WESTINGHOUSE AIR BRAKE TECHNOLOGIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

OVERVIEW

Wabtec is one of the world's largest providers of locomotives, value-added,
technology-based equipment, systems, and services for the global freight rail
and passenger transit industries. 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 efficiency 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 over 50 countries. In 2019, net sales of aftermarket
parts and services represented about 55% of total net sales, while 60% of the
Company's net sales 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 2018 bi-annual edition of a market study by UNIFE, the
Association of the European Rail Industry, the accessible global market for
railway products and services was more than $100 billion and was expected to
grow at a compounded annual growth rate of 2.6% through 2023. The three largest
geographic markets, which represented about 80% of the total accessible market,
were Europe, North America and Asia Pacific. UNIFE projected above-average
growth rates in North America, Latin America and Africa/Middle East, with Asia
Pacific and Europe growing at about the industry average. UNIFE said trends such
as urbanization and increasing mobility, deregulation, investments in new
technologies, energy and environmental issues, and increasing government support
continue to drive investment. The largest product segments of the market were
rolling stock, services and infrastructure, which represent almost 90% of the
accessible market. UNIFE projected spending on turnkey management projects and
infrastructure to grow at above-average rates. UNIFE estimated that the global
installed base of diesel and electric locomotives was about 114,800 units, with
about 33% in Asia Pacific, about 26% in North America and about 18% in
Russia-CIS (Commonwealth of Independent States). Wabtec estimates that about
2,900 new locomotives were delivered worldwide in 2019. UNIFE estimated the
global installed base of freight cars was about 5.1 million, with about 33% in
North America, about 26% in Asia Pacific and about 24% in Russia-CIS. Wabtec
estimates that about 174,000 new freight cars were delivered worldwide in
2019. UNIFE estimated the global installed base of passenger transit vehicles to
be about 600,000 units, with about 45% in Asia Pacific, about 33% in Europe and
about 12% in Russia-CIS. Wabtec estimates that about 35,000 new passenger
transit vehicles were ordered worldwide in 2019.
In Europe, the majority of the rail system serves the passenger transit market,
which is expected to continue growing as energy and environmental policies
encourage continued investment in public mass transit and modal shift from car
to rail. According to UNIFE, France, Germany and the United Kingdom were the
largest Western European transit markets, representing almost two-thirds of
industry spending in the European Union. UNIFE projected the accessible Western
European rail market to grow at about 2.3% annually, led by investments in new
rolling stock in France and Germany. 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.
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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 50% 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. India is making 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 GE Transportation.
Other key geographic markets include Russia-CIS and Africa-Middle East. With
about 1.2 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 were expected to grow at
above-average rates as global trade led to increased freight volumes and
urbanization led 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 expected 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. 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 2020 and beyond, general global economic and market conditions 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.

MERGER OF WABTEC WITH GE TRANSPORTATION
Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec company
formerly known as Transportation System Holdings Inc. ("SpinCo"), which was a
newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc.
("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company,
entered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo,
Wabtec and Wabtec US Rail, Inc. ("Direct Sale Purchaser") entered into the
Original Separation Agreement on May 20, 2018, which together provided for the
combination of Wabtec and GE Transportation. The Original Merger Agreement and
Original Separation Agreement were subsequently amended on January 25, 2019 and
the Merger was completed on February 25, 2019.
As part of the Merger, certain assets of GE Transportation, including the equity
interests of certain pre-Transaction subsidiaries of GE that compose part of GE
Transportation, were sold to Direct Sale Purchaser for a cash payment of $2.875
billion, and Direct Sale Purchaser assumed certain liabilities of GE
Transportation in connection with this purchase (the "Direct Sale"). Thereafter,
GE transferred the SpinCo business to SpinCo and its subsidiaries (to the extent
not already held by SpinCo and its subsidiaries), and SpinCo issued to GE shares
of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class
C preferred stock and additional shares of SpinCo common stock. Following this
issuance of additional SpinCo common stock to GE, and immediately prior to the
Distribution (as defined below), GE owned 8,700,000,000 shares of SpinCo common
stock, 15,000 shares of SpinCo Class A preferred stock, 10,000 shares of SpinCo
Class B preferred stock and one share of SpinCo Class C preferred stock, which
constituted all of the outstanding stock of SpinCo.
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Following the Direct Sale, GE distributed the distribution shares of SpinCo in a
spin-off transaction to its stockholder (the "Distribution"). Immediately after
the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), whereby
the separate corporate existence of Merger Sub ceased and SpinCo continued as
the surviving company and a wholly owned subsidiary of Wabtec (except with
respect to shares of SpinCo Class A preferred stock held by GE). In the Merger,
subject to adjustment in accordance with the Merger Agreement, each share of
SpinCo common stock converted into the right to receive a number of shares of
Wabtec common stock based on the common stock exchange ratio set forth in the
Merger Agreement and the share of SpinCo Class C preferred stock was converted
into the right to receive (a) 10,000 shares of Wabtec convertible preferred
stock and (b) a number of shares of Wabtec common stock equal to 9.9% of the
fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec
paid $10.0 million in cash to GE in exchange for all of the shares of SpinCo
Class B preferred stock.
Upon consummation of the Merger, Wabtec issued 46,763,975 shares of common stock
to the holders of GE common stock, 19,018,207 shares of common stock to GE and
10,000 shares of preferred stock to GE and made a cash payment to GE of $2.885
billion. As a result and calculated based on Wabtec's outstanding common stock
on a fully-diluted, as-converted and as-exercised basis, as of February 25,
2019, approximately 49.2% of the outstanding shares of Wabtec common stock was
held collectively by GE and holders of GE common stock (with 9.9% held by GE
directly in shares of Wabtec common stock and 15% underlying the shares of
Wabtec convertible preferred stock held by GE) and approximately 50.8% of the
outstanding shares of Wabtec common stock held by pre-Merger Wabtec
stockholders, in each case calculated on a fully-diluted, as-converted and
as-exercised basis. Following the Merger, GE also retained 15,000 shares of
SpinCo Class A non-voting preferred stock, and Wabtec held 10,000 shares of
SpinCo Class B non-voting preferred stock.
After the Merger, SpinCo, which is Wabtec's wholly owned subsidiary (except with
respect to shares of SpinCo Class A preferred stock held by GE), and Direct Sale
Purchaser, which also is Wabtec's wholly owned subsidiary, together own and
operate the post-transaction GE Transportation. All shares of the Company's
common stock, including those issued in the Merger, are listed on the NYSE under
the Company's current trading symbol "WAB." On the date of the Distribution, GE
and SpinCo, directly or through subsidiaries entered into additional agreements
relating to, among other things, intellectual property, employee matters, tax
matters, research and development and transition services.
On May 6, 2019, GE completed the sale of approximately 8,780 shares of Wabtec's
Series A Preferred stock which converted upon the sale to 25,300,000 shares of
Wabtec's common stock. On August 9, 2019, GE completed a sale of the remaining
shares of Series A Preferred Stock outstanding which converted to approximately
3,515,500 shares of common stock, as well as 16,969,656 shares of common stock
owned directly by GE. Finally, on September 12, 2019, GE completed a sale of all
of its remaining shares of common stock of Wabtec, approximately 2,048,515
shares. In conjunction with these secondary offerings, the Company waived the
requirements under the shareholders agreement for GE to maintain certain
ownership levels of Wabtec's stock following the closing date of the Merger. The
Company did not receive any proceeds from the sale of any of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment
of $470.0 million, which is directly related to the timing of tax benefits
expected to be realized by Wabtec as a result of the acquisition of GE
Transportation. This payment is considered contingent consideration because the
timing of cash payments to GE is directly related to the future timing of tax
benefits received by the Company as a result of the acquisition of GE
Transportation. The estimated total value of the consideration to be paid by
Wabtec in the acquisition transaction is approximately $10.3 billion, including
the cash paid for the Direct Sales Assets, equity transferred for SpinCo,
contingent consideration, assumed debt and net of cash acquired. The estimated
consideration is based on the Company's closing share price of $73.36 on
February 22, 2019 and the preliminary fair value of the contingent
consideration. The value of the preliminary purchase price consideration could
change when the Company has completed the detailed valuation of the contingent
consideration and other necessary calculations.

