Wabtec
Annual Report 2013

Plain-text annual report

® 2013 Annual Report Profile Wabtec Corporation provides highly engineered, value-added products and services to our freight rail, passenger transit and industrial customers around the world to help them increase their safety, efficiency and productivity. Through its subsidiaries, the company manufactures a range of products for locomotives, freight cars and passenger transit vehicles; builds new commuter and switcher locomotives; and manufactures cooling systems and related equipment for the power generation and transmission industry. We strive to combine practical innovations for our customers with the best in modern manufacturing and business practices to generate above- average, long-term returns for our shareholders, and to provide our employees with a safe, challenging and dynamic work environment. This annual report contains forward-looking statements and includes assumptions about future market conditions, operations and results. These statements are based on current expectations and are subject to risks and uncertainties. They are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Form 10-K and our other filings made with the Securities and Exchange Commission lists the factors that could cause actual results to differ materially from the forward-looking statements. In making these forward-looking statements, the company assumes no obligation to update them or advise of changes in the assumptions on which they were based. Stock Exchange Listing New York Stock Exchange Ticker Symbol: WAB Independent Public Accountants Ernst & Young LLP Pittsburgh, PA 15222 Form 10-K This document includes the company’s Form 10-K annual report. Annual Meeting May 14, 2014 11:30 a.m. The Duquesne Club Pittsburgh, PA 15219 CORPORATE INFORMATION Transfer Agent and Registrar Our transfer agent is responsible for shareholder records, issuance of stock certificates, and distribution of dividends and I.R.S. form 1099. Your requests, as shareholders, concerning these matters are most efficiently answered by communicating directly with: Wells Fargo Shareowner Services P.O. Box 64854 St Paul, MN 55164-0874 Street and overnight delivery address: Wells Fargo Shareowner Services MAC N9173-010 1110 Centre Point Curve, Suite 101 Mendota Heights, MN 55120 Toll-free number: (800) 468-9716 Message from the CEO In 2013, Wabtec delivered another year of strong financial performance, with revenues and earnings reaching all- time highs. Based on this performance, our year-end stock price increased for the 13th consecutive year, a record unmatched by any other U.S. public company. Since 2006, our earnings per diluted share have increased at a compounded annual growth rate of 19 percent. We’re proud of the company’s historical performance, but we’re also enthusiastic about its future growth opportunities. Through its diverse business model, Wabtec participates in compelling markets – mainly freight rail and passenger transit – that are large, global and growing. We are product and technology leaders in many of these markets, and we are investing globally to strengthen our position. We invest in four primary growth strategies with a singular financial goal in mind: To generate, on average, double-digit growth in earnings per diluted share through the business cycle. Our process starts with the principles of The Wabtec Performance System, which has been the hallmark of our corporate culture for nearly 25 years. By using these principles, we strive to improve safety, quality, delivery and cost for our customers, and to generate strong cash flow to invest in: • Global and market expansion • Aftermarket expansion • New products and technologies • Strategic acquisitions In 2013, we made solid progress. International sales reached a record $1.2 billion, with a compounded annual growth rate of 19 percent since 2006. During the year, we continued to build on strategic platforms in Europe, Brazil, China and South Africa. Because a majority of the world’s locomotives, freight cars and transit cars operate outside the U.S., those and other international markets represent significant future growth potential. Revenues from aftermarket products and services were a record $1.5 billion in 2013 and have grown at a compounded annual rate of 14 percent since 2006. We invest in the aftermarket because we have a large installed base of products to service, and because the maintenance, repair and overhaul market is less cyclical than the original equipment market. In 2013, we expanded our aftermarket presence around the world, especially in the U.K., where we are the leading provider of rolling stock maintenance and overhauls. Sales from new products and technologies introduced or acquired by Wabtec during the past five years represented about 38 percent of our total sales in 2013. Recent examples include Positive Train Control, oil-free compressors, electronic braking, low-noise brake pads and low-emission locomotives. We focus our ongoing product development efforts – in the U.S. alone we nearly doubled the number of patent applications compared to 2012 – on helping our customers improve their safety and efficiency, and we believe Wabtec continues to be an industry leader in this area. Strategic acquisitions have also been an integral part of our growth. In 2013, we acquired three businesses with revenues of about $140 million, which expanded our capabilities in both rail and non-rail markets: Napier Turbochargers and Turbonetics (turbochargers for rail and industrial markets), and Longwood Industries (specialty rubber products for a variety of industries, including rail). In addition, in the first quarter of 2014 we signed an agreement to acquire Fandstan Electric Group, an industry-leading manufacturer of electrical current and data collection products for rail and other industries, with annual sales of about $235 million. We continue to seek companies that will be a strong strategic fit, and that have solid financials and growth characteristics, and our strong balance sheet provides more than adequate flexibility and capacity. We believe these strategies, when combined with the compelling dynamics of our core markets, offer an exciting future for Wabtec. According to UNIFE, the European rail industry association, the global accessible market for rail-related products and services exceeds $100 billion and is projected to grow at about 3 percent annually. Markets outside of North America are much larger and are generally expected to grow faster, which validates Wabtec’s global growth strategies. UNIFE also cites several secular trends – including population growth, urbanization, global trade expansion, and increasing awareness of environmental and sustainability issues – as drivers of transportation investment globally. Before closing, I would like to mention the organizational changes we announced in 2013. During the year, I succeeded Bill Kassling as chairman, and he became our Lead Director. The patriarch of modern-day Wabtec, Bill led our company’s management buyout in 1990 and its initial public offering five years later. I’m personally grateful for the opportunity to succeed him, and for his continued counsel. Also during the year, Ray Betler was promoted to president and retained the title of chief operating officer. Ray joined Wabtec in 2008 and has more than 30 years of experience in the transportation industry. At year-end, Alvaro Garcia-Tunon retired after 10 years as the company’s chief financial officer; we are pleased that he remains with Wabtec as a strategic adviser. Alvaro came to the company through an acquisition in 1995, and he made invaluable contributions over the years. Pat Dugan, who joined Wabtec in 2003 as corporate controller, succeeded Alvaro as CFO and we believe that transition will be smooth. To close, I want to offer thanks to our more than 10,000 employees around the world, whose hard work and dedication have made Wabtec a great company; and to our customers and suppliers, whose trust and loyalty we strive to reward. Albert J. Neupaver Chairman and Chief Executive Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (cid:95) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2013 OR (cid:133) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-13782 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1001 Air Brake Avenue Wilmerding, Pennsylvania 15148 (Address of principal executive offices, including zip code) 25-1615902 (IRS Employer Identification No.) (412) 825-1000 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of Class Common Stock, par value $.01 per share Name of Exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:133). Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:133) No (cid:95). 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 (cid:95) No (cid:133). Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes (cid:95) No (cid:133). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer (cid:95) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes (cid:133) No (cid:95). The registrant estimates that as of June 30, 2013, the aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $4.9 billion based on the closing price on the New York Stock Exchange for such stock. As of February 14, 2014, 95,996,930 shares of Common Stock of the registrant were issued and outstanding. Portions of the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held on May 14, 2014 are incorporated by reference into Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE: TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business .............................................................................................................................................................. Risk Factors ........................................................................................................................................................ Unresolved Staff Comments .............................................................................................................................. Properties ............................................................................................................................................................ Legal Proceedings .............................................................................................................................................. Mine Safety Disclosures ..................................................................................................................................... Executive Officers of the Registrant .................................................................................................................. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Securities ....................................................................................................................................................... Selected Financial Data ...................................................................................................................................... Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................. Quantitative and Qualitative Disclosures About Market Risk ............................................................................ Financial Statements and Supplementary Data .................................................................................................. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................. Controls and Procedures ..................................................................................................................................... Other Information ............................................................................................................................................... PART III Directors, Executive Officers and Corporate Governance ................................................................................. Executive Compensation .................................................................................................................................... Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........... Certain Relationships and Related Transactions, and Director Independence ................................................... Principal Accountant Fees and Services ............................................................................................................. Item 15. Exhibits and Financial Statement Schedules ...................................................................................................... PART IV Page 3 10 14 15 16 16 17 19 21 22 36 37 37 37 37 38 38 38 38 38 39 2 Item 1. BUSINESS General PART I Westinghouse Air Brake Technologies Corporation, doing business as Wabtec Corporation, is a Delaware corporation with headquarters at 1001 Air Brake Avenue in Wilmerding, Pennsylvania. Our telephone number is 412-825-1000, and our website is located at www.wabtec.com. All references to “we”, “our”, “us”, the “Company” and “Wabtec” refer to Westinghouse Air Brake Technologies Corporation and its subsidiaries. Westinghouse Air Brake Company (“WABCO”) was formed in 1990 when it acquired certain assets and operations from American Standard, Inc., now known as Trane (“Trane”). In 1999, WABCO merged with MotivePower Industries, Inc. (“MotivePower”) and adopted the name Wabtec. Today, Wabtec is one of the world’s largest providers of value-added, technology-based equipment and services for the global rail industry. We believe we hold approximately a 50% market share in North America for our primary braking-related equipment and a leading position in North America for most of our other product lines. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on virtually all U.S. locomotives, freight cars, subway cars and buses, and on many of these vehicles around the world. In 2013, the Company had sales of approximately $2.6 billion and net income of about $292.2 million. In 2013 sales of aftermarket parts and services represented about 57% of total sales, while sales to customers outside of the U.S. accounted for about 48% of total sales. Industry Overview The Company primarily serves the worldwide freight rail and passenger transit industries. As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of the global railroad and transit industries. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight tonnage and passenger ridership; government spending on public transportation; and investment in new technologies by freight rail and passenger transit systems. According to a recent study by UNIFE, the Association of the European Rail Industry, the accessible global market for railway products and services is more than $100 billion, and it is expected to grow at about 2.7% annually through 2017. The three largest markets, which represent about 75% of the total market, are Europe, Asia-Pacific and North America. UNIFE projects the overall market to remain stable through 2020 as emerging markets show above-average growth due to increasing global trade and freight volumes, urbanization and growth in public mass transport systems, and increasing environmental awareness; while developed markets grow at a slower pace. By using various industry publications and market studies, we estimate that the global installed base of locomotives is about 110,000 units, with about 35% in Asia-Pacific, about 25% in Russia-CIS and about 20% in NAFTA. We estimate the global installed base of freight cars is about 5.2 million units, with about 30% each in Russia-CIS and NAFTA, and about 20% in Asia-Pacific. We estimate the global installed base of transit cars is about 330,000 units, with about 55% in Asia-Pacific, about 20% in Europe and about 10% in Russia. In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation. They are an integral part of the continent’s economy and transportation system, serving nearly every industrial, wholesale and retail sector. Through direct ownership and operating partnerships, U.S. railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service. There are more than 500 railroads operating in North America, with the largest railroads, referred to as “Class I,” accounting for more than 90% of the industry’s revenues. The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain, and petroleum. These commodities represent about 55% of total rail carloadings, with intermodal carloads accounting for the rest. Intermodal traffic—the movement of trailers or containers by rail in combination with another mode of transportation—has been the railroads’ fastest-growing market segment in the past 10 years. 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 2013: • The Association of American Railroads (“AAR”) reported total carloads increased 2.1% including a 4.4% increase in intermodal traffic, which generally reflected a growing economy. Demand for new locomotives was about 1,300 units in 2013, compared to about the same number in 2012. 3 • • Currently, the active locomotive fleet for Class I railroads in North America is about 24,000, with an average of about 1,000 new units delivered annually over the past 10 years. In 2013, the industry delivered about 53,000 new freight cars, compared to about 59,000 in 2012. Currently, the active freight car fleet in North America is approximately 1.5 million, and the average number of new freight cars delivered over the past 10 years is about 50,000 annually. In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues. With about 40% of the nation’s passenger transit vehicles, the New York City region is the largest passenger transit market in the U.S., but most major cities also offer either rail or bus transit services. 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. In 2012, the U.S. Congress passed a new, two-year funding bill, which maintained spending at the same level, about $10.7 billion, as in prior years. The number of new transit cars delivered in 2013 was about 1,000, compared to about 600 in 2012. The number of new buses delivered in 2013 was about 4,400 compared to about the same in 2012. In the past 10 years, the average number of new transit cars delivered annually is about 800, and the average number of new buses delivered annually is about 4,700. Ridership provides fare box revenues to transit authorities, which use these funds, along with state and local money, primarily for equipment and system maintenance. Based on preliminary figures from the American Public Transportation Association, ridership on U.S. transit vehicles increased slightly, about 0.2% in 2013, after a 2.5% increase in 2012. Outside of North America, many of the rail systems have historically been focused on passenger transit, rather than freight. In recent years, however, railroads in countries such as Australia, Brazil, India and China have been investing capital to expand and improve both their freight and passenger rail systems. Throughout the world, some government-owned railroads are being sold to private owners, who often look to improve the efficiency of the rail system by investing in new equipment and new technologies. According to UNIFE, emerging markets are expected to grow at above-average rates as global trade creates increases in freight volumes and urbanization leads to increased demand for efficient mass-transportation systems. As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets. In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as high fuel costs and environmental factors encourage investment in public mass transit. France, Germany, the United Kingdom and Italy are the largest transit markets, representing about two-thirds of passenger traffic in the European Union. UNIFE projects the Western European rail market to grow at about 2% in the next few years, with the United Kingdom and France expected to invest in new rolling stock. According to the UK’s Office of Rail Regulation, passenger rail usage has steadily increased in the past decade, with the Office reporting a 3.9% increase in second quarter ridership in its most recent quarterly report. For the same time period, the Office also reported an increase of 8.9% in freight volume, driven by a strong increase in coal shipments. Germany has the largest rail network in Europe. In its most recent report, The Federal Statistical Office of Germany reported an increase in passenger traffic of 0.8% in 2013. 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 the first nine months of 2013, The Federal Statistical Office of Germany reported a 1.1% decrease in freight volumes compared to the same period in 2012. For 2013, SNCF (French national railway) reported decreases of about 1.5% in local and regional passenger rail traffic, and about 3.0% in freight-related revenue. We estimate that the European rail market consists of about 11,000 locomotives, about 750,000 freight cars and about 72,000 passenger transit cars. The Asia/Pacific market is now the second-largest geographic segment, according to UNIFE. This market consists primarily of China, India and Australia. Growth has been driven by the continued urbanization of China and India, and by investment in freight rail infrastructure to serve the mining and natural resources markets in those countries, as well as in Australia. We estimate that this market consists of about 35,000 locomotives and about 1.0 million freight cars. China is expected to increase spending on rail infrastructure and equipment in 2014, as it resumes investment in high-speed rail programs. The Australian Railway Association, in a September 2013 study, reported an increase of freight volume of 8% and an increase of passenger ridership of 2%. In its most recent report, the Indian government reported that in the first nine months of its fiscal 2013 freight rail traffic increased about 5.0% and passenger rail traffic decreased about 0.5%. India is expected to increase spending significantly in 2014 as it seeks to modernize its rail system. 4 Other key geographic markets include Russia/CIS, South Africa, and Brazil. With about 1.5 million freight cars and about 28,000 locomotives, Russia/CIS is among the largest freight rail markets in the world, and it’s expected to invest significantly in new rolling stock and infrastructure. Russian Railways, a state-owned company, provides both freight and passenger transportation. In 2012, the most recent full year of reported data, freight traffic increased 2.9% and passenger traffic increased 3.4%. South Africa, in 2012, announced a major program to invest in its freight rail and passenger transit infrastructure during the next 20 years. As part of this program, PRASA, the Passenger Rail Agency of South Africa, plans to purchase about 3,600 new transit cars and about 1,000 new locomotives. In Brazil, MRS Logistica, one of the country’s largest railroads, reported a 5.6% increase in freight carloadings in its most recent quarter. The country has also been investing in its passenger transport systems in advances of hosting the 2014 World Cup and the 2016 Olympics. Business Segments and Products We provide our products and services through two principal business segments, the Freight Segment and the Transit Segment, both of which have different market characteristics and business drivers. The Freight Segment primarily manufactures and services components for new and existing locomotive and freight cars , supplies railway electronics, positive train control equipment, signal design and engineering services, builds switcher locomotives, rebuilds freight locomotives and provides heat exchangers and cooling systems for rail and other industrial markets. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities. As discussed previously, demand in the freight market is primarily driven by rail traffic, and deliveries of new locomotives and freight cars. In 2013, the Freight Segment accounted for 54% of our total sales, with about 55% of its sales in North America and the remainder to international customers. In 2013, slightly more than half of the Freight Segment’s sales were in aftermarket. The Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically subway cars and buses, builds new commuter locomotives and refurbishes subway cars. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world. As discussed previously, demand in the transit market is primarily driven by government funding at all levels and passenger ridership. In 2013, the Transit Segment accounted for 46% of our total sales, with about 48% of its sales in North America and the remainder to international customers. About two-thirds of the Transit Segment’s sales are in the aftermarket with the remainder in the original equipment market. Following is a summary of our leading product lines in both aftermarket and original equipment across both of our business segments: Specialty Products & Electronics: • • • • • • • • Positive Train Control equipment and electronically controlled pneumatic braking products Railway electronics, including event recorders, monitoring equipment and end of train devices Signal design and engineering services Freight car truck components Draft gears, couplers and slack adjusters Air compressors and dryers Heat exchangers and cooling products for locomotives and power generation equipment Track and switch products Brake Products: • • Railway braking equipment and related components for Freight and Transit applications Friction products, including brake shoes and pads Remanufacturing, Overhaul and Build: • • New commuter and switcher locomotives Transit car and locomotive overhaul and refurbishment 5 Transit Products: • • • Door and window assemblies for buses and subway cars Accessibility lifts and ramps for buses and subway cars Traction motors We have become a leader in the rail industry by capitalizing on the strength of our existing products, technological capabilities and new product innovation, and by our ability to harden products to protect them from severe conditions, including extreme temperatures and high-vibration environments. Supported by our technical staff of over 1,100 engineers and specialists, we have extensive experience in a broad range of product lines, which enables us to provide comprehensive, systems-based solutions for our customers. Over the past several years, we introduced a number of significant new products, including electronic braking equipment and train control equipment that encompasses onboard digital data and global positioning communication protocols. In 2007, for example, the Federal Railroad Administration (FRA) approved the use of our Electronic Train Management System®, which offers safety benefits to the rail industry. In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of Positive Train Control (“PTC”) technology, which includes on-board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With our Electronic Train Management System®, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the December 31, 2015 deadline set in the rail safety bill. In recent years, the railroads and transit authorities have stated they cannot achieve full implementation of PTC by the deadline, and various bills have been introduced to extend it, but to date there has been no change in the deadline. In 2013, Wabtec recorded about $235 million of revenue from implementation of PTC projects both foreign and domestic. These multi-year projects include: A $165 million contract to design and install a train control system for MRS Logistica, the fourth- largest railroad in Brazil; a $63 million contract to provide train control equipment and services for Denver Transit Partners for three new commuter rail lines; and a $27 million contract to provide train control equipment for Metrolink, a commuter rail agency in Los Angeles. For additional information on our business segments, see Note 19 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. Competitive Strengths Our key strengths include: • • Leading market positions in core products. Dating back to 1869 and George Westinghouse’s invention of the air brake, we are an established leader in the development and manufacture of pneumatic braking equipment for freight and passenger transit vehicles. We have leveraged our leading position by focusing on research and engineering to expand beyond pneumatic braking components to supplying integrated parts and assemblies for the locomotive through the end of the train. We are a recognized leader in the development and production of electronic recording, measuring and communications systems, positive train control equipment, highly engineered compressors and heat exchangers for locomotives, and a leading manufacturer of freight car components, including electronic braking equipment, draft gears, trucks, brake shoes and electronic end-of-train devices. We are also the leading manufacturer of commuter locomotives and a leading provider of braking equipment, door assemblies, lifts and ramps, and couplers for passenger transit vehicles. Breadth of product offering with a stable mix of original equipment market (OEM) and aftermarket business. Our product portfolio is one of the broadest in the rail industry, as we offer a wide selection of quality parts, components and assemblies across the entire train. We provide our products in both the original equipment market and the aftermarket. Our substantial installed base of products with end-users such as the railroads and the passenger transit authorities is a significant competitive advantage for providing products and services to the aftermarket because these customers often look to purchase safety- and performance-related replacement parts from the original equipment components supplier. In addition, as OEMs and Class I railroad operators attempt to modernize fleets with new products designed to improve and maintain safety and efficiency, these products must be designed to be interoperable with existing equipment. Over the last several years, more than 50% of our total net sales have come from our aftermarket products and services business. 6 • • • Leading design and engineering capabilities. We believe a hallmark of our relationship with our customers has been our leading design and engineering practice, which has, in our opinion, assisted in the improvement and modernization of global railway equipment. We believe both our customers and the government authorities value our technological capabilities and commitment to innovation, as we seek not only to enhance the efficiency and profitability of our customers, but also to improve the overall safety of the railways through continuous improvement of product performance. The Company has an established record of product improvements and new product development. We have assembled a wide range of patented products, which we believe provides us with a competitive advantage. Wabtec currently owns over 2,150 active patents worldwide and over 625 U.S. patents. During the last three years, we have filed for more than 250 patents worldwide in support of our new and evolving product lines. Experience with industry regulatory requirements. The U.S. rail industry is governed by the AAR and by the FRA. These groups mandate rigorous manufacturer certification, new product testing and approval processes that we believe are difficult for new entrants to meet cost-effectively and efficiently without the scale and extensive experience we possess. Experienced management team and the Wabtec Performance System. The Company has implemented numerous initiatives that enable us to manage successfully through cycles in the rail supply market. For example, the Wabtec Performance System (WPS), an ongoing program that focuses on lean manufacturing principles and continuous improvement across all aspects of our business, has been a part of the Company’s culture for more than 20 years. As a result, our management team has improved our cost structure, operating leverage and financial flexibility, and placed the Company in an excellent position to benefit from growth opportunities. Business strategy Using WPS, we strive to generate sufficient cash to invest in our growth strategies and to build on what we consider to be a leading position as a low-cost producer in the industry while maintaining world-class product quality, technology and customer responsiveness. Through WPS and employee-directed initiatives such as Kaizen, a Japanese-developed team concept, we continuously strive to improve quality, delivery and productivity, and to reduce costs. These efforts enable us to streamline processes, improve product reliability and customer satisfaction, reduce product cycle times and respond more rapidly to market developments. Over time, these lean initiatives have enabled us to increase operating margins, improve cash flow and strengthen our ability to invest in the following growth strategies: • • • • Expand globally and into new product markets. We believe that international markets represent a significant opportunity for future growth. In 2013, sales to non-U.S. customers were $1.2 billion, including export sales from the Company’s U.S. operations of $542.3million. We intend to increase our existing international sales through strategic acquisitions, direct sales of products through our existing subsidiaries and licensees, and joint ventures with railway suppliers which have a strong presence in their local markets. We are specifically targeting markets that operate significant fleets of U.S.-style locomotives and freight cars, including Australia, Brazil, China, India, Russia, South Africa, and other select areas within Europe and South America. In addition, we have opportunities to sell certain products that we currently manufacture for the rail industry into other industrial markets, such as mining, off-highway and energy. These products include heat exchangers and friction materials. Expand aftermarket sales. Historically, aftermarket sales are less cyclical than OEM sales because a certain level of aftermarket maintenance and service work must be performed, even during an industry slowdown. In 2013, Wabtec’s aftermarket sales and services represented approximately 57% of the Company’s total sales across both of our business segments. Wabtec provides aftermarket parts and services for its components, and the Company is seeking to expand this business with new customers such as short-line and regional railroads, or with customers who currently perform the work in-house. In this way, we expect to take advantage of the rail industry trend toward outsourcing, as railroads and transit authorities focus on their core function of transporting goods and people. Accelerate new product development. We continue to emphasize research and development funding to create new and improved products. We are focusing on technological advances, especially in the areas of electronics, braking products and other on-board equipment, as a means of new product growth. We seek to provide customers with incremental technological advances that offer immediate benefits with cost-effective investments. In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of PTC technology on a majority of the locomotives and track in the U.S. As the leading supplier of on-board train control equipment, Wabtec is working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology. Seek acquisitions, joint ventures and alliances. We are exploring acquisition, joint venture and alliance opportunities using a disciplined, selective approach and rigorous financial criteria. Such acquisitions will not only be expected to meet these financial criteria but also achieve our growth strategies of global expansion, new products and expanding aftermarket sales. All of these expansion strategies will help Wabtec to grow profitably, expand geographically, and dampen the impact from potential cycles in the North American rail industry. 