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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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
CORP
ORATION
(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.)
 
 
 
 
30 Isabella Street
Pittsburgh
PA
15212
(Address of principal executive offices)
(Zip code)
412-825-1000
(Registrant’s telephone number, including area code)
1001 Air Brake Avenue Wilmerding, PA 15148
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
WAB
New York Stock Exchange
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      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes      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
Accelerated filer
Non-accelerated filer
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  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 25, 2019, there were 191,682,482 shares of common stock, par value $.01 per share, of the registrant outstanding.
 




WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
September 30, 2019
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 millions, except shares and par value
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
587.4

 
$
580.9

Restricted cash

 
1,761.4

Accounts receivable
1,213.1

 
801.2

Unbilled accounts receivables
460.2

 
345.6

Inventories
1,957.3

 
844.9

Other current assets
192.4

 
115.6

Total current assets
4,410.4

 
4,449.6

Property, plant and equipment
2,177.1

 
1,036.6

Accumulated depreciation
(554.4
)
 
(472.8
)
Property, plant and equipment, net
1,622.7

 
563.8

Other Assets
 
 
 
Goodwill
8,103.2

 
2,396.5

Other intangibles, net
4,207.0

 
1,129.9

Other noncurrent assets
557.6

 
109.4

Total other assets
12,867.8

 
3,635.8

Total Assets
$
18,900.9

 
$
8,649.2

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
1,146.2

 
$
589.4

Customer deposits
670.6

 
373.5

Accrued compensation
287.9

 
173.2

Accrued warranty
215.8

 
135.6

Current portion of long-term debt
111.8

 
64.1

Other accrued liabilities
766.6

 
310.8

Total current liabilities
3,198.9

 
1,646.6

Long-term debt
4,633.5

 
3,792.8

Accrued postretirement and pension benefits
92.6

 
95.4

Deferred income taxes
72.6

 
198.3

Accrued warranty
30.8

 
18.1

Other long term liabilities
1,143.1

 
28.9

Total Liabilities
9,171.5

 
5,780.1

Commitments and contingencies (Note 16)

 

Equity
 
 
 
Convertible preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding, at September 30, 2019 and December 31, 2018

 

Common stock, $.01 par value; 500,000,000 shares authorized: 226,947,180 and 132,349,534 shares issued and 191,676,482 and 96,614,946 outstanding at September 30, 2019 and December 31, 2018, respectively
2.0

 
1.3

Additional paid-in capital
7,815.8

 
914.6

Treasury stock, at cost, 35,270,698 and 35,734,588 shares, at September 30, 2019 and December 31, 2018, respectively
(807.6
)
 
(816.1
)
Retained earnings
3,154.8

 
3,022.0

Accumulated other comprehensive loss
(468.6
)
 
(256.6
)
Total Westinghouse Air Brake Technologies Corporation shareholders’ equity
9,696.4

 
2,865.2

Noncontrolling interest
33.0

 
3.9

Total Equity
9,729.4

 
2,869.1

Total Liabilities and Equity
$
18,900.9

 
$
8,649.2

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 millions, except per share data
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
Sales of goods
$
1,605.4

 
$
1,031.7

 
$
4,932.4

 
$
3,108.3

Sales of services
396.3

 
46.1

 
899.2

 
137.4

Total net sales
2,001.7

 
1,077.8

 
5,831.6

 
3,245.7

Cost of sales:
 
 
 
 
 
 
 
Cost of goods
(1,184.1
)
 
(735.8
)
 
(3,635.4
)
 
(2,194.2
)
Cost of services
(218.2
)
 
(40.0
)
 
(593.1
)
 
(114.6
)
Total cost of sales
(1,402.3
)
 
(775.8
)
 
(4,228.5
)
 
(2,308.8
)
Gross profit
599.4

 
302.0

 
1,603.1

 
936.9

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
(292.2
)
 
(146.8
)
 
(842.9
)
 