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RESULTS OF OPERATIONS
Consolidated Results
                             2019 COMPARED TO 2018

The following table shows our Consolidated Statements of Operations for the years indicated.

                                                                               For the year ended December 31,
In millions                                                     2019                     2018               Percent Change
Net sales
Sales of goods                                                  $      6,907.9           $ 4,178.0                    65.3  %
Sales of services                                                      1,292.1               185.5                   596.5  %
Total net sales                                                        8,200.0             4,363.5                    87.9  %
Cost of sales
Cost of goods                                                         (5,128.4)           (2,973.5)                   72.5  %
Cost of services                                                        (793.6)             (156.1)                  408.4  %
Total cost of sales                                                   (5,922.0)           (3,129.6)                   89.2  %
Gross profit                                                           2,278.0             1,233.9                    84.6  %
Selling, general and administrative expenses                          (1,166.6)             (633.2)                   84.2  %
Engineering expenses                                                    (209.9)              (87.5)                  139.9  %
Amortization expense                                                    (238.4)              (39.8)                  499.0  %
Total operating expenses                                              (1,614.9)             (760.5)                  112.3  %
Income from operations                                                   663.1               473.4                    40.1  %
Other income and expenses
Interest expense, net                                                   (219.1)             (112.2)                   95.3  %
Other income, net                                                          2.8                 6.4                   (56.3) %
Income from operations before income taxes                               446.8               367.6                    21.5  %
Income tax expense                                                      (120.3)              (75.9)                   58.5  %
Net income                                                               326.5               291.7                    11.9  %
Less: Net loss attributable to noncontrolling interest                     0.2                 3.2                   (93.8) %
Net income attributable to Wabtec shareholders                  $        326.7           $   294.9                    10.8  %


Segment change
The Company has two reportable segments-the Freight Segment and the Transit
Segment. Initiatives to integrate GE Transportation operations into Wabtec
including recent restructuring programs announced in late 2019 resulted in
changes to the Company's organizational structure and the financial reporting
utilized by the Company's chief operating decision maker to assess performance
and allocate resources; as a result, certain asset groups were reorganized from
the Freight Segment to the Transit Segment and vice versa. The change in the
Company's reportable segments was effective in the fourth quarter of 2019 and is
reflected below in 2019 and through the retrospective revision of 2018 and 2017
segment information. The Company believes these changes better present
management's new view of the business.
The following table shows the major components of the change in net sales in
2019 from 2018:
                        Freight         Transit
In millions             Segment         Segment          Total
2018 Net Sales        $ 1,766.4       $ 2,597.1       $ 4,363.5
Acquisitions            3,840.7            22.8         3,863.5
Foreign Exchange          (17.7)         (136.7)         (154.4)
Organic                  (148.0)          275.4           127.4
2019 Net Sales        $ 5,441.4       $ 2,758.6       $ 8,200.0


Net sales
Net sales increased by $3.8 billion, or 87.9%, to $8.2 billion in 2019 from
$4.4 billion in 2018. The increase is primarily due to net sales from
acquisitions of $3.9 billion, mainly the acquisition of GE Transportation. GE
Transportation contributed $3.8 billion of net sales in the year, primarily from
locomotive equipment products and services. Additionally, Transit Segment net
sales increased $162 million due to increased original equipment project
deliveries for HVAC, door, and brake and coupler systems and higher aftermarket
deliveries for brake and coupler spare parts and door systems. These increases
were partially offset by an organic decrease of $148 million in the Freight
Segment, primarily in Components due to a lower carbuild in 2019 and in
Electronics due to lower PTC hardware demand. Unfavorable changes in foreign
currency exchange rates reduced net sales by $154 million.
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Cost of sales
Cost of sales increased by $2.8 billion to $5.9 billion in 2019 compared to
$3.1 billion in 2018. The increase is primarily due to $2.8 billion of
incremental costs from acquisitions, mainly GE Transportation. In 2019 cost of
sales as a percentage of net sales was 72.2% compared to 71.7% in 2018. Cost of
sales in 2019 includes $185 million of non-recurring costs related to purchase
price accounting for the step-up of inventory of GE Transportation on the date
of acquisition, and $38 million of restructuring charges related to certain
plant consolidations. Cost of sales in 2018 included $18 million of
restructuring costs, primarily in the Transit Segment. Excluding these
non-recurring costs, cost of sales as a percentage of net sales was 69.5% in
2019 and 71.3% in 2018, representing a 1.8% improvement. The margin improvement
can be attributed to the overall product mix, shifting away from lower margin
Transit sales to higher margin Freight sales.
Operating expenses
Total operating expenses increased 112.3% to 19.7% of net sales in 2019 compared
to 17.4% in 2018. Selling, general, and administrative expenses increased
$533 million, or 84.2%, primarily due to $369 million of incremental expense
from acquisitions, mainly GE Transportation, and $230 million of incremental GE
Transportation transaction and restructuring costs, as well as certain
litigation costs. In the prior year, selling, general, and administrative
expenses included $58 million of costs related to the GE Transportation
transaction, restructuring costs related to the exit of certain operations and
headcount reductions across the company and costs related to a goods and service
tax law change in India. Engineering expense increased $122 million and
amortization expense increased $199 million due to incremental expense from the
acquisition of GE Transportation.
Interest expense, net
Interest expense, net, increased $107 million in 2019 attributable to higher
overall debt balances related to the acquisition of GE Transportation.
Income taxes
The effective income tax rate was 26.9% and 20.6% in 2019 and 2018,
respectively. The increase in the effective tax rate in 2019 is primarily the
result of non-deductible transaction related expenses incurred as a result of
the acquisition of GE Transportation, a higher earnings mix in higher tax
jurisdictions, increased estimated liabilities resulting from the provision of
the 2017 Tax Cuts and Jobs Act (the "Tax Act") as well as a benefit from the
completion of the accounting for the income tax effects of the Tax Act recorded
in 2018.
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Freight Segment
The following table shows our Consolidated Statements of Operations for our
Freight Segment:
                                                                  For the year ended December 31,
In millions                                             2019                     2018                Percent Change
Net sales:
Sales of goods                                   $       4,186.5           $      1,616.3                    159.0  %
Sales of services                                        1,254.9                    150.1                    736.0  %
Total net sales                                          5,441.4                  1,766.4                    208.1  %
Cost of sales:
Cost of goods                                           (3,096.5)                (1,072.9)                   188.6  %
Cost of services                                          (763.5)                  (126.9)                   501.7  %
Total cost of sales                                     (3,860.0)                (1,199.8)                   221.7  %