7 Recent Acquisitions and Joint Ventures Wabtec has completed certain significant acquisitions in support of its growth strategies mentioned above: • • • • • • • • • On February 12, 2014, the Company signed a definitive agreement to acquire Fandstan Electric Group Ltd. (“Fandstan”), a leading rail and industrial equipment manufacturer for a variety of markets, including rail and tram transportation, industrial and energy, for a purchase price of approximately $215.0 million. The Company expects the transaction to be completed in the first quarter of 2014, subject to customary closing conditions and competition authority clearance. On September 24, 2013, the Company acquired Longwood Industries, Inc (“Longwood”), a manufacturer of specialty rubber products for transportation, oil and gas, and industrial markets, for a net purchase price of approximately $83.9 million, net of cash. On July 30, 2013, the Company acquired Turbonetics Holdings, Inc (“Turbonetics”), a manufacturer of turbochargers and related components for various industrial markets, for a net purchase price of approximately $23.2 million, net of cash. On February 26, 2013, the Company acquired Transdyne (“Transdyne”), a distributor of wear-protection components and other hardware used primarily on railroad freight cars, for a net purchase price of approximately $2.4 million, net of cash. On January 31, 2013, the Company acquired Napier Turbochargers Ltd., a UK-based provider of turbochargers and related parts for the worldwide power generation and marine markets, for a net purchase price of approximately $112.3 million, net of cash. October 2012, the Company acquired LH Group, a UK-based provider of maintenance and overhaul services for the passenger transit market, for a net purchase price of approximately $48.1 million, net of cash. July 2012, the Company acquired Winco Equipamentos Ltda., a Brazil-based marketing and sales company and provider of freight car components with capabilities including value-added engineering and assembly, service, and technical support and logistics, for an initial net purchase price of approximately $3.7 million, net of cash. July 2012, the Company acquired Tec Tran Corp. and its affiliates, the only U.S. owned manufacturer of hydraulic braking systems for transit cars, for a net purchase price of approximately $8.3 million, net of cash. June 2012, the Company acquired Mors Smitt Holding, a leading manufacturer of electronic components for rail and industrial markets with operations in the Netherlands, the United Kingdom, the U.S., France, China, and Hong Kong, for a net purchase price of $90.0 million, net of cash. Backlog The Company’s backlog was about $1.69 billion at December 31, 2013. For 2013, about 57% of total sales came from aftermarket orders, which typically carry lead times of less than 30 days, and are not recorded in backlog for a significant period of time. The Company’s contracts are subject to standard industry cancellation provisions, including cancellations on short notice or upon completion of designated stages. Substantial scope-of-work adjustments are common. For these and other reasons, completion of the Company’s backlog may be delayed or cancelled. The railroad industry, in general, has historically been subject to fluctuations due to overall economic conditions and the level of use of alternative modes of transportation. The backlog of firm customer orders as of December 31, 2013 and December 31, 2012, and the expected year of completion are as follows: In thousands Freight Segment ...................................................... $ 511,699 $ 447,429 $ 64,270 $ 491,772 $ 413,839 $ 77,933 464,692 Transit Segment ...................................................... 1,182,206 Total ........................................................................ $ 1,693,905 $ 1,098,119 $ 595,786 $ 1,659,503 $ 1,116,878 $ 542,625 1,167,731 703,039 531,516 650,690 2014 2013 Total Backlog 12/31/13 Other Years Total Backlog 12/31/12 Expected Delivery Expected Delivery Other Years Engineering and Development To execute our strategy to develop new products, we invest in a variety of engineering and development activities. For the fiscal years ended December 31, 2013, 2012, and 2011, we invested about $46.3 million, $41.3 million and $37.2 million, respectively, on product development and improvement activities. The engineering resources of the Company are allocated between research and development activities and the execution of original equipment customer contracts. 8 Our engineering and development program is largely focused upon train control and new braking technologies, with an emphasis on applying electronics to traditional pneumatic equipment. Electronic braking has been used in the transit industry for years, and freight railroads are conducting pilot programs to test its reliability and benefits. Freight railroads have generally been slower to accept the technology due to issues over interoperability, connectivity and durability. We are proceeding with efforts to enhance the major components for existing hard-wired braking equipment and development of new electronic technologies for the freight railroads. Sometimes we conduct specific research projects in conjunction with universities, customers and other railroad product suppliers. We use our Product Development System (PDS) to develop and monitor new product programs. The system requires the product development team to follow consistent steps throughout the development process, from concept to launch, to ensure the product will meet customer expectations and internal profitability targets. Intellectual Property We have more than 2,150 active patents worldwide. We also rely on a combination of trade secrets and other intellectual property laws, nondisclosure agreements and other protective measures to establish and protect our proprietary rights in our intellectual property. Certain trademarks, among them the name WABCO®, were acquired or licensed from American Standard Inc., now known as Trane, in 1990 at the time of our acquisition of the North American operations of the Railway Products Group of Trane. Other trademarks have been developed through the normal course of business, or acquired as a part of our ongoing merger and acquisition program. We have entered into a variety of license agreements as licensor and licensee. We do not believe that any single license agreement is of material importance to our business or either of our business segments as a whole. We have issued licenses to the two sole suppliers of railway air brakes and related products in Japan, Nabtesco and Mitsubishi Electric Company. The licensees pay annual license fees to us and also assist us by acting as liaisons with key Japanese passenger transit vehicle builders for projects in North America. We believe that our relationships with these licensees have been beneficial to our core transit business and customer relationships in North America. Customers Our customers include railroads and passenger transit authorities throughout North America, as well as in the United Kingdom, Australia, Europe, Asia, South Africa and South America; manufacturers of transportation equipment, such as locomotives, freight cars, subway vehicles and buses; and lessors of such equipment. In 2013, about 48% of sales were to customers outside the U.S. and to more than 100 countries throughout the world. About 57% of sales were in the aftermarket, with a majority of our remaining sales to OEMs of locomotives, freight cars, subway vehicles and buses. Top customers can change from year to year. For the fiscal year ended December 31, 2013, our top five customers accounted for 15% of net sales: The Massachusetts Bay Transportation Authority, General Electric Transportation, CSX Corporation, Trinity Industries, and Union Pacific Corporation. No one customer represents 10% or more of consolidated sales. We believe that we have strong relationships with all of our key customers. Competition We believe that we hold approximately a 50% market share in North America for our primary braking-related equipment and a leading market position in North America for most of our other product lines. On a global basis, our market shares are smaller. We operate in a highly competitive marketplace. Price competition is strong because we have a relatively small number of customers and they are very cost-conscious. In addition to price, competition is based on product performance and technological leadership, quality, reliability of delivery, and customer service and support. 9 Our principal competitors vary across product lines. Within North America, New York Air Brake Company, a subsidiary of the German air brake producer Knorr-Bremse AG (“Knorr”) and Amsted Rail Company, Inc., a subsidiary of Amsted Industries Corporation, are our principal overall OEM competitors. Our competition for locomotive, freight and passenger transit service and repair is mostly from the railroads’ and passenger transit authorities’ in-house operations, Electro-Motive Diesel, a division of Caterpillar, GE Transportation Systems, and New York Air Brake/Knorr. We believe our key strengths, which include leading market positions in core products, breadth of product offering with a stable mix of OEM and aftermarket business, leading design and engineering capabilities, significant barriers to entry and an experienced management team, enable us to compete effectively in this marketplace. Outside of North America, no individual company is our principal competitor in all of our operating locations. The largest competitors for Brake and Transit products are Faiveley Transport and Knorr. Employees At December 31, 2013, we had 10,234 full-time employees, approximately 27% of whom were unionized. A majority of the employees subject to collective bargaining agreements are within North America and these agreements are generally effective from 2014 through 2016. Agreements expiring at various times during 2014 cover approximately 15% of the Company’s workforce. We consider our relations with employees and union representatives to be good, but cannot assure that future contract negotiations will be favorable to us. Regulation In the course of our operations, we are subject to various regulations of agencies and other entities. In the United States, these include principally the FRA and the AAR. The FRA administers and enforces federal laws and regulations relating to railroad safety. These regulations govern equipment and safety standards for freight cars and other rail equipment used in interstate commerce. The AAR oversees a wide variety of rules and regulations governing safety and design of equipment, relationships among railroads with respect to railcars in interchange and other matters. The AAR also certifies railcar builders and component manufacturers that provide equipment for use on railroads in the United States. New products generally must undergo AAR testing and approval processes. As a result of these regulations and those stipulated in other countries in which we derive our revenues, we must maintain certain certifications as a component manufacturer and for products we sell. Effects of Seasonality Our business is not typically seasonal, although the third quarter results may be impacted by vacation and scheduled plant shutdowns at several of our major customers during this period. Environmental Matters Information on environmental matters is included in Note 18 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. Available Information We maintain an Internet site at www.wabtec.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as the annual report to stockholders and other information, are available free of charge on this site. The Internet site and the information contained therein or connected thereto are not incorporated by reference into this Form 10-K. Our Corporate Governance Guidelines, the charters of our Audit, Compensation and Nominating and Corporate Governance Committees, our Code of Conduct, which is applicable to all employees, and our Code of Ethics for Senior Officers, which is applicable to all of our executive officers, are also available free of charge on this site and are available in print to any shareholder who requests them. Item 1A. RISK FACTORS Prolonged unfavorable economic and market conditions could adversely affect our business. Unfavorable general economic and market conditions in the United States and internationally could have a negative impact on our sales and operations. To the extent that these factors result in continued 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. 10 We are dependent upon key customers. We rely on several key customers who represent a significant portion of our business. Our top customers can change from year to year. For the fiscal year ended December 31, 2013, our top five customers accounted for 15% of our net sales. While we believe our relationships with our customers are generally good, our top customers could choose to reduce or terminate their relationships with us. In addition, many of our customers place orders for products on an as-needed basis and operate in cyclical industries. As a result, their order levels have varied from period to period in the past and may vary significantly in the future. Such customer orders are dependent upon their markets and customers, and may be subject to delays and cancellations. As a result of our dependence on our key customers, we could experience a material adverse effect on our business, results of operations and financial condition if we lost any one or more of our key customers or if there is a reduction in their demand for our products. Our business operates in a highly competitive industry. We operate in a competitive marketplace and face substantial competition from a limited number of established competitors in the United States and abroad, some of which may have greater financial resources than we do. Price competition is strong and, coupled with the existence of a number of cost conscious customers, has historically limited our ability to increase prices. In addition to price, competition is based on product performance and technological leadership, quality, reliability of delivery and customer service and support. There can be no assurance that competition in one or more of our markets will not adversely affect us and our results of operations. We intend to pursue acquisitions, joint ventures and alliances that involve a number of inherent risks, any of which may cause us not to realize anticipated benefits. One aspect of our business strategy is to selectively pursue acquisitions, joint ventures and alliances that we believe will improve our market position, and provide opportunities to realize operating synergies. These transactions involve inherent risks and uncertainties, any one of which could have a material adverse effect on our business, results of operations and financial condition including: • • • • difficulties in achieving identified financial and operating synergies, including the integration of operations, services and products; diversion of Management’s attention from other business concerns; the assumption of unknown liabilities; and unanticipated changes in the market conditions, business and economic factors affecting such an acquisition. We cannot assure that we will be able to consummate any future acquisitions, joint ventures or other business combinations. If we are unable to identify suitable acquisition candidates or to consummate strategic acquisitions, we may be unable to fully implement our business strategy, and our business and results of operations may be adversely affected as a result. In addition, our ability to engage in strategic acquisitions will be dependent on our ability to raise substantial capital, and we may not be able to raise the funds necessary to implement our acquisition strategy on terms satisfactory to us, if at all. As we introduce new products and services, a failure to predict and react to consumer demand could adversely affect our business. We have dedicated significant resources to the development, manufacturing and marketing of new products. Decisions to develop and market new transportation products are typically made without firm indications of customer acceptance. Moreover, by their nature, new products may require alteration of existing business methods or threaten to displace existing equipment in which our customers may have a substantial capital investment. There can be no assurance that any new products that we develop will gain widespread acceptance in the marketplace or that such products will be able to compete successfully with other new products or services that may be introduced by competitors. In addition, we may incur additional warranty or other costs as new products are tested and used by customers. A portion of our sales are related to delivering products and services to help our U.S. railroad and transit customers meet the Positive Train Control (PTC) mandate from the U.S. federal government, which requires the use of on-board locomotive computers and software by December 31, 2015. For the year ended December 31, 2013, we had sales of about $235 million related to PTC. In recent years, the railroads and transit authorities have stated they cannot achieve full implementation of PTC by the deadline, and various bills have been introduced to extend it, but to date there has been no change in the deadline. Should the federal government change its mandate by amending the timing, scope or requirements of the safety bill, there could be an adverse impact on our revenues in future periods, and would cause us to reassess the staffing, resources and assets deployed in delivering Positive Train Control services. 11 Our revenues are subject to cyclical variations in the railway and passenger transit markets and changes in government spending. The railway industry historically has been subject to significant fluctuations due to overall economic conditions, the use of alternate methods of transportation and the levels of federal, state and local government spending on railroad transit projects. In economic downturns, railroads have deferred, and may defer, certain expenditures in order to conserve cash in the short term. Reductions in freight traffic may reduce demand for our replacement products. The passenger transit railroad industry is also cyclical. New passenger transit car orders vary from year to year and are influenced greatly by major replacement programs and by the construction or expansion of transit systems by transit authorities. A substantial portion of our net sales have been, and we expect that a material portion of our future net sales will be, derived from contracts with metropolitan transit and commuter rail authorities and Amtrak. To the extent that future funding for proposed public projects is curtailed or withdrawn altogether as a result of changes in political, economic, fiscal or other conditions beyond our control, such projects may be delayed or cancelled, resulting in a potential loss of business for us, including transit aftermarket and new transit car orders. There can be no assurance that economic conditions will be favorable or that there will not be significant fluctuations adversely affecting the industry as a whole and, as a result, us. Our backlog is not necessarily indicative of the level of our future revenues. Our backlog represents future production and estimated potential revenue attributable to firm contracts with, or written orders from, our customers for delivery in various periods. Instability in the global economy, negative conditions in the global credit markets, volatility in the industries that our products serve, changes in legislative policy, adverse changes in the financial condition of our customers, adverse changes in the availability of raw materials and supplies, or un-remedied contract breaches could possibly lead to contract termination or cancellations of orders in our backlog or request for deferred deliveries of our backlog orders, each of which could adversely affect our cash flows and results of operations. A growing portion of our sales may be derived from our international operations, which exposes us to certain risks inherent in doing business on an international level. In fiscal year 2013, approximately 48% of our consolidated net sales were to customers outside of the U.S. and we intend to continue to expand our international operations in the future. We currently conduct our international operations through a variety of wholly and majority-owned subsidiaries and joint ventures in Australia, Austria, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Macedonia, Mexico, the Netherlands, Poland, Spain, South Africa, Turkey, and the United Kingdom. As a result, we are subject to various risks, any one of which could have a material adverse effect on those operations and on our business as a whole, including: • • • • • • • lack of complete operating control; lack of local business experience; currency exchange fluctuations and devaluations; foreign trade restrictions and exchange controls; difficulty enforcing agreements and intellectual property rights; the potential for nationalization of enterprises; and economic, political and social instability and possible terrorist attacks against American interests. In addition, certain jurisdictions have laws that limit the ability of non-U.S. subsidiaries and their affiliates to pay dividends and repatriate cash flows. We may incur increased costs due to fluctuations in interest rates and foreign currency exchange rates. In the ordinary course of business, we are exposed to increases in interest rates that may adversely affect funding costs associated with variable-rate debt and changes in foreign currency exchange rates. We may seek to minimize these risks through the use of interest rate swap contracts and currency hedging agreements. There can be no assurance that any of these measures will be effective. Any material changes in interest or exchange rates could result in material losses to us. 12 We may have liability arising from asbestos litigation. Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (RFPC), and are based on a product sold by RFPC prior to the time that the Company acquired any interest in RFPC. Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non- affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with most other pending litigation, cannot be estimated. We are subject to a variety of environmental laws and regulations. We are subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. We believe our operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements. Future climate change regulation could result in increased operating costs, affect the demand for our products or affect the ability of our critical suppliers to meet our needs. The Company has followed the current debate over climate change and the related policy discussion and prospective legislation. The potential challenges for the Company that climate change policy and legislation may pose have been reviewed by the Company. Any such challenges are heavily dependent on the nature and degree of climate change legislation and the extent to which it applies to our industry. At this time, the Company cannot predict the ultimate impact of climate change and climate change legislation on the Company’s operations. Further, when or if these impacts may occur cannot be assessed until scientific analysis and legislative policy are more developed and specific legislative proposals begin to take shape. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gas could require us to incur increased operating costs, and could have an adverse effect on demand for our products. In addition, the price and availability of certain of the raw materials that we use could vary in the future as a result of environmental laws and regulations affecting our suppliers. An increase in the price of our raw materials or a decline in their availability could adversely affect our operating margins or result in reduced demand for our products. Our manufacturer’s warranties or product liability may expose us to potentially significant claims. We warrant the workmanship and materials of many of our products. Accordingly, we are subject to a risk of product liability or warranty claims in the event that the failure of any of our products results in personal injury or death, or does not conform to our customers’ specifications. In addition, in recent years, we have introduced a number of new products for which we do not have a history of warranty experience. Although we have not had any material product liability or warranty claims made against us and we currently maintain liability insurance coverage, we cannot assure that product liability claims, if made, would not exceed our insurance coverage limits or that insurance will continue to be available on commercially acceptable terms, if at all. The possibility exists for these types of warranty claims to result in costly product recalls, significant repair costs and damage to our reputation. Labor disputes may have a material adverse effect on our operations and profitability. We collectively bargain with labor unions that represent approximately 27% of our employees. Our current collective bargaining agreements are generally effective from 2014 through 2016. Agreements expiring at various times during 2014 cover approximately 15% of the Company’s workforce. Failure to reach an agreement could result in strikes or other labor protests which could disrupt our operations. If we were to experience a strike or work stoppage, it would be difficult for us to find a sufficient number of employees with the necessary skills to replace these employees. We cannot assure that we will reach any such agreement or that we will not encounter strikes or other types of conflicts with the labor unions of our personnel. Such labor disputes could have an adverse effect on our business, financial condition or results of operations, could cause us to lose revenues and customers and might have permanent effects on our business. From time to time we are engaged in contractual disputes with our customers. From time to time, we are engaged in contractual disputes with our customers regarding routine delivery and performance issues as well as adjustments for design changes and related extra work. These disputes are generally resolved in the ordinary course of business without having a material adverse impact on us. 13 Our indebtedness could adversely affect our financial health. At December 31, 2013, we had total debt of $450.7 million. If it becomes necessary to access our available borrowing capacity under the 2013 Refinancing Credit Agreement, the $200.0 million currently borrowed under this facility and the $250.0 million 4.375% senior notes, being indebted could have important consequences to us. For example, it could: • • • • • increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; place us at a disadvantage compared to competitors that have less debt; and limit our ability to borrow additional funds. The indenture for our $250 million 4.375% senior notes due in 2023 and our 2013 Refinancing Credit Agreement contain various covenants that limit our Management’s discretion in the operation of our businesses. The indenture governing the notes and our credit agreement contain various covenants that limit our Management’s discretion. The 2013 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2013 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations and sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; capital expenditures; and imposes a minimum interest expense coverage ratio and a maximum debt to cash flow ratio. The indenture under which the senior notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens. The integration of our recently completed acquisitions may not result in anticipated improvements in market position or the realization of anticipated operating synergies or may take longer to realize than expected. In 2012 and 2013, we completed multiple acquisitions with a combined investment of $371.9 million. Although we believe that the acquisitions will improve our market position and realize positive operating results, including operating synergies, operating expense reductions and overhead cost savings, we cannot be assured that these improvements will be obtained or the timing of such improvements. The management and acquisition of businesses involves substantial risks, any of which may result in a material adverse effect on our business and results of operations, including: • • • • • • • • the uncertainty that an acquired business will achieve anticipated operating results; significant expenses to integrate; diversion of Management’s attention; departure of key personnel from the acquired business; effectively managing entrepreneurial spirit and decision-making; integration of different information systems; unanticipated costs and exposure to unforeseen liabilities; and impairment of assets. Item 1B. UNRESOLVED STAFF COMMENTS None. 14 Item 2. PROPERTIES Facilities The following table provides certain summary information about the principal facilities owned or leased by the Company as of December 31, 2013. The Company believes that its facilities and equipment are generally in good condition and that, together with scheduled capital improvements, they are adequate for its present and immediately projected needs. Leases on the facilities are long- term and generally include options to renew. The Company’s corporate headquarters are located at the Wilmerding, PA site. Location Primary Use Segment Own/Lease Approximate Square Feet Domestic Rothbury, MI ................................................. Manufacturing/Warehouse/Office Wilmerding, PA .............................................. Manufacturing/Service Lexington, TN ................................................. Manufacturing Jackson, TN .................................................... Manufacturing Berwick, PA .................................................... Manufacturing/Warehouse Chicago, IL ..................................................... Manufacturing/Service Greensburg, PA ............................................... Manufacturing Chillicothe, OH ............................................... Manufacturing/Office Warren, OH ..................................................... Manufacturing Coshocton, OH ................................................ Manufacturing/Warehouse/Office Germantown, MD ........................................... Manufacturing Kansas City, MO ............................................. Service Center Pittsburgh, PA ................................................. Manufacturing/Office Strongsville, OH ............................................. Manufacturing/Warehouse/Office Columbia, SC .................................................. Service Center Bensenville, IL ................................................ Manufacturing/Warehouse/Office Jacksonville, FL .............................................. Office Cedar Rapids, IA ............................................. Office Jacksonville, FL .............................................. Warehouse Boise, ID ......................................................... Manufacturing Maxton, NC .................................................... Manufacturing Willits, CA ...................................................... Manufacturing Brenham, TX ................................................. Manufacturing/Office Wytheville, VA .............................................. Manufacturing/Office Panorama City, CA ......................................... Manufacturing Spartanburg, SC .............................................. Manufacturing/Service Buffalo Grove, IL ........................................... Manufacturing Cleveland, OH ................................................ Manufacturing/Warehouse/Office Plattsburgh, NY .............................................. Manufacturing Moorpark, CA ................................................ Office/Warehouse Cleveland, OH ................................................ Manufacturing/Warehouse/Office Export, PA ...................................................... Manufacturing Greer, SC ........................................................ Warehouse Elmsford, NY .................................................. Service Center Mountaintop, PA ............................................. Vacant Land Available for Sale International Wallaceburg (Ontario), Canada ...................... Manufacturing San Luis Potosi, Mexico ................................. Manufacturing/Service East Beijing, Hebei Province, China ............... Manufacturing Daye City, Hubei Province, China .................. Manufacturing Northampton, UK ........................................... Manufacturing Shenyang City, Liaoning Province, China ...... Manufacturing Lincolnshire, UK ............................................ Manufacturing/Office London (Ontario), Canada .............................. Manufacturing Stoney Creek (Ontario), Canada ..................... Manufacturing/Service 15 Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight Freight/Transit Freight/Transit Freight/Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Freight Freight Freight Freight Freight Freight Freight Freight Freight Own Own Own Own Own Own Own Own Own Own Own Lease Lease Lease Lease Lease Lease Lease Lease Own Own Own Own Own Lease Lease Lease Lease Lease Lease Lease Lease Lease Lease Own Own Own Own Own Lease Lease Lease Lease Lease 500,000 365,000(1) 170,000 150,000 150,000 123,140 113,000 104,000 102,650 83,000 80,000 95,900 90,000 80,000 71,400 58,000 46,351 37,000 30,000 326,000 105,000 70,000 144,671 82,400 200,000 183,600 115,570 92,609 64,000 45,916 43,283 34,000 34,000 28,000 N/A 126,000 73,100 64,702 59,147 300,000 290,550 149,468 103,540 47,940 Primary Use Location Kolkata, India .................................................. Manufacturing Belo Horizonte, Brazil .................................... Manufacturing/Service Juiz de Fora, Minas Gerais, Brazil .................. Manufacturing/Office Lachine (Quebec), Canada .............................. Service Center Doncaster, UK ................................................ Manufacturing/Service Kilmarnock, UK .............................................. Manufacturing Loughborough, UK ......................................... Manufacturing Kempton Park, South Africa ........................... Manufacturing Wetherill Park, Australia ................................ Manufacturing Avellino, Italy ................................................. Manufacturing/Office Recklinghausen, Germany .............................. Manufacturing Sable-sur-Sarthe, France ................................. Manufacturing Utrecht, The Netherlands ................................ Manufacturing Soria, Spain ..................................................... Manufacturing/Office Burton on Trent, UK ....................................... Manufacturing/Office Camisano, Italy ............................................... Manufacturing/Office San Luis Potosi, Mexico ................................. Manufacturing/Office St. Laurent (Quebec), Canada ......................... Office Hangzhou City, Hunan Province, China ......... Manufacturing Sassuolo, Italy ................................................. Manufacturing Segment Own/Lease Approximate Square Feet Freight Freight Freight Freight Freight/Transit Freight/Transit Freight/Transit Freight/Transit Freight/Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Transit Lease Lease Lease Lease Own Own Lease Lease Lease Own Own Own Own Own Lease Lease Lease Lease Lease Lease 36,965 33,992 33,992 25,455 330,000 107,975 225,274 156,077 70,600 132,495 86,390 51,667 48,438 31,000 253,453 136,465 112,825 38,926 31,032 30,000 (1) Approximately 250,000 square feet are currently used in connection with the Company’s corporate and manufacturing operations. The remainder is leased to third parties. Item 3. LEGAL PROCEEDINGS Information with respect to legal proceedings is included in Note 18 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. Item 4. MINE SAFETY DISCLOSURES Not applicable. 16 EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides information on our executive officers. They are elected periodically by our Board of Directors and serve at its discretion. Officers Age Position Albert J. Neupaver ....................................... Raymond T. Betler ....................................... Patrick D. Dugan .......................................... Charles F. Kovac .......................................... R. Mark Cox ................................................ David L. DeNinno ........................................ Scott E. Wahlstrom ...................................... Robert Bourg................................................ Karl-Heinz Colmer ...................................... Michael E. Fetsko ........................................ John A. Mastalerz ........................................ David Meyer ................................................ Timothy R. Wesley ...................................... Chairman and Chief Executive Officer President and Chief Operating Officer Senior Vice President and Chief Financial Officer Senior Vice President and Group Executive Senior Vice President, Corporate Development Senior Vice President, General Counsel and Secretary Senior Vice President, Human Resources 63 58 47 57 46 58 50 52 Vice President and Group Executive 57 Vice President and Group Executive 48 Vice President and Group Executive 47 Vice President and Corporate Controller 43 Vice President and Group Executive 52 Vice President, Investor Relations and Corporate Communications Albert J. Neupaver was named Chairman and Chief Executive Officer of the Company in May, 2013. Previously, Mr. Neupaver was President and CEO from February 2006 to May 2013. Prior to joining Wabtec, Mr. Neupaver served in various positions at AMETEK, Inc., a leading global manufacturer of electronic instruments and electric motors. Most recently he served as President of its Electromechanical Group for nine years. Raymond T. Betler was named President and Chief Operating Officer in May 2013. Previously, Mr. Betler was Chief Operating Officer since December 2010 until then and Vice President, Group Executive of the Company since August 2008. Prior to joining Wabtec, Mr. Betler served in various positions of increasing responsibility at Bombardier Transportation since 1979. Most recently, Mr. Betler served as President, Total Transit Systems from 2004 until 2008 and before that as President, London Underground Projects from 2002 to 2004. Patrick D. Dugan was named Senior Vice President and Chief Financial officer effective January 2014. Previously, Mr. Dugan was Senior Vice President, Finance and Corporate Controller from January 2012 until November 2013. He originally joined Wabtec in 2003 as Vice President, Corporate Controller. Prior to joining Wabtec, Mr. Dugan served as Vice President and Chief Financial Officer of CWI International, Inc. from December 1996 to November 2003. Prior to 1996, Mr. Dugan was a Manager with PricewaterhouseCoopers. Charles F. Kovac was named Senior Vice President and Group Executive in December 2010. Mr. Kovac was Vice President, Group Executive of the Company from September 2007 until December 2010. Prior to joining Wabtec, Mr. Kovac served as General Manager of the Global Floor Care / Specialty Motors Division of AMETEK, Inc. since 2003. Prior to joining AMETEK, Inc., Mr. Kovac was Chief Operating Officer of The Teleios Group, LLC from 1999 to 2003. R. Mark Cox was named Senior Vice President, Corporate Development in January 2012, and has been with Wabtec since September 2006 as Vice President, Corporate Development. Prior to joining Wabtec, Mr. Cox served as Director of Business Development for the Electrical Group of Eaton Corporation since 2002. Prior to joining Eaton, Mr. Cox was an investment banker with UBS Warburg, Prudential and Stephens. David L. DeNinno was named Senior Vice President, General Counsel and Secretary of the Company in February 2012. Previously, Mr. DeNinno served as a partner at K&L Gates LLP since May 2011 and prior to that with Reed Smith LLP. Scott E. Wahlstrom was named Senior Vice President, Human Resources in January 2012. Mr. Wahlstrom has been Vice President, Human Resources, since November 1999. Previously, Mr. Wahlstrom was Vice President, Human Resources & Administration of MotivePower Industries, Inc. from August 1996 until November 1999. Robert Bourg was named Vice President and Group Executive in February 2012. Prior to that, he was Vice President Rail Electronics from May 2010. Previously, he was Vice President and General Manager of Wabtec Railway Electronics from May 2006 to May 2010. Prior to that, he held various senior management positions within Wabtec since he was hired in August 1992. 17 Karl-Heinz Colmer was named Vice President and Group Executive in February 2012. Mr. Colmer served as Managing Director of Friction Products from January 2009 until February 2012. Prior to that position, Mr. Colmer served as Managing Director of Becorit GmbH since 2006 after joining Wabtec. Prior to joining Wabtec Mr. Colmer served in various management roles with BBA PLC. Michael E. Fetsko was named Vice President and Group Executive in January 2014. Mr Fetsko joined Wabtec in July of 2011 as Vice President, Freight Pneumatics. Prior to joining Wabtec, Mr. Fetsko serviced in various executive management roles with Bombardier Transportation. John A. Mastalerz was named Vice President and Corporate Controller in January 2014. Prior to joining Wabtec, Mr. Mastalerz served in various executive management roles with the H.J. Heinz Company from January 2001 to December 2013, most recently as the Corporate Controller and Principal Accounting Officer. Prior to 2001, Mr. Mastalerz was a Senior Manager with PricewaterhouseCoopers. David Meyer was named Vice President and Group Executive in February 2012. Mr. Meyer served as Vice President, Freight Car Products from April 2007 until February 2012. Prior to this position, Mr. Meyer served in several Vice President and General Manager roles within Wabtec since 2003 and joined Wabtec as a Product Line Manager in 1999. Prior to joining Wabtec, Mr. Meyer served in various management roles with Eaton Corporation. Timothy R. Wesley was named Vice President, Investor Relations and Corporate Communications in November 1999. Previously, Mr. Wesley was Vice President, Investor and Public Relations of MotivePower Industries, Inc. from August 1996 until November 1999. 18 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Common Stock of the Company is listed on the New York Stock Exchange under the symbol “WAB”. As of February 14, 2014, there were 95,996,930 shares of Common Stock outstanding held by 595 holders of record. On May 14, 2013, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 200.0 million shares. In addition, on May 14, 2013, our Board of Directors approved a two-for-one split of the Company’s issued and outstanding common stock in the form of a 100% stock dividend. The increase in the authorized shares and the stock split became effective on May 14, 2013 and June 11, 2013. The high and low sales price of the shares and dividends declared per share were as follows: 2013 First Quarter ............................................................................................................ $ Second Quarter ........................................................................................................ $ Third Quarter ........................................................................................................... $ Fourth Quarter ......................................................................................................... $ High Low Dividends 51.19 $ 56.50 $ 63.29 $ 77.64 $ 44.04 $ 48.04 $ 52.63 $ 61.63 $ 0.025 0.025 0.04 0.04 2012 First Quarter ............................................................................................................ $ Second Quarter ........................................................................................................ $ Third Quarter ........................................................................................................... $ Fourth Quarter ......................................................................................................... $ High Low Dividends 39.54 $ 41.45 $ 41.59 $ 44.52 $ 33.15 $ 34.14 $ 36.44 $ 39.24 $ 0.015 0.025 0.025 0.025 The Company’s credit agreement restricts the ability to make dividend payments, with certain exceptions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and see Note 8 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. At the close of business on February 14, 2014, the Company’s Common Stock traded at $76.45 per share. 19 The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference to any future filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended, except to the extent that Wabtec specifically incorporates it by reference into such filing. The graph below compares the total stockholder return through December 31, 2013, of Wabtec’s common stock to, (i) the S&P 500, (ii) our former peer group of manufacturing companies which consisted of the following publicly traded companies: The Greenbrier Companies, L.B. Foster, Trinity Industries and Freight Car America; and (iii) our new peer group of manufacturing companies which consists of the following publicly traded companies: The Greenbrier Companies, Trinity Industries, AMETEK, Regal Beloit, Harsco, Valmont, Lincoln Electric, Kennametal, Pall, Crane, Donaldson, WABCO, ITT, Briggs & Stratton, IDEX, Woodward, Titan Wheel, Actuant and Koppers. The peer group was revised to better match the operations and products of Wabtec. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2013 400 350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 Wabtec Corporation S&P 500 Index - Total Returns New Peer Group Old Peer Group On December 11, 2013, the Board of Directors amended its stock repurchase authorization to $200 million of the Company’s outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $150 million of which $44.4 million remained. Through December 31, 2013, no shares have been repurchased under the new authorization. The Company intends to purchase shares on the open market or in negotiated or block trades. No time limit was set for the completion of the programs which conform to the requirements under the 2013 Refinancing Credit Agreement, as well as the Notes currently outstanding. During the first and second quarters of 2013, no shares were repurchased. During the third quarter of 2013, the Company repurchased 93,205 shares at an average price of $58.86 per share. During the fourth quarter of 2013, the Company repurchased 413,900 shares at an average price of $66.47 per share. All purchases were on the open market. During the first quarter of 2012, no shares were repurchased. During the second quarter of 2012, the Company repurchased 597,600 shares at an average price of $36.69 per share. During the third quarter of 2012, the Company repurchased 155,000 shares at an average price of $39.16 per share. During the fourth quarter of 2012, the Company repurchased 462,200 shares at an average price of $40.15 per share. All purchases were on the open market. 20 Item 6. SELECTED FINANCIAL DATA The following table shows selected consolidated financial information of the Company and has been derived from audited financial statements. This financial information should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Form 10-K. Year Ended December 31, 2011 2010 2012 2009 2013 764,027 (326,717) 694,567 (302,288) 570,424 449,078 (299,723 ) (246,268) In thousands, except per share amounts Income Statement Data Net sales ........................................................................................ $2,566,392 $2,391,122 $1,967,637 $ 1,507,012 $1,401,616 393,326 Gross profit ................................................................................... (213,294) Operating expenses ....................................................................... Income from operations (1) ........................................................... $ 437,310 $ 392,279 $ 270,701 $ 202,810 $ 180,032 (15,923) $ (16,674) Interest expense, net ...................................................................... $ (15,341) $ (14,251) $ (15,007 ) $ Other income (expense), net ......................................................... 1 (380 ) Net income attributable to Wabtec shareholders (2) ..................... $ 292,235 $ 251,732 $ 170,149 $ 123,099 $ 115,055 Diluted Earnings per Common Share Net income attributable to Wabtec shareholders (3) ..................... $ Cash dividends declared per share (3) ........................................... $ Fully diluted shares outstanding (3) .............................................. Balance Sheet Data Total assets .................................................................................... $2,821,997 $2,351,542 $2,158,953 $ 1,803,081 $1,585,835 188,659 Cash .............................................................................................. 285,615 236,941 391,780 395,873 422,075 Total debt ...................................................................................... 778,913 Shareholders’ equity ..................................................................... 1,587,167 1,282,017 1,047,644 903,387 1.76 $ 0.04 $ 96,657 3.01 $ 0.13 $ 96,832 2.60 $ 0.08 $ 96,742 1.28 $ 0.02 $ 96,010 1.19 0.02 95,954 285,760 450,709 215,766 317,896 (670) (882) (60) (1) (2) (3) In 2011, includes an $18.1 million charge for a court ruling. In 2009, includes $3.9 million royalty charge related to the Final Award in the arbitration proceeding between Faiveley Transport Malmo AB and Wabtec. In 2009, a tax benefit of $9.7 million was recognized primarily related to resolving certain tax issues from prior years that have been closed from further regulatory examination. Information above for net income attributable to Wabtec shareholders, cash dividends declared per share and fully diluted shares outstanding for all periods presented reflects the two-for-one split of the Company’s common stock, which occurred on May 14, 2013. 21 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 19 countries. In 2013, about 48% of the Company’s revenues came from customers outside the U.S. Management Review and Future Outlook Wabtec’s long-term financial goals are to generate cash flow from operations in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Performance System, and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company’s current operational performance through measures such as quality and on-time delivery. The Company monitors a variety of factors and statistics to gauge market activity. The North America freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. Based on those fluctuations, railroads can increase or decrease purchases of new locomotives and freight cars. The AAR compiles statistics that gauge the level of activity in the freight rail industry, including revenue ton-miles and carloadings, which are generally referred to as “rail traffic”. In 2013, North American carloadings increased 2.1%, including a 4.4% increase in intermodal carloadings. In 2014, we expect demand for new locomotives to be about the same as in 2013, while we expect demand for new freight cars to be slightly higher. Future demand depends largely on the strength in the overall economy and in rail traffic volumes. In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of PTC technology, which includes on- board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With our Electronic Train Management System®, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the December 31, 2015 deadline set in the rail safety bill. In recent years, the railroads and transit authorities have stated they cannot achieve full implementation of PTC by the deadline, and various bills have been introduced to extend it, but to date there has been no change in the deadline. An extension of the deadline could affect the rate of industry spending on this technology. Wabtec’s PTC revenue was about $235 million in 2013. The North American transit rail industry is driven by government spending and ridership. In 2012, the U.S. Congress passed a new, two-year funding bill, which maintained spending at about the same level, about $10.7 billion, as in prior years. Ridership provides fare box revenues to transit authorities, which use these funds, along with state and local money, primarily for equipment and system maintenance. Based on preliminary figures from the American Public Transportation Association, ridership on U.S. transit vehicles increased slightly, about 0.2% in 2013, after a 2.5% increase in 2012. Spending in 2014 is expected to remain at about current levels. Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe, Asia-Pacific and South America. To gauge activity in these markets, we monitor trends in rail traffic and the spending plans of our customers. In Europe, the majority of the rail system serves the passenger transit market, which is larger than the transit market in the U.S. Our presence in the U.K., Germany and Italy has positioned the Company to take advantage of this market. UNIFE projects the Western European rail market to grow at about 2% in the next few years, with the United Kingdom and France expected to invest in new rolling stock. Asia-Pacific is a growth market and our various joint ventures and direct exports to China have positioned the Company to take advantage of this growth. Growth has been driven by the continued urbanization of countries such as China, and by investment in freight rail infrastructure to serve the mining and natural resources markets in those countries, as well as in Australia. China is expected to increase spending on rail infrastructure and equipment in 2014, as it resumes investment in high-speed rail programs. Economic growth in Australia has been an area of expansion for the Company as commodity suppliers use our products to meet the demands of their regional customers. The Company is delivering on a PTC contract, expanding locations and has completed two acquisitions in Brazil, allowing us to increase our sales in that market. 22 In 2014 and beyond, general economic and market conditions in the United States and internationally could have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks. RESULTS OF OPERATIONS The following table shows our Consolidated Statements of Operations for the years indicated. Year Ended December 31, 2012 2013 In millions Net sales ............................................................................................................................................ $ 2,566.4 $ 2,391.1 $ 1,967.6 (1,802.4 ) (1,696.5) (1,397.2) Cost of sales ...................................................................................................................................... 694.6 570.4 Gross profit ....................................................................................................................................... (245.7) (247.5) Selling, general and administrative expenses .................................................................................... (41.3) (37.2) Engineering expenses ........................................................................................................................ (15.3) (15.0) Amortization expense ....................................................................................................................... (302.3) (299.7) Total operating expenses ................................................................................................................... 392.3 270.7 Income from operations .................................................................................................................... (14.3) (15.0) Interest expense, net .......................................................................................................................... (0.7) (0.4) Other income (expense), net ............................................................................................................. 377.3 255.3 Income from operations before income taxes ................................................................................... (85.2) Income tax expense ........................................................................................................................... (125.6) 170.1 Net income attributable to Wabtec shareholders ............................................................................... $ 292.2 $ 251.7 $ 764.0 (262.7 ) (46.3 ) (17.7 ) (326.7 ) 437.3 (15.3 ) (0.9 ) 421.1 (128.9 ) 2011 The following table summarizes the results of operations for the period: 2013 COMPARED TO 2012 For the year ended December 31, In thousands Freight Segment ............................................................................ $ 1,398,103 $ 1,501,911 889,211 Transit Segment ............................................................................ 1,168,289 Net sales .............................................................................. 2,566,392 2,391,122 392,279 437,310 251,732 292,235 $ Income from operations ................................................................ Net income attributable to Wabtec shareholders .......................... $ 2013 2012 Percent Change (6.9)% 31.4% 7.3% 11.5% 16.1% The following table shows the major components of the change in sales in 2013 from 2012: In thousands 2012 Net Sales ............................................................................. $ Acquisitions ................................................................................. Change in Sales by Product Line: Brake Products ................................................................... Remanufacturing, Overhaul & Build ................................. Other Transit Products ........................................................ Specialty Products & Electronics ....................................... Other ................................................................................... Foreign Exchange ........................................................................ 2013 Net Sales ............................................................................. $ 23 Freight Segment Transit Segment Total 1,501,911 $ 72,418 889,211 $ 2,391,122 157,881 85,463 (16,124) (27,684) — 35,524 74,786 5,901 (84,879) 1,626 (15,569) 1,398,103 $ 1,168,289 $ 2,566,392 51,648 102,470 5,901 26,801 2,195 4,600 (111,680) (569) (20,169) Net sales increased by $175.3 million to $2,566.4 million in 2013 from $2,391.1 million in 2012. The increase is due to sales related to acquisitions of $157.9 million; higher Brake Products sales of $35.5 million due to higher demand for transit original equipment brakes; higher Remanufacturing, Overhaul and Build sales of $74.8 million from increased demand for transit original equipment locomotives and aftermarket services for locomotives; and an increase in Other Transit Products of $5.9 million. These increases were partially offset by a $84.9 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products, lower demand heat exchange products, partially offset by an increased demand for positive train control products.. Company net sales decreased $15.6 million and income from operations decreased $0.7 million due to unfavorable effects of foreign exchange. Net income for 2013 was $292.2 million or $3.01 per diluted share. Net income increased due to higher sales volume. Freight Segment sales decreased by $103.8 million, or 6.9%, due to a decrease of $27.7 million for freight original equipment locomotives as contract mix shifted to transit locomotives; $111.7 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products and heat exchange products; and $16.1 million from decreased demand for original equipment brake products. These decreases were partially offset by $72.4 million in sales from acquisitions. For the Freight Segment, net sales decreased by $20.2 million due to unfavorable effects of foreign exchange. Transit Segment sales increased by $279.1 million, or 31.4%, due to higher sales of $102.5 million for original equipment transit locomotives as contract mix shifted from freight locomotives; $85.5 million from acquisitions; $51.6 million from increased demand for original equipment brakes; $26.8 million primarily from increased demand for positive train control electronics; and an increase of $5.9 million from certain transit car build contracts. For the Transit Segment, net sales increased by $4.6 million due to favorable effects of foreign exchange. Cost of Sales and Gross profit Cost of Sales increased by $105.9 million to $1,802.4 million in 2013 from $1,696.5 million in 2012. Cost of sales, as a percentage of sales was 70.2% in 2013 and 71.0% in 2012. Raw material costs were approximately 43% as a percentage of sales in 2013 and 2012. Labor costs were approximately 12% as a percentage of sales in 2013 and 2012. Overhead costs as a percentage of sales were approximately 15% in 2013 and 16% in 2012. Freight Segment raw material costs decreased as a percentage of sales to approximately 40% in 2013 from 43% in 2012. Freight Segment labor costs were approximately 11% as a percentage of sales in 2013 and 2012, and overhead costs as a percentage of sales were approximately 15% in 2013 and 2012. Transit Segment raw material costs increased as a percentage of sales to approximately 46% in 2013 from 43% in 2012. Transit Segment labor costs decreased as a percentage of sales to approximately 12% in 2013 from 13% in 2012, and overhead costs as a percentage of sales were 17% in 2013 and 19% in 2012. Freight Segment material costs decreased as a percentage of sales and Transit Segment material costs increased as a percentage of sales due to shift in contract mix for original equipment locomotives from freight to transit. Overhead costs vary as a percentage of sales depending on product mix and changes in sales volume. Included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $0.2 million higher in 2013 compared to 2012 due to increased sales. As a percentage of sales, warranty expense was 0.9% in 2013 and 1.0% in 2012. Gross profit increased to $764.0 million in 2013 compared to $694.6 million in 2012, due to higher sales volume and the reasons discussed above. For 2013 and 2012, gross profit, as a percentage of sales, was 29.8% and 29.0%, respectively. Operating expenses The following table shows our operating expenses: In thousands Selling, general and administrative expenses ................................................ $ Engineering expenses .................................................................................... Amortization expense .................................................................................... Total operating expenses ............................................................................... $ 2013 262,718 $ 46,289 17,710 326,717 $ 2012 245,709 41,307 15,272 302,288 Percent Change 6.9% 12.1% 16.0% 8.1% For the year ended December 31, 24 Selling, general, and administrative expenses increased $17.0 million in 2013 compared to 2012 primarily due to $17.4 million of expenses from acquisitions, partially offset by a release of $3.9 million of certain legal reserves for a court ruling. In addition, selling, general and administrative expenses increased to support higher sales volumes. Engineering expense increased by $5.0 million in 2013 compared 2012 primarily from acquisitions. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense increased in 2013 compared to 2012 due to amortization of intangibles in 2013 associated with acquisitions. Total operating expenses were 12.7% and 12.6% of sales for 2013 and 2012, respectively. The following table shows our segment operating expenses: For the year ended December 31, In thousands Freight Segment ........................................................................................ $ 158,128 $ 157,320 127,759 Transit Segment ........................................................................................ Corporate .................................................................................................. 17,209 Total operating expenses ........................................................................... $ 326,717 $ 302,288 153,132 15,457 2013 2012 Percent Change 0.5% 19.9% (10.2)% 8.1% Segment operating expenses consist of specific segment costs such as, sales and marketing, information technology, insurance, and audit and tax fees, allocated corporate costs, and other segment specific discrete charges. Corporate costs are allocated to the freight and transit segments based on segment revenues. Certain corporate departmental expenses are not allocated. Allocated operating expenses decreased $2.1 million in 2013 compared to 2012, mostly due to a decrease in allocated legal expenses. Freight Segment operating expenses increased $0.8 million in 2013 compared to 2012 because of $5.2 million of expenses from acquisitions, partially offset by a decrease of $4.0 million in expenses allocated to the operating segments. Freight Segment operating expenses were 11.3% and 10.5% of sales for 2013 and 2012, respectively. Transit Segment operating expenses increased $25.4 million in 2013 compared to 2012 because of $12.2 million of expenses from acquisitions, and an increase of $1.8 million in expense allocated to the operating segments. In addition, Transit Segment selling, general and administrative expenses increased to support higher sales volumes. Transit Segment operating expenses were 13.1% and 14.4% of sales for 2013 and 2012, respectively. Corporate non-allocated operating expenses decreased $1.8 million in 2013 compared to 2012 primarily due to a release of $2.8 million of certain allocated legal reserves for a court ruling, partially offset by an increase in certain non-allocated administrative expenses. Income from operations Income from operations totaled $437.3 million or 17.0% of sales in 2013 compared to $392.3 million or 16.4% of sales in 2012. Income from operations increased due to higher sales volume, partially offset by increased operating expenses discussed above. Interest expense, net Overall interest expense, net, increased due to higher debt balances. Other expense, net The Company recorded foreign exchange losses of $3.5 million and $0.1 million in 2013 and 2012, respectively, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings. Income taxes The effective income tax rate was 30.6% and 33.3% in 2013 and 2012, respectively. The decrease in the effective rate is primarily due to retroactive extension of the R&D tax credit, an increase in foreign income taxed at lower statutory rates, and a benefit recorded for the enacted reduction of a foreign statutory tax rate. Net income Net income for 2013 increased $40.5 million, compared to 2012. The increase in net income is due to higher sales volume and lower effective tax rate, partially offset by higher operating expenses. 25 The following table summarizes the results of operations for the period: 2012 COMPARED TO 2011 In thousands Freight Segment ..................................................................... $ Transit Segment ..................................................................... Net sales ....................................................................... Income from operations ......................................................... Net income attributable to Wabtec shareholders ................... $ 2012 1,501,911 $ 889,211 2,391,122 392,279 251,732 $ 2011 1,210,059 757,578 1,967,637 270,701 170,149 Percent Change 24.1% 17.4% 21.5% 44.9% 47.9% For the year ended December 31, The following table shows the major components of the change in sales in 2012 from 2011: In thousands 2011 Net Sales .............................................................................. $ Acquisitions .................................................................................. Change in Sales by Product Line: Freight Segment Transit Segment Total 1,210,059 $ 65,731 757,578 $ 1,967,637 72,615 138,346 Specialty Products & Electronics ........................................ Remanufacturing, Overhaul & Build .................................. Brake Products .................................................................... Other Transit Products ......................................................... Other .................................................................................... Foreign Exchange ......................................................................... 2012 Net Sales .............................................................................. $ 132,948 46,124 41,362 — 7,733 (2,046) 1,501,911 $ 20,908 153,856 97,703 51,579 40,795 (567 ) 4,176 4,176 8,541 808 (19,932) (17,886 ) 889,211 $ 2,391,122 Net sales increased by $423.5 million to $2,391.1 million in 2012 from $1,967.6 million in 2011. The increase is due to higher sales of $153.9 million for Specialty Products and Electronics from increased demand for freight original equipment rail products, and positive train control electronics and aftermarket products; $138.3 million from acquisitions; $97.7 million for Remanufacturing, Overhaul and Build sales from increased demand for freight original equipment locomotives and aftermarket services for locomotives; $40.8 million for Brake Products sales due to higher demand for original equipment brakes; and $8.6 million for other products. Company net sales decreased $19.9 million and income from operations decreased $2.4 million due to unfavorable effects of foreign exchange. Net income for 2012 was $251.7 million or $2.60 per diluted share. Net income increased due to higher sales volume. Freight Segment sales increased by $291.9 million, or 24.1%, due to higher sales of $132.9 million for Specialty Products and Electronics, primarily resulting from increased demand for original equipment rail products, and positive train control electronics and aftermarket rail products; $65.7 million from acquisitions; $46.1 million from increased demand for freight original equipment locomotives and aftermarket services for locomotives; $41.4 million for Brake Products; and $7.7 million for other products. For the Freight Segment, net sales decreased by $2.0 million due to unfavorable effects of foreign exchange. Transit Segment sales increased by $131.6 million, or 17.4%, due to $72.6 million from acquisitions; higher sales of $51.6 million for Remanufacturing, Overhaul and Build from increased demand for overhaul and aftermarket services; $20.9 million of higher Specialty Products and Electronics sales from increased demand for transit positive train control electronics; and $4.2 million for Other Transit Products. For the Transit Segment, net sales decreased by $17.9 million due to unfavorable effects of foreign exchange. Cost of Sales and Gross profit Cost of Sales increased by $299.3 million to $1,696.5 million in 2012 from $1,397.2 million in 2011. Cost of sales, as a percentage of sales was 71.0% in 2012 and 2011. 26 During 2012, raw material costs decreased as a percentage of sales to approximately 43% in 2012 from 44% in 2011. Labor costs increased as a percentage of sales to approximately 12% in 2012 from 11% in 2011. Overhead costs as a percentage of sales were approximately 16% in 2012 and 2011. Freight Segment raw material costs decreased as a percentage of sales to approximately 43% in 2012 from 44% in 2011. Freight Segment labor costs increased as a percentage of sales to approximately 11% in 2012 from 10% in 2011, and overhead costs as a percentage of sales were approximately 15% in 2012 and 2011. Transit Segment raw material costs as a percentage of sales were approximately 43% in 2012 and 2011. Transit Segment labor costs increased as a percentage of sales to approximately 13% in 2012 from 12% in 2011, and overhead costs as a percentage of sales were 19% in 2012 and 2011. In general, raw material costs as a percentage of sales decreased and labor costs as a percentage of sales increased reflecting the higher mix of revenue generated from positive train control electronics and aftermarket services, which has a lower raw material component and higher labor component as cost of sales. Included in costs of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $3.1 million higher in 2012 compared to 2011 due to increased sales and increased provisions for certain transit contracts. As a percentage of sales, warranty expense was 1.0% in 2012 and 2011. Gross profit increased to $694.6 million in 2012 compared to $570.4 million in 2011, due to higher sales volume and the reasons discussed above. For 2012 and 2011, gross profit, as a percentage of sales, was 29.0%. Operating expenses The following table shows our operating expenses: In thousands Selling, general and administrative expenses .............. $ Engineering expenses .................................................. Amortization expense .................................................. Total operating expenses ............................................. $ 2012 245,709 $ 41,307 15,272 302,288 $ 2011 247,534 37,193 14,996 299,723 Percent Change (0.7%) 11.1% 1.8% 0.9% For the year ended December 31, Selling, general, and administrative expenses decreased $1.8 million in 2012 compared to 2011 because the prior year included an $18.1 million charge for a court ruling which was recorded in the second quarter of 2011 and a decrease of $3.0 million in other Corporate expenses. This was offset by $18.0 million of expenses from acquisitions, and $1.7 million increase in incentive and non- cash compensation. Engineering expense increased by $4.1 million in 2012 compared 2011 as the company focused engineering resources on product development. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense increased in 2012 compared to 2011 due to amortization of intangibles in 2012 associated with acquisitions. Total operating expenses were 12.6% and 15.2% of sales for 2012 and 2011, respectively. The following table shows our segment operating expenses: In thousands Freight Segment .......................................................... $ Transit Segment........................................................... Corporate ..................................................................... Total operating expenses ............................................. $ 2012 157,320 $ 127,759 17,209 302,288 $ 2011 146,992 114,390 38,341 299,723 Percent Change 7.0% 11.7% (55.1)% 0.9% For the year ended December 31, Segment operating expenses consist of specific segment costs such as, sales and marketing, information technology, insurance, and audit and tax fees, allocated corporate costs, and other segment specific discrete charges. Corporate costs are allocated to the freight and transit segments based on segment revenues. Certain corporate departmental expenses are not allocated. Freight Segment operating expenses increased $10.3 million in 2012 compared to 2011 because of $6.4 million of expenses from acquisitions, an increase of $0.7 million in expenses allocated to the operating segments and an increase of $3.2 million in selling, general and administrative expense supporting higher sales volume. Freight Segment operating expenses were 10.5% and 12.1% of sales for 2012 and 2011, respectively. 27 Transit Segment operating expenses increased $13.4 million in 2012 compared to 2011 because of $13.1 million of expenses from acquisitions, a benefit of $2.4 million for a settlement related to a prior acquisition which was recorded in the second quarter of 2011, and an increase of $0.6 million in expense allocated to the operating segments, partially offset by a decrease of $2.7 million in selling, general and administrative expense from cost saving initiatives. Transit Segment operating expenses were 14.4% and 15.1% of sales for 2012 and 2011, respectively. Corporate non-allocated operating expenses decreased $21.1 million in 2012 compared to 2011 because of the charge for a court ruling discussed above and decreases in other non-allocated departmental expenses. Income from operations Income from operations totaled $392.3 million or 16.4% of sales in 2012 compared to $270.7 million or 13.8% of sales in 2011. Income from operations increased due to higher sales volume, partially offset by increased operating expenses discussed above. Interest expense, net Overall interest expense, net, decreased due to lower interest rates and lower debt balances. Other expense, net The Company recorded foreign exchange gains of $0.1 million in 2012 and foreign exchange losses of $2.0 million in 2011 due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings. Income taxes The effective income tax rate was 33.3% and 33.4% in 2012 and 2011, respectively. Net income Net income for 2012 increased $81.6 million, compared to 2011. The increase in net income is due to higher sales volume, partially offset by increased operating expenses. 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: In thousands Cash provided by (used for): For the year ended December 31, 2012 2011 2013 Operating activities ............................................................................... $ Investing activities ................................................................................ Financing activities: 235,653 $ (258,692) 237,438 $ (184,944 ) 248,626 (146,182) Proceeds from debt ...................................................................... Payments of debt ......................................................................... Stock repurchase .......................................................................... Cash dividends ............................................................................ Other ............................................................................................ 959,067 (829,842) (32,998) (12,644) 9,431 233,400 (311,457 ) (46,556 ) (7,666 ) 7,556 257,000 (283,202) (26,022) (3,849) 9,314 Operating activities. In 2013, 2012 and 2011, cash provided by operations was $235.7 million, $237.4 million and $248.6 million, respectively. In comparison to 2012, cash provided by operations in 2013 resulted from higher operating results offset by higher cash outflows for working capital. The major components of the higher cash outflows were as follows: a negative change in accounts receivable of $126.7 million as the number of days to collect cash increased slightly and sales increased, a negative change in customer deposits due to the completion of certain large contracts, and a $15.8 million payment in the prior year for a court ruling. These cash outflows were partially offset by the following cash inflows: a favorable change in accounts payable of $60.9 million due to payment timing, and a favorable change or decrease of $58.6 million in inventory as our days’ supply in inventory (DSI) decreased to 63 days from 72 days at the end of 2012 due to the completion of certain original equipment contracts. In comparison to 2011, the decrease in cash provided by operations in 2012 resulted from higher working capital, offset by higher net income and higher non-cash items. In 2012 the following working capital items used cash: accounts receivable increased by $23.0 million, primarily due to higher sales; inventory increased by $32.5 million to support the higher sales and due to certain long term contracts; accounts payable and accrued income taxes decreased $34.6 million due to the timing of payments. All other operating assets and liabilities, net, provided cash of $13.4 million due to the payment timing of certain accrued liabilities. 28 Investing activities. In 2013, 2012 and 2011, cash used in investing activities was $258.7 million, $184.9 million and $146.2 million, respectively. The major components of the cash outflow are as follows: planned additions to property, plant, and equipment of $41.2 million for continued investments in our facilities and manufacturing processes and acquisitions of $223.5 million. This compares to $36.0 million in property, plant, and equipment and $149.9 million in net cash paid for acquisitions in 2012. Refer to Note 3 of the “Notes to Condensed Consolidated Financial Statements” for additional information on acquisitions. Financing activities . In 2013, cash provided by financing activities was $93.0 million, which included $711.6 million in proceeds from the revolving credit facility debt, proceeds of $247.4 million from the issuance of 4.375% Senior Notes, net of issuance costs, $679.6 million of repayments of debt on the revolving credit facility, $150.0 million payment for the maturity of the 2003 Senior Notes, $12.6 million of dividend payments and $33.0 million of Wabtec stock repurchases. In 2012, cash used in financing activities was $124.7 million, which included $233.4 million in proceeds from debt and $311.4 million of repayments of debt on the revolving credit facility, $7.7 million of dividend payments and $46.6 million of Wabtec stock repurchases. In 2011, cash used in financing activities was $46.8 million, which included $257.0 million in proceeds from debt and $243.5 million of repayments of debt on the revolving credit facility, $39.7 million of debt repayments on the term loan and other debt, $3.8 million of dividend payments and $26.0 million of Wabtec stock repurchases. The following table shows outstanding indebtedness at December 31, 2013 and 2012. December 31, In thousands — 4.375% senior notes, due 2023 ......................................................................................................... $ 250,000 $ 150,000 6.875% senior notes, due 2013 ......................................................................................................... — 167,000 Revolving Credit Facility ................................................................................................................. 200,000 896 709 Capital Leases ................................................................................................................................... 317,896 Total ........................................................................................................................................ 450,709 Less—current portion ............................................................................................................. 43 421 Long-term portion ................................................................................................................... $ 450,288 $ 317,853 2013 2012 Cash balances at December 31, 2013 and 2012 were $285.8 million and $215.8 million, respectively. 2013 Refinancing Credit Agreement On December 19, 2013, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provides the company with a $800 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The facility expires on December 19, 2018. The 2013 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At December 31, 2013, the Company had available bank borrowing capacity, net of $59.8 million of letters of credit, of approximately $540.2 million, subject to certain financial covenant restrictions Under the 2013 Refinancing Credit Agreement, the Company may elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 100 basis points. At December 31, 2013 the weighted average interest rate on the Company’s variable rate debt was 1.17%. On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150 million. The effective date of the interest rate swap agreement is July 31, 2013, and the termination date is November 7, 2016. The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible. 29 The 2013 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2013 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company does not expect that these measurements will limit the Company in executing our operating activities. 2011 Refinancing Credit Agreement On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility with a consortium of commercial banks. This “2011 Refinancing Credit Agreement” provides the company with a $600 million, five-year revolving credit facility. The Company incurred approximately $1.9 million of deferred financing cost related to the 2011 Refinancing Credit Agreement. The facility was set to expire on November 7, 2016. Under the 2011 Refinancing Credit Agreement, the Company may have elected a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on quoted LIBOR rates plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to cash flow ratios. The current Base Rate margin was 0 basis points and the Alternate Rate margin was 100 basis points. 4.375% Senior Notes Due August 2023 In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (“the 2013 Notes”). Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance. The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens. The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities. 6.875% Senior Notes Due August 2013 In August 2003, the Company issued $150.0 million of Senior Notes due in 2013 (“the 2003 Notes”). The 2003 Notes were issued at par. Interest on the 2003 Notes accrued at a rate of 6.875% per annum and was payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement and for general corporate purposes. The Company paid off the 2003 Notes, which matured on July 31, 2013 utilizing available capacity under the 2011 Refinancing Credit Agreement. 30 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 have 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, 2013: In thousands Operating activities: Total Less than 1 year 1 – 3 years 3 – 5 years More than 5 years Purchase obligations (1) .................................................................... $ 27,232 $ 20,008 $ 6,277 $ Operating leases (2) ........................................................................... Pension benefit payments (3) ............................................................ Postretirement benefit payments (4) .................................................. 16,591 37,437 33,705 10,299 20,632 21,796 3,490 87,733 112,311 18,677 1,574 3,259 947 $ — — 59,584 10,354 Financing activities: Interest payments (5) ......................................................................... Long-term debt (6) ............................................................................ Dividends to shareholders (7) ............................................................ 123,274 450,709 15,376 Investing activities: 15,199 29,990 26,556 189 200,081 — 15,376 — 421 51,529 250,018 — Capital projects (8) ............................................................................ 58,341 58,341 — — — Other: Standby letters of credit (9) ............................................................... Total ............................................................................................................ 60,188 55,699 1,576 — $193,508 $ 99,360 $ 286,575 2,913 (1) Purchase obligations represent non-cancelable contractual obligations at December 31, 2013. In addition, the Company had $302.6 million 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 14 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 $5.2 million to pension plan investments in 2013. See further disclosure in Note 9 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. (5) Postretirement payments are based on actuarial estimates using current assumptions for discount rates and health care costs. See further disclosure in Note 9 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. 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 Capital Leases are based on contractual terms and the Company’s current interest rates. (6) Scheduled principal repayments of outstanding loan balances are disclosed in Note 8 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 $15.4 million. (8) The annual capital expenditure budget is subject to approval by the Board of Directors. The 2014 budget amount was approved at the December 2013 Board of Directors meeting. (9) The Company has $59.8 million in outstanding letters of credit for performance and bid bond purposes, which expire in various dates through 2019. 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 $10.5 million, the timing of which are uncertain except for $0.3 million that may become payable during 2014. Refer to Note 10 of the “Notes to Consolidated Financial Statements” for additional information on uncertain tax positions. 31 Obligations for operating activities. The Company has entered into $27.2 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 $10.1 million and $12.9 million in 2013 and 2012, respectively. Benefits paid for post-retirement plans were $2.9 million and $1.5 million in 2013 and in 2012, 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 $15.4 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, 2013 initial value of performance bonds issued on the Company’s behalf is about $246.5 million. Obligations for investing activities. The Company typically spends approximately $40 million to $60 million a year for capital expenditures, primarily related to facility expansion efficiency and modernization, health and safety, and environmental control. The Company expects annual capital expenditures in the future will be within this range. Forward Looking Statements We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward- looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct. These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things: Economic and industry conditions • • • • • • • • • • • prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia, and South Africa; decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services; reliance on major original equipment manufacturer customers; original equipment manufacturers’ program delays; demand for services in the freight and passenger rail industry; demand for our products and services; orders either being delayed, cancelled, not returning to historical levels, or reduced or any combination of the foregoing; consolidations in the rail industry; continued outsourcing by our customers; industry demand for faster and more efficient braking equipment; fluctuations in interest rates and foreign currency exchange rates; or availability of credit; Operating factors • • • • • supply disruptions; technical difficulties; changes in operating conditions and costs; increases in raw material costs; successful introduction of new products; 32 • • • • performance under material long-term contracts; labor relations; completion and integration of acquisitions; or the development and use of new technology; Competitive factors • the actions of competitors; Political/governmental factors • • • • • • political stability in relevant areas of the world; future regulation/deregulation of our customers and/or the rail industry; levels of governmental funding on transit projects, including for some of our customers; political developments and laws and regulations, including those related to Positive Train Control; federal and state income tax legislation; or the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental, asbestos-related matters and pension liabilities; and Transaction or commercial factors • the outcome of negotiations with partners, governments, suppliers, customers or others. Statements in this 10-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. 33 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. 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 the cost of additional reserves 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. 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 last quantitative analysis performed as of October 1, 2013, a decline in the terminal growth rate greater than 50 basis points would decrease fair market value by $175.2 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 $482.9 million. Even with such changes the fair value of the reporting units would be greater than their net book values as of the valuation date of October 1, 2013, necessitating no Step 2 calculations. 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 at risk of realizing material gains or losses. Accounting for Pensions and Postretirement Benefits: Description These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality). 34 Judgments and Uncertainties Significant judgments and estimates are used in determining the liabilities and expenses for pensions and other postretirement benefits. The rate used to discount future estimated liabilities is determined considering the rates available at year-end on debt instruments that could be used to settle the obligations of the plan. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations and is generally applied to a five-year average market value of assets. The differences between actual and expected asset returns are recognized in expense using the normal amortization of gains and losses per ASC 715. Effect if Actual Results Differ From Assumptions If assumptions used in determining the pension and other postretirement benefits change significantly, these costs can fluctuate materially from period to period. The key assumptions in determining the pension and other postretirement expense and obligation include the discount rate, expected return on assets and health care cost trend rate. For example, a 1% decrease or increase in the discount rate used in determining the pension and postretirement expense would increase expense $3.7 million or decrease expense $1.9 million, respectively. A 1% decrease or increase in the discount rate used in determining the pension and postretirement obligation would increase the obligation $38.0 million or decrease the obligation $30.0 million, respectively. A 1% decrease or increase in the expected return on assets used in determining the pension expense would increase or decrease expense $2.0 million, respectively. If the actual asset values at December 31, 2012 had been 1% lower, the amortization of losses in the following year would increase $0.2 million. A 1% decrease or increase in the health care cost trend rate used in determining the postretirement expense would decrease or increase expense $0.4 million. A 1% decrease or increase in the health care cost trend rate used in determining the postretirement obligation would decrease the obligation $3.1 million or increase the obligation $3.6 million, respectively. Stock-based Compensation: Description The Company has issued incentive stock awards 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 commenced cycle being 2012-2014. No incentive stock awards will vest for performance below the three- year cumulative threshold. The Company utilizes an economic profit measure for this performance 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 awards 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 $0.8 million and $0.8 million, respectively. 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. 35 Revenue Recognition: Description Revenue is recognized in accordance with ASC-605 “Revenue Recognition.” The Company recognizes revenues on long- term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Certain pre-production costs relating to long term production and supply contracts have been deferred and will be recognized over the life of the contracts. Judgments and Uncertainties Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined. Contract accounting involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated profit margin percentages. For each contract with revenue recognized using the percentage of completion method, the amount reported as revenues is determined by calculating cost incurred to date as a percentage of the total expected contract costs to determine the percentage of total contract revenue to be recognized in the current period. Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Total contract sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, and price adjustment clauses (such as inflation or index-based clauses). Total contract cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. 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. For long-term contracts, revenues and cost estimates are reviewed and revised quarterly at a minimum and adjustments are reflected in the accounting period as such amounts are determined. Pre-production costs are recognized over the expected life of the contract usually based on the Company’s progress toward the estimated number of units expected to be delivered under the production or supply contract. 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 adversely or positively affect financial performance in future periods. If the combined profit margin for all contracts recognized on the percentage of completion method during 2013 had been estimated to be higher or lower by 1%, it would have increased or decreased revenue and gross profit for the year by approximately $8.3 million. A few of our contracts are expected to be completed in a loss position. Provisions are made currently for estimated losses on uncompleted contracts. A charge to expense for unrecognized portions of pre-production costs could be realized if the Company’s estimate of the number of units to be delivered changes or the underlying contract is cancelled. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. The Company’s variable rate debt represents 11% and 53% of total long-term debt at December 31, 2013 and 2012, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at December 31, 2013 would increase or decrease interest expense by about $0.5 million. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swap agreements which effectively converted a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for additional information regarding interest rate risk. Foreign Currency Exchange Risk The Company is subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the year ended December 31, 2013, approximately 52% of Wabtec’s net sales were to the United States, 12% to the United Kingdom, 7% to Canada, 5% to Australia, 5% to Mexico, 3% to Brazil, 2% to Germany and 14% in other international locations. (See Note 19 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report). To reduce the impact of changes in currency exchange rates, the Company has periodically entered into foreign currency forward contracts. Refer to “Financial Derivatives and Hedging Activities” in Note 2 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for more information regarding foreign currency exchange risk. 36 Our market risk exposure is not substantially different from our exposure at December 31, 2012. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are set forth in Item 15, of Part IV hereof. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with our independent public accountants. Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2013. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal finance officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting. Management’s annual report on internal control over financial reporting and the attestation report of the registered public accounting firm are included in Part IV, Item 15 of this report. Management’s Report on Internal Control over Financial Reporting Management’s Report on Internal Control Over Financial Reporting appears on page 42 and is incorporated herein by reference. Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Ernst & Young’s attestation report on internal control over financial reporting appears on page 44 and is incorporated herein by reference. Item 9B. OTHER INFORMATION None. 37 PART III Items 10 through 14. In accordance with the provisions of General Instruction G(3) to Form 10-K, the information required by Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accounting Fees and Services) is incorporated herein by reference from the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 14, 2014, except for the Equity Compensation Plan Information required by Item 12, which is set forth in the table below. The definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013. Information relating to the executive officers of the Company is set forth in Part I. Wabtec has adopted a Code of Ethics for Senior Officers which is applicable to all of our executive officers. As described in Item 1 of this report the Code of Ethics for Senior Officers is posted on our website at www.wabtec.com. In the event that we make any amendments to or waivers from this code, we will disclose the amendment or waiver and the reasons for such on our website. This table provides aggregate information as of December 31, 2013 concerning equity awards under Wabtec’s compensation plans and arrangements. Plan Category Equity compensation plans approved by shareholders ..... Equity compensation plans not approved by shareholders ............................................................... Total ..................................................................... (a) (b) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 1,232,862 $ — 1,232,862 $ 24.36 — 24.36 3,733,139 — 3,733,139 38 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The financial statements, financial statement schedules and exhibits listed below are filed as part of this annual report: PART IV (a) (1) Financial Statements and Reports on Internal Control Management’s Reports to Westinghouse Air Brake Technologies Corporation Shareholders ...... Report of Independent Registered Public Accounting Firm ........................................................... Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ................................................................................................................................... Consolidated Balance Sheets as of December 31, 2013 and 2012 ................................................. Consolidated Statements of Operations for the three years ended December 31, 2013, 2012 and 2011 ........................................................................................................................................... Page 42 43 44 45 46 Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013, 2012 and 2011 .................................................................................................................. 47 Consolidated Statements of Cash Flows for the three years ended December 31, 2013, 2012 and 2011 .................................................................................................................................... 48 Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2013, 2012 and 2011 ........................................................................................................................... Notes to Consolidated Financial Statements .................................................................................. 49 50 (2) Financial Statement Schedules Schedule II—Valuation and Qualifying Accounts ........................................................................ 79 (b) Exhibits 3.1 3.2 3.3 4.1 4.2 4.3 10.1 10.2 10.3 Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended December 31, 2003......................................................................................................................... Certificate of Amendment of Restated Certificate of Incorporation dated May 14, 2013 .............. Amended and Restated By-Laws of the Company, effective February 15, 2011 ........................... Indenture, dated August 8, 2013 by and between the Company and Wells Fargo, National Association, as Trustee ................................................................................................................... First Supplemental Indenture, dated August 8, 2013, by and between the Company and Wells Fargo Bank, National Association, as Trustee ................................................................................ Form of 4.375% Senior Note due 2023 (included in Exhibit 4.2) .................................................. Agreement of Sale and Purchase of the North American Operations of the Railway Products Group, an operating division of American Standard Inc. (now known as Trane), dated as of 1990 between Rail Acquisition Corp. and American Standard Inc. (only provisions on indemnification are reproduced) ..................................................................................................... Letter Agreement (undated) between the Company and American Standard Inc. (now known as Trane) on environmental costs and sharing .................................................................................... Purchase Agreement dated as of June 17, 1992 among the Company, Schuller International, Inc., Manville Corporation and European Overseas Corporation (only provisions on indemnification are reproduced) ..................................................................................................... 39 Filing Method 9 11 8 12 12 3 2 2 2 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 21 23.1 31.1 31.2 32.1 Westinghouse Air Brake Company 1995 Non-Employee Directors’ Fee and Stock Option Plan, as amended * .................................................................................................................................. Westinghouse Air Brake Technologies Corporation 2000 Stock Incentive Plan, as amended * .... Employment Agreement with Albert J. Neupaver, dated February 1, 2006 * ................................ 4 4 3 Form of Restricted Stock Agreement * .......................................................................................... 10 Westinghouse Air Brake Technologies Corporation 2011 Stock Incentive Plan * ........................ Stock Purchase Agreement, by and among the Company, Standard Car Truck Company and Robclif, Inc., dated September 12, 2008 ........................................................................................ First Amended and Restated Refinancing Credit Agreement, dated as of December 19, 2013, by and among the Company, Wabtec Cooperatief UA, certain subsidiaries as the guarantors, the lenders party thereto and, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, J.P. Morgan Securities, Inc., as Joint Lead Arranges and Joint Book Runners, JP Morgan Chase Bank, N.A. as Syndication Agent, Bank of America, N.A., and Citizens Bank of Pennsylvania, Branch Banking and Trust Company and The Bank of Toyko- Mitsubish UFJ, Ltd., as Co-Documentation Agents ....................................................................... Form of Employment Continuation Agreement entered into by the Company with Albert J. Neupaver, Alvaro Garcia-Tunon, Raymond T. Betler, Charles F. Kovac, R. Mark Cox, David L. DeNinno, Patrick D. Dugan, Scott E. Wahlstrom and Timothy R. Wesley* ............................. Wabtec Corporation Deferred Compensation Plan for Executive Officers and Directors as adopted December 10, 2009 * ........................................................................................................ Form of Agreement for Nonstatutory Stock Option under the 1995 Non-Employee Directors’ Fee and Stock Option Plan, as amended * ...................................................................................... Form of Agreement for Nonstatutory Stock Options under 2000 Stock Incentive Plan, as amended *....................................................................................................................................... Form of Agreement for Nonstatutory Stock Options under 2011 Stock Incentive Plan as amended *....................................................................................................................................... List of subsidiaries of the Company ............................................................................................... Consent of Ernst & Young LLP ..................................................................................................... Rule 13a-14(a)/15d-14(a) Certifications ......................................................................................... Rule 13a-14(a)/15d-14(a) Certifications ......................................................................................... Section 1350 Certifications ............................................................................................................ 101.INS XBRL Instance Document.............................................................................................................. 101.SCH XBRL Taxonomy Extension Calculation Linkbase Document ...................................................... 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document ...................................................... 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. ....................................................... 