(465.2
)
Engineering expenses
(58.6
)
 
(20.1
)
 
(150.3
)
 
(61.6
)
Amortization expense
(79.5
)
 
(9.9
)
 
(172.9
)
 
(30.1
)
Total operating expenses
(430.3
)
 
(176.8
)
 
(1,166.1
)
 
(556.9
)
Income from operations
169.1

 
125.2

 
437.0

 
380.0

Other income and expenses:
 
 
 
 
 
 
 
Interest expense, net
(57.7
)
 
(23.7
)
 
(160.8
)
 
(75.9
)
Other income (expense), net
1.9

 
1.2

 
(4.1
)
 
6.0

Income from operations before income taxes
113.3

 
102.7

 
272.1

 
310.1

Income tax expense
(22.7
)
 
(16.6
)
 
(82.6
)
 
(53.2
)
Net income
90.6

 
86.1

 
189.5

 
256.9

Less: Net loss attributable to noncontrolling interest
0.5

 
1.6

 
1.5

 
3.7

Net income attributable to Wabtec shareholders
91.1

 
87.7

 
191.0

 
260.6

 
 
 
 
 
 
 
 
Earnings Per Common Share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.48

 
$
0.91

 
$
1.17

 
$
2.71

Diluted
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
0.48

 
$
0.91

 
$
1.11

 
$
2.70

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
189.6

 
96.2

 
163.2

 
95.9

Diluted
191.5

 
96.6

 
172.2

 
96.4

 
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 millions
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income attributable to Wabtec shareholders
$
91.1

 
$
87.7

 
$
191.0

 
$
260.6

Foreign currency translation loss
(181.1
)
 
(44.3
)
 
(208.9
)
 
(159.0
)
Unrealized gain (loss) on derivative contracts
0.2

 

 
(4.0
)
 
(5.5
)
Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans
2.2

 
(6.9
)
 
(0.1
)
 
3.3

Other comprehensive income (loss) before tax
(178.7
)
 
(51.2
)
 
(213.0
)
 
(161.2
)
Income tax (benefit) expense related to components of
 
 
 
 
 
 
 
other comprehensive income
(0.7
)
 
1.7

 
1.0

 
0.5

Other comprehensive income (loss), net of tax
(179.4
)
 
(49.5
)
 
(212.0
)
 
(160.7
)
Comprehensive income (loss) attributable to Wabtec shareholders
$
(88.3
)
 
$
38.2

 
$
(21.0
)
 
$
99.9

 
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 millions, except per share data
2019
 
2018
 
 
 
 
Operating Activities
 
 
 
Net income
$
189.5

 
$
256.9

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
289.3

 
83.0

Stock-based compensation expense
36.1

 
20.5

Below market intangible amortization
(29.9
)
 

Loss on disposal of property, plant and equipment
12.6

 
4.0

Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable and unbilled accounts receivable
(32.3
)
 
(100.2
)
Inventories
58.7

 
(125.5
)
Accounts payable
(146.5
)
 
4.2

Accrued income taxes
14.5

 
(43.8
)
Accrued liabilities and customer deposits
18.8

 
16.4

Other assets and liabilities
156.9

 
(77.5
)
Net cash provided by operating activities
567.7

 
38.0

Investing Activities
 
 
 
Purchase of property, plant and equipment
(112.6
)
 
(64.2
)
Proceeds from disposal of property, plant and equipment
3.4

 
9.1

Acquisitions of businesses, net of cash acquired
(3,000.6
)
 
(49.1
)
Net cash used for investing activities
(3,109.8
)
 
(104.2
)
Financing Activities
 
 
 
Proceeds from debt
2,955.5

 
3,490.2

Payments of debt
(2,064.6
)
 
(1,466.6
)
Proceeds from exercise of stock options and other benefit plans
0.7

 
13.1

Payment of income tax withholding on share-based compensation
(6.2
)
 
(6.7
)
Payment of contingent consideration on acquisitions
(10.1
)
 

Cash dividends
(58.2
)
 
(34.7
)
Net cash provided by financing activities
817.1

 
1,995.3

Effect of changes in currency exchange rates
(29.9
)
 
(27.1
)
(Decrease) increase in cash
(1,754.9
)
 
1,902.0

Cash, cash equivalents, and restricted cash, beginning of period
2,342.3

 
233.4

Cash, cash equivalents, and restricted cash, end of period
$
587.4

 
$
2,135.4

 
The accompanying notes are an integral part of these statements.
 