Gross profit                                             1,581.4                    566.6                    179.1  %

Operating Expenses                                        (938.5)                  (232.3)                   304.0  %

Income from operations ($)                                 642.9                    334.3                     92.3  %
Income from operations (%)                                  11.8   %                 18.9  %


The following table shows the major components of the change in net sales for
the Freight Segment in 2019 from 2018:
In millions
2018 Net Sales                          $ 1,766.4
Acquisitions                              3,840.7
Changes in Sales by Product Line:
Components                                  (87.2)
Electronics/Digital                         (70.1)
Services                                      9.3
Foreign Exchange                            (17.7)
2019 Net Sales                          $ 5,441.4


Net sales
Freight Segment net sales increased by $3.7 billion, or 208.1%, to $5.4 billion,
due to the acquisition of GE Transportation which contributed $3.8 billion of
net sales in the year, primarily from locomotive equipment products and
services. This increase was partially offset by lower net sales in Components
due to a lower freight carbuild in 2019 and certain restructuring and plant
consolidation efforts, and in Digital Electronics due to lower PTC hardware
demand. Unfavorable foreign currency exchange rate changes decreased net sales
by $18 million.
Cost of sales
Freight Segment cost of sales increased by $2.7 billion to $3.9 billion in 2019.
The increase is primarily due to $2.8 billion of incremental cost of sales and
services from the acquisition of GE Transportation. In 2019, total cost of sales
as a percentage of total net sales was 70.9% compared to 67.9% in 2018. Total
cost of sales in 2019 includes $185 million of non-recurring costs related to
purchase price accounting for the step-up of the inventory of GE Transportation
on the date of acquisition and $34 million of restructuring costs related to
integrating our combined business. Excluding these non-recurring costs, total
cost of sales as a percentage of net sales was 66.9%, 1.0% lower than 2018. This
decrease can be attributed to a higher mix of freight services sales offset by a
decrease in the higher margin sales from Digital Electronics.
Operating expenses
Freight Segment operating expenses increased $706 million, or 304.0%, in 2019
and increased to 17.2% of net sales. Selling, general, and administrative
expenses increased $397 million due to $368 million in incremental expense from
the acquisition of GE Transportation and $33 million for transaction and
restructuring costs related to the GE Transportation transaction. Engineering
expense increased $116 million and amortization expense increased $200 million,
both due to the acquisition of GE Transportation.
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Transit Segment
The following table shows our Consolidated Statements of Operations for our
Transit Segment:
                                                               For the year ended December 31,
In millions                                          2019                     2018                Percent Change
Net sales                                     $       2,758.6           $      2,597.1                      6.2  %
Cost of sales                                        (2,062.0)                (1,929.8)                     6.9  %
Gross profit                                            696.6                    667.3                      4.4  %

Operating Expenses                                     (482.2)                  (474.8)                     1.6  %

Income from operations ($)                              214.4                    192.5                     11.4  %
Income from operations (%)                                7.8   %                  7.4  %


The following table shows the major components of the change in net sales for
the Transit Segment in 2019 from 2018:
In millions
2018 Net Sales                          $ 2,597.1
Acquisitions                                 22.8
Changes in Sales by Product Line:
OEM                                         141.3
Aftermarket                                 134.1
Foreign Exchange                           (136.7)
2019 Net Sales                          $ 2,758.6


Net sales
Transit Segment net sales increased by $162 million, or 6.2%, primarily due to
increased original equipment project deliveries for HVAC, door, and brake and
coupler systems and higher aftermarket deliveries for brake and coupler spare
parts and door systems. Unfavorable foreign currency exchange rate changes
decreased net sales by $137 million.
Cost of sales
Transit Segment cost of sales increased by $132 million to $2.1 billion in 2019.
In 2019, cost of sales as a percentage of net sales was 74.7% compared to 74.3%
in 2018. Total cost of sales includes $5 million of restructuring charges
primarily related to severance and plant consolidations while total cost of
sales in 2018 included $16 million of restructuring costs. Excluding these
costs, total cost of sales as a percentage of net sales was 74.6% in 2019 and
73.7% in 2018. This increase can be attributed to an unfavorable product mix
consisting of lower margin overhaul contracts and less original equipment and
aftermarket brake and coupler systems.
Operating expenses
Transit Segment operating expenses increased $7 million to $482 million, or 1.6%
in 2019 and decreased 80 basis points to 17.5% of net sales. Operating expenses
includes $13 million for restructuring costs in the current year, compared to
$26 million in the prior year. The decrease as a percentage of net sales can be
attributed to the effect of prior year restructuring plans and headcount
reductions in the current year.
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                             2018 COMPARED TO 2017

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

                                                                          For the year ended December 31,
In millions                                                2018                     2017               Percent Change
Net sales
Sales of goods                                             $      4,178.0           $ 3,685.6                    13.4  %
Sales of services                                                   185.5               196.1                    (5.4) %
Total net sales                                                   4,363.5             3,881.7                    12.4  %
Cost of sales
Cost of goods                                                    (2,973.5)           (2,667.8)                   11.5  %
Cost of services                                                   (156.1)             (148.6)                    5.0  %
Total cost of sales                                              (3,129.6)           (2,816.4)                   11.1  %
Gross profit                                                      1,233.9             1,065.3                    15.8  %
Selling, general and administrative expenses                       (633.2)             (512.5)                   23.6  %
Engineering expenses                                                (87.5)              (95.2)                   (8.1) %
Amortization expense                                                (39.8)              (36.5)                    9.0  %
Total operating expenses                                           (760.5)             (644.2)                   18.1  %
Income from operations                                              473.4               421.1                    12.4  %
Other income and expenses
Interest expense, net                                              (112.2)              (77.9)                   44.0  %
Other income, net                                                     6.4                 8.9                   (28.1) %
Income from operations before income taxes                          367.6               352.1                     4.4  %
Income tax expense                                                  (75.9)              (89.8)                  (15.5) %
Net income                                                          291.7               262.3                    11.2  %
Less: Net loss attributable to noncontrolling
interest                                                              3.2                   -                   100.0  %
Net income attributable to Wabtec shareholders             $        294.9           $   262.3                    12.4  %


The following table shows the major components of the change in net sales in
2018 from 2017:
In millions             Freight         Transit          Total
2017 Net Sales        $ 1,538.6       $ 2,343.1       $ 3,881.7
Acquisitions               50.9            83.8           134.7
Foreign Exchange           (1.5)           63.7            62.2
Organic                   178.4           106.5           284.9
2018 Net Sales        $ 1,766.4       $ 2,597.1       $ 4,363.5


