

 
$
924,559

 
$
(113,553
)
 
$
2,171,206

Cost of sales
(356,575
)
 
(561,361
)
 
(641,550
)
 
93,330

 
(1,466,156
)
Gross profit (loss)
137,775

 
304,489

 
283,009

 
(20,223
)
 
705,050

Total operating expenses
(88,916
)
 
(91,967
)
 
(128,606
)
 

 
(309,489
)
(Loss) income from operations
48,859

 
212,522

 
154,403

 
(20,223
)
 
395,561

Interest (expense) income, net
(21,608
)
 
5,049

 
662

 

 
(15,897
)
Other income (expense), net
17,640

 
(3,956
)
 
(13,571
)
 

 
113

Equity earnings (loss)
308,681

 
111,917

 

 
(420,598
)
 

Pretax income (loss)
353,572

 
325,532

 
141,494

 
(440,821
)
 
379,777

Income tax expense
(86,495
)
 
(380
)
 
(25,826
)
 

 
(112,701
)
Net income (loss)
267,077

 
325,152

 
115,668

 
(440,821
)
 
267,076

Less: Net income attributable to noncontrolling interest

 

 

 

 

Net income attributable to Wabtec shareholders
$
267,077

 
$
325,152

 
$
115,668

 
$
(440,821
)
 
$
267,076

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Wabtec shareholders
$
266,355

 
$
325,152

 
$
107,054

 
$
(440,821
)
 
$
257,740

    
Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2017:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net cash (used for) provided by operating activities
$
(38,954
)
 
$
115,816

 
$
(27,921
)
 
$
(22,430
)
 
$
26,511

Net cash used for investing activities
(12,591
)
 
(110,741
)
 
(26,492
)
 

 
(149,824
)
Net cash provided by (used for) financing activities
52,072

 
(8,489
)
 
(136,062
)
 
22,430

 
(70,049
)
Effect of changes in currency exchange rates

 

 
22,958

 

 
22,958

Increase (decrease) in cash
527

 
(3,414
)
 
(167,517
)
 

 
(170,404
)
Cash, beginning of period
2,522

 
9,496

 
386,466

 

 
398,484

Cash, end of period
$
3,049

 
$
6,082

 
$
218,949

 
$

 
$
228,080

    
Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2016:
In thousands
Parent
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
Net cash (used for) provided by operating activities
$
(53,967
)
 
$
220,963

 
$
100,120

 
$
(20,223
)
 
$
246,893

Net cash used for investing activities
(5,067
)
 
(26,693
)
 
(84,131
)
 

 
(115,891
)
Net cash provided by (used for) financing activities
70,272

 
(193,669
)
 
(9,162
)
 
20,223

 
(112,336
)
Effect of changes in currency exchange rates

 

 
5,525

 

 
5,525

Increase (decrease) in cash
11,238

 
601

 
12,352

 

 
24,191

Cash, beginning of period

 
13,157

 
213,034

 

 
226,191

Cash, end of period
$
11,238

 
$
13,758

 
$
225,386

 
$

 
$
250,382






33


17. OTHER INCOME (EXPENSE), NET
The components of other income (expense) are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
In thousands
2017
 
2016
 
2017
 
2016
Foreign currency (loss) gain
$
(4,113
)
 
$
880

 
$
(5,202
)
 
$
(488
)
Equity income
520

 

 
1,587

 

Other miscellaneous expense
660

 
308

 
1,449

 
601

Total other income (expense), net
$
(2,933
)
 
$
1,188

 
$
(2,166
)
 
$
113



34


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, 2016, filed with the Securities and Exchange Commission on February 28, 2017.
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 31 countries. For the nine months ended September 30, 2017, approximately 65% of the Company’s revenues came from customers outside the U.S.
Management Review and Future Outlook
Wabtec’s long-term financial goals are to generate cash flow from operations in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Excellence Program, and increase revenues through a focused growth strategy, including product innovation and new technologies, global and market expansion, 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 primarily serves the worldwide freight and transit rail industries. As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of railroads and passenger transit agencies around the world, and transportation equipment manufacturers who serve those markets. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight carloadings and passenger ridership; government spending on public transportation; and investment in new technologies. In general, trends such as increasing urbanization, a focus on sustainability and environmental awareness, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight and transit rail.
The Company monitors a variety of factors and statistics to gauge market activity. Freight rail markets around the world are driven primarily by overall economic conditions and activity, while Transit markets are driven primarily by government funding and passenger ridership. Changes in these market drivers can cause fluctuations in demand for Wabtec's products and services.
According to the 2016 edition of a market study by UNIFE, the Association of the European Rail Industry, the accessible global market for railway products and services is more than $100 billion, and it is expected to grow at about 3.2% annually through 2021. The three largest geographic markets, which represent about 80% of the total accessible market, are Europe, North America and Asia Pacific. Over the next five years, UNIFE projects above-average growth in Asia Pacific and Europe due to overall economic growth and trends such as urbanization and increasing mobility, deregulation, investments in new technologies, energy and environmental issues, and increasing government support. The largest product segments of the market are rolling stock, services and infrastructure, which represent almost 90% of the accessible market. Over the next five years, UNIFE projects spending on rolling stock to grow at an above-average rate due to increased investment in passenger transit vehicles. UNIFE estimates that the global installed base of locomotives is about 114,000 units, with about 32% in Asia Pacific, about 25% in North America and about 18% in Russia-CIS (Commonwealth of Independent States).  Wabtec estimates that about 3,400 new locomotives were delivered worldwide in 2016, and it expects deliveries of about 3,200 in 2017. UNIFE estimates the global installed base of freight cars is about 5.5 million units, with about 37% in North America, about 26% in Russia-CIS and about 20% in Asia Pacific. Wabtec estimates that about 108,000 new freight cars were delivered worldwide in 2016, and it expects deliveries of about 97,000 in 2017.  UNIFE estimates the global installed base of passenger transit vehicles to be about 569,000 units, with about 43% in Asia Pacific, about 32% in Europe and about 14% in Russia-CIS. UNIFE estimates that about 208,000 new passenger transit vehicles were ordered annually from 2013-2015, and that about 184,000 will be ordered annually from 2016-2018.
In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as energy and environmental factors encourage continued investment in public mass transit. France, Germany and the United

35


Kingdom are the largest Western European transit markets, representing almost two-thirds of industry spending in the European Union. UNIFE projects the Western European rail market to grow at about 3.6% annually during the next five years, led by investments in new rolling stock in France and Germany.  Significant investments are also expected in Turkey, the largest market in Eastern Europe. About 75% of freight traffic in Europe is hauled by truck, while rail accounts for about 20%. The largest freight markets in Europe are Germany, Poland and the United Kingdom. In recent years, the European Commission has adopted a series of measures designed to increase the efficiency of the European rail network by standardizing operating rules and certification requirements. UNIFE believes that adoption of these measures should have a positive effect on ridership and investment in public transportation over time.
In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation. Through direct ownership and operating partnerships, U.S. railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service. There are more than 500 railroads operating in North America, with the largest railroads, referred to as “Class I,” accounting for more than 90% of the industry’s revenues. The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain, and petroleum.  These commodities represent about 55% of total rail carloadings, with intermodal carloads accounting for the rest. Railroads operate in a competitive environment, especially with the trucking industry, and are always seeking ways to improve safety, cost and reliability. New technologies offered by Wabtec and others in the industry can provide some of these benefits. Demand for our freight related products and services in North America is driven by a number of factors, including rail traffic, and production of new locomotives and new freight cars.  In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues. Demand for North American passenger transit products is driven by a number of factors, including government funding, deliveries of new subway cars and buses, and ridership. The U.S. federal government provides money to local transit authorities, primarily to fund the purchase of new equipment and infrastructure for their transit systems.
Growth in the Asia Pacific market has been driven mainly by the continued urbanization of China and India, and by investments in freight rail rolling stock and infrastructure in Australia to serve its mining and natural resources markets. During the next five years, UNIFE expects India to make significant investments in rolling stock and infrastructure to modernize its rail system; for example, the country has awarded a 1,000-unit locomotive order to a U.S. manufacturer. UNIFE expects the increased spending in India to offset decreased spending on very-high-speed rolling stock in China during the next five years.
Other key geographic markets include Russia-CIS and Africa-Middle East.  With about 1.4 million freight cars and about 20,000 locomotives, Russia-CIS is among the largest freight rail markets in the world, and it’s expected to invest in both freight and transit rolling stock. PRASA, the Passenger Rail Agency of South Africa, is expected to continue to invest in new transit cars and new locomotives. According to UNIFE, emerging markets are expected to grow at above-average rates as global trade creates increases in freight volumes and urbanization leads to increased demand for efficient mass-transportation systems. As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets.
In its study, UNIFE also said it expects increased investment in digital tools for data and asset management, and in rail control technologies, both of which would improve efficiency in the global rail industry during the next five years. UNIFE said data-driven asset management tools have the potential to reduce equipment maintenance costs and improve asset utilization, while rail control technologies have been focused on increasing track capacity, improving operational efficiency and ensuring safer railway traffic. Wabtec offers products and services to help customers make ongoing investments in these initiatives.
In 2017 and beyond, general economic and market conditions in the United States and internationally will 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.