101.LAB XBRL Taxonomy Extension Label Linkbase Document ............................................................... 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document..................................................... 1 2 3 4 5 6 Filed herewith. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 33-90866). Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 033-90866) for the period ended March 31, 2006. Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on April 13, 2006. Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on March 31, 2011. Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 1-13782) for the period ended September 30, 2008. 40 5 6 1 7 10 10 10 10 1 1 1 1 1 1 1 1 1 1 1 Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782) dated July 2, 2009. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated February 22, 2011. Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 25, 2011. Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 22, 2013. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated May 15, 2013. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated August 8, 2013. 7 8 9 10 11 12 * Management contract or compensatory plan. 41 MANAGEMENT’S REPORTS TO WABTEC SHAREHOLDERS Management’s Report on Financial Statements and Practices The accompanying consolidated financial statements of Westinghouse Air Brake Technologies Corporation and subsidiaries (the “Company”) were prepared by Management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on Management’s best judgments and estimates. The other financial information included in the 10-K is consistent with that in the financial statements. Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, Management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has excluded Napier Turbochargers Ltd. (“Napier”), Turbonetics Holdings, Inc. (“Turbonetics”), and Longwood Industries, Inc. (“Longwood”) from its assessment of internal controls over financial reporting as of December 31, 2013 because the Company acquired Napier effective February 1, 2013, Turbonetics effective July 30, 2013 and Longwood effective September 24, 2013. Napier, Turbonetics and Longwood are wholly owned subsidiaries whose total assets represents 4.9%, 0.8% and 3.8%, respectively and whose total net assets represents 7.5%, 1.4% and 5.3%, respectively, and net income represents 1.8%, 0.1% and 0.1%, respectively and whose customer revenues represents 1.7%, 0.2% and 0.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2013. Based on its assessment, Management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013, based on criteria in Internal Control-Integrated Framework issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein. 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Westinghouse Air Brake Technologies Corporation: We have audited the accompanying consolidated balance sheets of Westinghouse Air Brake Technologies Corporation as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westinghouse Air Brake Technologies Corporation as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Westinghouse Air Brake Technologies Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 21, 2014 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania February 21, 2014 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Shareholders of Westinghouse Air Brake Technologies Corporation: We have audited Westinghouse Air Brake Technologies Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Westinghouse Air Brake Technologies Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Napier Turbochargers Ltd. (“Napier”), Turbonetics Holdings, Inc. (“Turbonetics”), and Longwood Industries, Inc. (“Longwood”) which are included in the 2013 consolidated financial statements of Westinghouse Air Brake Technologies Corporation and constituted 4.9%, 0.8% and 3.8%, respectively, of total assets and 7.5%, 1.4% and 5.3%, respectively, of total net assets as of December 31, 2013, and 1.8%, 0.1% and 0.1%, respectively, of net income and 1.7%, 0.2% and 0.7%, respectively, of customer revenue for the year then ended. Our audit of internal control over financial reporting of Westinghouse Air Brake Technologies Corporation also did not include an evaluation of the internal control over financial reporting of Napier, Turbonetics, and Longwood. In our opinion, Westinghouse Air Brake Technologies Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Westinghouse Air Brake Technologies Corporation as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 21, 2014 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania February 21, 2014 44 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS In thousands, except shares and par value Assets Current Assets Cash and cash equivalents ........................................................................................................................... $ Accounts receivable ..................................................................................................................................... Unbilled accounts receivable ....................................................................................................................... Inventories ................................................................................................................................................... Deferred income taxes ................................................................................................................................. Other ............................................................................................................................................................ Total current assets ................................................................................................................................ Property, plant and equipment ..................................................................................................................... Accumulated depreciation ........................................................................................................................... Property, plant and equipment, net ........................................................................................................ Other Assets Goodwill ...................................................................................................................................................... Other intangibles, net ................................................................................................................................... Deferred income taxes ................................................................................................................................. Other noncurrent assets ................................................................................................................................ Total other assets ................................................................................................................................... Total Assets ..................................................................................................................................... $ Liabilities and Shareholders’ Equity Current Liabilities Accounts payable ......................................................................................................................................... $ Customer deposits ........................................................................................................................................ Accrued compensation ................................................................................................................................. Accrued warranty......................................................................................................................................... Current portion of long-term debt ................................................................................................................ Commitments and contingencies ................................................................................................................. Other accrued liabilities ............................................................................................................................... Total current liabilities ........................................................................................................................... Long-term debt ............................................................................................................................................ Accrued postretirement and pension benefits .............................................................................................. Deferred income taxes ................................................................................................................................. Commitments and contingencies ................................................................................................................. Accrued warranty......................................................................................................................................... Other long-term liabilities ............................................................................................................................ Total liabilities ................................................................................................................................. Shareholders’ Equity Preferred stock, 1,000,000 shares authorized, no shares issued ................................................................... Common stock, $.01 par value; 200,000,000 shares authorized: 132,349,534 shares issued and 95,909,948 and 95,407,368 outstanding at December 31, 2013 and December 31, 2012, respectively ................................................................... Additional paid-in capital ............................................................................................................................ Treasury stock, at cost, 36,439,586 and 36,518,656 shares, at December 31, 2013 and December 31, 2012, respectively ....................................................................... Retained earnings ......................................................................................................................................... Accumulated other comprehensive loss ....................................................................................................... Total Westinghouse Air Brake Technologies Corporation shareholders' equity .................................... Non-controlling interest (minority interest) ................................................................................................. Total shareholders’ equity ..................................................................................................................... Total Liabilities and Shareholders’ Equity ...................................................................................... $ December 31, 2013 2012 285,760 $ 349,458 205,045 403,229 50,622 38,933 1,333,047 597,740 (321,662 ) 276,078 786,433 385,679 987 39,773 1,212,872 2,821,997 $ 326,666 $ 66,573 57,058 43,197 421 485 85,000 579,400 450,288 50,003 114,486 1,141 17,396 22,116 1,234,830 215,766 292,786 97,129 407,039 60,894 19,324 1,092,938 555,924 (311,836) 244,088 666,022 308,321 183 39,990 1,014,516 2,351,542 248,593 82,810 53,222 39,860 43 435 128,096 553,059 317,853 66,388 91,176 1,238 18,352 21,459 1,069,525 - - 1,323 415,059 (372,969 ) 1,576,702 (34,856 ) 1,585,259 1,908 1,587,167 2,821,997 $ 1,323 381,348 (349,388) 1,297,111 (53,564) 1,276,830 5,187 1,282,017 2,351,542 The accompanying notes are an integral part of these statements. 45 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 2013 2012 2011 In thousands, except per share data Net sales ............................................................................................... $ Cost of sales ......................................................................................... Gross profit ............................................................................. Selling, general and administrative expenses ....................................... Engineering expenses ........................................................................... Amortization expense .......................................................................... Total operating expenses ........................................................ Income from operations .......................................................... Other income and expenses Interest expense, net ....................................................................... Other (expense) income, net ........................................................... Income from operations before income taxes ......................... Income tax expense .............................................................................. Net income attributable to Wabtec shareholders .................... $ Earnings Per Common Share Basic Net income attributable to Wabtec shareholders .................... $ Diluted Net income attributable to Wabtec shareholders .................... $ 2,566,392 (1,802,365) 764,027 (262,718) (46,289) (17,710) (326,717) 437,310 (15,341) (882) 421,087 (128,852) 292,235 3.05 3.01 $ $ $ $ Weighted average shares outstanding Basic ....................................................................................... Diluted .................................................................................... 95,463 96,832 $ $ $ $ 2,391,122 (1,696,555) 694,567 (245,709) (41,307) (15,272) (302,288) 392,279 (14,251) (670) 377,358 (125,626) 251,732 2.62 2.60 95,469 96,742 1,967,637 (1,397,213) 570,424 (247,534) (37,193) (14,996) (299,723) 270,701 (15,007) (380) 255,314 (85,165) 170,149 1.77 1.76 95,639 96,657 The accompanying notes are an integral part of these statements. 46 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended December 31, 2013 2012 2011 In thousands, except per share data Net income attributable to Wabtec shareholders ......................................... $ Foreign currency translation gain (loss) ...................................................... Unrealized gain (loss) on foreign exchange contracts ................................. Unrealized gain (loss) on interest rate swap contracts ................................ Pension benefit plans and post-retirement benefit plans ............................. Other comprehensive income (loss) before tax ..................................... Income tax (expense) benefit related to components of $ 292,235 5,345 (256) 1,066 21,102 27,257 other comprehensive income .................................................................... Other comprehensive income (loss), net of tax ..................................... Comprehensive income attributable to Wabtec shareholders ................ $ (8,549) 18,708 310,943 $ 251,732 14,428 - (2,628) (6,292) 5,508 1,825 7,333 259,065 $ $ 170,149 (12,714) 191 1,096 (16,420) (27,847) 5,027 (22,820) 147,329 The accompanying notes are an integral part of these statements. 47 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands, except per share data Operating Activities Net income attributable to Wabtec shareholders ............................................ $ Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization .................................................................. Stock-based compensation expense .......................................................... Deferred income taxes .............................................................................. (Gain) loss on disposal of property, plant and equipment ........................ Excess income tax benefits from exercise of stock options ...................... Changes in operating assets and liabilities, net of acquisitions Accounts receivable and unbilled accounts receivable ....................... Inventories ........................................................................................... Accounts payable ................................................................................ Accrued income taxes ......................................................................... Accrued liabilities and customer deposits ........................................... Other assets and liabilities ................................................................... Net cash provided by operating activities ...................................... Investing Activities Purchase of property, plant and equipment ............................................... Proceeds from disposal of property, plant and equipment ........................ Acquisitions of businesses, net of cash acquired ...................................... Net cash used for investing activities ............................................. Financing Activities Proceeds from debt ................................................................................... Payments of debt ...................................................................................... Stock re-purchase ..................................................................................... Proceeds from exercise of stock options and other benefit plans ............. Excess income tax benefits from exercise of stock options ...................... Cash dividends ($0.13, $0.08 and $0.04 per share for years ended December 31, 2013, 2012 and 2011....................................................... Net cash provided by (used for) financing activities ..................... Effect of changes in currency exchange rates ................................................ Increase (decrease) in cash ....................................................................... Cash, beginning of year ....................................................................... Cash, end of year ................................................................................. $ 2013 Year ended December 31, 2012 2011 292,235 $ 251,732 $ 170,149 51,193 24,107 15,248 (15) (4,266) (149,699) 26,060 60,976 (15,033) (48,831) (16,322) 235,653 (41,238) 6,000 (223,454) (258,692) 959,067 (829,842) (32,998) 5,165 4,266 (12,644) 93,014 19 69,994 215,766 285,760 $ 44,136 19,848 581 1,112 (3,125) (22,976) (32,491) (12,483) (33,202) 13,323 10,983 237,438 (36,001) 971 (149,914) (184,944) 233,400 (311,457) (46,556) 4,431 3,125 (7,666) (124,723) 2,380 (69,849) 285,615 215,766 $ 44,849 18,646 (16,595) 1,191 (4,415) (68,697) (79,537) 59,974 31,514 43,201 48,346 248,626 (37,971) 663 (108,874) (146,182) 257,000 (283,202) (26,022) 4,899 4,415 (3,849) (46,759) (7,011) 48,674 236,941 285,615 The accompanying notes are an integral part of these statements. 48 N O I T A R O P R O C S E I G O L O N H C E T E K A R B R I A E S U O H G N I T S E W Y T I U Q E ’ S R E D L O H E R A H S F O S T N E M E T A T S D E T A D I L O S N O C ) 9 4 8 , 3 ( 1 7 7 , 9 9 8 l a t o T 4 1 3 , 9 6 4 6 , 8 1 ) 4 1 7 , 2 1 ( 9 4 1 , 0 7 1 2 2 1 2 6 6 ) 0 9 8 , 0 1 ( ) 2 2 0 , 6 2 ( - - - 2 2 1 2 6 6 ) 4 1 7 , 2 1 ( - ) 0 9 8 , 0 1 ( ) 7 7 0 , 8 3 ( d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( e m o c n I 9 8 1 , 5 4 0 , 1 ) 7 9 8 , 0 6 ( ) 6 6 6 , 7 ( 6 5 5 , 7 2 4 2 , 9 1 8 2 4 , 4 1 2 3 7 , 1 5 2 ) 8 8 5 , 1 ( ) 7 0 5 , 5 ( ) 6 5 5 , 6 4 ( ) 4 4 6 , 2 1 ( 0 3 8 , 6 7 2 , 1 ) 5 9 1 ( 4 4 6 2 3 2 , 1 2 6 9 8 , 1 2 5 4 3 , 5 5 3 2 , 2 9 2 4 1 9 , 2 1 ) 8 9 9 , 2 3 ( - - - - - ) 8 8 5 , 1 ( ) 7 0 5 , 5 ( 8 2 4 , 4 1 ) 4 6 5 , 3 5 ( - - - - ) 5 9 1 ( 4 4 6 5 4 3 , 5 - 4 1 9 , 2 1 ) 9 4 8 , 3 ( 5 4 7 , 6 8 8 d e n i a t e R s g n i n r a E - - 9 4 1 , 0 7 1 - - - - - - - - - ) 6 6 6 , 7 ( 5 4 0 , 3 5 0 , 1 - - 2 3 7 , 1 5 2 ) 4 4 6 , 2 1 ( 1 1 1 , 7 9 2 , 1 - - 5 3 2 , 2 9 2 - - - - - 9 5 2 , 5 8 5 , 1 ) 6 5 8 , 4 3 ( 2 0 7 , 6 7 5 , 1 y r u s a e r T k c o t S t n u o m A y r u s a e r T k c o t S s e r a h S l a n o i t i d d A n i - d i a P l a t i p a C n o m m o C k c o t S t n u o m A n o m m o C k c o t S s e r a h S ) 1 8 0 , 0 9 2 ( ) 5 5 2 , 8 6 2 , 6 3 ( 1 6 8 9 3 3 , 3 2 3 1 , $ , 4 3 5 9 4 3 2 3 1 , - 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e r k c o t S (cid:3) , 0 3 5 5 $ (cid:3) f o (cid:3) t e n l (cid:3) , s n a p (cid:3) t i f e n e b (cid:3) t n e m e r i t e r (cid:882) t s o p d n a n o i s n e p n (cid:3) (cid:3) (cid:3) i (cid:3) e g n a h C - - - - - - 2 9 1 , 1 2 4 2 , 9 1 - 8 4 3 , 1 8 3 5 1 8 , 1 1 6 9 8 , 1 2 - - - - - - - - - - - - - - - - - - - - - - . . . . . . . . . . . . . . . . . . . . . x a t 0 4 0 1 $ , f o t e n , s t c a r t n o c p a w s e t a r t s e r e t n i n o ) s s o l ( d e z i l a e r n U . . . . x a t 5 8 7 $ f o t e n , s n a l p t i f e n e b t n e m e r i t e r - t s o p d n a n o i s n e p n i e g n a h C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e s a h c r u p - e r k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) e r a h s r e p d n e d i v i d 8 0 . 0 $ ( s d n e d i v i d h s a C s n o i t p o k c o t s f o e s i c r e x e e h t m o r f d e u s s i k c o t s y r u s a e r t m o r f s d e e c o r P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x a t f o t e n , s n a l p t i f e n e b r e h t o d n a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e m o c n i t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t n e m t s u j d a n o i t a l s n a r T 49 3 2 3 , 1 $ 4 3 5 , 9 4 3 , 2 3 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 0 2 , 1 3 r e b m e c e D , e c n a l a B - - - - - - - - - - - - - - - - - - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) e r a h s r e p d n e d i v i d 3 1 . 0 $ ( s d n e d i v i d h s a C s n o i t p o k c o t s f o e s i c r e x e e h t m o r f d e u s s i k c o t s y r u s a e r t m o r f s d e e c o r P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x a t f o t e n , s n a l p t i f e n e b r e h t o d n a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e m o c n i t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t n e m t s u j d a n o i t a l s n a r T . . . . . . . . . . . . x a t 1 6 $ f o t e n , s t c a r t n o c e g n a h c x e n g i e r o f n o ) s s o l ( d e z i l a e r n U . . . . . . . . . . . . x a t 2 2 4 $ f o t e n , s t c a r t n o c p a w s e t a r t s e r e t n i n o n i a g d e z i l a e r n U 8 8 1 , 8 $ f o t e n , s n a l p t i f e n e b t n e m e r i t e r - t s o p d n a n o i s n e p n i e g n a h C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x a t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e s a h c r u p - e r k c o t S 9 5 0 , 5 1 4 3 2 3 , 1 4 3 5 , 9 4 3 , 2 3 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 0 2 , 1 3 r e b m e c e D , e c n a l a B ) 0 8 9 , 5 7 2 , 6 3 ( 4 1 9 , 0 6 3 3 2 3 , 1 $ 4 3 5 , 9 4 3 , 2 3 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 0 2 , 1 3 r e b m e c e D , e c n a l a B s t n e m e t a t s e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 19 countries. In 2013, about 48% of the Company’s revenues came from customers outside the U.S. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Such statements have been prepared in accordance with generally accepted accounting principles. Sales between subsidiaries are billed at prices consistent with sales to third parties and are eliminated in consolidation. Capital Structure On May 14, 2013, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 200.0 million shares. In addition, on May 14, 2013, our Board of Directors approved a two-for-one split of the Company’s issued and outstanding common stock in the form of a 100% stock dividend. The increase in the authorized shares and the stock split became effective on May 14, 2013 and June 11, 2013, respectively. The Company issued approximately 66.2 million shares of its common stock as a result of the two-for-one stock split. The par value of the Company’s common stock remained unchanged at $0.01 per share. Information regarding shares of common stock (except par value per share), retained earnings, and net income per common share attributable to Wabtec shareholders for all periods presented reflects the two-for-one split of the Company’s common stock. The number of shares of the Company’s common stock issuable upon exercise of outstanding stock options and vesting of other stock- based awards was proportionally increased, and the exercise price per share thereof was proportionally decreased, in accordance with the terms of the stock incentive plans. Cash Equivalents Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Allowance for Doubtful Accounts 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. The allowance for doubtful accounts was $5.7 million and $6.7 million as of December 31, 2013 and 2012, respectively. Inventories Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. Property, Plant and Equipment Property, plant and equipment additions are stated at cost. Expenditures for renewals and improvements are capitalized. Expenditures for ordinary maintenance and repairs are expensed as incurred. The Company provides for book depreciation principally on the straight-line method. Accelerated depreciation methods are utilized for income tax purposes. Leasing Arrangements The Company conducts a portion of its operations from leased facilities and finances certain equipment purchases through lease agreements. In those cases in which the lease term approximates the useful life of the leased asset or the lease meets certain other prerequisites, the leasing arrangement is classified as a capital lease. The remaining arrangements are treated as operating leases. Intangible Assets Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Amortizable intangible assets are reviewed for impairment when indicators of impairment are present. The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed, and also tests for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Periodically, Management of the Company assesses whether or not an indicator of impairment is present that would necessitate an impairment analysis be performed. 50 In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (Topic) 350) – Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02). The provisions of ASU 2012-02 provide an entity with the option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If, based on the review of the qualitative factors, an entity determines it is not more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value, no further action is required. If an entity determines otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test required by prior accounting guidance. The entity has the option to bypass the qualitative assessment and proceed directly to the fair value calculation and the entity may resume performing the qualitative analysis in any subsequent period. ASU 2012-02 was effective for fiscal years beginning after September 15, 2012, with early adoption permitted if the financial statements for the most recent annual or interim period have not yet been issued. We chose to early adopt these new accounting provisions effective with our intangible impairment review during the fourth quarter of fiscal 2012. We determined, based upon our qualitative assessments, that the fair value calculation was not required for either 2012 and 2013 as there were no indications that the fair value of our indefinite-lived intangible assets was less than their carrying value. In September 2011, the FASB issued Accounting Standards Updated (“ASU”) 2011-08 which amends the rules for testing goodwill for impairment. Under the new rules, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. We adopted ASU 2011-08 for our 2011 and 2012 annual goodwill impairment test. For 2013, the Company opted to perform a quantitative assessment and determined that step two was not necessary. In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include 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 impact. If our qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company then performs a two-step impairment test. In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. The Company reviews goodwill for impairment at the reporting unit level. The Company prepares its goodwill impairment analysis by comparing the estimated fair value of each reporting unit, using an income approach (a discounted cash flow model) as well as a market approach, with its carrying value. The income approach and the market approach are equally weighted in arriving at fair value, which the Company has applied consistently. The discounted cash flow model requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins and capital expenditures for the reporting units. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the three years forecasted by the reporting units), as well as projections of future operating margins. The market approach requires several assumptions including EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies that operate in the same markets as the Company’s reporting units. Warranty Costs Warranty costs are accrued based on Management’s estimates of repair or upgrade costs per unit and historical experience. Warranty expense was $23.1 million, $22.9 million and $19.9 million for 2013, 2012 and 2011, respectively. Accrued warranty was $60.6 million and $58.2 million at December 31, 2013 and 2012, respectively. Income Taxes Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws. The provision for income taxes includes federal, state and foreign income taxes. Stock-Based Compensation The Company recognizes compensation expense for stock-based compensation based on the grant date fair value amortized ratably over the requisite service period following the date of grant. Financial Derivatives and Hedging Activities The Company has entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis. At December 31, 2013, the Company had no forward contracts. 51 To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into a forward starting interest rate swap agreement with a notional value of $150.0 million. Effective July 31, 2013, with a termination date of November 7, 2016, this interest rate swap agreement converts a portion of the Company’s then outstanding debt from a variable rate to a fixed-rate borrowing. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible. The Company concluded that the interest rate swap agreement qualifies for special cash flow hedge accounting which requires the recording of the fair value of the interest rate swap agreement and permits the corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. As of December 31, 2013, the Company has recorded a current liability of $3.0 million and a corresponding offset in accumulated other comprehensive loss of $1.8 million, net of tax, related to this agreement. Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the average rates of exchange prevailing during the year. Foreign currency gains and losses resulting from transactions, and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of accumulated other comprehensive loss. The effects of currency exchange rate changes on intercompany transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings. Foreign exchange transaction losses recognized in other (expense) income, net were $3.5 million, $0.1 million and $2.0 million for 2013, 2012 and 2011, respectively. Noncontrolling Interests In accordance with ASC 810, the Company has classified noncontrolling interests as equity on our condensed consolidated balance sheets as of December 31, 2013 and 2012. Net income attributable to noncontrolling interests for the years ended December 31, 2013, 2012 and 2011 was not material. Other Comprehensive Income (Loss) Comprehensive income (loss) is defined as net income and all other non-owner changes in shareholders’ equity. The Company’s accumulated other comprehensive income consists of foreign currency translation adjustments, foreign currency hedges, foreign exchange contracts, interest rate swaps, and pension and post retirement related adjustments. Revenue Recognition Revenue is recognized in accordance with ASC 605 “Revenue Recognition,” The Company recognized revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred; 3) an established sales price has been set with the customer; 4) collection of the sale revenue from the customer is reasonably assured; and 5) no contingencies exist. Delivery is considered to have occurred when the customer assumes the risk and rewards of ownership. The Company estimates and records provisions for quantity rebates and sales returns and allowances as an offset to revenue in the same period the related revenue is recognized, based upon its experience. These items are included as a reduction in deriving net sales. In general, the Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts. Unbilled accounts receivables were $205.0 million and $97.1, customer deposits were $66.6 million and $82.8, and provisions for loss contracts were $14.0 million and $14.2 million at December 31, 2013 and 2012, respectively. Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $19.2 million and $20.5 million at December 31, 2013 and 2012, respectively. Significant Customers and Concentrations of Credit Risk The Company’s trade receivables are from rail and transit industry original equipment manufacturers, Class I railroads, railroad carriers and commercial companies that utilize rail cars in their operations, such as utility and chemical companies. No one customer accounted for more than 10% of the Company’s consolidated net sales in 2013, 2012 and 2011. 52 Shipping and Handling Fees and Costs All fees billed to the customer for shipping and handling are classified as a component of net revenues. All costs associated with shipping and handling is classified as a component of cost of sales. Research and Development Research and development costs are charged to expense as incurred. For the years ended December 31, 2013, 2012 and 2011, the Company incurred costs of approximately $46.3 million, $41.3 million and $37.2 million, respectively. Employees As of December 31, 2013, approximately 27% of the Company’s workforce was covered by collective bargaining agreements. These agreements are generally effective from 2014 through 2017. Agreements expiring in 2014 cover approximately 15% of the Company’s workforce. Earnings Per Share Basic and diluted earnings per common share is computed in accordance with ASC 260 “Earnings Per Share.” Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and included in the computation of earnings per share pursuant to the two-class method included in ASC 260-10-55. (See Note 11 “Earnings Per Share” included herein) Reclassifications Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, Management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. 3. ACQUISITIONS The Company made the following acquisitions operating as a business unit or component of a business unit in the Freight Segment: • • • • • On September 24, 2013, the Company acquired Longwood Industries, Inc (“Longwood”), a manufacturer of specialty rubber products for transportation, oil and gas, and industrial markets, for a net purchase price of approximately $83.9 million, net of cash, resulting in preliminary goodwill of $36.0 million, none of which will be deductible for tax purposes. On July 30, 2013, the Company acquired Turbonetics Holdings, Inc (“Turbonetics”), a manufacturer of turbochargers and related components for various industrial markets, for a net purchase price of approximately $23.2 million, net of cash, resulting in preliminary goodwill of $7.0 million, none of which will be deductible for tax purposes. On February 26, 2013, the Company acquired Transdyne (“Transdyne”), a distributor of wear-protection components and other hardware used primarily on railroad freight cars, for a net purchase price of approximately $2.4 million, net of cash, resulting in preliminary goodwill of $0.5 million, which will be deductible for tax purposes. On January 31, 2013, the Company acquired Napier Turbochargers Ltd. (“Napier”), a UK-based provider of turbochargers and related parts for the worldwide power generation and marine markets, for a net purchase price of approximately $112.3 million, net of cash, resulting in preliminary goodwill of $65.4 million, none of which will be deductible for tax purposes. On July 31, 2012, the Company acquired Winco Equipamentos Ferroviarios Ltda. (“Winco”), an established marketing and sales company and provider of freight car components with capabilities including value-added engineering and assembly, service, technical support and logistics, based in Brazil, for an initial net payment of approximately $3.7 million, net of cash, resulting in additional goodwill of $3.8 million, none of which will be deductible for tax purposes. In addition to the $3.7 million, the purchase agreement includes contingent consideration to be paid in future periods based on the achievement of certain financial results. 