6


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Common
Stock
 
Common
Stock
 
Additional
Paid-in
 
Treasury
Stock
 
Treasury
Stock
 
Retained
 
Accumulated
Other
 
Non-controlling
 
 
In millions, except share and per share data
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Comprehensive Loss
 
Interest
 
Total
Balance, June 30, 2019
 
223,431,716

 
$
2.0

 
$
7,807.1

 
(35,248,610
)
 
$
(805.6
)
 
$
3,087.5

 
$
(289.2
)
 
$
33.4

 
$
9,835.2

Cash dividends ($0.12 dividend per share)
 

 

 

 

 

 
(23.8
)
 

 

 
(23.8
)
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
 

 

 
(3.5
)
 
(22,088
)
 
(2.0
)
 

 

 

 
(5.5
)
Stock based compensation
 

 

 
12.2

 

 

 

 

 

 
12.2

Net income (loss)
 

 

 

 

 

 
91.1

 

 
(0.5
)
 
90.6

Other comprehensive income, net of tax
 

 

 

 

 

 

 
(179.4
)
 

 
(179.4
)
Other owner changes
 
3,515,464

 

 

 

 

 

 

 
0.1

 
0.1

Balance, September 30, 2019
 
226,947,180

 
$
2.0

 
$
7,815.8

 
(35,270,698
)
 
$
(807.6
)
 
$
3,154.8

 
$
(468.6
)
 
$
33.0

 
$
9,729.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
132,349,534

 
$
1.3

 
$
914.6

 
(35,734,588
)
 
$
(816.1
)
 
$
3,022.0

 
$
(256.6
)
 
$
3.9

 
$
2,869.1

Cash dividends ($0.36 dividend per share)
 

 

 

 

 

 
(58.2
)
 

 

 
(58.2
)
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
 

 

 
(22.5
)
 
463,890

 
8.5

 

 

 

 
(14.0
)
Stock based compensation
 

 

 
36.1

 

 

 

 

 

 
36.1

Net income (loss)
 

 

 

 

 

 
191.0

 

 
(1.5
)
 
189.5

Other comprehensive income, net of tax
 

 

 

 

 

 

 
(212.0
)
 

 
(212.0
)
Acquisitions, net
 
65,782,182

 
0.7

 
6,887.6

 

 

 

 

 
30.6

 
6,918.9

Other owner changes
 
28,815,464

 

 

 

 

 

 

 


 

Balance, September 30, 2019
 
226,947,180

 
$
2.0

 
$
7,815.8

 
(35,270,698
)
 
$
(807.6
)
 
$
3,154.8

 
$
(468.6
)
 
$
33.0

 
$
9,729.4



























7



WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Common
Stock
 
Common
Stock
 
Additional
Paid-in
 
Treasury
Stock
 
Treasury
Stock
 
Retained
 
Accumulated
Other
 
Non-controlling
 
 
In millions, except share and per share data
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Comprehensive Loss
 
Interest
 
Total
Balance, June 30, 2018
 
132,349,534

 
$
1.3

 
$
910.4

 
(35,963,155
)
 
$
(821.2
)
 
$
2,923.0

 
$
(156.2
)
 
$
17.3

 
$
2,874.6

Cash dividends ($0.12 dividend per share)
 

 

 

 

 

 
(11.6
)
 

 

 
(11.6
)
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
 

 