ACQUISITION OF FAIVELEY TRANSPORT S.A.
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport under the terms of the Share Purchase Agreement. Faiveley Transport is a leading global provider of value-added, integrated systems and services for the railway industry with annual sales of about $1.2 billion and more than 5,700 employees in 24 countries. Faiveley Transport supplies railway manufacturers, operators and maintenance providers with a range of value-added, technology-based systems and services in Energy & Comfort (air conditioning, power collectors and converters, and passenger information), Access &

36


Mobility (passenger access systems and platform doors), and Brakes and Safety (braking systems and couplers). The transaction was structured as a step acquisition as follows:
On November 30, 2016, the Company acquired majority ownership of Faiveley Transport, after completing the purchase of the Faiveley family’s ownership interest under the terms of the Share Purchase Agreement, which directed the Company to pay €100 per share of Faiveley Transport, payable between 25% and 45% in cash at the election of those shareholders and the remainder payable in Wabtec stock. The Faiveley family’s ownership interest acquired by the Company represented approximately 51% of outstanding share capital and approximately 49% of the outstanding voting shares of Faiveley Transport. Upon completion of the share purchase under the Share Purchase Agreement, Wabtec commenced a tender offer for the remaining publicly traded Faiveley Transport shares. The public shareholders had the option to elect to receive €100 per share in cash or 1.1538 shares of Wabtec common stock per share of Faiveley Transport. The common stock portion of the consideration was subject to a cap on issuance of Wabtec common shares that was equivalent to the rates of cash and stock elected by the 51% owners.
On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
As of November 30, 2016, the date the Company acquired 51% of the share capital and 49% of the voting interest in Faiveley Transport, Faiveley Transport was consolidated under the variable interest entity model as the Company concluded that it was the primary beneficiary of Faiveley Transport as it then possessed the power to direct the activities of Faiveley Transport that most significantly impact its economic performance and it then possessed the obligation and right to absorb losses and benefits from Faiveley Transport. The aggregate value of consideration paid for 100% ownership of Faiveley Transport was $1,736.1 million, including $944.3 million in cash, $560.2 million in stock or approximately 6.6 million shares, $409.9 million in debt assumed, less $178.3 million in cash acquired. The $744.7 million included as deposits in escrow on the consolidated balance sheet at December 31, 2016 was cash designated for use as consideration for the tender offers.



37


RESULTS OF OPERATIONS
The following table shows our Consolidated Statements of Operations for the periods indicated.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
In millions
2017
 
2016
 
2017
 
2016
Net sales
$
957,931

 
$
675,574

 
$
2,806,218

 
$
2,171,206

Cost of sales
(704,728
)
 
(463,093
)
 
(2,009,345
)
 
(1,466,156
)
Gross profit
253,203

 
212,481

 
796,873

 
705,050

Selling, general and administrative expenses
(117,838
)
 
(70,757
)
 
(367,753
)
 
(241,118
)
Engineering expenses
(24,709
)
 
(16,289
)
 
(71,511
)
 
(52,271
)
Amortization expense
(8,645
)
 
(5,339
)
 
(27,039
)
 
(16,100
)
Total operating expenses
(151,192
)
 
(92,385
)
 
(466,303
)
 
(309,489
)
Income from operations
102,011

 
120,096

 
330,570

 
395,561

Interest expense, net
(17,893
)
 
(6,057
)
 
(51,025
)
 
(15,897
)
Other (expense) income, net
(2,933
)
 
1,188

 
(2,166
)
 
113

Income from operations before income taxes
81,185

 
115,227

 
277,379

 
379,777

Income tax expense
(12,746
)
 
(32,799
)
 
(64,776
)
 
(112,701
)
Net income
68,439

 
82,428

 
$
212,603

 
$
267,076

Less: Net (gain) loss attributable to noncontrolling interest
(1,040
)
 

 
710

 

Net income attributable to Wabtec shareholders
$
67,399

 
$
82,428

 
$
213,313

 
$
267,076

THIRD QUARTER 2017 COMPARED TO THIRD QUARTER 2016
The following table summarizes our results of operations for the periods indicated:
 
Three Months Ended September 30,
In thousands
2017
 
2016
 
Percent
Change
Freight Segment Sales
$
340,185

 
$
361,998

 
(6.0
)%
Transit Segment Sales
617,746

 
313,576

 
97.0
 %
Net sales
957,931

 
675,574

 
41.8
 %
Income from operations
102,011

 
120,096

 
(15.1
)%
Net income attributable to Wabtec shareholders
67,399

 
82,428

 
(18.2
)%
The following table shows the major components of the change in sales in the third quarter of 2017 from the third quarter of 2016:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
Third Quarter 2016 Net Sales
$
361,998

 
$
313,576

 
$
675,574

Acquisitions
40,633

 
289,941

 
330,574

Change in Sales by Product Line:
 
 
 
 
 
Specialty Products & Electronics
(40,429
)
 
5,819

 
(34,610
)
Brake Products
(12,579
)
 
(1,353
)
 
(13,932
)
Remanufacturing, Overhaul & Build
(12,666
)
 
3,351

 
(9,315
)
Transit Products

 
2,400

 
2,400

Other
996

 
(615
)
 
381

Foreign exchange
2,232

 
4,627

 
6,859

Third Quarter 2017 Net Sales
$
340,185

 
$
617,746

 
$
957,931


38


Net sales for the three months ended September 30, 2017 increased by $282.4 million, or 41.8%, to $957.9 million. The increase is primarily due to sales from acquisitions of $330.6 million with the majority related to the Faiveley Transport acquisition. This increase was partially offset by a $34.6 million decrease for Specialty Products and Electronics due to lower demand for freight original equipment rail products, and a $13.9 million decrease for Brake Products primarily due to lower demand for original equipment brakes for freight customers. Favorable foreign exchange increased sales by $6.9 million.
Freight Segment sales decreased by $21.8 million, or 6.0%, primarily due to a decrease of $40.4 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products, a decrease of $12.7 million for Remanufacturing, Overhaul & Build sales primarily due to the absence of a large locomotive rebuild contract that completed in 2016, and a decrease of $12.6 million for Brake Products sales from lower demand for original equipment brakes for freight customers. Acquisitions increased sales by $40.6 million and favorable foreign exchange increased sales by $2.2 million.
Transit Segment sales increased by $304.2 million, or 97.0%, primarily due to sales from acquisitions of $289.9 million with the majority related to the Faiveley Transport acquisition. Favorable foreign exchange increased sales by $4.6 million.
Cost of Sales The following table shows the major components of cost of sales for the periods indicated:
 