Net sales
Net sales increased by $482 million to $4.4 billion in 2018 from $3.9 billion in
2017. The increase is primarily due to an organic increase of $113 million from
higher demand for freight rail components, an increase of $76 million for train
control and signaling products, and an increase of $124 million due to transit
original equipment and aftermarket brake and coupler products, partially offset
by lower door and HVAC sales. Additionally, sales from acquisitions increased
net sales by $135 million, and favorable foreign exchange increased net sales
$62 million.
Cost of sales
Cost of sales increased by $313.2 million to $3.1 billion in 2018 compared to
$2.8 billion in 2017. In 2018, cost of sales as a percentage of net sales was
71.7% compared to 72.5% in 2017. Cost of sales in 2018 includes $18 million of
restructuring costs, primarily in the Transit Segment. Cost of sales in 2017
includes $45 million of project adjustments on certain projects and $12 million
of restructuring and integration costs related to recent acquisitions, all of
which were primarily in the Transit Segment. Excluding the restructuring costs
and contract adjustments in both years, cost of sales increased 0.2% as a
percentage of net sales.
                                       32
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Operating Expenses
Total operating expenses as a percentage of net sales increased 0.8% to 17.4% in
2018 compared to 16.6% in 2017. Selling, general, and administrative expenses
increased $121 million, or 23.5%, primarily due to $21 million of costs related
to the GE Transportation transaction, $20 million of restructuring costs related
to the exit of certain operations and headcount reductions across the company,
$7 million of costs related to a goods and service tax law change in India, $15
million of increased employee benefit costs and $18 million in incremental
expense from acquisitions. Changes in foreign currency rates increased selling,
general, and administrative expenses by $14 million and organic sales volume
increases contributed to the remainder of the change. In 2017, selling, general,
and administrative expenses included $30 million of Faiveley Transport
transaction and restructuring costs. Engineering expense decreased by $8
million, or 8.1%, primarily due to timing of research and development expenses.
Amortization expense increased $3 million due to amortization of intangibles
associated with acquisitions.
Interest expense, net
Overall interest expense, net, increased $34 million in 2018 because of interest
expense associated with the GE Transportation transaction of $29 million. In
addition, net interest expense in the prior year included a $2 million benefit
related to the prepayment of debt assumed in the Faiveley Transport acquisition.
Income taxes
The effective income tax rate was 20.6% and 25.5% in 2018 and 2017,
respectively. On December 22, 2017, the U.S. government enacted comprehensive
tax legislation commonly referred to as the Tax Act. The U.S. tax reform bill
lowered the Federal statutory tax rate from 35% to 21% beginning January 1,
2018. The decrease in the effective tax for the twelve months ended December 31,
2018 is the result of higher earnings mix in lower tax jurisdictions as well as
a benefit from the completion of the accounting for the income tax effects of
the Tax Act and the adjustment to the provisional amounts previously recorded in
accordance with SEC Staff Accounting Bulletin No. 118 which was partially offset
by the reversal of non-recurring tax benefits recorded in the twelve months
ended December 31, 2018.
                                       33
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Freight Segment The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated.

                                                                  For the year ended December 31,
In millions                                             2018                     2017                Percent Change
Net sales:
Sales of goods                                   $       1,616.3           $      1,378.2                     17.3  %
Sales of services                                          150.1                    160.4                     (6.4) %
Total net sales                                          1,766.4                  1,538.6                     14.8  %
Cost of sales:
Cost of goods                                           (1,072.9)                  (952.2)                    12.7  %
Cost of services                                          (126.9)                  (119.1)                     6.5  %
Total cost of sales                                     (1,199.8)                (1,071.3)                    12.0  %

Gross profit                                               566.6                    467.3                     21.2  %

Operating Expenses                                        (232.3)                  (195.6)                    18.8  %

Income from operations ($)                                 334.3                    271.7                     23.0  %
Income from operations (%)                                  18.9   %                 17.7  %


The following table shows the major components of the change in net sales for
the Freight Segment in 2018 from 2017:
In millions
2017 Net Sales                               $ 1,538.6
Acquisitions                                      50.9
Changes in Net Sales by Product Line:
Components                                       112.7
Digital Electronics                               75.7
Services                                         (10.0)
Foreign Exchange                                  (1.5)
2018 Net Sales                               $ 1,766.4


Net sales
Freight Segment net sales increased by $228 million, or 14.8%, primarily due to
an organic increase of $113 million from higher demand for freight rail
components and an increase of $76 million for train control and signaling
products. Acquisitions increased net sales by $51 million.
Cost of sales
Freight Segment cost of sales decreased 1.7% as a percentage of net sales to
67.9% in 2018 compared to 69.6% in 2017. The decrease is primarily related to a
favorable product mix which saw an increase in net sales for train control and
signaling products and services and freight car products due to an increase in
freight cars built which have a higher margin. Additionally, there were $11
million of project adjustments and restructuring costs in 2017, which did not
recur in 2018.
Operating expenses
Freight Segment operating expenses increased $37 million, or 18.8%, in 2018. The
increase is primarily attributable to increased sales and marketing expenses
attributable to the increased sales volumes and, increased employee benefit
costs, and $11 million of incremental operating expenses from prior year
acquisitions.

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Transit Segment
The following table shows our Consolidated Statements of Operations for our
Transit Segment:
                                                               For the year ended December 31,
In millions                                          2018                     2017                Percent Change
Net sales                                     $       2,597.1           $      2,343.1                     10.8  %
Cost of sales                                        (1,929.8)                (1,745.1)                    10.6  %
Gross profit                                            667.3                    598.0                     11.6  %

Operating Expenses                                     (474.8)                  (420.8)                    12.8  %

Income from operations ($)                              192.5                    177.2                      8.6  %
Income from operations (%)                                7.4   %                  7.6  %


The following table shows the major components of the change in net sales for
the Transit Segment in 2018 from 2017:
In millions
2017 Net Sales                               $ 2,343.1
Acquisitions                                      83.8
Changes in Net Sales by Product Line:
OEM                                               61.4
Aftermarket                                       45.1
Foreign Exchange                                  63.7
2018 Net Sales                               $ 2,597.1


Net sales
Transit Segment net sales increased by $254 million, or 10.8%, primarily due to
$84 million from sales related to acquisitions, a $61 million increase primarily
for original equipment brake products, and favorable foreign exchange of $64
million.
Cost of sales
Transit Segment cost of sales decreased 0.2% as a percentage of net sales to
74.3% in 2018 compared to 74.5% in 2017. Cost of sales in 2018 includes $16
million of restructuring costs primarily related to the downsizing of operations
in the U.K. and consolidation of certain operations in the U.S. and China. Cost
of sales in 2017 includes $38 million of project adjustments on certain
contracts primarily related to material and warranty cost and $7 million of
restructuring and integration costs related to recent acquisitions. Excluding
the restructuring costs and contract adjustments in both years, Transit Segment
cost of sales increased 1.1% as a percentage of net sales. This increase is a
result of additional costs on projects primarily in the U.K.
Operating expenses
Transit Segment operating expenses increased $54 million, or 12.8%, in 2018 and
increased 30 basis points to 18.3% of net sales. Operating expense included $18
million and $20 million of restructuring and integration charges in 2018 and
2017, respectively. The 2018 restructuring charges related to the exit of
certain operations and headcount reductions and the 2017 restructuring charges
related to Faiveley Transportation integration costs. Additionally, in 2018,
operating expenses includes $7 million of costs related to a goods and service
tax law change in India. Excluding restructuring and integration costs in both
years and the impact of the goods and service tax law change in 2018, Transit
operating expenses increased $49 million. This increase is primarily due to
increased sales volumes, increased employee benefit costs of $10 million, and
$11 million of incremental operating expenses from acquisitions. In addition,
changes in foreign currency rates increased operating expenses by $16 million.
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Liquidity and Capital Resources
Liquidity is provided 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:
                                                 For the year ended
                                                    December 31,
In millions                             2019            2018            

