item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report independent public accountants board directors westinghouse air brake company audited accompanying consolidated balance sheet westinghouse air brake company delaware corporation subsidiaries december 31 1998 1997 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake company subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles arthur andersen llp pittsburgh pennsylvania february 17 1999 westinghouse air brake company consolidated balance sheet accompanying notes integral part statement westinghouse air brake company consolidated statement operations accompanying notes integral part statement westinghouse air brake company consolidated statement cash flows accompanying notes integral part statement westinghouse air brake company consolidated statement shareholders equity accompanying notes integral part financial statements westinghouse air brake company notes consolidated financial statements 1 business westinghouse air brake company north americas largest manufacturer valueadded equipment locomotives railway freight cars passenger transit vehicles companys products sold original equipment manufacturer market aftermarket intended enhance safety improve productivity reduce maintenance costs customers companys products include electronic controls monitors air brakes couplers door controls draft gears brake shoes companys primary manufacturing operations united states canada companys revenues primarily north america companys customer base consists railroad transportation companies locomotive freight car original equipment manufacturers railroads transit car builders public transit systems portion companys railroad groups operations revenue base generally dependent capital replacement cycles locomotives freight cars large north americanbased railroad companies companys passenger transit operations dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles intercompany accounts transactions eliminated consolidation certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead components inventory net reserves property plant equipment property plant equipment additions stated cost expenditures renewals betterments capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method following estimated useful lives plant equipment accelerated depreciation methods utilized income tax purposes intangible assets goodwill amortized straightline basis 40 years intangibles amortized straightline basis estimated economic lives goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations see note 4 revenue recognition revenue recognized products shipped respective customers price product determined percentage completion method accounting revenues longterm sales contracts applied relatively small amount contracts appropriate sales returns infrequent material relation companys net sales stockbased compensation company accounts stockbased compensation including stock options employee stock purchases apb opinion 25 accounting stock issued employees see note 11 related pro forma disclosures research development research development costs charged expense incurred costs totaled 304 million 244 million 182 million 1998 1997 1996 respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 62 million 99 million 55 million 1998 1997 1996 respectively warranty reserves 127 million 129 million december 31 1998 1997 respectively financial derivatives company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received accrued interest expense see note 5 addition company periodically enters foreign currency exchange forward options contracts mitigate effects fluctuations foreign exchange rates countries significant operations income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 8 foreign currency translation financial statements companys foreign subsidiaries translated us currency guidelines set forth sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions longterm investment nature accumulated carried component shareholders equity effects currency exchange rate changes intercompany transactions non us dollar amounts charged credited earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 11 comprehensive income 1998 company adopted statement financial accounting standards sfas 130 reporting comprehensive income established standards reporting displaying comprehensive income components financial statements comprehensive income defined net income nonowner changes shareholders equity companys accumulated comprehensive income loss consists entirely foreign currency translation adjustments significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 companys sales 1998 1997 1996 allowance doubtful accounts 29 million 20 million december 31 1998 1997 respectively employees december 31 1998 approximately 28 companys workforce covered collective bargaining agreements generally effective 2001 2002 recent accounting pronouncements june 1998 financial accounting standards board issued statement accounting standards 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards requiring every derivative instrument measured fair value changes fair value recorded currently earnings unless specific hedge accounting criteria met statement 133 effective fiscal years beginning june 15 1999 accordingly company anticipates adopting standard january 1 2000 management continues evaluate impact standard results operations financial condition 3 acquisitions october 5 1998 company purchased railway electronics business rockwell railroad electronics rre rockwell collins inc wholly owned subsidiary rockwell international corporation approximately 80 million cash purchase initially financed obtaining additional term debt 40 million amendment companys existing credit facility unsecured bank loan 30 million additional borrowings companys revolving credit agreement rre leading manufacturer supplier mobile electronics display positioning systems data communications electronic braking systems railroad industry operations united states revenues acquired business fiscal year ended september 30 1998 approximately 46 million acquisition accounted purchase accounting method accordingly results included wabcos consolidated financial statements since date