Three Months Ended September 30, 2017
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
129,912

 
38.2
%
 
$
283,376

 
45.9
%
 
$
413,288

 
43.1
%
Labor
48,473

 
14.2
%
 
81,828

 
13.2
%
 
130,301

 
13.6
%
Overhead
54,712

 
16.1
%
 
90,508

 
14.7
%
 
145,220

 
15.2
%
Other/Warranty
2,630

 
0.8
%
 
13,288

 
2.2
%
 
15,918

 
1.7
%
Total cost of sales
$
235,727

 
69.3
%
 
$
469,000

 
76.0
%
 
$
704,727

 
73.6
%
 
Three Months Ended September 30, 2016
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
135,798

 
37.5
%
 
$
136,311

 
43.5
%
 
$
272,109

 
40.3
%
Labor
44,583

 
12.3
%
 
38,317

 
12.2
%
 
82,900

 
12.3
%
Overhead
57,990

 
16.0
%
 
43,516

 
13.9
%
 
101,506

 
15.0
%
Other/Warranty
2,125

 
0.6
%
 
4,453

 
1.4
%
 
6,578

 
1.0
%
Total cost of sales
$
240,496

 
66.4
%
 
$
222,597

 
71.0
%
 
$
463,093

 
68.6
%
Cost of sales increased by $241.6 million to $704.7 million in the third quarter of 2017 compared to $463.1 million in the same period of 2016. In the third quarter of 2017, cost of sales as a percentage of sales was 73.6% compared to 68.6% in the same period of 2016. The increase as a percentage of sales is due to product mix largely attributable to higher transit segment sales due to acquisitions, along with an unfavorable product mix within the freight segment and higher project adjustments of $20.4 million on certain existing contracts.
Freight Segment cost of sales increased 2.9% as a percentage of sales to 69.3% in 2017 compared to 66.4% for the same period in 2016. The increase is primarily related to lower demand for freight original equipment rail products and higher project contract adjustments of $5.5 million on certain existing contracts primarily related to labor and warranty costs.
Transit Segment cost of sales increased 5.0% as a percentage of sales to approximately 76.0% in the third quarter of 2017 from 71.0% for the same period of 2016. The increase is primarily related to product mix largely attributable to the acquisition of Faiveley Transport, which has lower overall margins and higher project adjustments of $14.9 million on certain existing contracts primarily related to material costs.
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 $17.1 million in the third quarter of 2017 compared to $6.8 million in the third quarter of 2016. The increase in warranty expense is primarily related to the increase in sales and the higher project costs on certain existing contacts discussed above.

39


Operating expenses The following table shows our operating expenses for the periods indicated:
 
Three Months Ended September 30,
In thousands
2017
 
Percentage of
Sales
 
2016
 
Percentage of
Sales
Selling, general and administrative expenses
$
117,838

 
12.3
%
 
$
70,757

 
10.5
%
Engineering expenses
24,709

 
2.6
%
 
16,289

 
2.4
%
Amortization expense
8,645

 
0.9
%
 
5,339

 
0.8
%
Total operating expenses
$
151,192

 
15.8
%
 
$
92,385

 
13.7
%
Total operating expenses were 15.8% and 13.7% of sales for the third quarters of 2017 and 2016, respectively. Selling, general, and administrative expenses increased $47.1 million, or 66.5%, primarily due to $56.7 million in incremental expense from acquisitions and $4.7 million in Faiveley Transport transaction and integration related charges partially offset by lower costs due to cost saving initiatives and lower organic sales volumes. Engineering expense increased by $8.4 million, or 51.7%, due to $5.1 million of incremental costs associated with acquisitions but remained relatively constant as a percentage of sales at 2.6%. Amortization expense increased $3.3 million due to amortization of intangibles associated with acquisitions.
The following table shows our segment operating expense for the periods indicated:
 
Three Months Ended September 30,
In thousands
2017
 
2016
 
Percent
Change
Freight Segment
$
42,862

 
$
40,270

 
6.4
 %
Transit Segment
101,214

 
43,048

 
135.1
 %
Corporate
7,116

 
9,067

 
(21.5
)%
Total operating expenses
151,192

 
92,385

 
63.7
 %
Freight Segment operating expenses increased $2.6 million, or 6.4%, in 2017 and increased 150 basis points to 12.6% of sales. The increase is primarily attributable to $5.0 million of incremental operating expenses from acquisitions and $0.6 million of integration and restructuring costs, partially offset by cost saving initiatives across the freight business and lower selling expenses related to reduced volume.
Transit Segment operating expenses increased $58.2 million, or 135.1%, in 2017 and increased 270 basis points to 16.4% of sales. The increase is primarily attributable to acquisitions with $51.7 million of incremental operating expenses and $3.4 million of Faiveley Transport integration costs.
Corporate non-allocated operating expenses decreased $2.0 million in 2017 primarily due to lower Faiveley Transport transaction costs in the current quarter as well as lower costs associated with cost saving initiatives.
Interest expense, net Interest expense, net, increased $11.8 million in 2017 attributable to higher overall debt balances in 2017 than 2016, primarily related to the Faiveley Transport acquisition and higher interest rates.
Other income (expense), net Other income/(expense), net, totaled $2.9 million of expense in 2017 compared to $1.2 million of income in 2016 primarily due to foreign currency losses.
Income taxes The effective income tax rate was 15.7% and 28.5% for the third quarter of 2017 and 2016, respectively. The decrease in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related to the adjustment of deferred tax liabilities which had originally been established in prior periods in several foreign jurisdictions.




40



FIRST NINE MONTHS OF 2017 COMPARED TO FIRST NINE MONTHS OF 2016
The following table summarizes our results of operations for the periods indicated:
 
Nine Months Ended September 30,
In thousands
2017
 
2016
 
Percent
Change
Freight Segment Sales
$
1,032,959

 
$
1,201,734

 
(14.0
)%
Transit Segment Sales
1,773,259

 
969,472

 
82.9
 %
Net sales
2,806,218

 
2,171,206

 
29.2
 %
Income from operations
330,570

 
395,561

 
(16.4
)%
Net income attributable to Wabtec shareholders
213,313

 
267,076

267,076

(20.1
)%
The following table shows the major components of the change in sales for the nine months ended September 30, 2017 from the nine months ended September 30, 2016:
In thousands
Freight
Segment
 
Transit
Segment
 
Total
First Nine Months of 2016 Net Sales
$
1,201,734

 
$
969,472

 
$
2,171,206

Acquisitions
121,246

 
843,251

 
964,497

Change in Sales by Product Line:

 

 

Specialty Products & Electronics
(162,744
)
 
(12,403
)
 
(175,147
)
Remanufacturing, Overhaul, and Build
(74,243
)
 
(1,930
)
 
(76,173
)
Brake Products
(43,270
)
 
(5,887
)
 
(49,157
)
Transit Products

 
(801
)
 
(801
)
Other
(6,725
)
 
606

 
(6,119
)
Foreign exchange
(3,040
)
 
(19,048
)
 
(22,088
)
First Nine Months of 2017 Net Sales
$
1,032,958

 
$
1,773,260

 
$
2,806,218

Net sales for the nine months ended September 30, 2017 increased by $635.0 million, or 29.2%, to $2,806.2 million from $2,171.2 million. The increase is due to sales from acquisitions of $964.5 million with the majority related to the Faiveley Transport acquisition. This increase was partially offset by a $175.1 million decrease for Specialty Products and Electronics due to lower demand for freight original equipment rail products and train control and signaling products and services, and a $76.2 million decrease for Remanufacturing, Overhaul and Build primarily due to the absence of a large locomotive rebuild contract that completed in 2016. Unfavorable foreign exchange decreased sales by $22.1 million.
Freight Segment sales decreased by $168.8 million, or 14.0%, primarily due to a decrease of $162.7 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products as well as train control and signaling products and services, a decrease of $74.2 million for Remanufacturing, Overhaul & Build sales primarily due to the absence of a large locomotive rebuild contract that completed in 2016, and a decrease of $43.3 million for Brake Products sales from lower demand for original equipment brakes for freight customers. Acquisitions increased sales by $121.2 million and unfavorable foreign exchange decreased sales by $3.0 million.
Transit Segment sales increased by $803.8 million, or 82.9%, primarily due to an increase in sales from acquisitions of $843.3 million with the majority related to the Faiveley Transport acquisition. This increase was partially offset by a decrease of $12.4 million for Specialty Products and Electronics due to lower demand for original equipment conduction systems and current collectors. Unfavorable foreign exchange decreased sales by $19.0 million.