2017

Cash provided by (used for):
Operating activities                $ 1,015.5       $   314.7       $    188.8
Investing activities                 (3,177.8)         (147.3)        (1,033.5)
Financing activities:
Proceeds from debt                    3,982.4         3,480.7          1,216.7
Payments of debt                     (3,423.6)       (1,454.0)        (1,269.5)
Cash dividends                          (81.7)          (46.3)           (42.2)


 Operating activities. Cash provided by operations in 2019 was $1,016 million
compared with $315 million in 2018. In comparison to 2018, cash provided by
operations increased due to favorable working capital performance and higher net
income of $35 million. The major components of the increase in cash provided by
operations were as follows: a favorable change in inventories of $365 million
which is attributable to improved controls over inventory management directed at
reducing inventory levels and the liquidation of acquired inventory related to
the acquisition of GE Transportation, improved performance on the collection of
accounts receivable of $48 million, a favorable change in non-cash items of $228
million related primarily to increased depreciation and amortization as a result
of the acquisition of GE Transportation, and a favorable change in other assets
and liabilities of $259 million primarily due to the timing of payments related
to accrued expenses. These favorable changes in working capital were offset by
an unfavorable change in accounts payable of $193 million due to the timing of
payments to suppliers.
Cash provided by operations in 2018 was $315 million compared with $189 million
in 2017. In comparison to 2017, cash provided by operations increased due to
favorable working capital performance and higher net income of $29 million. The
major components of the increase in cash provided by operations were as follows:
a favorable change in accounts payable of $141 million due to the timing of
payments to suppliers, a favorable change in taxes of $22 million due to the
revaluation of deferred taxes caused by the Tax Act and the timing of income tax
payments, and a favorable change in accrued liabilities and customer deposits of
$51 million due to an increase in customer advances during 2018. These favorable
changes in working capital were offset by an unfavorable change in inventory of
$100 million due to efforts to ramp up production in anticipation of stronger
product demand in 2019.
Investing activities. In 2019, 2018 and 2017, cash used in investing activities
was $3,178 million, $147 million and $1,034 million, respectively. The major
components of the cash outflow in 2019 was $2,996 million in net cash paid for
primarily the GE Transportation acquisition and planned additions to property,
plant, and equipment of $185 million for continued investments in our facilities
and manufacturing processes. This compares to $93 million for property, plant,
and equipment additions and $51 million in net cash paid for acquisitions in
2018. In 2017, $90 million of cash was used to purchase property, plant, and
equipment and net cash paid for acquisitions was $945 million, primarily related
to the acquisition of Faiveley Transport.
Financing activities. In 2019, cash provided by financing activities was $462
million, which included net proceeds from debt of $559 million and $82 million
of dividend payments. In 2018, cash provided by financing activities was $1,978
million, which included net proceeds from debt of $2,027 million and dividend
payments of $46 million. In 2017, cash used for financing activities was $97
million, which included net repayments of debt of $53 million and dividend
payments of $42 million.
                                       36
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The following table shows outstanding indebtedness at December 31, 2019 and
2018:
                                                                                        December 31,
In millions                                                                           2019                      2018
Senior Credit Facility:

U.S. dollar-denominated Term Loans, net of unamortized debt issuance costs of $1.1 and $1.2

$ 684.7 $ 338.1 Multi-Currency Revolving loan facility net of unamortized debt issuance costs of $0.9 and $1.9

                                                             231.5                  -

Floating Senior Notes, due 2021, net of unamortized debt issuance costs of $2.0 and $3.2

                                                    498.0              496.8
4.375% Senior Notes, due 2023, net of unamortized
discount and debt issuance costs of $0.9 and $1.2                                  249.1              248.8

4.15% Senior Notes, due 2024, net of unamortized debt issuance costs of $5.7 and $7.0

                                                    744.3              743.0

4.70% Senior Notes, due 2028, net of unamortized debt issuance costs of $9.2 and $10.3

                                                 1,240.8            1,239.7

3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $1.5 and $1.7

       748.5              748.3
Other Borrowings                                                                    32.4               42.2
Total                                                                            4,429.3            3,856.9
Less - current portion                                                              95.7               64.1
Long-term portion                                                              $ 4,333.6          $ 3,792.8


Senior Notes
On September 14, 2018 in order to fund the GE Acquisition and related fees and
expenses, we issued a total of $2.5 billion in aggregate principal amount of
unsecured senior notes (in two separate series of fixed rate unsecured senior
notes "Senior Notes" and one series of floating rate unsecured senior notes
"Floating Senior Notes"). We collectively refer to the Floating Senior Notes and
the Senior Notes as the "Notes." Upon issuance, the Notes were reflected on our
Consolidated Balance Sheets net of discount of $2.9 million and net of the
capitalized debt issuance costs, including commissions and offering expenses of
$18.0 million, both of which will be amortized in interest expense through the
respective maturity dates of each series of unsecured senior notes using the
effective interest method.
The Floating Senior Notes bear interest at a floating rate equal to the
three-month LIBOR rate plus 1.05% per year; the Senior Notes due 2024 bear
interest at 4.15% per year; and the Senior Notes due 2028 bear interest at 4.70%
per year. The interest rate payable on the Notes will be subject to adjustment
based on certain rating events. Interest on the Senior Notes is payable
semi-annually in arrears on March 15th and September 15th of each year,
commencing on March 15, 2019. Interest on the Floating Senior Notes is payable
quarterly in arrears on December 15, March 15, June 15, and September 15 of each
year, commencing on December 15, 2018.
The U.K Financial Conduct Authority (the "FCA"), which regulates LIBOR, has
announced that the FCA will no longer persuade nor compel banks to submit rates
for the calculation of LIBOR after 2021, and the continuation of LIBOR cannot be
guaranteed after 2021. The indenture for the Floating Senior Notes provides that
upon a permanent discontinuation of LIBOR while the Floating Senior Notes remain
outstanding, an alternative reference rate will be used subject to adjustments
consistent with industry-accepted practice for such alternative reference rate.
The issuance was comprised of the following three series of notes:
Senior Notes (in                                   Discount            Net Price            Issuance
millions)                      Par Value          at Issuance         at Issuance             Cost             Net Proceeds
Floating Senior Notes
due 2021                      $   500.0          $        -          $     500.0          $      3.5          $      496.5
4.15% Senior Notes due
2024                              750.0                 1.5                748.5                 7.4                 741.1
4.70 Senior Notes due
2028                            1,250.0                 1.4              1,248.6                10.6               1,238.0
Total                         $ 2,500.0          $      2.9          $   2,497.1          $     21.5          $    2,475.6