53 For the Napier, Transdyne, Turbonetics and Longwood acquisition, the following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition. For the Winco acquisition, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of the acquisition. Longwood Turbonetics July 30, 2013 Transdyne February 26, 2013 Napier January 31, In thousands Current assets ........................................................................... $ Property, plant & equipment .................................................... Goodwill and other intangible assets ....................................... Other assets .............................................................................. September 24, 2013 18,162 $ 14,838 75,411 187 Total assets acquired ...................................................... 108,598 Total liabilities assumed ................................................. Net assets acquired ......................................................... $ (24,735) 83,863 $ 5,562 $ 996 18,135 — 24,693 (1,510) 23,183 $ 1,062 $ 83 1,485 — 2,630 (228) 2,402 $ Winco July 31, 2012 1,584 47 6,471 1,825 9,927 (6,271) 3,656 2013 15,848 $ 8,836 106,030 — 130,714 (18,373) 112,341 $ The Company made the following acquisitions operating as a business unit or component of a business unit in the Transit Segment: • • • • On February 12, 2014, the Company signed a definitive agreement to acquire Fandstan Electric Group Ltd. (“Fandstan”), a leading rail and industrial equipment manufacturer for a variety of markets, including rail and tram transportation, industrial and energy, for a purchase price of approximately $215.0 million. The Company expects the transaction to be completed in the first quarter of 2014, subject to customary closing conditions and competition authority clearance. On October 1, 2012, the Company acquired LH Group (“LH”), a UK-based provider of maintenance and overhaul services for the passenger transit market, for a net purchase price of approximately $48.1 million, net of cash, resulting in additional goodwill of $20.1 million, none of which will be deductible for tax purposes. On July 13, 2012, the Company acquired Tec Tran Corp. and its affiliates (“Tec Tran”), the only U.S.-owned manufacturer of hydraulic braking systems for transit cars, based in North Carolina, for a net purchase price of approximately $8.3 million, net of cash, resulting in additional goodwill of $1.7 million, which will be deductible for tax purposes. On June 14, 2012, the Company acquired Mors Smitt Holding (“Mors Smitt”), a leading manufacturer of electronic components for rail and industrial markets with operations in the Netherlands, the United Kingdom, the U.S., France, China and Hong-Kong, for a net purchase price of approximately $90.0 million, net of cash, resulting in additional goodwill of $42.9 million, none of which will be deductible for tax purposes. For the LH, Tec Tran and Mors Smitt acquisitions, the following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of the acquisition. LH Group October 1, 2012 Tec Tran July 13, 2012 Mors Smitt June 14, 2012 $ $ In thousands Current assets ......................................................................... $ Property, plant & equipment .................................................. Goodwill and other intangible assets ..................................... Other assets ............................................................................ Total assets acquired .................................................... Total liabilities assumed ............................................... Net assets acquired ....................................................... $ 19,126 5,874 38,712 — 63,712 (15,592) 48,120 1,955 116 6,717 — 8,788 (470 ) 8,318 23,649 10,389 79,730 944 114,712 (24,724) 89,988 $ $ The 2013 acquisitions listed above include escrow deposits of $20.8 million, which may be released to the Company for indemnity and other claims in accordance with the purchase and escrow agreements. 54 The total goodwill and other intangible assets for acquisitions listed in the tables above was $332.6 million, of which $177.4 million and $155.2 million was related to goodwill and other intangible assets, respectively. Of the allocation of $155.2 million of acquired intangible assets for the companies listed in the above tables, $105.0 million was assigned to customer relationships, $39.4 million was assigned to trade names, $5.2 million was assigned to patents, $0.8 million was assigned to favorable leasehold interest, $0.6 million was assigned to non-compete agreements and $4.2 million was assigned to customer backlog. The trade names are considered to have an indefinite useful life while the customer relationships’ useful life is 20 years, the patents’ useful life is 12 years, the favorable leasehold useful life is five years and non-compete agreements useful life is two years. The following unaudited pro forma financial information presents income statement results as if the acquisition of Winco, Mors Smitt, Tec Tran, LH, Napier, Transdyne, Turbonetics and Longwood had occurred January 1, 2012: In thousands, except per share Net sales ......................................................................................... $ Gross profit ..................................................................................... Net income attributable to Wabtec shareholders ............................ Diluted earnings per share For the year ended December 31, 2013 2,629,417 $ 777,139 297,040 2012 2,622,843 759,368 275,403 As reported ............................................................................ $ Pro forma .............................................................................. $ 3.01 $ 3.07 $ 2.60 2.84 4. SUPPLEMENTAL CASH FLOW DISCLOSURES In thousands Interest paid during the year ........................................................................ $ Income taxes paid during the year, net of amount refunded ........................ Business acquisitions: Fair Value of assets acquired ............................................................ $ Liabilities assumed ........................................................................... Cash paid .................................................................................... Less cash acquired ............................................................................ Net cash paid ...................................................................... $ For the year ended December 31, 2013 2012 2011 15,601 137,945 267,306 44,846 222,460 671 221,789 $ $ $ 16,309 135,691 198,066 46,009 152,057 2,303 149,754 $ $ $ 16,505 68,053 160,862 47,620 113,242 4,248 108,994 On December 11, 2013, the Board of Directors amended its stock repurchase authorization to $200 million of the Company’s outstanding shares. This share repurchase authorization supersedes the previous authorization of $150 million of which $44.4 million remained. Through December 31, 2013, no shares have been repurchased under the new authorization. The Company intends to purchase shares on the open market or in negotiated or block trades. No time limit was set for the completion of the programs which conform to the requirements under the 2013 Refinancing Credit Agreement, as well as the Notes currently outstanding. During the first and second quarters of 2013, no shares were repurchased. During the third quarter of 2013, the Company repurchased 93,205 shares at an average price of $58.86 per share. During the fourth quarter of 2013, the Company repurchased 413,900 shares at an average price of $66.47 per share. All purchases were on the open market. During the first quarter of 2012, no shares were repurchased. During the second quarter of 2012, the Company repurchased 597,600 shares at an average price of $36.69 per share. During the third quarter of 2012, the Company repurchased 155,000 shares at an average price of $39.16 per share. During the fourth quarter of 2012, the Company repurchased 462,200 shares at an average price of $40.15 per share. All purchases were on the open market. 55 5. INVENTORIES The components of inventory, net of reserves, were: In thousands Raw materials ............................................................................... $ Work-in-progress ......................................................................... Finished goods ............................................................................. Total inventories ................................................................ $ 6. PROPERTY, PLANT & EQUIPMENT The major classes of depreciable assets are as follows: December 31, 2013 2012 165,906 137,449 99,874 403,229 $ $ 186,341 129,605 91,093 407,039 In thousands Machinery and equipment .................................................................................................... $ Buildings and improvements ................................................................................................ Land and improvements ....................................................................................................... Locomotive leased fleet ....................................................................................................... PP&E ......................................................................................................................... Less: accumulated depreciation ........................................................................................... Total .......................................................................................................................... $ December 31, 2013 2012 440,297 138,469 16,271 2,703 597,740 (321,662) 276,078 $ $ 406,574 129,869 16,297 3,184 555,924 (311,836) 244,088 The estimated useful lives of property, plant and equipment are as follows: Land improvements ........................................................................................................................................... Buildings and improvements ............................................................................................................................. Machinery and equipment ................................................................................................................................. Locomotive leased fleet ..................................................................................................................................... Years 10 to 20 20 to 40 3 to 15 4 to 15 Depreciation expense was $33.5 million, $28.9 million, and $29.9 million for 2013, 2012 and 2011, respectively. 7. INTANGIBLES Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Goodwill and indefinite lived intangible assets are reviewed annually during the fourth quarter for impairment (See Note 2 “Summary of Significant Accounting Policies” included herein). Goodwill and indefinite live intangible assets were not impaired at December 31, 2013 and 2012. The change in the carrying amount of goodwill by segment for the year ended December 31, 2013 is as follows: In thousands Balance at December 31, 2012 .................................................................................... $ Adjustment to preliminary purchase price allocation of acquisitions .......................... Acquisitions ................................................................................................................. Foreign currency impact .............................................................................................. Balance at December 31, 2013 .................................................................................... $ Freight Segment Transit Segment 397,184 $ (855) 115,062 (1,727) 509,664 $ 268,838 $ 1,303 -- 6,628 276,769 $ Total 666,022 448 115,062 4,901 786,433 56 As of December 31, 2013 and 2012, the Company’s trademarks had a net carrying amount of $156.8 million and $131.3 million, respectively, and the Company believes these intangibles have an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following: In thousands Patents, non-compete, and other intangibles, net of accumulated amortization of $37,824 and $35,556 ............................................................................................................................................. $ Customer relationships, net of accumulated amortization of $44,910 and $31,572 .............................. Total ............................................................................................................................................ $ December 31, 2013 2012 $ 15,561 213,324 228,885 $ 11,835 165,160 176,995 The remaining weighted average useful lives of patents, customer relationships and intellectual property were ten years, 17 years and 16 years respectively. Amortization expense for intangible assets was $17.7 million, $15.3 million, and $15.0 million for the years ended December 31, 2013, 2012, and 2011, respectively. Amortization expense for the five succeeding years is as follows (in thousands): 2014 ................................................................................................................................................................ $ 2015 ................................................................................................................................................................ $ 2016 ................................................................................................................................................................ $ 2017 ................................................................................................................................................................ $ 2018 ................................................................................................................................................................ $ 17,574 16,131 15,980 15,084 14,448 8. LONG-TERM DEBT Long-term debt consisted of the following: In thousands December 31, 2013 2012 — 4.375% senior notes, due 2023 ......................................................................................................... $ 250,000 $ 6.875% senior notes, due 2013 ......................................................................................................... — 150,000 Revolving Credit Facility ................................................................................................................. 200,000 167,000 896 Capital Leases .................................................................................................................................. Total ........................................................................................................................................ 450,709 317,896 Less—current portion ............................................................................................................. 43 Long-term portion ................................................................................................................... $ 450,288 $ 317,853 709 421 2013 Refinancing Credit Agreement On December 19, 2013, the Company amended its existing revolving credit facility with a consortium of commercial banks. This “2013 Refinancing Credit Agreement” provides the company with a $800 million, five-year revolving credit facility. The Company incurred approximately $1.0 million of deferred financing cost related to the 2013 Refinancing Credit Agreement. The facility expires on December 19, 2018. The 2013 Refinancing Credit Agreement borrowings bear variable interest rates indexed as described below. At December 31, 2013, the Company had available bank borrowing capacity, net of $59.8 million of letters of credit, of approximately $540.2 million, subject to certain financial covenant restrictions. Under the 2013 Refinancing Credit Agreement, the Company may elect a Base Rate of interest for U.S. Dollar denominated loans or, for certain currencies, an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest, or other rates appropriate for such currencies (in any case, “the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points, plus a margin that ranges from 0 to 75 basis points. The Alternate Rate is based on the quoted rates specific to the applicable currency, plus a margin that ranges from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 0 basis points and the Alternate Rate margin is 100 basis points. 57 At December 31, 2013 the weighted average interest rate on the Company’s variable rate debt was 1.17%. On January 12, 2012, the Company entered into a forward starting interest rate swap agreement with a notional value of $150 million. The effective date of the interest rate swap agreement is July 31, 2013, and the termination date is November 7, 2016. The impact of the interest rate swap agreement converts a portion of the Company’s outstanding debt from a variable rate to a fixed-rate borrowing. During the term of the interest rate swap agreement the interest rate on the notional value will be fixed at 1.415% plus the Alternate Rate margin. The Company is exposed to credit risk in the event of nonperformance by the counterparty. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparty is a large financial institution with an excellent credit rating and history of performance. The Company currently believes the risk of nonperformance is negligible. The 2013 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2013 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company does not expect that these measurements will limit the Company in executing our operating activities. See Note 8 of “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report. 2011 Refinancing Credit Agreement On November 7, 2011, the Company refinanced its existing revolving credit and term loan facility with a consortium of commercial banks. This “2011 Refinancing Credit Agreement” provided the company with a $600 million, five-year revolving credit facility. The Company incurred approximately $1.9 million of deferred financing cost related to the 2011 Refinancing Credit Agreement. The facility was set to expire on November 7, 2016. Under the 2011 Refinancing Credit Agreement, the Company may have elected a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusted on a daily basis and was the greater of the Federal Funds Effective Rate plus 0.5% per annum, the PNC, N.A. prime rate or the Daily LIBOR Rate plus 100 basis points plus a margin that ranged from 0 to 75 basis points. The Alternate Rate was based on quoted LIBOR rates plus a margin that ranged from 75 to 175 basis points. Both the Base Rate and Alternate Rate margins were dependent on the Company’s consolidated total indebtedness to cash flow ratios. The current Base Rate margin was 0 basis points and the Alternate Rate margin was 100 basis points. 4.375% Senior Notes Due August 2023 In August 2013, the Company issued $250.0 million of Senior Notes due in 2023 (“the 2013 Notes”). Interest on the 2013 Notes accrues at a rate of 4.375% per annum and is payable semi-annually on February 15 and August 15 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity. The Company incurred $2.6 million of deferred financing costs related to the issuance. The 2013 Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the 2013 Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens. The Company is in compliance with the restrictions and covenants in the indenture under which the 2013 Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities. 6.875% Senior Notes Due August 2013 In August 2003, the Company issued $150.0 million of Senior Notes due in 2013 (“the 2003 Notes”). The 2003 Notes were issued at par. Interest on the 2003 Notes accrued at a rate of 6.875% per annum and was payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement and for general corporate purposes. The Company paid off the 2003 Notes, which matured on July 31, 2013 utilizing available capacity under the 2011 Refinancing Credit Agreement. 58 Debt and Capital Leases Scheduled principal repayments of debt and capital lease balances as of December 31, 2013 are as follows: 421 2014 .............................................................................................................................................................. $ 103 2015 .............................................................................................................................................................. 86 2016 .............................................................................................................................................................. 51 2017 .............................................................................................................................................................. 200,030 2018 .............................................................................................................................................................. Future years ................................................................................................................................................... 250,018 Total .............................................................................................................................................................. $ 450,709 9. EMPLOYEE BENEFIT PLANS Defined Benefit Pension Plans The Company sponsors defined benefit pension plans that cover certain U.S., Canadian, German, and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee. The Company uses a December 31 measurement date for the plans. 59 The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components. Obligations and Funded Status In thousands Change in projected benefit obligation U.S. International 2013 2012 2013 2012 Obligation at beginning of year ........................................................................... $(52,226) $ (52,351 ) $ (163,507) $(144,641) (2,006) Service cost .......................................................................................................... (7,114) Interest cost .......................................................................................................... (419) Employee contributions ....................................................................................... — Plan curtailments and amendments ..................................................................... 9,335 Benefits paid ........................................................................................................ 541 Expenses and premiums paid .............................................................................. (1,050) Acquisition .......................................................................................................... (13,360) Actuarial gain (loss) ............................................................................................ (4,793) Effect of currency rate changes ........................................................................... Obligation at end of year ............................................................................ $(47,090) $ (52,226 ) $ (170,931) $(163,507) (379 ) (1,960) (2,113 ) — — 3,586 3,548 — — (931 ) — (2,035) (6,661) (442) 34 6,554 360 — (7,860) 2,626 — — 3,942 — (432) — — Change in plan assets Fair value of plan assets at beginning of year ...................................................... $ 42,403 $ 39,951 $ 144,089 $ 131,327 10,621 Actual return on plan assets ................................................................................. 6,739 Employer contributions ....................................................................................... 419 Employee contributions ....................................................................................... (9,335) Benefits paid ........................................................................................................ (541) Expenses and premiums paid .............................................................................. 667 Acquisition .......................................................................................................... 4,192 Effect of currency rate changes ........................................................................... Fair value of plan assets at end of year ...................................................... $ 42,980 $ 42,403 $ 156,705 $ 144,089 4,163 4,484 17,273 4,810 442 (6,554) (360) — (2,995) 1,516 — (3,586) (3,548 ) — — — — — — — — Funded status Fair value of plan assets ...................................................................................... $ 42,980 $ 42,403 $ 156,705 $ 144,089 (47,090) (52,226 ) (170,931) (163,507) Benefit obligations ............................................................................................... Funded Status ............................................................................................. $ (4,110) $ (9,823 ) $ (14,226) $ (19,418) Amounts recognized in the statement of financial position consist of: Noncurrent assets ................................................................................................. $ Current liabilities ................................................................................................. Noncurrent liabilities ........................................................................................... 930 (47) (20,301) Net amount recognized .............................................................................. $ (4,110) $ (9,823 ) $ (14,226) $ (19,418) 3,554 $ (44) (4,110) (9,823 ) (17,736) — $ — $ — — Amounts recognized in accumulated other comprehensive income (loss) consist of: Initial net obligation ............................................................................................ $ Prior service costs ................................................................................................ Net actuarial loss ................................................................................................. (801) (390) (45,824) Net amount recognized .............................................................................. $(22,285) $ (30,655 ) $ (41,229) $ (47,015) (647) $ (223) (22,249) (30,557 ) (40,359) — $ — $ (98 ) (36) 60 The aggregate accumulated benefit obligation for the U.S. pension plans was $46.3 million and $51.4 million as of December 31, 2013 and 2012, respectively. The aggregate accumulated benefit obligation for the international pension plans was $159.8 million and $154.2 million as of December 31, 2013 and 2012, respectively. In thousands Information for pension plans with accumulated benefit obligations in excess of plan assets: U.S. International 2013 2012 2013 2012 Projected benefit obligation ......................................................................... $(47,090) $(52,226 ) $ (117,717) $(125,145) (115,885) Accumulated benefit obligation ................................................................... 104,797 Fair value of plan assets .............................................................................. Information for pension plans with projected benefit obligations in excess (108,182) 100,798 (51,428 ) 42,403 (46,316) 42,980 of plan assets: Projected benefit obligation ......................................................................... $(47,090) $(52,226 ) $ (126,998) $(125,145) 104,797 Fair value of plan assets .............................................................................. 109,219 42,403 42,980 Components of Net Periodic Benefit Costs In thousands 309 $ 2,035 $ 2,006 $ 3,204 Service cost .............................................................................................. $ Interest cost .............................................................................................. 1,960 2,113 2,428 6,661 7,114 7,575 Expected return on plan assets ................................................................. (2,977) (3,095) (3,331 ) (8,418 ) (8,132) (8,477) Amortization of initial net obligation and prior service cost .................... 380 3,180 2,968 2,502 3,107 2,412 1,665 Amortization of net loss ........................................................................... 168 1,149 1,024 — Settlement and Curtailment losses recognized ......................................... Net periodic benefit cost ................................................................. $ 2,657 $ 2,427 $ 1,970 $ 3,823 $ 4,871 $ 5,371 — — 432 $ 379 $ 270 322 62 62 62 2011 2011 2013 2013 U.S. 2012 International 2012 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income during 2013 are as follows: In thousands Net gain (loss) arising during the year .................................................................................................. $ Effect of exchange rates ........................................................................................................................ Amortization, settlement, or curtailment recognition of net transition obligation ................................ Amortization or curtailment recognition of prior service cost .............................................................. Amortization or settlement recognition of net loss ............................................................................... Total recognized in other comprehensive income (loss) ............................................................. $ Total recognized in net periodic benefit cost and other comprehensive income (loss) ............... $ U.S. International 5,128 $ — — 62 3,180 8,370 $ 5,713 $ 996 1,211 160 144 3,275 5,786 1,963 The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. Discount rate .............................................................................. Expected return on plan assets ................................................... Rate of compensation increase ................................................... 4.70% 6.20% 3.00% 3.90% 7.50% 3.00% 4.30% 7.50% 3.00% 4.43 % 6.07 % 3.59 % 4.30% 6.09% 3.10% 4.96% 6.12% 3.21% 2013 U.S. 2012 2011 2013 International 2012 2011 61 The discount rate is based on settling the pension obligation with high grade, high yield corporate bonds, and the rate of compensation increase is based on actual experience. The expected return on plan assets is based on historical performance as well as expected future rates of return on plan assets considering the current investment portfolio mix and the long-term investment strategy. As of December 31, 2013 the following table represents the amounts included in other comprehensive loss that are expected to be recognized as components of periodic benefit costs in 2014. In thousands Net transition obligation........................................................................................................................ $ Prior service cost ................................................................................................................................... Net actuarial loss ................................................................................................................................... $ U.S. International — $ 23 2,599 2,622 $ 169 90 2,847 3,106 Pension Plan Assets The Company has established formal investment policies for the assets associated with our pension plans. Objectives include maximizing long-term return at acceptable risk levels and diversifying among asset classes. Asset allocation targets are based on periodic asset liability study results which help determine the appropriate investment strategies. The investment policies permit variances from the targets within certain parameters. The plan assets consist primarily of equity security funds, debt security funds, and temporary cash and cash equivalent investments. The assets held in these funds are generally passively managed and are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy (See Note 17 “Fair Value Measurement” included herein). Plan assets by asset category at December 31, 2013 and 2012 are as follows: In thousands Pension Plan Assets U.S. International 2013 2012 2013 2012 Equity security funds ............................................................................................... $21,562 $ 21,081 $ 84,699 $ 77,715 65,674 Debt security funds and other .................................................................................. 700 Cash and cash equivalents ....................................................................................... Fair value of plan assets ................................................................................. $42,980 $ 42,403 $ 156,705 $144,089 20,749 20,785 66,238 5,768 669 537 The U.S. pension plan has a target asset allocation of 50% equity securities and 50% debt securities. The Canadian and German pension plans have target asset allocations of 50% equity securities and 50% debt securities. The United Kingdom plan has a target asset allocation of 62.5% equity securities and 37.5% debt securities. Investment policies are determined by the respective Plan’s Pension Committee and set forth in its Investment Policy. Rebalancing of the asset allocation occurs on a quarterly basis. Cash Flows The Company’s funding methods are based on governmental requirements and differ from those methods used to recognize pension expense. The Company expects to contribute $5.2 million to the international plans and does not expect to make a contribution to the U.S. plans during 2014. Benefit payments expected to be paid to plan participants are as follows: In thousands Year ended December 31, 2014 ..................................................................................................................................................... $ 3,562 $ 2015 ..................................................................................................................................................... 3,610 2016 ..................................................................................................................................................... 3,534 2017 ..................................................................................................................................................... 3,555 2018 ..................................................................................................................................................... 3,511 2019 through 2023 ............................................................................................................................... 17,190 U.S. International 6,737 6,765 6,723 7,210 7,520 42,394 62 Post Retirement Benefit Plans In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990. The Company uses a December 31 measurement date for all post retirement plans. The following tables provide information regarding the Company’s post retirement benefit plans summarized by U.S. and international components. Obligations and Funded Status In thousands Change in projected benefit obligation U.S. International 2013 2012 2013 2012 Obligation at beginning of year ................................................................................... $(33,807 ) $ (33,464 ) $(4,296) $(4,003) (45) Service cost .................................................................................................................. (201) Interest cost .................................................................................................................. 