41



Cost of Sales The following table shows the major components of cost of sales for the periods indicated:
 
Nine Months Ended September 30, 2017
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
395,683

 
38.3
%
 
$
778,222

 
43.9
%
 
$
1,173,905

 
41.8
%
Labor
140,679

 
13.6
%
 
241,400

 
13.6
%
 
382,079

 
13.6
%
Overhead
164,503

 
15.9
%
 
250,879

 
14.1
%
 
415,382

 
14.8
%
Other/Warranty
4,236

 
0.4
%
 
33,743

 
1.9
%
 
37,979

 
1.4
%
Total cost of sales
$
705,101

 
68.2
%
 
$
1,304,244

 
73.5
%
 
$
2,009,345

 
71.6
%
 
Nine Months Ended September 30, 2016
In thousands
Freight
 
Percentage of
Sales
 
Transit
 
Percentage of
Sales
 
Total
 
Percentage of
Sales
Material
$
450,990

 
37.5
%
 
$
410,244

 
42.3
%
 
$
861,234

 
39.7
%
Labor
139,867

 
11.6
%
 
119,553

 
12.3
%
 
259,420

 
11.9
%
Overhead
185,964

 
15.5
%
 
137,749

 
14.2
%
 
323,713

 
14.9
%
Other/Warranty
6,261

 
0.5
%
 
15,528

 
1.6
%
 
21,789

 
1.0
%
Total cost of sales
$
783,082

 
65.1
%
 
$
683,074

 
70.4
%
 
$
1,466,156

 
67.5
%
Cost of sales increased by $543.2 million to $2,009.3 million in the nine months ended September 30, 2017 compared to $1,466.2 million in the same period of 2016. For the nine months ended September 30, 2017, cost of sales as a percentage of sales was 71.6% compared to 67.5% in the same period of 2016.  The increase as a percentage of sales is due to product mix largely attributable to higher transit segment sales due to acquisitions, along with an unfavorable product mix within the freight segment and higher project adjustments of $20.4 million recorded in the three months ended September 30, 2017 on certain existing contracts and $6.0 million of restructuring and integration costs.
Freight Segment cost of sales increased 3.1% as a percentage of sales to 68.2% for the nine months ended September 30, 2017 compared to 65.1% for the same period in 2016. The increase is primarily related to lower demand for freight original equipment rail products and train control and signaling products and services which typically offer a higher margin, higher project adjustments of $5.5 million on certain existing contracts primarily related to labor and warranty costs, and $1.7 million of restructuring and integration costs.
Transit Segment cost of sales increased 3.1% as a percentage of sales to 73.5% for the nine months ended September 30, 2017 from 70.4% for the same period of 2016. The increase is primarily related to product mix largely attributable to the acquisition of Faiveley Transport, which has lower overall margins and higher project adjustments of $14.9 million on certain existing contracts primarily related to material costs and $4.3 million of restructuring and integration costs.
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 $33.1 million in the nine months ended September 30, 2017 compared to $22.8 million in the nine months ended September 30, 2016. The increase in warranty expense is primarily related to the increase in sales.
Operating expenses The following table shows our operating expenses for the periods indicated:
 
Nine Months Ended September 30,
In thousands
2017
 
Percentage of
Sales
 
2016
 
Percentage of
Sales
Selling, general and administrative expenses
$
367,753

 
13.1
%
 
$
241,118

 
11.1
%
Engineering expenses
71,511

 
2.5
%
 
52,271

 
2.4
%
Amortization expense
27,039

 
1.0
%
 
16,100

 
0.7
%
Total operating expenses
$
466,303

 
16.6
%
 
$
309,489

 
14.2
%

42


Total operating expenses were 16.6% and 14.2% of sales for the nine months of 2017 and 2016, respectively.  Selling, general, and administrative expenses increased $126.6 million, or 52.5%, primarily due to $145.4 million in incremental expense from acquisitions and $18.0 million of Faiveley Transport transaction and integration related charges partially offset by lower costs due to cost saving initiatives and lower organic sales volumes. Engineering expense increased by $19.2 million, or 36.7%, primarily due to $16.6 million in expenses from acquisitions and remained relatively consistent as a percentage of sales. Amortization expense increased $10.9 million due to amortization of intangibles associated with acquisitions.
The following table shows our segment operating expense for the periods indicated:
 
Nine Months Ended September 30,
In thousands
2017
 
2016
 
Percent
Change
Freight Segment
$
131,530

 
$
135,544

 
(3.0
)%
Transit Segment
313,114

 
144,194

 
117.1
 %
Corporate
21,659

 
29,751

 
(27.2
)%
Total operating expenses
$
466,303

 
$
309,489

 
50.7
 %
Freight Segment operating expenses decreased $4.0 million, or 3.0%, in the nine months ended September 30, 2017 and increased 140 basis points to 12.7% of sales. The decrease is primarily attributable to reduced sales volumes, and realized benefits from the cost saving initiatives undertaken in 2016 and 2017, partially offset by $15.6 million of incremental operating expenses from acquisitions and $2.8 million of restructuring and integration costs.
Transit Segment operating expenses increased $168.9 million, or 117.1%, in the nine months ended September 30, 2017 and increased 280 basis points to 17.7% of sales. The increase is attributed to $156.9 million of incremental operating expenses from acquisitions and $11.0 million of Faiveley Transport and integration costs.
Corporate non-allocated operating expenses decreased $8.1 million in the nine months ended September 30, 2017 primarily due to lower Faiveley Transport transaction and integration costs as well as benefits from cost savings initiatives undertaken in 2017 and 2016.
Interest expense, net Interest expense, net, increased $35.1 million in the nine months ended September 30, 2017 attributable to higher overall debt balances in 2017 than 2016, primarily related to the Faiveley Transport acquisition and higher interest rates.
Other income (expense), net Other income/(expense), net, totaled $2.2 million of expense in the nine months ended September 30, 2017 compared to $0.1 million of income for the comparable period in 2016 primarily due to foreign currency losses.
Income taxes The effective income tax rate was 23.4% and 29.7% for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the effective rate is primarily due to $9.5 million of favorable deferred tax net benefits recorded in the three months ended September 30, 2017 and the result of a lower earnings mix in higher tax rate jurisdictions. The net favorable deferred tax benefits related to the adjustment of deferred tax liabilities which had originally been established in prior periods in several foreign jurisdictions.