Consistent with the Company's existing senior notes, the newly issued 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 indentures under which the Notes
were issued contain covenants and restrictions which limit among other things,
the following: the incurrence of indebtedness, payment of dividends and certain
distributions, sales of assets, change in control, mergers and consolidations
and the incurrence of liens. But the covenants do not require the Company to
maintain any financial ratios or specified levels of net worth or liquidity. The
Company may redeem each series of the Notes
                                       37
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at any time in whole or from time to time in part in accordance with the
provisions of the indentured, under which such series of Notes was issued.
Upon the occurrence of a change of control repurchase event with respect to the
Notes, each holder of the Notes has the right to require the Company to purchase
that holder's Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, unless the Company has exercised its option to
redeem all the Notes.
On February 12, 2019, the rating assigned by Moody's was decreased to Ba1.
Accordingly, pursuant to the respective terms of the Senior Notes issued on
September 14, 2018, the interest rate increased by 0.25%. The interest rate
increase took effect from the next interest period following February 12, 2019.
The Company is in compliance with the restrictions and covenants in the
indenture under which the Notes were issued and expects that these restrictions
and covenants will not be any type of limiting factor in executing our operating
activities.
Term Loan Agreement
On June 8, 2018, the Company arranged (i) a $350.0 million term loan with
proceeds used to refinance existing loans (the "Refinancing Term Loan"), and
(ii) a new $400.0 million delayed draw term loan in order to fund the GE
Acquisition and related fees and expenses (the "Delayed Draw Term Loan"). The
Company collectively refers to the Refinance Term Loans and the Delayed Draw
Term Loans as the "Term Loans."
Consistent with our other debt securities, the Term Loan Agreement includes
covenants that, among other things, limit our liens and the liens of certain of
our consolidated subsidiaries. In addition, it requires us to maintain the same
financial maintenance covenants as discussed below.
Loans under the Term Loan bear interest at a variable rate based on, at the
Company's option, either the ABR rate or the LIBOR rate (each as defined in the
Term Loan Agreement) plus an applicable margin that is determined based on our
credit ratings or the Company's ratio of total debt (less unrestricted cash up
to $300.0 million) to EBITDA ("Leverage Ratio"). As of December 31, 2019, the
applicable margin was 0.375% for base rate loans and 1.375% for Eurodollar rate
loans.
Senior Credit Facility
On June 8, 2018, the Company entered into a credit agreement (the "Senior Credit
Facility"), which replaced the Company's then-existing "2016 Refinancing Credit
Agreement." The Senior Credit Facility is with a syndicate of lenders and
provides for borrowings consisting of (i) term loans denominated in euros and
U.S. dollars; and (ii) a multi-currency revolving loan facility, providing for
an equivalent in U.S. dollars of up to $1,200.0 million in multi-currency
revolving loans (inclusive of swingline loans of up to $75.0 million and letters
of credit of up to $450.0 million).
The multi-currency revolving loan facility will mature on June 8, 2023, and the
Term Loans will mature on June 8, 2021. Subject to any mandatory or optional
prepayments, the Term Loans are required to be repaid on a quarterly basis in an
amount equal to 2.5% of the principal amount drawn, with the final payment due
at maturity.
The following table presents availability under our credit facilities:
(in millions)                    Multi-currency revolving loan facility
Maximum Availability                                       $ 1,200.0
Outstanding Borrowings                                         232.0
LC Under Credit Agreement                                       31.0
Current Availability                                       $   938.0


Under the Senior Credit Facility, we can elect to receive advances bearing
interest based on either the ABR rate or the LIBOR rate (each as defined in the
Credit Agreement) plus an applicable margin that is determined based on our
credit ratings or the Company's Leverage Ratio. As of December 31, 2019, the
applicable margin was 0.375% for base rate advances and 1.375% for LIBOR rate
advances.
The Company also pays fees related to the Senior Credit Facility. The largest of
these fees is a commitment fee on the unused portion of the multi-currency
revolving loan facility of 0.10% to 0.30% per annum (currently 0.15% per annum),
depending on our credit ratings or Leverage Ratio. None of the fees were
material to interest expense.
The obligations under the Senior Credit Facility are guaranteed by Wabtec and
each of Wabtec's wholly owned subsidiaries (collectively, the "Subsidiary
Guarantors"). In addition, the Senior Credit Facility contains a number of
customary affirmative and negative covenants. In addition to other and customary
covenants, the Senior Credit Facility and the Term Loan each require that we
maintain the financial covenants listed below as of the end of each fiscal
quarter for the period of four fiscal quarters then ended. The Company was in
compliance with all of our covenants in the Credit Agreement and the Term Loans
as of December 31, 2019.

                                       38
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Interest Coverage Ratio 1           3.0x
Leverage Ratio 2                   3.25x



1. The interest coverage ratio is defined as EBITDA, as defined in the Credit
Agreement and Term Loan Agreement, to net interest expense for the four quarters
then ended.
2. The leverage ratio is defined as net debt as of the last day of such fiscal
quarter to EBITDA, as defined in the Amendment Credit Agreement and Term Loan
Agreement, for the four quarters then ended.
The 2018 Senior Credit Facility contains an uncommitted accordion feature
allowing the Company to request the establishment, in an aggregate amount not to
exceed $600.0 million, of incremental borrowing commitments under the Revolving
Credit Facility or of incremental term loan commitment.
The FCA, which regulates LIBOR, has announced that the FCA will no longer
persuade nor compel banks to submit rates for the calculation of LIBOR after
2021, and the continuation of LIBOR cannot be guaranteed after 2021. The Senior
Credit Agreement provides that upon a permanent discontinuation of LIBOR, an
alternate rate of interest will be established by the administrative agent and
the Company giving due consideration to then prevailing U.S. market convention.
At December 31, 2019, the weighted average interest rate on the Company's
variable rate debt was 3.08%.
Cash Pooling
Wabtec aggregates the Company's domestic cash position on a daily basis. Outside
the United States, the Company uses cash pooling arrangements with banks to help
manage our liquidity requirements. In these pooling arrangements, Wabtec
subsidiaries "Participants" agree with a single bank that the cash balances of
any of the pool Participants with the bank will be subject to a full right of
set-off against amounts other Participants owe the bank, and the bank provides
for overdrafts as long as the net balance for all Participants does not exceed
an agreed-upon level. Typically, each Participant pays interest on outstanding
overdrafts and receives interest on cash balances. The Company's Consolidated
Balance Sheets reflect cash, net of bank overdrafts, under all pooling
arrangements.