 
(0.1
)
 
220,567

 
4.9

 

 

 

 
4.8

Stock based compensation
 

 

 
6.5

 

 

 

 

 

 
6.5

Net income (loss)
 

 

 

 

 

 
87.7

 

 
(1.6
)
 
86.1

Other comprehensive income, net of tax
 

 

 

 

 

 

 
(49.5
)
 

 
(49.5
)
Other owner changes
 

 

 

 

 

 

 

 
(0.5
)
 
(0.5
)
Balance, September 30, 2018
 
132,349,534

 
$
1.3

 
$
916.8

 
(35,742,588
)
 
$
(816.3
)
 
$
2,999.1

 
$
(205.7
)
 
$
15.2

 
$
2,910.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
132,349,534

 
$
1.3

 
$
906.6

 
(36,315,182
)
 
$
(827.4
)
 
$
2,773.3

 
$
(45.0
)
 
$
19.7

 
$
2,828.5

Cash dividends ($0.36 dividend per share)
 

 

 

 

 

 
(34.8
)
 

 

 
(34.8
)
Proceeds from treasury stock issued from the exercise of stock
options and other benefit plans, net of tax
 

 

 
(10.3
)
 
572,594

 
11.1

 

 

 

 
0.8

Stock based compensation
 

 

 
20.5

 

 

 

 

 

 
20.5

Net income (loss)
 

 

 

 

 

 
260.6

 

 
(3.7
)
 
256.9

Other comprehensive income, net of tax
 

 

 

 

 

 

 
(160.7
)
 

 
(160.7
)
Other owner changes
 

 

 

 

 

 

 

 
(0.8
)
 
(0.8
)
Balance, September 30, 2018
 
132,349,534

 
$
1.3

 
$
916.8

 
(35,742,588
)
 
$
(816.3
)
 
$
2,999.1

 
$
(205.7
)
 
$
15.2

 
$
2,910.4


The accompanying notes are an integral part of these statements

8


WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019 (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 equipment, systems and services for the global freight rail and passenger transit industries. Our highly engineered products enhance safety, improve productivity and reduce maintenance costs for customers and can be found on most locomotives, freight cars, passenger transit cars and buses around the world. 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 over 50 countries and our products can be found in more than 100 countries throughout the world. In the first nine months of 2019, approximately 58% 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, 2018. The December 31, 2018 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Revenue Recognition On January 1, 2018, the Company adopted Accounting Standards Codification (ASC) 606 “Revenue from Contracts with Customers”. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires 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.
Approximately 75% of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract revenues and cost estimates are reviewed and revised periodically through the year and adjustments are reflected in the accounting period as such amounts are determined.
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled Accounts Receivable” while the noncurrent contract assets are classified as other assets under the caption "Other Noncurrent Assets" on the consolidated balance sheet. Noncurrent contract assets were $119.4 million at September 30, 2019 and were not material at December 31, 2018, respectively. Included in noncurrent contract assets are certain costs that are specifically related to a contract, however, do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.

9


Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract liabilities are classified as current liabilities under the caption “Customer Deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other Long-Term Liabilities" on the consolidated balance sheet. Noncurrent contract liabilities were $59.2 million at September 30, 2019 and were not material at December 31, 2018. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were $115.5 million and $71.2 million at September 30, 2019 and December 31, 2018, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other Accrued Liabilities” on the consolidated balance sheet.
Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good; however, a single contract may have multiple performance obligations comprising multiple promises to customers. Performance obligations are determined based on the customer's intended use of products and services. Less complex products principally result in each completed product being a separate performance obligation recognized at a point in time. More complex products or services principally result in a single performance obligation as a customer is either procuring a bundled offering that is managed or utilized on a combined basis or there are multiple complex goods or services in the contract, which are substantially the same and recognized over time. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.
Remaining performance obligations represent the transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of September 30, 2019, the Company's remaining performance obligations were $20.6 billion. The Company expects to recognize revenue of approximately 26% of remaining performance obligation over the next 12 months, with the remainder recognized thereafter.
Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation, including the reclassification of "Net Sales" to "Sales of Goods" and "Sales of Services".
Use of Estimates The preparation of financial statements in conformity with GAAP 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 mitigate the impact of changes in foreign currency exchange rates and interest rates on earnings and cash flow. For further information regarding financial derivatives and hedging activities, refer to Footnotes 13 and 14.
Foreign Currency Translation Certain of our international operations have determined that the local currency is the functional currency whereas others have determined the U.S. dollar is their functional currency. Assets and liabilities of foreign subsidiaries where the functional currency is the local currency 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