43



Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under the Company’s unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:
 
Nine Months Ended
September 30,
In thousands
2017
 
2016
Cash (used for) provided by:
 
 
 
Operating activities
$
26,511

 
$
246,893

Investing activities
(149,824
)
 
(115,891
)
Financing activities
(70,049
)
 
(112,336
)
(Decrease)/increase in cash
$
(170,404
)
 
$
24,191

Operating activities In the first nine months of 2017, cash provided by operations was $26.5 million. In the first nine months of 2016, cash provided by operations was $246.9 million. In comparison to the first nine months of 2016, cash provided by operations for the comparable period in 2017 decreased due to unfavorable working capital performance and lower net income of $54.5 million. The major components of working capital were as follows: an unfavorable change of $87.8 million in other assets and liabilities primarily due to an unfavorable change in accrued liabilities due to payments related to contract liabilities, accrued expenses, and acquisition costs during the first nine months of 2017, an unfavorable change in accounts payable of $77.6 million due to the timing of payments to suppliers, an unfavorable change in inventory of $55.7 million due to efforts to ramp up production in anticipation of stronger product demand in the fourth quarter of 2017, an unfavorable change in accrued income taxes of $41.9 million, partially offset by a favorable change in accrued liabilities and customer deposits of $89.6 million primarily due to the timing of cash receipts from customers for long term projects.
Investing activities In the first nine months of 2017 and 2016, cash used for investing activities was $149.8 million and $115.9 million, respectively. The major components of the cash outflow in 2017 were $114.2 million in net cash paid for acquisitions and $60.3 million in planned additions to property, plant and equipment for investments in our facilities and manufacturing processes. These outflows were partially offset by $23.5 million in cash released from escrow related to the Faiveley acquisition. This compares to $84.4 million in net cash paid for acquisitions and $31.7 million in property, plant, and equipment for investments in the first nine months of 2016. Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions.
Financing activities In the first nine months of 2017, cash used for financing activities was $70.0 million which included $883.5 million in proceeds from the revolving credit facility, $918.9 million in repayments of debt and $30.7 million of dividend payments. In the first nine months of 2016, cash used for financing activities was $112.3 million, which included $346.0 million in proceeds from the revolving credit facility, $215.9 million in repayments of debt on the revolving credit facility, $212.2 million for purchases of treasury stock, $23.5 million of dividend payments, and $9.0 million related to payment of income tax withholding on share-based compensation.
               
Senior Notes Due November 2026

On November 3, 2016, the Company issued $750.0 million of Senior Notes due in 2026.  The 2016 Notes were issued at 99.965% of face value.  Interest on the 2016 Notes accrues at a rate of 3.45% per annum and is payable semi-annually on May 15 and November 15 of each year.  The proceeds were used to finance the cash portion of the Faiveley Transport acquisition, refinance Faiveley Transport's indebtedness, and for general corporate purposes.  The principal balance is due in full at maturity. 

The 2016 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company.  The indenture under which the 2016 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens. The Company is in compliance with the restrictions and covenants in the indenture under which the 2016 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.

44





Faiveley Transport Tender Offer

On February 3, 2017, the initial cash tender offer was closed, which resulted in the Company acquiring approximately 27% of additional outstanding share capital and voting rights of Faiveley Transport for approximately $411.8 million in cash and $25.2 million in Wabtec stock. After the initial cash tender offer, the Company owned approximately 78% of outstanding share capital and 76% of voting rights.
On March 6, 2017, the final cash tender offer was closed, which resulted in the Company acquiring approximately 21% of additional outstanding share capital and 22% of additional outstanding voting rights of Faiveley Transport for approximately $303.2 million in cash and $0.3 million in Wabtec stock. After the final cash tender offer, the Company owned approximately 99% of the share capital and 98% of the voting rights of Faiveley Transport.
On March 21, 2017, a mandatory squeeze-out procedure was finalized, which resulted in the Company acquiring the Faiveley Transport shares not tendered in the offers for approximately $17.5 million in cash. This resulted in the Company owning 100% of the share capital and voting rights of Faiveley Transport.
Company Stock Repurchase Plan
On February 8, 2016, the Board of Directors amended its stock repurchase authorization to $350 million of the Company’s outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $350 million of which about $33.3 million remained. During the first nine months of 2017, the Company did not repurchase any shares. The Company intends to purchase shares on the open market or in negotiated block trades from time to time depending on market conditions. No time limit was set for the completion of the programs which conforms to the requirements under the 2016 Refinancing Credit Agreement, as well as the senior notes currently outstanding.
Forward Looking Statements
We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:
Economic and industry conditions
prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and South Africa;
decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;
reliance on major original equipment manufacturer customers;
original equipment manufacturers’ program delays;
demand for services in the freight and passenger rail industry;
demand for our products and services;
orders either being delayed, canceled, 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

45


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;
the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities or intellectual property claims;
completion and integration of acquisitions, including the acquisition of Faiveley Transport; 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; or
federal and state income tax legislation; and
the outcome of negotiations with partners, governments, suppliers, customers or others.
Statements in this Quarterly Report on Form 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, 2016.
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, 2016. 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, 2016.

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 38% and 36% of total long-term debt at September 30, 2017 and December 31, 2016, respectively.  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 convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. Refer to Note 6 – Long Term Debt of “Notes to Condensed Consolidated Financial Statements” for additional information regarding interest rate risk.


46


Foreign Currency Exchange Risk
The Company is subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the first nine months of 2017, approximately 35% of Wabtec’s net sales were to customers in the United States, 9% in the United Kingdom, 7% in Canada, 6% in France, 6% in Germany, 4% in China, 4% in Mexico, 3% in Italy, 3% in Australia, and 23% 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.


47


Item 4.
CONTROLS AND PROCEDURES
Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2017. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.


48


PART II—OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
Except as described below, there have been no material changes regarding the Company’s commitments and contingencies as described in Note 19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, including with respect to the litigation with Siemens described therein.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“Denver Transit”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and Xorail is in the final stages of successfully implementing a recovery plan concerning the TMDS issues. With regard to the wireless crossings, as of September 8, 2017, Denver Transit alleged that total damages were $36.8 million through July 31, 2017, and are continuing to accumulate. The crossings have not been certified for use without flaggers, which Denver Transit alleges is due to Xorail's failure to achieve constant warning times satisfactory to the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"). No claims have been filed by Denver Transit with regard to either issue. Xorail has denied Denver Transit’s assertions regarding the wireless crossings, and Denver Transit has also notified RTD that Denver Transit considers the new certification requirements imposed by FRA and/or PUC as a change in law, for which neither Denver Transit nor its subcontractors are liable. Xorail has worked with Denver Transit to modify its system to meet the FRA’s and PUC's previously undefined, and evolving, certification requirements. On September 28, 2017, the FRA granted a 5 year approval of the modified wireless crossing system as currently implemented; however, the PUC has not granted approval of the modified system and therefore the crossings are still not certified for use without flaggers. Denver Transit and RTD are continuing to seek approval from PUC. The Company does not believe that it has any liability with respect to the wireless crossing issue.

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, 2016.

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's stock repurchase activity for the three months ended September 30, 2017:
Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
 
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs (1)
July 2017
 

 

 

 
$

August 2017
 

 
$

 

 
$

September 2017
 

 
$

 

 
$

Total quarter ended September 30, 2017
 

 
$

 

 
$

(1)
On February 9, 2016, the Board of Directors amended its stock repurchase authorization to $350.0 million of the Company’s outstanding shares. No time limit was set for the completion of the programs which conforms to the requirements under the 2016 Refinancing Credit Agreement, as well as the senior notes currently outstanding.

Item 4.
MINE SAFETY DISCLOSURES
Not Applicable

Item 6.
EXHIBITS
The following exhibits are being filed with this report:

49


10.1
 
 
31.1
 
 
31.2
 
 
32.1
 
 
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.