270 Benefits paid ................................................................................................................ (228) Actuarial (loss) gain .................................................................................................... (89) Effect of currency rate changes ................................................................................... Obligation at end of year .................................................................................... $(25,860 ) $ (33,807 ) $(3,871) $(4,296) (24 ) (1,113 ) (1,387 ) 2,641 1,197 (129 ) 6,466 — — (48) (172) 220 153 272 (47 ) Change in plan assets Fair value of plan assets at beginning of year .............................................................. $ Employer contributions ............................................................................................... Benefits paid ................................................................................................................ Fair value of plan assets at end of year .............................................................. $ Funded status 1,158 1,197 (1,158 ) (1,197 ) — $ — $ — $ — 270 (270) — $ — $ — $ — 220 (220) Fair value of plan assets .............................................................................................. $ Benefit obligations ....................................................................................................... — $ — $ — $ — (25,860 ) (33,807 ) (3,871) (4,296) Funded status ..................................................................................................... $(25,860 ) $ (33,807 ) $(3,871) $(4,296) In thousands Amounts recognized in the statement of financial position consist of: U.S. International 2013 2012 2013 2012 Current liabilities ......................................................................................................... $ (1,357 ) $ (1,509 ) $ (217) $ (330) (24,503 ) (32,298 ) (3,654) (3,966) Noncurrent liabilities ................................................................................................... Net amount recognized ...................................................................................... $(25,860 ) $ (33,807 ) $(3,871) $(4,296) Amounts recognized in accumulated other comprehensive income (loss) consist of: Initial net obligation .................................................................................................... $ Prior service credit ....................................................................................................... Net actuarial (loss) gain ............................................................................................... 11,722 12,663 (21,619 ) (29,719 ) Net amount recognized ...................................................................................... $ (9,897 ) $ (17,056 ) $ — $ — $ — $ — 265 44 753 761 805 $ 1,018 Components of Net Periodic Benefit Cost In thousands Service cost ....................................................................................................... $ 31 $ 48 $ 45 $ 56 Interest cost ....................................................................................................... 1,113 1,387 1,610 172 201 231 Amortization of initial net obligation and prior service credit .......................... (2,689) (2,608) (2,661 ) (211) (240) (243) (90) (142) Amortization of net loss (gain) ......................................................................... 1,634 1,790 1,761 (93) 593 $ 741 $ (84) $ (84) $ (98) Net periodic benefit cost (credit) ............................................................. $ 105 $ 24 $ 47 $ 2013 2011 2013 2011 U.S. 2012 International 2012 63 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income during 2013 are as follows: In thousands Net gain arising during the year ............................................................................................................................ $ 8,214 $ Effect of exchange rates ........................................................................................................................................ — Amortization or curtailment recognition of prior service cost .............................................................................. (2,689) Amortization or settlement recognition of net loss (gain) ..................................................................................... 1,634 Total recognized in other comprehensive income (loss) ............................................................................. $ 7,159 $ Total recognized in net periodic benefit cost and other comprehensive income (loss) ............................... $ 7,054 $ U.S. 153 (62) (211) (93) (213) (129) International The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. The discount rate is based on settling the pension obligation with high grade, high yield corporate bonds. Discount rate .......................................................................................................... 2013 4.70% 3.90% 4.30 % 4.60% 4.30% 5.15% 2011 2011 2013 International 2012 U.S. 2012 As of December 31, 2013 the following table represents the amounts included in other comprehensive loss that are expected to be recognized as components of periodic benefit costs in 2014. In thousands Prior service credit ................................................................................................................................ $ Net actuarial loss (gain) ........................................................................................................................ $ U.S. International (2,729) $ 1,423 (1,306) $ (9) (55) (64) The assumed health care cost trend rate for the U.S. plans grades from an initial rate of 7.0% to an ultimate rate of 4.5% by 2027 and for international plans from 7.0% to 4.5% by 2027. A 1% increase in the assumed health care cost trend rate will increase the service and interest cost components of the expense recognized for the U.S. and international postretirement plans by approximately $159,000 and $17,000, respectively, for 2013, and increase the accumulated postretirement benefit obligation by approximately $3.3 million and $237,000, respectively. A 1% decrease in the assumed health care cost trend rate will decrease the service and interest cost components of the expense recognized for the U.S. and international postretirement plans by approximately $134,000 and $15,000, respectively, for 2013, and decrease the accumulated postretirement benefit obligation by approximately $2.8 million and $219,000, respectively. Cash Flows Benefit payments expected to be paid to plan participants are as follows: In thousands Year ended December 31, 2014 ........................................................................................................................................................ $ 1,357 $ 2015 ........................................................................................................................................................ 1,365 2016 ........................................................................................................................................................ 1,431 2017 ........................................................................................................................................................ 1,454 2018 ........................................................................................................................................................ 1,558 2019 through 2023 ................................................................................................................................. 8,924 U.S. International 217 228 235 233 245 1,430 Defined Contribution Plans The Company also participates in certain defined contribution plans and multiemployer pension plans. Costs recognized under these plans are summarized as follows: In thousands Multi-employer pension and health & welfare plans .............................................................................. $ 2,678 $ 2,122 $ 1,574 11,045 401(k) savings and other defined contribution plans .............................................................................. 17,291 14,394 Total .............................................................................................................................................. $ 19,969 $16,516 $12,619 2013 2011 For the year ended December 31, 2012 64 The 401(k) savings plan is a participant directed defined contribution plan that holds shares of the Company’s stock as one of the investment options. At December 31, 2013 and 2012, the plan held on behalf of its participants about 713,200 shares with a market value of $53.0 million, and 742,400 shares with a market value of $32.5 million, respectively. Additionally, the Company has stock option based benefit and other plans further described in Note 12. The Company contributes to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain of its union-represented employees. The risks of participating in such plans are different from the risks of single- employer plans. Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer ceases to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If the Company ceases to have an obligation to contribute to the multiemployer plan in which it had been a contributing employer, it may be required to pay to the plan an amount based on the underfunded status of the plan and on the history of the Company’s participation in the plan prior to the cessation of its obligation to contribute. The amount that an employer that has ceased to have an obligation to contribute to a multiemployer plan is required to pay to the plan is referred to as a withdrawal liability. The Company’s participation in multiemployer plans for the year ended December 31, 2013 is outlined in the table below. For plans that are not individually significant to the Company, the total amount of contributions is presented in the aggregate. Pension Protection Act Zone Status (b) FIP / RP Status Pending / Implemented (c) No Contributions by the Company 2013 2012 $2,154(1) $1,803(1) $ 1,269 (1) 2011 Surcharge Imposed (d) No Expiration Dates of Collective Bargaining Agreements 6/30/2015 Pension Fund Idaho Operating Engineers– Employers Pension Trust Fund ...... EIN / PN (a) 2012 Green 2011 Green Automobile Mechanics’ Local No 701 Union and Industry Pension Plan ................................................ EIN # 91- 6075538 Plan #001 EIN #36- 6042061 Plan #001 Red Red Yes (2) Other Plans Total Contributions $ 525 $ 0 $2,678 $ 310 $ 9 $2,122 $ 298 $ 7 $1,574 Yes (3) 12/11/2014 (1) The Company’s contribution represents more than 5% of the total contributions to the plan. (2) The Pension Fund’s board adopted a Rehabilitation Plan on September 30, 2012, increasing the weekly pension fund contribution rates by $75 with corresponding decreases to the weekly welfare fund contribution rates. (3) Critical status triggered a 5% surcharge on employer contributions effective June 2012. Effective January 1, 2013, this surcharge increases to 10% and remains in effect until the Company’s union adopts the Rehabilitation Plan. (a) The “EIN / PN” column provides the Employer Identification Number and the three-digit plan number assigned to a plan by the Internal Revenue Service. (b) The most recent Pension Protection Act Zone Status available for 2012 and 2011 is for plan years that ended in 2012 and 2011, respectively. The zone status is based on information provided to the Company and other participating employers by each plan and is certified by the plan’s actuary. A plan in the “red” zone has been determined to be in “critical status”, based on criteria established under the Internal Revenue Code (“Code”), and is generally less than 65% funded. A plan in the “yellow” zone has been determined to be in “endangered status”, based on criteria established under the Code, and is generally less than 80% funded. A plan in the “green” zone has been determined to be neither in “critical status” nor in “endangered status”, and is generally at least 80% funded. (c) The “FIP/RP Status Pending/Implemented” column indicates whether a Funding Improvement Plan, as required under the Code to be adopted by plans in the “yellow” zone, or a Rehabilitation Plan, as required under the Code to be adopted by plans in the “red” zone, is pending or has been implemented as of the end of the plan year that ended in 2013. (d) The “Surcharge Imposed” column indicates whether the Company’s contribution rate for 2013 included an amount in addition the contribution rate specified in the applicable collective bargaining agreement, as imposed by a plan in “critical status”, in accordance with the requirements of the Code. 10. INCOME TAXES The Company is responsible for filing consolidated U.S., foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities. The components of the income from operations before provision for income taxes for the Company’s domestic and foreign operations for the years ended December 31 are provided below: In thousands Domestic ............................................................................................................................ $285,395 $ 273,234 $161,108 Foreign ............................................................................................................................... 94,206 Income from operations before income taxes ..................................................................... $421,087 $ 377,358 $255,314 135,692 104,124 2013 2011 For the year ended December 31, 2012 65 Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $515.8 million at December 31, 2013. Those earnings are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation. Withholding taxes of approximately $5.4 million would be payable upon remittance of all previously unremitted earnings at December 31, 2013. The consolidated provision for income taxes included in the Statement of Income consisted of the following: In thousands Current taxes For the year ended December 31, 2012 2011 2013 Federal ................................................................................................................... $ 70,459 $ 81,630 $ 57,272 13,173 16,415 12,203 State ....................................................................................................................... 29,972 27,000 32,285 Foreign ................................................................................................................... $113,604 $ 125,045 $101,760 Deferred taxes Federal ................................................................................................................... State ....................................................................................................................... Foreign ................................................................................................................... (2,203) (10,591) (2,326) (3,678) 581 (16,595) Total provision ............................................................................................. $128,852 $ 125,626 $ 85,165 11,146 1,375 2,727 15,248 851 1,933 A reconciliation of the United States federal statutory income tax rate to the effective income tax rate on operations for the years ended December 31 is provided below: In thousands U. S. federal statutory rate .................................................................................................................. 35.0 % 35.0% 35.0% State taxes ........................................................................................................................................... 2.2 2.3 Tax reserves ........................................................................................................................................ 0.0 (0.5) Foreign ................................................................................................................................................ (3.9 ) (2.0) Research and development credit ....................................................................................................... (0.6 ) (0.9) Manufacturing deduction .................................................................................................................... (1.7 ) (1.6) 1.1 Other, net ............................................................................................................................................ (0.4 ) Effective rate ............................................................................................................................. 30.6 % 33.3% 33.4% 2.8 0.3 (2.7) (0.2) (2.1) 0.2 2013 2011 For the year ended December 31, 2012 On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position. Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes. These deferred income taxes will be recognized as future tax benefits or costs when the temporary differences reverse. 66 Components of deferred tax assets and liabilities were as follows: In thousands Deferred income tax assets: December 31, 2013 2012 Accrued expenses and reserves ................................................................................................................... $ 32,243 $ 38,288 Warranty reserve ......................................................................................................................................... 16,783 15,496 Deferred compensation/employee benefits .................................................................................................. 21,326 14,117 Pension and postretirement obligations ....................................................................................................... 17,920 25,685 9,841 Inventory ..................................................................................................................................................... 10,089 4,744 5,770 Net operating loss carry forwards ................................................................................................................ 2,857 4,126 Tax credit carry forwards ............................................................................................................................ Gross deferred income tax assets .......................................................................................................................... 108,257 111,028 2,141 Total deferred income tax assets ........................................................................................................................... 104,925 108,887 Deferred income tax liabilities: Valuation allowance .................................................................................................................................... 3,332 Property, plant & equipment ....................................................................................................................... 25,440 24,273 Intangibles ................................................................................................................................................... 140,317 112,431 2,282 Other ............................................................................................................................................................ Total deferred income tax liabilities...................................................................................................................... 167,802 138,986 Net deferred income tax liability ........................................................................................................................... $ (62,877) $ (30,099) 2,045 A 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. As of December 31, 2013, the valuation allowance for certain foreign carryforwards was $3.3 million. State and foreign tax credit carry-forwards of approximately $4.1 million expire in various periods from December 31, 2015 to December 31, 2030. State net operating loss carry-forwards in the amount of $69.2 million expire in various periods from December 31, 2015 to December 31, 2034. As of December 31, 2013, the liability for income taxes associated with uncertain tax positions was $10.5 million, of which $4.7 million, if recognized, would favorably affect the Company’s effective income tax rate. As of December 31, 2012, the liability for income taxes associated with uncertain tax positions was $11.3 million, of which $3.7 million, if recognized, would favorably affect the Company’s effective tax rate. A reconciliation of the beginning and ending amount of the liability for income taxes associated with uncertain tax positions follows: In thousands Gross liability for uncertain tax positions at beginning of year ............................................... $ 11,267 $ 8,204 $ 9,974 859 180 Gross increases—uncertain tax positions in prior periods ............................................. 375 Gross increases—current period uncertain tax positions ............................................... 3,279 4,649 Gross decreases—audit settlements during year ............................................................ (2,515 ) (648) (1,889) Gross decreases—expiration of audit statute of limitations ........................................... (1,555 ) (1,118) (1,115) Gross liability for uncertain tax positions at end of year ......................................................... $ 10,531 $ 11,267 $ 8,204 55 2013 2011 2012 The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2013, the total interest and penalties accrued was approximately $1.5 million and $0.9 million, respectively. As of December 31, 2012, the total interest and penalties accrued was approximately $2.5 million and $1.4 million, respectively. With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2011. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $0.3 million may change within the next 12 months due to the expiration of statutory review periods and current examinations. 67 11. EARNINGS PER SHARE The computation of earnings per share from operations is as follows: In thousands, except per share Numerator Numerator for basic and diluted earnings per common share—net income attributable to For the Year Ended December 31, 2012 2011 2013 Less: dividends declared—common shares and non-vested restricted stock ............................... Undistributed earnings ................................................................................................................. Percentage allocated to common shareholders (1) ....................................................................... Wabtec shareholders ............................................................................................................... $292,235 $ 251,732 $170,149 (3,849) 166,300 99.5% 165,469 Add: dividends declared—common shares .................................................................................. 3,829 Numerator for basic and diluted earnings per common share ...................................................... $290,776 $ 250,471 $169,298 Denominator Denominator for basic earnings per common share—weighted-average shares .......................... Effect of dilutive securities: Assumed conversion of dilutive stock-based compensation plans ............................................... Denominator for diluted earnings per common share—adjusted weighted-average shares and assumed conversion ................................................................................................................. (12,644 ) 279,591 (7,666) 244,066 278,193 12,583 242,846 7,625 95,463 96,832 96,742 96,657 95,639 95,469 99.5 % 99.5% 1,369 1,018 1,273 Net income per common share attributable to Wabtec shareholders Basic ............................................................................................................................................. $ Diluted ......................................................................................................................................... $ 3.05 $ 3.01 $ 2.62 $ 2.60 $ 1.77 1.76 (1) Basic weighted-average common shares outstanding ........................................................ Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest ................................................................................................................... Percentage allocated to common shareholders ........................................................................ 95,463 95,469 95,639 95,932 95,976 99.5% 99.5% 96,149 99.5% Options to purchase approximately 12,000, 38,000, and 50,000 shares of Common Stock were outstanding in 2013, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price exceeded the average market price of the common shares. 12. STOCK-BASED COMPENSATION PLANS As of December 31, 2013, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock awards as governed by the 2011 Stock Incentive Compensation Plan (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a 10 year term through March 27, 2021 and as of December 31, 2013 the number of shares available for future grants under the 2011 Plan was 3,731,087 shares, which includes remaining shares to grant under the 2000 Plan. The 2011 Plan was approved by stockholders of Wabtec on May 11, 2011. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan (“ the Directors Plan”). The Directors Plan, as amended, authorizes a total of 1,000,000 shares of Common Stock to be issued. Under the Directors Plan options issued become exercisable over a three-year vesting period and expire ten years from the date of grant and restricted stock issued under the plan vests one year from the date of grant. As compensation for directors’ fees for the years ended December 31, 2013, 2012 and 2011, the Company issued a total of 17,875, 22,010 and 23,272 shares of restricted stock to non-employee directors. The total number of shares issued under the plan as of December 31, 2013 was 823,760 shares. No awards may be made under the Directors Plan subsequent to October 31, 2016. Stock-based compensation expense for all of the plans was $24.1 million, $19.8 million and $18.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company recognized associated tax benefits related to the stock-based compensation plans of $7.9 million, $5.9 million and $5.1 million for the respective periods. Included in the stock-based compensation expense for 2013 above is $2.3 million of expense related to stock options, $5.6 million related to non-vested restricted stock, $2.1 million related to restricted stock units, $13.1 million related to incentive stock awards and $1.0 million related to awards issued for Directors’ fees. At December 31, 2013, unamortized compensation expense related to those stock options, non-vested restricted shares and incentive stock awards expected to vest totaled $21.0 million and will be recognized over a weighted average period of 1.2 years. 68 Stock Options Stock options are granted to eligible employees and directors at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a four year vesting period and expire 10 years from the date of grant. The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and Directors Plan for the years ended December 31: Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate intrinsic value (in thousands) Options Outstanding at December 31, 2010 ..................................................................... Granted ...................................................................................................... Exercised ................................................................................................... Canceled .................................................................................................... Outstanding at December 31, 2011 ..................................................................... Granted ...................................................................................................... Exercised ................................................................................................... Canceled .................................................................................................... Outstanding at December 31, 2012 ..................................................................... Granted ...................................................................................................... Exercised ................................................................................................... Canceled .................................................................................................... Outstanding at December 31, 2013 ..................................................................... Exercisable at December 31, 2013 ...................................................................... 1,996,778 $ 13.92 252,892 29.03 9.69 (505,720) (19,166) 13.96 1,724,784 $ 17.37 151,396 35.36 (346,736) 12.78 (63,766) 19.11 1,465,678 $ 20.24 116,392 48.29 (344,806) 14.98 (4,402) 26.61 1,232,862 $ 24.36 798,316 $ 18.76 Options outstanding at December 31, 2013 were as follows: 6.2 $ 25,018 1,505 (12,788) (403) 6.5 $ 30,362 1,274 (10,746) (1,573) 6.3 $ 34,487 3,024 (20,444) (210) 6.1 $ 61,530 5.3 $ 44,317 Range of Exercise Prices Under $10.00 ........................................................................... 10.00 – 15.00 ........................................................................... 15.00 – 23.00 ........................................................................... 23.00 – 30.00 ........................................................................... Over 30.00............................................................................... Weighted Average Exercise Price of Options Outstanding Weighted Average Remaining Contractual Life Number of Options Currently Exercisable Weighted Average Exercise Price of Options Currently Exercisable 8.54 14.39 18.19 28.60 40.62 24.36 1.2 5.0 4.9 6.8 8.5 1,666 $ 269,084 399,848 93,978 33,740 798,316 $ 8.54 14.39 18.07 28.45 35.21 18.76 Number of Options Outstanding 1,666 $ 269,084 452,332 231,746 278,034 1,232,862 $ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: For the year ended December 31, 2012 2011 2013 .08% Dividend yield .......................................................................................................................................... 3.0% Risk-free interest rate ............................................................................................................................... 45.6 Stock price volatility ................................................................................................................................ 43.8 5.0 5.0 Expected life (years) ................................................................................................................................ Weighted average fair value of options granted during the year .............................................................. $ 17.60 $13.21 $11.60 45.0 5.0 .23% 1.4% .21 % 1.4 % The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the 7 year U.S. Treasury bond rates for the expected life of the option. 69 Restricted Stock and Incentive Stock Beginning in 2006 the Company adopted a restricted stock program. As provided for under the 2011 and 2000 Plans, eligible employees are granted restricted stock that generally vests over four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant. In addition, the Company has issued incentive stock awards to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three year period then ended, the incentive stock awards can vest and be awarded ranging from 0% to 200% of the initial incentive stock awards granted. The incentive stock awards included in the table below represent the number of shares that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of December 31, 2013, the Company estimates that it will achieve 200%, 164% and 100% for the incentive stock awards expected to vest based on performance for the three year periods ending December 31, 2013, 2014, and 2015, respectively, and has recorded incentive compensation expense accordingly. If our estimate of the number of these stock awards expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period. Compensation expense for the non-vested restricted stock and incentive stock awards is based on the closing price of the Company’s common stock on the date of grant and recognized over the applicable vesting period. The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan, and Directors Plan, and incentive stock awards activity and related information for the 2011 Plan and the 2000 Plan with related information for the years ended December 31: Non- Vested Restricted Stock Incentive Stock Awards Weighted Average Grant Date Fair Value Outstanding at December 31, 2010 ............................................................................................ Granted ............................................................................................................................. Vested ............................................................................................................................... Adjustment for incentive stock awards expected to vest .................................................. Canceled ........................................................................................................................... Outstanding at December 31, 2011 ............................................................................................ Granted ............................................................................................................................. Vested ............................................................................................................................... Adjustment for incentive stock awards expected to vest .................................................. Canceled ........................................................................................................................... Outstanding at December 31, 2012 ............................................................................................ Granted ............................................................................................................................. Vested ............................................................................................................................... Adjustment for incentive stock awards expected to vest .................................................. Canceled ........................................................................................................................... Outstanding at December 31, 2013 ............................................................................................ 13. OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss were: (6,540 ) 553,254 712,654 $ 227,164 234,300 (224,660 ) (134,684) — 484,452 (3,998) 549,218 1,292,724 $ 223,960 237,320 (197,388 ) (244,158) 69,778 — (29,016 ) (26,586) 546,774 1,329,078 $ 173,887 200,090 (204,494 ) (570,918) 91,694 (6,350) 510,129 1,043,594 $ — (6,038 ) 17.95 14.18 18.24 23.06 17.41 22.02 35.45 17.87 32.77 22.52 26.69 48.62 20.86 33.49 26.98 35.27 December 31, In thousands Foreign currency translation gain ............................................................................................................................ $ 17,326 $ 11,981 Unrealized loss on interest rate swap contracts, net of tax of $1,252 and $1,612 ................................................... (2,010) (2,459) Pension and post-retirement benefit plans, net of tax of $(22,434) and $(30,622) ................................................. (50,172) (63,086) Total accumulated other comprehensive loss .......................................................................................................... $ (34,856) $(53,564) 2013 2012 70 The changes in accumulated other comprehensive loss by component, net of tax, for the year-ended December 31, 2013 are as follows: In thousands Balance at December 31, 2012 ...................................................................... $ Other comprehensive income before reclassifications .................................. Amounts reclassified from accumulated other comprehensive income ........ Net current period other comprehensive income .......................................... Balance at December 31, 2013 ...................................................................... $ Foreign currency translation Interest rate swap contracts 11,981 $ 5,345 - 5,345 17,326 $ (2,459 ) $ 449 - 449 (2,010 ) $ Pension and post retirement benefit plans (63,086) $ 9,264 3,650 12,914 (50,172) $ Total (53,564) 15,058 3,650 18,708 (34,856) Reclassifications out of accumulated other comprehensive loss for the year-ended December 31, 2013 are as follows: In thousands Amortization of defined pension and post retirement items Amount reclassified from accumulated other comprehensive income Affected line item in the Condensed Consolidated Statements of Operations Amortization of initial net obligation and prior service cost ........................... $ Amortization of net loss .................................................................................. $ (2,568 ) Cost of sales 7,828 Cost of sales 5,260 Income from Operations (1,610 ) Income tax expense 3,650 Net income 14. OPERATING LEASES The Company leases office and manufacturing facilities under operating leases with terms ranging from one to 15 years, excluding renewal options. Total net rental expense charged to operations in 2013, 2012, and 2011 was $18.2 million, $14.7 million and $13.4 million respectively. The amounts above are shown net of sublease rentals of $0.3 million, $0.2 million and $0.3 million for the years 2013, 2012 and 2011, respectively. Future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year are as follows: In thousands 2014 ...................................................................................................................................................... $ 15,241 $ 1,350 $16,591 2015 ...................................................................................................................................................... 13,461 14,385 2016 ...................................................................................................................................................... 12,569 13,107 2017 ...................................................................................................................................................... 9,794 9,945 2018 ...................................................................................................................................................... 7,832 7,874 25,831 2019 and after ....................................................................................................................................... 25,821 924 538 151 42 10 Equipment Total Real Estate 71 15. WARRANTIES The following table reconciles the changes in the Company’s product warranty reserve as follows: For the year ended December 31, In thousands Balance at beginning of period ............................................................................................................ $ 58,212 50,640 Warranty expense ....................................................................................................................... 23,059 22,862 Acquisitions ............................................................................................................................... 2,227 1,529 Warranty payments .................................................................................................................... (20,603) (16,972) 153 Foreign currency impact/other ................................................................................................... (2,302) Balance at end of period ...................................................................................................................... $ 60,593 $ 58,212 2013 2012 16. PREFERRED STOCK The Company’s authorized capital stock includes 1,000,000 shares of preferred stock. The Board of Directors has the authority to issue the preferred stock and to fix the designations, powers, preferences and rights of the shares of each such class or series, including dividend rates, conversion rights, voting rights, terms of redemption and liquidation preferences, without any further vote or action by the Company’s shareholders. The rights and preferences of the preferred stock would be superior to those of the common stock. At December 31, 2013 and 2012 there was no preferred stock issued or outstanding. 17. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model. Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2013, which are included in other current liabilities on the Consolidated Balance sheet: Fair Value Measurements at December 31, 2013 Using In thousands Interest rate swap agreement ....................................................... Total ............................................................................................ $ Total Carrying Value at December 31, 2013 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 3,005 3,005 $ — — $ 3,005 3,005 $ — — The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2012, which are included in other current liabilities on the Consolidated Balance sheet: Fair Value Measurements at December 31, 2012 Using In thousands Interest rate swap agreements ..................................................... Total ............................................................................................ $ Total Carrying Value at December 31, 2012 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 4,070 4,070 $ — — $ 4,070 4,070 $ — — 72 To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as interest rate swaps, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy. As a result of our global operating activities the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2. The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at December 31, 2013 and December 31, 2012. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. Generally, all plan assets are considered Level 2 based on the fair value valuation hierarchy. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets. Trusts are valued at the net asset value (“NAV”) as determined by their custodian. NAV represent the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates. The 2013 Notes and the 2003 Notes are considered Level 2 based on the fair value valuation hierarchy. The estimated fair values and related carrying values of the Company’s financial instruments are as follows: In thousands Interest rate swap agreement ......................................................................................... $ 4.375% Senior Notes ..................................................................................................... 6.875% Senior Notes ..................................................................................................... December 31, 2013 Fair Carry Value Value December 31, 2012 Fair Carry Value Value 3,005 $ 3,005 $ 4,070 $ 250,000 — 253,135 — — 150,000 4,070 — 154,125 The fair value of the Company’s interest rate swap agreement, the 2013 Notes and the 2003 Notes were based on dealer quotes and represent the estimated amount the Company would pay to the counterparty to terminate the agreement. 18. COMMITMENTS AND CONTINGENCIES The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. The Company believes its operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements. Under terms of the purchase agreement and related documents for the 1990 Acquisition, American Standard, Inc., now known as Trane (“Trane”), has indemnified the Company for certain items including, among other things, certain environmental claims the Company asserted prior to 2000. If Trane was unable to honor or meet these indemnifications, the Company would be responsible for such items. In the opinion of Management, Trane currently has the ability to meet its indemnification obligations. Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (“RFPC”), and are based on a product sold by RFPC prior to the time that the Company acquired any interest in RFPC. Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non- affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated. 73 It is Management’s belief that the potential range of loss for asbestos-related bodily injury cases is not reasonably determinable at present due to a variety of factors, including: (1) the asbestos case settlement history of the Company’s wholly owned subsidiary, RFPC; (2) the unpredictable nature of personal injury litigation in general; and (3) the uncertainty of asbestos litigation in particular. Despite this uncertainty, and although the results of the Company’s operations and cash flows for any given period could be adversely affected by asbestos-related lawsuits, Management believes that the final resolution of the Company’s asbestos-related cases will not be material to the Company’s overall financial position, results of operations and cash flows. In general, this belief is based upon: (1) Wabtec’s and RFPC’s history of settlements and dismissals of asbestos-related cases to date; (2) the inability of many plaintiffs to establish any exposure or causal relationship to RFPC’s product; and (3) the inability of many plaintiffs to demonstrate any identifiable injury or compensable loss. More specifically, as to RFPC, Management’s belief that any losses due to asbestos-related cases would not be material is also based on the fact that RFPC owns insurance which provides coverage for asbestos-related bodily injury claims. To date, RFPC’s insurers have provided RFPC with defense and indemnity in these actions. The overall number of new claims being filed against RFPC has dropped significantly in recent years; however, these new claims, and all previously filed claims, may take a significant period of time to resolve. As to Wabtec and its divisions, Management’s belief that asbestos-related cases will not have a material impact is also based on its position that it has no legal liability for asbestos-related bodily injury claims, and that the former owners of Wabtec’s assets retained asbestos liabilities for the products at issue. To date, Wabtec has been able to successfully defend itself on this basis, including two arbitration decisions and a judicial opinion, all of which confirmed Wabtec’s position that it did not assume any asbestos liabilities from the former owners of certain Wabtec assets. Although Wabtec has incurred defense and administrative costs in connection with asbestos bodily injury actions, these costs have not been material, and the Company has no information that would suggest these costs would become material in the foreseeable future. From time to time the Company is involved in litigation relating to claims arising out of its operations in the ordinary course of business. As of the date hereof, the Company is involved in no litigation that the Company believes will have a material adverse effect on its financial condition, results of operations or liquidity. 19. SEGMENT INFORMATION Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are: Freight Segment primarily manufactures and services components for new and existing freight cars and locomotives, builds new switcher locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities. Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically subway cars and buses, builds new commuter locomotives and refurbishes subway cars. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world. The Company evaluates its business segments’ operating results based on income from operations. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies. 74 Segment financial information for 2013 is as follows: Freight Segment Transit Segment Corporate Activities and Elimination In thousands Sales to external customers .............................................................................. $1,398,103 $1,168,289 $ 6,992 Intersegment sales/(elimination) ...................................................................... Total sales ............................................................................................... $1,423,566 $1,175,281 $ Income (loss) from operations ......................................................................... $ 309,133 $ 143,634 $ — Interest expense and other ................................................................................ Income (loss) from operations before income taxes ............................... $ 309,133 $ 143,634 $ 19,103 17,119 Depreciation and amortization ......................................................................... Capital expenditures ......................................................................................... Segment assets ................................................................................................. — $2,566,392 (32,455) — (32,455) $2,566,392 (15,457) $ 437,310 (16,223) (16,223) (31,680) $ 421,087 51,193 41,238 1,706,829 (1,143,605) 2,821,997 30,645 22,020 2,258,773 1,445 2,099 25,463 — Total Segment financial information for 2012 is as follows: Freight Segment Transit Segment Corporate Activities and Elimination In thousands Sales to external customers .............................................................................. $1,501,911 $ 889,211 $ 7,752 Intersegment sales/(elimination) ...................................................................... Total sales ............................................................................................... $1,524,581 $ 896,963 $ 94,861 $ — 94,861 $ 16,583 8,688 Income (loss) from operations ......................................................................... $ 314,627 $ Interest expense and other ................................................................................ Depreciation and amortization ......................................................................... Capital expenditures ......................................................................................... Segment assets ................................................................................................. — $2,391,122 — (30,422) (30,422) $2,391,122 (17,209) $ 392,279 (14,921) (14,921) (32,130) $ 377,358 44,136 36,001 1,599,835 (1,143,805) 2,351,542 Income (loss) from operations before income taxes ............................... $ 314,627 $ 26,436 25,095 1,895,512 1,117 2,218 22,670 — Total Segment financial information for 2011 is as follows: Freight Segment Transit Segment Corporate Activities and Elimination Income (loss) from operations .......................................................................... $ 225,282 $ Interest expense and other ................................................................................. In thousands Sales to external customers ............................................................................... $1,210,059 $ 757,578 $ 6,419 Intersegment sales/(elimination) ....................................................................... Total sales ................................................................................................ $1,226,762 $ 763,997 $ 83,760 $ — 83,760 $ 14,864 11,857 1,102,370 Depreciation and amortization .......................................................................... 29,216 24,118 Capital expenditures .......................................................................................... Segment assets .................................................................................................. 1,799,385 Income (loss) from operations before income taxes ................................ $ 225,282 $ 16,703 — Total — $1,967,637 (23,122) — (23,122) $1,967,637 (38,341) $ 270,701 (15,387) (15,387) (53,728) $ 255,314 44,849 37,971 (742,802) 2,158,953 769 1,996 75 The following geographic area data as of and for the years ended December 31, 2013, 2012 and 2011, respectively, includes net sales based on product shipment destination and long-lived assets, which consist of plant, property and equipment, net of depreciation, resident in their respective countries: Net Sales 2012 Long-Lived Assets 2012 2013 2011 2013 In thousands United States ................................................................ $1,336,604 $1,199,294 $1,051,372 $ 150,952 $ 131,850 $126,837 21,046 United Kingdom ........................................................... 12,982 Canada ......................................................................... 5,075 Australia ....................................................................... 5,281 Mexico ......................................................................... 893 Brazil ............................................................................ France ........................................................................... 15 21,937 Italy .............................................................................. 13,211 Germany ....................................................................... 6,248 China ............................................................................ 8,497 Other international ....................................................... Total ................................................................... $2,566,392 $2,391,122 $1,967,637 $ 276,078 $ 244,088 $222,022 43,733 28,905 6,442 11,043 5,151 5,033 4,886 5,862 1,082 1,031 3,564 3,404 21,374 20,926 13,599 12,914 7,555 16,785 16,212 297,139 167,417 141,056 128,184 78,532 37,925 42,702 54,869 30,226 251,738 255,326 194,493 191,994 139,089 96,620 42,310 39,462 38,574 28,886 165,074 182,653 157,379 106,254 104,384 70,786 35,199 50,412 33,452 20,641 155,105 7,863 2011 Export sales from the Company’s United States operations were $542.3 million, $579.6 million and $410.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Sales by product are as follows: In thousands Specialty Products & Electronics ............................................................................................. $1,041,771 $ 1,094,148 $ 880,030 331,787 Remanufacturing, Overhaul & Build ....................................................................................... 497,968 Brake Products ......................................................................................................................... 195,251 Other Transit Products ............................................................................................................. Other ........................................................................................................................................ 62,601 Total Sales ................................................................................................................................ $2,566,392 $ 2,391,122 $1,967,637 655,387 496,883 567,730 527,399 204,115 197,634 75,058 97,389 2013 2011 2012 20. OTHER INCOME (EXPENSE) The components of other expense are as follows: In thousands Foreign currency loss .................................................................................................................................... $ (3,512) $(134) $(2,041) Other miscellaneous income (expense) ......................................................................................................... 2,630 (536) 1,661 Total other (expense) income .............................................................................................................. $ (882) $(670) $ (380) 2013 2011 For the year ended December 31, 2012 76 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter In thousands, except per share data 2013 Net sales ........................................................................................................................ $615,510 $ 638,002 $ 631,398 $681,482 200,125 Gross profit ................................................................................................................... 111,218 Income from operations ................................................................................................ 74,041 Net income attributable to Wabtec shareholders ........................................................... 0.77 Basic earnings from operations per common share (1) ................................................. $ Diluted earnings from operations per common share (1) .............................................. $ 0.76 2012 Net sales ........................................................................................................................ $583,309 $ 609,820 $ 587,593 $610,400 180,480 Gross profit ................................................................................................................... 100,462 Income from operations ................................................................................................ 64,765 Net income attributable to Wabtec shareholders ........................................................... 0.68 Basic earnings from operations per common share (1) ................................................. $ 0.67 Diluted earnings from operations per common share (1) .............................................. $ 173,427 171,279 100,865 96,842 64,712 62,994 192,881 188,133 112,554 109,871 74,638 73,943 169,381 94,110 59,261 182,888 103,667 69,613 0.78 $ 0.77 $ 0.62 $ 0.61 $ 0.73 $ 0.72 $ 0.66 $ 0.65 $ 0.77 $ 0.76 $ 0.67 $ 0.67 $ The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30 and September 30. The fiscal year ends on December 31. (1) Information above for basic earnings from operations per common share and diluted earnings from operations per common share for all periods presented reflects the two-for-one split of the Company’s common stock, which occurred on May 14, 2013. 77 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION Date: February 21, 2014 By: /S/ ALBERT J. NEUPAVER Albert J. Neupaver, Chief Executive Officer, Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature and Title Date By By By By By By By By By By /S/ ALBERT J. NEUPAVER Albert J. Neupaver, Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) /S/ PATRICK D. DUGAN Patrick D. Dugan, Senior Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) /S/ WILLIAM E. KASSLING William E. Kassling, Director /S/ ROBERT J. BROOKS Robert J. Brooks, Director /S/ EMILIO A. FERNANDEZ Emilio A. Fernandez, Director /S/ LEE B. FOSTER, II Lee B. Foster, II, Director /S/ BRIAN P. HEHIR Brian P. Hehir, Director /S/ MICHAEL W. D. HOWELL Michael W. D. Howell, Director /S/ NICKOLAS W. VANDE STEEG Nickolas W. Vande Steeg, Director /S/ GARY C. VALADE Gary C. Valade, Director 78 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 February 21, 2014 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION VALUATION AND QUALIFYING ACCOUNTS For each of the three years ended December 31 SCHEDULE II In thousands 2013 Warranty and overhaul reserves ................................................................ $ 58,212 $ Allowance for doubtful accounts .............................................................. Valuation allowance-taxes ........................................................................ Merger and restructuring reserve .............................................................. 6,656 2,141 836 23,059 $ 2,361 1,191 — (75 ) $ 20,603 $60,593 5,707 3,310 — 3,332 — — 775 61 — Balance at beginning of period Charged/ (credited) to expense Charged to other accounts (1) Deductions from reserves (2) Balance at end of period 2012 Warranty and overhaul reserves ................................................................ $ 50,640 $ Allowance for doubtful accounts .............................................................. Valuation allowance-taxes ........................................................................ Merger and restructuring reserve .............................................................. 8,406 — 960 22,862 $ 2,484 2,141 — 1,682 $ 16,972 $58,212 6,656 4,306 2,141 — 836 124 72 — — 2011 Warranty and overhaul reserves ................................................................ $ 35,513 $ Allowance for doubtful accounts .............................................................. Valuation allowance-taxes ........................................................................ Merger and restructuring reserve .............................................................. 7,503 2,471 1,070 19,884 $ 12,070 $ 16,827 $50,640 8,406 5,047 — (2,471) 960 — 4,144 — 122 — — 12 (1) Reserves of acquired/(sold) companies; valuation allowances for state and foreign deferred tax assets; impact of fluctuations in foreign currency exchange rates. (2) Actual disbursements and/or charges. 79 Exhibits EXHIBIT INDEX 3.1 3.2 3.3 4.1 4.2 4.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 Filing Method 9 11 8 12 12 12 2 2 2 4 4 3 Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended December 31, 2003......................................................................................................................... Certificate of Amendment of Restated Certificate of Incorporation dated May 14, 2013 .............. Amended and Restated By-Laws of the Company, effective February 15, 2011 ........................... Indenture, dated August 8, 2013 by and between the Company and Wells Fargo, National Association, As Trustee .................................................................................................................. First Supplemental Indenture, dated August 8, 2013 by and between the Company and Wells Fargo Bank, National Association, as Trustee ................................................................................ Form of 4.375% Senior Note due 2023 (included in Exhibit 4.2) .................................................. Agreement of Sale and Purchase of the North American Operations of the Railway Products Group, an operating division of American Standard Inc. (now known as Trane), dated as of 1990 between Rail Acquisition Corp. and American Standard Inc. (only provisions on indemnification are reproduced) ..................................................................................................... Letter Agreement (undated) between the Company and American Standard Inc. (now known as Trane) on environmental costs and sharing .................................................................................... Purchase Agreement dated as of June 17, 1992 among the Company, Schuller International, Inc., Manville Corporation and European Overseas Corporation (only provisions on indemnification are reproduced) ..................................................................................................... Westinghouse Air Brake Company 1995 Non-Employee Directors’ Fee and Stock Option Plan, as amended * .................................................................................................................................. Westinghouse Air Brake Technologies Corporation 2000 Stock Incentive Plan, as amended * .... Employment Agreement with Albert J. Neupaver, dated February 1, 2006 * ................................ Form of Restricted Stock Agreement * .......................................................................................... 10 Westinghouse Air Brake Technologies Corporation 2011 Stock Incentive Plan * ........................ Stock Purchase Agreement, by and among the Company, Standard Car Truck Company and Robclif, Inc., dated September 12, 2008 ........................................................................................ First Amended and Restated Refinancing Credit Agreement, dated as of December 19, 2013 by and among the Company, Wabtec Cooperatief UA, certain subsidiaries as the guarantors, the lenders party thereto and, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC and J.P. Morgan Securities, Inc., as Joint Lead Arrangers and Joint Book Runners, JP Morgan Chase Bank, N.A. as Syndication Agent, Bank of America, N.A., and Citizens Bank of Pennsylvania, Branch Banking and Trust Company and The Bank of Toyko- Mitsubish UFJ, Ltd., as Co-Documentation Agents ....................................................................... Form of Employment Continuation Agreement entered into by the Company with Albert J. Neupaver, Alvaro Garcia-Tunon, Raymond T. Betler, Charles F. Kovac, R. Mark Cox, David L. DeNinno, Patrick D. Dugan, Scott E. Wahlstrom and Timothy R. Wesley* ............................. Wabtec Corporation Deferred Compensation Plan for Executive Officers and Directors as adopted December 10, 2009 * ........................................................................................................ Form of Agreement for Nonstatutory Stock Option under the 1995 Non-Employee Directors’ Fee and Stock Option Plan, as amended * ...................................................................................... Form of Agreement for Nonstatutory Stock Options under 2000 Stock Incentive Plan, as amended * ...................................................................................................................................... 5 6 1 7 10 10 10 80 10.15 Form of Agreement for Nonstatutory Stock Options under 2011 Stock Incentive Plan as amended * ...................................................................................................................................... 10 21 23.1 31.1 31.2 32.1 List of subsidiaries of the Company ............................................................................................... Consent of Ernst & Young LLP ..................................................................................................... Rule 13a-14(a)/15d-14(a) Certifications ......................................................................................... Rule 13a-14(a)/15d-14(a) Certifications ......................................................................................... Section 1350 Certifications ............................................................................................................ 101.INS XBRL Instance Document. ............................................................................................................ 101.SCH XBRL Taxonomy Extension Calculation Linkbase Document ...................................................... 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document ...................................................... 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. ....................................................... 101.LAB XBRL Taxonomy Extension Label Linkbase Document ............................................................... 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document .................................................... 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 6 Filed herewith. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 33-90866). Filed as an exhibit to the Company’s Registration Statement on Form S-4 (File No. 333-110600). 4 Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 033-90866) for the period ended March 31, 2006. Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on April 13, 2006. Filed as an Annex to the Company’s Schedule 14A Proxy Statement (File No. 1-13782) filed on March 31, 2011. Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 1-13782) for the period ended September 30, 2008. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782) dated July 2, 2009. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated February 22, 2011. Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 25, 2011. Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 1-13782), dated February 22, 2013. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated May 15, 2013. Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-13782), dated August 8, 2013. 7 8 9 10 11 12 * Management contract or compensatory plan. 81 [THIS PAGE INTENTIONALLY LEFT BLANK] BOARD OF DIRECTORS Albert J. Neupaver Chairman and Chief Executive Officer Wabtec Corporation William E. Kassling Lead Director Emilio A. Fernandez (1,3) Vice Chairman Robert J. Brooks (1,3) Former Chief Financial Officer Wabtec Corporation Lee B. Foster II (1,2) Chairman L.B. Foster Co. Brian P. Hehir (1,2) Former Vice Chairman Investment Banking Merrill Lynch Michael W. D. Howell (2,3) Former Chief Executive Officer Transport Initiatives Edinburgh Limited Gary C. Valade (1) Former Executive Vice President DaimlerChrysler Nickolas W. Vande Steeg (2,3) Former President Parker Hannifin Corporation (1) Audit Committee (2) Compensation Committee (3) Nominating and Corporate Governance Committee EXECUTIVE MANAGEMENT Albert J. Neupaver Chairman and Chief Executive Officer Raymond T. Betler President and Chief Operating Officer Patrick D. Dugan Senior Vice President, Chief Financial Officer Charles F. Kovac Senior Vice President, Group Executive R. Mark Cox Senior Vice President, Corporate Development OPERATING MANAGEMENT Darren J. Beatty Vice President and General Manager-Operations, Wabtec Elastomers Bruce M. Beveridge Vice President and General Manager, Wabtec Railway Electronics Brian C. Blackwell Vice President, Corporate Quality Christiaan D. Bezuidenhout Managing Director, Wabtec South Africa David A. Bode Vice President and General Manager, Durox Michael B. Bratcher Vice President, Signal and Train Management Systems Michael R. Bruneau Vice President and General Manager, Wabtec Global Services Greg S. Cody Vice President and General Manager, Vapor Rail Yao Cui Managing Director, Wabtec China Tapas Das Gupta Managing Director, InTrans Engineering Vittorio De Soccio Managing Director, CoFren Robert F. Dezzi Vice President and General Manager, Wabtec Passenger Transit Robert D. Dimsa Vice President, Locomotive Products Danny Dolzadelli Managing Director, Wabtec Australia Simon T. Dutton Managing Director, Bearward Engineering John Fink Vice President, Sales and Marketing Herbert Freudenberg Vice President, Friction Technology Robert R. Gallant Vice President and General Manager, Vapor Bus International David Haynes Managing Director, Brush Traction Dirk Herkrath Managing Director, Becorit David L. DeNinno Senior Vice President, General Counsel and Secretary Scott E. Wahlstrom Senior Vice President, Human Resources Robert C. Bourg Vice President, Group Executive Donald C. Hutchins Vice President and General Manager, Barber Steel Foundry Matthew P. Jarusinski Vice President and General Manager, Railroad Friction Products Corp. W. Kent Jones Vice President, Supply Chain Chris Katakouzinos Managing Director, FIP Mickey J. Korzeniowski Vice President and General Manager, Freight Car Products Kash C. Krishnarao Vice President, Rail Control Systems Gary E. Kujala Vice President and General Manager, Xorail Jeffrey S. Langer Vice President, Wabtec Performance System Brad Lewis General Manager Turbonetics Gregory C. Lewis Vice President and General Manager, Unifin International Karl-Heinz Colmer Vice President, Group Executive Michael E. Fetsko III Vice President, Group Executive John A. Mastalerz, Jr. Vice President and Corporate Controller David J. Meyer Vice President, Group Executive Timothy R. Wesley Vice President, Investor Relations and Corporate Communications Renata Muramatsu Managing Director, Wabtec Brasil Robert G. Oehler Managing Director, Wabtec Europe Mark J. Pace Vice President, Sales and Marketing Giuseppe A. Poli Managing Director, POLI Janice L. Rivera Vice President and General Manager, Ricon Robert M. Sehnert Vice President, Global Services Gary M. Sich Vice President and General Manager, Freight Pneumatics Selim Simbil Managing Director, MZT Gary L. Smith Vice President and General Manager Wabtec Elastomers Geoff D. Smith Vice President, Radiator and Heat Exchanger Jeffrey W. Stearns Vice President, Sales and Marketing Jason D. Moore Managing Director, Napier Turbochargers Michael A. Trivisonno Vice President and General Manager, Swiger Coil Systems David Waller Managing Director, LH Group Chris J. Weatherall Managing Director, Wabtec Rail Group Warren J. White Regional Managing Director, Australia John D. Whiteford Vice President, Bus Components Arne J. Wijnmaalen Managing Director, Mors Smitt Ronald L. Witt Vice President, International Sales and Marketing David I. Woolhouse Managing Director, Wabtec Rail THE 2013 GEORGE WESTINGHOUSE PERFORMANCE AWARD WINNERS Greg Davies Wabtec Bill Kassling President’s Cup Performance System Gold: WABCO Vapor Stone Rail Locomotive and Wabtec Systems, Young China Touchstone Safety Wabtec de Mexico Quality Napier Turbochargers and Wabtec de Mexico Global and Market Expansion Winco/Cardwell/MZT/ Wabtec Global Services and Bearward Engineering New Products WABCO Locomotive and Wabtec China Customer Service Wabtec Passenger Transit Aftermarket LH Group 

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