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Contractual Obligations and Off-Balance Sheet Arrangements
The Company is obligated to make future payments under various contracts such as
debt agreements, lease agreements and has certain contingent commitments such as
debt guarantees. The Company has grouped these contractual obligations and
off-balance sheet arrangements into operating activities, financing activities,
and investing activities in the same manner as they are classified in the
Statement of Consolidated Cash Flows to provide a better understanding of the
nature of the obligations and arrangements and to provide a basis for comparison
to historical information. The table below provides a summary of contractual
obligations and off-balance sheet arrangements as of December 31, 2019:
                                                              Less than           1 - 3              3 - 5            More than
In millions                                  Total             1 year             years              years             5 years
Operating activities:
Purchase obligations (1)                  $   387.3          $   68.4

$ 93.8 $ 217.4 $ 7.7 Operating leases (2)

                          303.2              53.9               83.4               62.7              103.2
Pension benefit payments (3)                  206.5              19.2               39.6               41.4              106.3
Postretirement benefit payments (4)             9.4               1.1                2.1                2.0                4.2
Financing activities:
Interest payments (5)                         945.2             171.9              290.8              222.1              260.4
Long-term debt (6)                          4,429.3              95.7            1,109.8            1,234.5            1,989.3
Dividends to shareholders (7)                  92.0              92.0                  -                  -                  -

Other:

Standby letters of credit (8)                 714.0             183.5              112.5              152.9              265.1
Total                                     $ 7,086.9          $  685.7          $ 1,732.0          $ 1,933.0          $ 2,736.2