50


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/ PATRICK D. DUGAN
 
Patrick D. Dugan,
 
Executive Vice President Finance and
Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)
 
 
DATE:
November 1, 2017


51
Exhibit

SECOND AMENDMENT TO SECOND AMENDED AND RESTATED
REFINANCING CREDIT AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED REFINANCING CREDIT AGREEMENT (the "Amendment"), dated as of October 11, 2017, is made by and among WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION, a Delaware corporation, as a borrower (the "Company"), WABTEC COÖPERATIEF U.A., a coöperatieve vereniging met uitsluiting van aansprakelijkheid under the laws of the Netherlands, as a borrower ("WABTEC UA" and together with the Company, collectively referred to as the "Borrowers" and each, a "Borrower"), the GUARANTORS, the LENDERS party to the Credit Agreement, and PNC BANK, NATIONAL ASSOCIATION, in its capacity as administrative agent for the Lenders (the "Administrative Agent").
WHEREAS, the parties hereto are parties to that certain Second Amended and Restated Refinancing Credit Agreement dated as of June 22, 2016, as amended by First Amendment to Second Amended and Restated Credit Agreement dated April 19, 2017 (as so amended, the "Credit Agreement"), pursuant to which the Lenders provided a revolving credit facility and a delayed draw term loan to the Borrowers; and
WHEREAS, the Borrowers, the Lenders and the Administrative Agent desire to amend the Credit Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows:
1.Recitals. The foregoing recitals are incorporated herein by reference.
2.    Defined Terms. Capitalized terms not otherwise defined in this Amendment have the meanings given to them in the Credit Agreement.
3.    Amendments to Credit Agreement.
(a)    Effective as of September 30, 2017, Section 1.1 [Certain Definitions] of the Credit Agreement is hereby amended to amend and restate the following definition in its entirety:
EBITDA shall mean, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, Interest Expense, income tax expense, depreciation, amortization, losses from Asset Dispositions, extraordinary losses, noncash losses from discontinued operations and other noncash charges to net income for such period, one-time transaction and restructuring costs related to the LEY Acquisition in an aggregate amount not to exceed $50,000,000, minus, to the extent added in determining such Consolidated Net Income, noncash credits to net income, gains from Asset Dispositions, noncash gains from discontinued operations, and other extraordinary income for such period; provided, however, that in the event of an acquisition or disposition of a Subsidiary or material line of business or a material division during the period of determination and solely for the purposes of Section 8.2.13.2 [Leverage Ratio - Covenant] and the calculation of the Leverage Ratio for purposes of interest, Letter of Credit Fee and Commitment Fee determinations, such calculation shall (a) in the case of such a disposition, exclude for the period of determination, EBITDA attributable to the disposed Subsidiary, line of business, or division as if such disposition had occurred at the beginning of such period of determination and (b) in the case of such an acquisition, include for the period of determination, EBITDA attributable to the acquired Subsidiary, line of business, or division as if such acquisition had occurred at the beginning of such period of determination.
(b)    Effective as of September 30, 2017, Section 1.1 [Certain Definitions] of the Credit Agreement is hereby amended to insert the following new definitions in their appropriate alphabetical positions:
Eligible European Cash shall mean as of any date of determination, unencumbered cash of the Company and its Subsidiaries denominated in the official currency of the United Kingdom, Switzerland, or any member of the European Union in an aggregate amount up to, but not in excess of, the amount of Total Debt held by WABTEC UA and its Subsidiaries that is both permitted to be repaid at such date of determination and denominated in one of the currencies referenced above in this definition.
Leverage Ratio - Covenant shall mean, as of the end of any date of determination, the ratio of (a) Total Debt less Eligible Unencumbered Cash less Eligible European Cash to (b) EBITDA.
(c)    Effective as of September 30, 2017, Section 8.2.13.2 [Leverage Ratio] of the Credit Agreement is hereby amended and restated in its entirety as follows:
8.2.13.2    Leverage Ratio - Covenant. The Company shall not permit the Leverage Ratio - Covenant as of the last day of any Computation Period to exceed 3.25 to 1.00; provided that, other than with respect to the LEY Acquisition, to the extent the consideration paid in connection with any Acquisition equals or exceeds $500,000,000, at the election of the Company, during the Fiscal Quarter in which such Acquisition is consummated and during the three (3) subsequent Fiscal Quarters (each such four-Fiscal Quarter period, an "Acquisition Period"), the then applicable maximum Leverage Ratio - Covenant of 3.25 to 1.00 shall be deemed increased to 3.50 to 1.00. No more than two (2) Acquisition Periods shall exist during the term of the Revolving Credit Commitments.
(d)    Effective as of September 30, 2017, Section 8.3.3 [Certificate of the Company] of the Credit Agreement is hereby amended and restated in its entirety as follows:
8.3.3    Certificate of the Company. Concurrently with the financial statements of the Company furnished to the Administrative Agent and to the Lenders pursuant to Sections 8.3.1 [Quarterly Financial Statements] and 8.3.2 [Annual Reports], a certificate (each, a "Compliance Certificate") of the Company signed by a Senior Officer of the Company, in the form of Exhibit 8.3.3, containing a computation of each of the financial ratios and restrictions set forth in Section 8.2.13 [Financial Covenants], a computation of the Leverage Ratio as of the last day of the Computation Period corresponding to the date of the financial statements to which the Compliance Certificate being furnished pursuant to this Section 8.3.3 relates, and a statement to the effect that such officer has not become aware of any Event of Default or Potential Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it.
(e)    Effective as of the Closing Date, Section 9.1.5 of the Credit Agreement is hereby amended to delete the parenthetical "(other than Section 8.2.13.2 [Covenant Calculations])".
(f)    Effective as of September 30, 2017, Exhibit 8.3.3 [Compliance Certificate] of the Credit Agreement is hereby amended and restated in its entirety as set forth on the attached Exhibit 8.3.3 [Compliance Certificate].
(g)    Schedule 1.1(E) [Excluded Subsidiaries] of the Credit Agreement is hereby amended and restated in its entirety as set forth on the attached Schedule 1.1(E) [Excluded Subsidiaries].
4.    Conditions of Effectiveness of Amendments. The effectiveness of this Amendment is expressly conditioned upon satisfaction of each of the following conditions precedent:
(a)    Execution and Delivery of Amendment. The Borrowers, the other Loan Parties, each of the Lenders, and the Administrative Agent shall have executed and delivered this Amendment to the Administrative Agent, and all other documentation necessary for effectiveness of this Amendment shall have been executed and delivered all to the satisfaction of the Administrative Agent.
(b)    Officer's Certificate. There shall be delivered to the Administrative Agent for the benefit of each Lender a certificate, dated the date hereof and signed by an authorized officer certifying that (i) all representations and warranties of the Loan Parties set forth in the Credit Agreement and hereunder are true and correct in all material respects, except for any such representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty is true and correct in all respects, (ii) the Loan Parties are in compliance with each of the covenants and conditions set forth in the Credit Agreement and hereunder, (iii) since the date of the last audited financial statements of the Borrowers delivered to the Administrative Agent there has been no material adverse change in the financial condition, operations, assets, business, or properties of the Loan Parties taken as a whole, and (iv) no Event of Default or Potential Default exists.
(c)    Representations. Each of the Loan Parties represents and warrants to the Administrative Agent and the Lenders that, by its execution and delivery hereof to the Administrative Agent, after giving effect to this Amendment: (i) the representations and warranties of the Loan Parties contained in Article 6 of the Credit Agreement shall be true and correct on and as of the date hereof with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein); (ii) the Loan Parties shall have performed and complied with all covenants and conditions of the Credit Agreement and this Amendment; (iii) no Event of Default or Potential Default under the Credit Agreement shall have occurred and be continuing or shall exist, (iv) since the Closing Date of the Credit Agreement no event has occurred which would have a Material Adverse Effect, (v) there are no actions, suits, investigations, litigation or governmental proceedings pending or, to the Loans Parties' knowledge, threatened against any of the Loan Parties that could reasonably be expected to have a Material Adverse Effect, (vi) each Loan Party possesses all of the powers requisite for it to enter into and carry out the transactions referred to herein and to execute, enter into and perform the terms and conditions of this Amendment and any other documents contemplated herein that are to be performed by such Loan Party; and that any and all actions required or necessary pursuant to such Loan Party's organizational documents or otherwise have been taken to authorize the due execution, delivery and performance by such Loan Party of the terms and conditions of this Amendment and any other documents contemplated herein, and that such execution, delivery and performance will not conflict with, constitute a default under or result in a breach of any applicable law or any agreement, instrument, order, writ, judgment, injunction or decree to which such Loan Party is a party or by which such Loan Party or any of its properties are bound, and that all consents, authorizations and/or approvals required or necessary from any third parties in connection with the entry into, delivery and performance by such Loan Party of the terms and conditions of this Amendment and any other documents contemplated herein and the transactions contemplated hereby have been obtained by such Loan Party and are full force and effect, and (vii) this Amendment constitutes the valid and legally binding obligation of each Loan Party, enforceable against such Loan Party in accordance with their its terms.
(d)    Consents. All material consents required to effectuate the transactions contemplated by this Amendment and the other Loan Documents shall have been obtained and are in full force and effect.
(e)    Confirmation of Guaranty. Each of the Guarantors confirms that they have read and understand this Amendment. In order to induce the Lenders and the Administrative Agent to enter into this Amendment, each of the Guarantors: (i) consents to the Amendment and the transactions contemplated thereby; (ii) ratifies and confirms each of the Loan Documents to which it is a party; (iii) ratifies, agrees and confirms that it has been a Guarantor and a Loan Party at all times since it became a Guarantor and a Loan Party and from and after the date hereof, each Guarantor shall continue to be a Guarantor and a Loan Party in accordance with the terms of the Loan Documents, as the same may be amended in connection with this Amendment and the transactions contemplated thereby; and (iv) hereby ratifies and confirms its obligations under each of the Loan Documents (including all exhibits and schedules thereto), as the same may be amended in connection with this Amendment and the transactions contemplated thereby, by signing below as indicated and hereby acknowledges and agrees that nothing contained in any of such Loan Documents is intended to create, nor shall it constitute an interruption, suspension of continuity, satisfaction, discharge of prior duties, novation or termination of the indebtedness, loans, liabilities, expenses, guaranty or obligations of any of the Loan Parties under the Credit Agreement or any other such Loan Document.
(f)    Legal Details. All legal details and proceedings in connection with the transactions contemplated by this Amendment and the other Loan Documents shall be in form and substance satisfactory to the Administrative Agent and counsel for the Administrative Agent, and the Administrative Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Administrative Agent and its counsel, as the Administrative Agent or its counsel may reasonably request.
(g)    Payment of Fees. The Borrowers shall have paid to the Administrative Agent all fees, costs and expenses payable to the Administrative Agent, for which the Administrative Agent is entitled to be reimbursed, including but not limited to the fees and expenses of the Administrative Agent's legal counsel.
5.    Force and Effect. Except as otherwise expressly modified by this Amendment, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed and shall remain in full force and effect after the date hereof.
6.    Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.
7.    Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
8.    Entire Agreement. This Amendment constitutes the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, written or oral, with respect thereto.
9.    Loan Document Pursuant to Credit Agreement. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with all of the terms and provisions of the Credit Agreement.
10.    Governing Law. This Amendment shall be deemed to be a contract under the Laws of the State of New York and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to its conflict of laws principles.
11.    Effective Date. This Amendment shall be dated as of and shall be binding, effective and enforceable upon the date of satisfaction of all conditions set forth in Section 4 hereof, and from and after such date this Amendment shall be binding upon the Borrowers, each Lender and the Administrative Agent, and their respective successors and assigns permitted by the Credit Agreement.
12.    No Novation. This Amendment amends the Credit Agreement, but is not intended to constitute, and does not constitute, a novation of the Obligations of the Loan Parties under the Credit Agreement or any other Loan Document.
13.    Counterparts. This Amendment may be signed in counterparts (by facsimile transmission or otherwise) but all of such counterparts together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment as of the day and year first above written.
BORROWERS:

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION,
a Delaware corporation

By:    /s/ Patrick D. Dugan          (SEAL)
Name: Patrick D. Dugan
Title: Executive Vice President & Chief Financial Officer

WABTEC COÖPERATIEF U.A.,
a coöperatieve vereniging met uitsluiting van aansprakelijkheid under the laws of the Netherlands

By:    /s/ Patrick D. Dugan          (SEAL)
Name: Patrick D. Dugan
Title: Authorized Person





GUARANTORS:

MOTIVEPOWER, INC.,
a Delaware corporation;
RAILROAD FRICTION PRODUCTS CORPORATION,
a Delaware corporation;
RICON CORP.,
a California corporation;
SCHAEFER EQUIPMENT, INC.,
an Ohio corporation;
YOUNG TOUCHSTONE COMPANY,
a Wisconsin corporation;
STANDARD CAR TRUCK COMPANY,
a Delaware corporation;
DUROX COMPANY,
an Ohio corporation;
G&B SPECIALTIES, INC.,
a Pennsylvania corporation;
XORAIL, INC.,
a Florida corporation;
WABTEC INTERNATIONAL, INC.,
a Delaware corporation;
TURBONETICS HOLDINGS, INC.,
a Delaware corporation;
BARBER STEEL FOUNDRY CORP.,
a Delaware corporation;
LONGWOOD ELASTOMERS, INC.,
a Virginia corporation;
LONGWOOD INDUSTRIES, INC.,
a New Jersey corporation;
LONGWOOD INTERNATIONAL, INC.,
a Delaware corporation;
RCL, L.L.C.,
a Tennessee limited liability company;
WABTEC RAILWAY ELECTRONICS, INC.,
a Delaware corporation;
WABTEC RAILWAY ELECTRONICS MANUFACTURING, INC.,
a Delaware corporation;
TRANSTECH OF SOUTH CAROLINA, INC.,
a Delaware corporation

By:         /s/ Patrick D. Dugan         (SEAL)
Name:    Patrick D. Dugan
Title:    Vice President, Finance of each Guarantor listed above


WORKHORSE RAIL, LLC,
a Pennsylvania limited liability company

By:
        /s/ Patrick D. Dugan         (SEAL)
Name: Patrick D. Dugan
Title: Vice President, Finance
RAILROAD CONTROLS, L.P.,
a Texas limited partnership
By: RCL, L.L.C., its General Partner
By:         /s/ Patrick D. Dugan         (SEAL)
Name: Patrick D. Dugan
Title: Vice President, Finance
THERMAL TRANSFER ACQUISITION CORPORATION,
a Delaware corporation
By:         /s/ Patrick D. Dugan         (SEAL)
Name: Patrick D. Dugan
Title: Vice President & Treasurer
AERO TRANSPORTATION PRODUCTS, INC.,
a Missouri corporation
By:         /s/ Patrick D. Dugan         (SEAL)
Name: Patrick D. Dugan
Title: Vice President & Treasurer



PNC BANK, NATIONAL ASSOCIATION,
as a Lender and as Administrative Agent
By:        /s/ Tracy J. DeCock                
Name:    Tracy J. DeCock
Title:     Senior Vice President


JPMORGAN CHASE BANK, N.A.
By:        /s/ Deborah R. Winkler    
Name:    Deborah R. Winkler
Title:    Executive Director


BANK OF AMERICA, N.A.
By:        /s/ Susan Rich        
Name:    Susan Rich
Title:    Vice President


HSBC BANK USA, NATIONAL ASSOCIATION
By:        /s/ Ross Graney        
Name:    Ross Graney
Title:    Assistant Vice President


HSBC FRANCE, S.A.
By:        /s/ Philippe Abonneau        
Name:     Philippe Abonneau
Title:    

By:        /s/ Bruno Marchand            
Name:    Bruno Marchand
Title:



SOCIÉTÉ GÉNÉRALE
By:        /s/ Joseph Moreno        
Name:    Joseph Moreno
Title:    Managing Director


CITIZENS BANK OF PENNSYLVANIA
By:        /s/ Carl S. Tabacjar, Jr.        
Name:    Carl S. Tabacjar, Jr.
Title:    Senior Vice President


BRANCH BANKING AND TRUST COMPANY
By:        /s/ David Miller        
Name:    David Miller
Title:    Vice President


THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.
By:        /s/ George Stoecklein            
Name:    George Stoecklein
Title:    Managing Director


CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK
By:        /s/ Gordon Yip        
Name:    Gordon Yip
Title:    Director

By:        /s/ Mark Koneval        
Name:    Mark Koneval
Title:    Managing Director


TD BANK, N.A.
By:        /s/ Mark Hogan        
Name:    Mark Hogan
Title:    Senior Vice President