10


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.
Recently Issued Accounting Pronouncements In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 unit's 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, 2018.
In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This updated guidance sets forth a current expected credit loss model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements but does not expect the impact of adopting this new standard to be material.
Recently Adopted Accounting Pronouncements In February 2018, FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amendments in this update allow a reclassification from AOCI to retained earnings for stranded effects resulting from the Tax Act. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance became effective for reporting periods beginning after December 15, 2018. The Company adopted this accounting standard at the beginning of the period and elected to not retrospectively apply the new standard. The impact of adopting the new standard was not material to the consolidated statement of income or the consolidated balance sheet.
In February 2016, 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. This guidance became effective for the Company on January 1, 2019. The Company elected the practical expedient which does not require the capitalization of leases with terms of 12 months or less, and the Company did not elect the practical expedient which allows hindsight to be used to determine the term of a lease. The Company adopted the standard using the transition alternative, which allowed for the application of the guidance at beginning of the period in which it is adopted, rather than requiring the adjustment of prior comparative periods. For further information regarding the Company's adoption of the new standard, see Footnote 7.
Other Comprehensive Income (Loss) Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from nonowner sources.

11


The changes in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended September 30, 2019 are as follows:
In millions
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2018
$
(202.2
)
 
$
(0.1
)
 
$
(54.3
)
 
$
(256.6
)
Other comprehensive income (loss) before reclassifications
(208.9
)
 
(3.0
)
 
(1.7
)
 
(213.6
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 

 
1.6

 
1.6

Net current period other comprehensive income (loss)
(208.9
)
 
(3.0
)
 
(0.1
)
 
(212.0
)
Balance at September 30, 2019
$
(411.1
)
 
$
(3.1
)
 
$
(54.4
)
 
$
(468.6
)

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended September 30, 2019 are as follows:
In millions
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
$
(0.4
)
 
Other income (expense), net
Amortization of net loss
1.1

 
Other income (expense), net
 
0.7

 
Other income (expense), net
 
(0.2
)
 
Income tax expense
 
$
0.5

 
Net income

Reclassifications out of accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 are as follows:
In millions
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
$
(1.1
)
 
Other income (expense), net
Amortization of net loss
3.3

 
Other income (expense), net
 
2.2

 
Other income (expense), net
 
(0.6
)
 
Income tax expense
 
$
1.6

 
Net income

12


The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2018 are as follows:
In millions
Foreign
currency
translation
 
Derivative
contracts
 
Pension and
post
retirement
benefit plans
 
Total
Balance at December 31, 2017
$
5.1

 
$
4.0

 
$
(54.1
)
 
$
(45.0
)
Other comprehensive income (loss) before reclassifications
(159.1
)
 
(8.5
)
 
1.0

 
(166.6
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
4.3

 
1.6

 
5.9

Net current period other comprehensive income (loss)
(159.1
)
 
(4.2
)
 
2.6

 
(160.7
)
Balance at September 30, 2018
$
(154.0
)
 
$
(0.2
)
 
$
(51.5
)
 
$
(205.7
)

Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2018 are as follows:
In millions
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
$
(0.4
)
 
Other income (expense), net
Amortization of net loss
1.1

 
Other income (expense), net