(1)Purchase obligations represent non-cancelable contractual obligations at
December 31, 2019. In addition, the Company had $1.5 billion of open purchase
orders for which the related goods or services had not been received. Although
open purchase orders are considered enforceable and legally binding, their terms
generally allow us the option to cancel, reschedule and adjust our requirements
based on our business needs prior to the delivery of goods or performance of
services.
(2)Future minimum payments for operating leases are disclosed by year in Note 15
of the "Notes to Consolidated Financial Statements" included in Part IV, Item 15
of this report.
(3)Annual payments to participants are expected to continue into the foreseeable
future at the amounts or ranges noted. Pension benefit payments are based on
actuarial estimates using current assumptions for discount rates, expected
return on long-term assets and rate of compensation increases. The Company
expects to contribute about $10.9 million to pension plan investments in 2020.
See further disclosure in Note 10 of the "Notes to Consolidated Financial
Statements" included in Part IV, Item 15 of this report.
(4)Annual payments to participants are expected to continue into the foreseeable
future at the amounts or ranges noted. Postretirement payments are based on
actuarial estimates using current assumptions for discount rates and health care
costs.
(5)Interest payments are payable March, June, September and December of each
year at a rate based on contractual terms of Floating Senior Notes due 2021.
Interest payments are payable May and September of each year at 4.15% of $750
million Senior Notes due 2024. Interest payments are payable March and September
of each year at 4.7% of $1,250 million Senior Note due 2028. Interest payments
are payable May and November of each year at 3.45% of $750 million Senior Notes
due in 2026. Interest payments are payable February and August of each year at
4.375% of $250 million Senior Notes due in 2023. Interest payments for the
Revolving Credit Facility and Other Borrowings are based on contractual terms
and the Company's current interest rates.
(6)Scheduled principal repayments of outstanding loan balances are disclosed in
Note 9 of the "Notes to Consolidated Financial Statements" included in Part IV,
Item 15 of this report.
(7)Shareholder dividends are subject to approval by the Company's Board of
Directors, currently at an annual rate of approximately $92.0 million.
(8)The $714.0 million of standby letters of credit is comprised of outstanding
letters of credit for performance and bid bond purposes, which expire in various
dates through 2034. Amounts include interest payments based on contractual terms
and the Company's current interest rate.
The above table does not reflect uncertain tax positions of $17.2 million, the
timing of which are uncertain. Refer to Note 11 of the "Notes to Consolidated
Financial Statements" for additional information on uncertain tax positions.
                                       40
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Obligations for operating activities. The Company has entered into $387.3
million of material long-term non-cancelable materials and supply purchase
obligations. Operating leases represent multi-year obligations for rental of
facilities and equipment. Estimated pension funding and post-retirement benefit
payments are based on actuarial estimates using current assumptions for discount
rates, expected return on long-term assets, rate of compensation increases and
health care cost trend rates. Benefits paid for pension obligations were $16.0
million and $17.0 million in 2019 and 2018, respectively. Benefits paid for
post-retirement plans were $0.9 million and $1.0 million in 2019 and in 2018,
respectively.
Obligations for financing activities. Cash requirements for financing activities
consist primarily of long-term debt repayments, interest payments and dividend
payments to shareholders. The Company has historically paid quarterly dividends
to shareholders, subject to quarterly approval by our Board of Directors,
currently at a rate of approximately $92.0 million annually.
The Company arranges for performance bonds to be issued by third party insurance
companies to support certain long term customer contracts. At December 31, 2019,
the initial value of performance bonds issued on the Company's behalf is about
$619 million.
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
•availability of credit;
Operating factors
•supply disruptions including but not limited to disease outbreak, fires,
earthquakes, explosions, floods, tornadoes, hurricanes or weather conditions;
•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;
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•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, competition and anti-trust matters or
intellectual property claims;
•completion and integration of acquisitions, including the acquisition of GE
Transportation; or
•the development and use of new technology;
Competitive factors
•the actions of competitors; or
•the outcome of negotiations with partners, suppliers, customers or others;
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 governments.
Statements in this 10-K 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.
Critical Accounting Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires Management to make judgments, estimates
and assumptions regarding uncertainties that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Areas of uncertainty that require
judgments, estimates and assumptions include the accounting for allowance for
doubtful accounts, inventories, the testing of goodwill and other intangibles
for impairment, warranty reserves, pensions and other postretirement benefits,
stock based compensation and tax matters. Management uses historical experience
and all available information to make these judgments and estimates, and actual
results will inevitably differ from those estimates and assumptions that are
used to prepare the Company's financial statements at any given time. Despite
these inherent limitations, Management believes that Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) and the
financial statements and related footnotes provide a meaningful and fair
perspective of the Company. A discussion of the judgments and uncertainties
associated with accounting for derivatives and environmental matters can be
found in Notes 2 and 18, respectively, in the "Notes to Consolidated Financial
Statements" included in Part IV, Item 15 of this report.
A summary of the Company's significant accounting policies is included in Note 2
in the "Notes to Consolidated Financial Statements" included in Part IV, Item 15
of this report and is incorporated by reference herein. Management believes that
the application of these policies on a consistent basis enables the Company to
provide the users of the financial statements with useful and reliable
information about the Company's operating results and financial condition.
Accounts Receivable and Allowance for Doubtful Accounts:
Description The Company provides an allowance for doubtful accounts to cover
anticipated losses on uncollectible accounts receivable.
Judgments and Uncertainties The allowance for doubtful accounts receivable
reflects our best estimate of probable losses inherent in our receivable
portfolio determined on the basis of historical experience, specific allowances
for known troubled accounts and other currently available evidence.
Effect if Actual Results Differ From Assumptions If our estimates regarding the
collectability of troubled accounts, and/or our actual losses within our
receivable portfolio exceed our historical experience, we may be exposed to the
expense of increasing our allowance for doubtful accounts.
Inventories:
Description Inventories are stated at the lower of cost or market and are
reviewed to ensure that an adequate provision is recognized for excess, slow
moving and obsolete inventories.
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Judgments and Uncertainties Cost is determined under the first-in, first-out
(FIFO) method. Inventory costs include material, labor and overhead. The Company
compares inventory components to prior year sales history and current backlog
and anticipated future requirements. To the extent that inventory parts exceed
estimated usage and demand, a reserve is recognized to reduce the carrying value
of inventory. Also, specific reserves are established for known inventory
obsolescence.
Effect if Actual Results Differ From Assumptions If the market value of our
products were to decrease due to changing market conditions, the Company could
be at risk of incurring write-downs to adjust inventory value to a market value
lower than stated cost. If our estimates regarding sales and backlog
requirements are inaccurate, we may be exposed to the expense of increasing our
reserves for slow moving and obsolete inventory.
Business Combinations:
Description The Company accounts for business acquisitions in accordance with
ASC 805, Business Combinations which requires the purchase price of the acquired
business to be allocated to tangible and intangible assets acquired and
liabilities assumed based on the respective fair values. The amount of purchase
price which is in excess of the fair values of assets acquired and liabilities
assumed is recognized as goodwill.
Judgments and Uncertainties Discounted cash flow models are used to estimate the
fair values of acquired contract backlog, customer relationships, intellectual
property intangibles, and below-market customer contract liabilities. The
significant assumptions used to estimate the value of the intangible assets and
off-market customer contract liabilities included revenue growth rates,
projected profit margins, discount rates, royalty rates, customer attrition
rates, revenue obsolescence rates and market participant profit margins. These
significant assumptions are forward-looking and could be affected by future
economic and market conditions.
Effect if Actual Results Differ From Assumptions Different assumptions may
result in materially different values for assets acquired and liabilities
assumed, which may impact the Company's financial position and future results of
operations.
Goodwill and Indefinite-Lived Intangibles:
Description Goodwill and indefinite-lived intangibles are required to be tested
for impairment at least annually. The Company performs its annual impairment
test during the fourth quarter and more frequently when indicators of impairment
are present. The Company reviews goodwill for impairment at the reporting unit
level. The evaluation of impairment involves comparing the current fair value of
the business to the recorded value (including goodwill).
Judgments and Uncertainties A number of significant assumptions and estimates
are involved in the application of the impairment test, including the
identification of macroeconomic conditions, industry and market considerations,
cost factors, overall financial performance, Wabtec specific events and share
price trends and making the assessment on whether each relevant factor will
impact the impairment test positively or negatively and the magnitude of any
such amount.
Effect if Actual Results Differ From Assumptions Management considers historical
experience and all available information at the time the fair values of its
reporting units are estimated. However, actual amounts realized may differ from
those used to evaluate the impairment of goodwill. If actual results are not
consistent with our assumptions and judgments used in estimating future cash
flows and asset fair values, we may be exposed to impairment losses that could
be material to our results of operations. For example, based on the quantitative
analysis performed as of October 1, 2019, a decline in the terminal growth rate
by 50 basis points would decrease fair market value by $794 million, or an
increase in the weighted-average cost of capital by 100 basis points would
result in a decrease in fair market value by $2,168 million. Even with such
changes the fair value of the reporting units would be greater than their net
book values. See Note 2 in the "Notes to Consolidated Financial Statements"
included in Part IV, Item 15 of this report for additional discussion regarding
impairment testing.
Warranty Reserves:
Description The Company provides warranty reserves to cover expected costs from
repairing or replacing products with durability, quality or workmanship issues
occurring during established warranty periods.
Judgments and Uncertainties In general, reserves are provided for as a
percentage of sales, based on historical experience. In addition, specific
reserves are established for known warranty issues and their estimable losses.
Effect if Actual Results Differ From Assumptions If actual results are not
consistent with the assumptions and judgments used to calculate our warranty
liability, the Company may be exposed to the expense of increasing our reserves
for warranty expense.
Stock-based Compensation:
Description The Company has issued incentive stock units to eligible employees
that vest upon attainment of certain cumulative three-year performance goals.
The program is structured as a rolling three-year plan; each year starts a new
three-year performance cycle with the most recently completed cycle being
2017-2019. No incentive stock units will vest for performance below the
three-year cumulative threshold. The Company utilizes an economic profit measure
for this performance
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goal. Economic profit is a measure of the extent to which the Company produces
financial results in excess of its cost of capital. Based on the Company's
achievement of the threshold and three-year cumulative performance, the stock
units vested can range from 0% to 200% of the shares granted.
Judgments and Uncertainties Significant judgments and estimates are used in
determining the estimated three-year performance, which is then used to estimate
the total shares expected to vest over the three year vesting cycle and
corresponding expense based on the grant date fair value of the award. When
determining the estimated three-year performance, the Company utilizes a
combination of historical actual results, budgeted results and forecasts. In the
initial grant year of a performance cycle, the Company estimates the three-year
performance at 100%. As actual performance results for a cycle begin to
accumulate and the Company completes its budgeting and forecasting cycles the
performance estimates are updated. These judgments and estimates are reviewed
and updated on a quarterly basis.
Effect if Actual Results Differ From Assumptions If assumptions used in
determining the estimated three-year performance change significantly,
stock-based compensation expense related to the unvested incentive stock awards
can fluctuate materially from period to period. For example, a 10% decrease or
increase in the estimated vesting percentage for incentive stock awards would
decrease or increase stock-based compensation expense by approximately $1.5
million.
Income Taxes:
Description Wabtec records an estimated liability or benefit for income and
other taxes based on what it determines will likely be paid in various tax
jurisdictions in which it operates in accordance with ASC 740-10 Accounting for
Income Taxes and Accounting for Uncertainty in Income Taxes.
Judgments and Uncertainties The estimate of our tax obligations are uncertain
because Management must use judgment to estimate the exposures associated with
our various filing positions, as well as realization of our deferred tax assets.
ASC 740-10 establishes a recognition and measurement threshold to determine the
amount of tax benefit that should be recognized related to uncertain tax
positions.
Effect if Actual Results Differ From Assumptions Management uses its best
judgment in the determination of these amounts. However, the liabilities
ultimately realized and paid are dependent on various matters including the
resolution of the tax audits in the various affected tax jurisdictions and may
differ from the amounts recorded. An adjustment to the estimated liability would
be recorded through income in the period in which it becomes probable that the
amount of the actual liability differs from the recorded amount. A deferred tax
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Revenue Recognition:
Description Revenue is recognized in accordance with ASC 606 "Revenue from
Contracts with Customers." The Company recognizes revenues on 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. 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.
Judgments and Uncertainties Accounting for long-term customer agreements
involves a judgmental process of estimating the total sales and costs for each
contract, which results in the development of estimated profit margin
percentages. 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 subcontracts that may be associated with the contract.
Factors that influence these estimates include inflationary trends, technical
and schedule risk, internal and subcontractor performance trends, business
volume assumptions, asset utilization, and anticipated labor agreements.
Generally, pricing is defined in our contracts but may contain include an
estimate of variable consideration when required by the terms of the individual
customer contract. Types of variable consideration that the Company typically
has include volume discounts, prompt payment discounts, liquidating damages, and
performance bonuses.
Effect if Actual Results Differ From Assumptions Should market conditions and
customer demands dictate changes to our standard shipping terms, the Company may
be impacted by longer than typical revenue recognition cycles. The development
of expected contract costs and contract profit margin percentages involves
procedures and personnel in all areas that provide financial or production
information on the status of contracts. Due to the significance of judgment in
the estimation process, it is likely that materially different revenue amounts
could be recorded if we used different assumptions or if the underlying
circumstances were to change. Changes in underlying assumptions/estimates,
supplier performance, or circumstances may
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adversely or positively affect financial performance in future periods. Some of
our contracts are expected to be completed in a loss position. Provisions are
made currently for estimated losses on uncompleted contracts.

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