WELLS FARGO BANK, NATIONAL ASSOCIATION
By:        /s/Thomas M. Molitor        
Name:    Thomas M. Molitor
Title:    Managing Director


THE BANK OF NOVA SCOTIA
By:        /s/ Sangeeta Shah        
Name:    Sangeeta Shah
Title:    Director

THE HUNTINGTON NATIONAL BANK
By:        /s/ Michael Kiss        
Name:    Michael Kiss
Title:    Vice President

FIRST NATIONAL BANK OF PENNSYLVANIA
By:        /s/ Brad Johnston        
Name:    Brad Johnston
Title:    Vice President

U.S. BANK NATIONAL ASSOCIATION
By:        /s/ Paul F. Johnson                
Name:    Paul F. Johnson
Title:    Vice President

BANK OF THE WEST
By:     /s/ M. Weinert    /s/ K. Smires    
Name:    M. Weinert
Title:    Director
Name:    K. Smires

Title:    Vice President


CITIBANK, N.A.
By:        /s/ Christopher Hartzell    
Name:    Christopher Hartzell
Title:    Director

FIRST COMMONWEALTH BANK
By:        /s/ Brian J. Sohocki        
Name:    Brian J. Sohocki
Title:    Senior Vice President

CIBC BANK USA f/k/a
THE PRIVATE BANK AND TRUST COMPANY
By:        /s/ Anne M. Westbrook        
Name:    Anne M. Westbrook
Title:    Managing Director

DOLLAR BANK, FEDERAL SAVINGS BANK
By:        /s/ Brian E. Waychoff        
Name:    Brian E. Waychoff
Title:    Vice President


NORTHWEST BANK
By:        /s/ C. Forrest Tefft        
Name:    C. Forrest Tefft
Title:    Senior Vice President

KEYBANK NATIONAL ASSOCIATION
By:        /s/ Philip R. Medsger        
Name:    Philip R. Medsger
Title:    Senior Vice President


SCHEDULE 1.1(E)

EXCLUDED SUBSIDIARIES

Ricon Acquisition Corp.
Barber Tian Rui Railway Supply LLC
Longwood Engineered Products, Inc.
SCT Technology LLC
Standard Car Truck – Asia, Inc.
Wabtec Corporation
Wabtec Investments Limited LLC
Wabtec Finance LLC
Mors Smitt Technologies, Inc.
Wabtec Railway Electronics Holdings, LLC
Fandstan Electric, Inc.,
RCLP Acquisition LLC,
IP09 RCL Corporation,
FW Acquisition LLC
Faiveley Transport USA, Inc.
Wabtec Greenville Real Estate, LLC
Graham White Manufacturing Company
Faiveley Transport North America, Inc.
Advanced Global Environmental LLC
ATR Investments LLC
The Vista Corporation of Virginia
Wabtec Manufacturing, LLC
RFPC Holding Corp.
Wabtec Holding Corp.



EXHIBIT 8.3.3
FORM OF
QUARTERLY COMPLIANCE CERTIFICATE
____________________, 20___
Please refer to the Second Amended and Restated Refinancing Credit Agreement dated as of June 22, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION, a Delaware corporation, and WABTEC COÖPERATIEF U.A., a coöperatieve vereniging met uitsluiting van aansprakelijkheid under the laws of the Netherlands (collectively, the "Borrowers"), the Guarantors from time to time party thereto, the financial institutions from time to time party thereto (the "Lenders") and PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement.
I.
Reports. Enclosed herewith is a copy of the annual audited/quarterly consolidated financial statements of the Company and its Subsidiaries as at _____________, ____ (the "Computation Date"), consisting of the consolidated 10-K/10-Q of the Company and its Subsidiaries, which to the best of my knowledge, fairly presents in all material respects the financial condition and results of operations of the Company as of the Computation Date and has been prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) consistently applied.
II.
Financial Tests. The Company hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Credit Agreement:
A.    EBITDA
1.
Consolidated Net Income    $________
2.
Plus:    Interest Expense    $________
income tax expense    $________
depreciation    $________
amortization    $________
losses from Asset Dispositions    $________
extraordinary losses    $________
noncash losses from discontinued operations     $________
other noncash charges    $________
one –time transaction and restructuring
costs related to the LEY acquisition    $________
3.
Minus:    noncash credits    $________
gains from Asset Dispositions    $________
noncash gains from discontinued operations     $________
other extraordinary income    $________
4.
Total (EBITDA)    $________
B.    Section 8.2.13.1 - Interest Coverage Ratio
1.
EBITDA (from Item A(4) above)    $________
2.
Interest Expense    $________
3.
Ratio of (1) to (2)    ______ to 1.00
4.
Minimum required    3.00 to 1.00
C.    Total Debt
1.
Total Indebtedness from Balance Sheet    $________
2.
Plus:    Contingent Liabilities incurred in respect of letters
of credit or bank guaranties (including Letters of Credit or

bank guaranties issued hereunder), but excluding all other
Contingent Liabilities, Hedging Liabilities, and obligations
of a Loan Party arising from any Performance Letter of Credit,
surety bonds, performance bonds, bid bonds, performance
guaranties, or similar obligations incurred in the ordinary
course of business that do not support Indebtedness    $________
3.
Total (Debt)    $________
D.    Section 8.2.13.2 - Leverage Ratio - Covenant
1.
Total Debt (from Item C(3) above)    $________
2.
Less:    Eligible Unencumbered Cash    $________
3.
Less:    Eligible European Cash    $________
4.
Total Debt:    $________
5.
EBITDA (from Item A(4) above)    $________
5a.
[EBITDA from Acquisitions (pursuant to the proviso at the
end of the definition of EBITDA, and without duplication
in Item A(4) above)]    [$________]
6.
Ratio of (4) to (5)    ______ to 1.00
6a.
[Ratio of (4) to (5) plus/minus (5)a.]    [______ to 1.00]
7.
Maximum allowed    [3.__ to 1.00]
E.    Leverage Ratio – Calculation to be Reported per Section 8.3.3
1.
Total Debt (from Item C(3) above)    $________
2.
Less:    Eligible Unencumbered Cash    $________
3.
Total Debt:    $________
4.
EBITDA (from Item A(4) above)    $________
4a.
[EBITDA from Acquisitions (pursuant to the proviso at the
end of the definition of EBITDA, and without duplication
in Item A(4) above)]    [$________]
5.
Ratio of (3) to (4)    ______ to 1.00
5a.
[Ratio of (3) to (4) plus/minus (4)a.]    [______ to 1.00]
The Company further certifies to you that no Event of Default or Potential Default has occurred and is continuing.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]


[Signature Page - Quarterly Compliance Certificate]

The Company has caused this Certificate to be executed and delivered by its duly authorized officer on ________ ___, 20__.
 
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION,
a Delaware corporation


By:                   
Name:                 
Title:
                




1
Exhibit


Exhibit 31.1
CERTIFICATION
I, Raymond T. Betler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2017
 
By:
 
/s/    RAYMOND T. BETLER         
Name:
 
Raymond T. Betler
Title:
 
President and Chief Executive Officer



Exhibit


Exhibit 31.2
CERTIFICATION
I, Patrick D. Dugan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2017
 
By:
 
/S/    PATRICK D. DUGAN         
Name:
 
Patrick D. Dugan
Title:
 
Executive Vice President Finance and Chief Financial Officer



Exhibit


Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. § 1350, the undersigned officers of Westinghouse Air Brake Technologies Corporation (the “Company”), hereby certify, to the best of their knowledge, that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
By:
 
/s/    RAYMOND T. BETLER        
 
 
Raymond T. Betler
President and Chief Executive Officer
 
 
 
Date:
 
November 1, 2017
 
 
 
By:
 
/s/    PATRICK D. DUGAN       
 
 
Patrick D. Dugan,
Executive Vice President Finance and Chief Financial Officer
Date:
 
November 1, 2017