acquisition excess purchase price fair value net assets acquired approximately 63 million allocated goodwill amount based upon independent appraisal may decrease result adjustments purchase price following unaudited pro forma results operations including effects pro forma adjustments related acquisition rockwell railroad electronics prepared transaction occurred beginning 1997 pro forma financial information purport present companys results operations would acquisition rre actually occurred january 1 1997 project companys results operations future period reflect anticipated cost savings combination operations past three years company also completed following acquisitions october 1998 acquisition united states railway service center business comet industries inc 132 million financed issuance 122 million promissory notes annual revenue recent fiscal year approximately 20 million ii july 30 1998 purchased assets assumed certain liabilities usbased lokring corporation 51 million cash lokring develops manufactures markets patented nonwelded connectors sealing products railroad industries annual sales 1997 approximately 10 million iii acquired april 1998 100 stock rfs e limited rfs england approximately 100 million including assumption certain debt rfs leading provider vehicle overhaul conversion maintenance services britains railway industry annual revenue recent fiscal year approximately 275 million iv acquired april 1998 transit coupler product line hadady corporation located united states 46 million cash v october 1997 company purchased rail products business related assets sloan valve company 25 million vi effective july 31 1997 company acquired 100 stock hp srl hp italian transit company total purchase price 58 million included assumption 23 million debt hp located sassuolo italy leading supplier door controls transit rail cars buses italian market annual revenues approximated 9 million vii acquired may 1997 stone safety service corporation new jersey stone uk limited stone supplier transit air conditioning equipment june 1997 company acquired heavy rail air conditioning business thermo king corporation thermo king westinghouse electric aggregate purchase price stone thermo king acquisitions approximately 77 million annual revenues acquisitions prior purchase approximately 30 million viii september 19 1996 company purchased vapor group vapor approximately 639 million cash vapor leading manufacturer door controls transit rail cars metropolitan buses united states annual revenues recent fiscal year prior acquisition totaled 65 million ix january 1996 company acquired futuris industrial products pty ltd australian molded products manufacturer approximately 15 million annual revenues prior acquisition approximately 105 million acquisitions accounted purchase method accordingly results operations applicable acquisition included companys financial statements prospectively acquisition date excess purchase price fair value net assets allocated goodwill recorded amounts totaled approximately 24 million 7 million 17 million 1998 1997 1996 respectively 4 intangibles intangible assets company goodwill consist following december 31 1998 1997 goodwill net accumulated amortization 77 million 54 million respectively totaled 1517 million 666 million respectively company evaluates recoverability intangible assets including goodwill balance sheet date based forecasted future operations undiscounted cash flows subjective criteria based upon historical information management believes carrying amount intangible assets realizable respective amortization periods 5 longterm debt longterm debt consisted following credit agreement june 1998 company refinanced credit facility consortium commercial banks amended october 1998 connection rockwell acquisition amended credit agreement credit agreement provides aggregate credit facility 350 million consisting 170 million june 1998 term loans 40 million september 1998 term loans 140 million revolving loans addition credit agreement provides swingline loans aggregate amount 5 million issuance letters credit aggregate face amount 50 million swingline loans issuance letters credit reduce amount revolving loans may incurred revolving credit facility december 31 1998 company available borrowing capacity net letters credit approximately 12 million company repaid portion borrowings credit agreement january 1999 proceeds offering 75 million 9 38 senior notes described resulting increased borrowing capacity 47 million see note 19 credit agreement limits company respect declaring making cash dividend payments prohibits company declaring making distributions whether cash property securities combination thereof respect shares companys capital stock subject certain exceptions including exception pursuant company permitted pay cash dividends common stock fiscal year aggregate amount 15 million minus aggregate amount prepayments pulse note fiscal year long default payment interest fees occurred thereunder credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions mergers consolidations certain subsidiaries sales assets ordinary course business acquisitions consideration paid company exceed 50 million individually 150 million aggregate limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum leverage ratio debt incurred credit agreement secured substantially assets company domestic subsidiaries guaranteed companys domestic subsidiaries credit agreement contains customary events default including payment defaults failure representations true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 671 december 31 1998 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 1998 notional value interest rate swaps outstanding totaled 50 million effectively changed companys interest rate variable rate fixed rate 709 interest rate swap agreements mature 2000 2001 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance scheduled term loan principal repayments required credit agreement december 31 1998 follows 9 38 senior notes due june 2005 june 1995 company issued 100 million 9 38 senior notes due 2005 existing notes january 1999 company issued additional 75 million 9 38 senior notes due 2005 additional notes existing notes additional notes collectively notes see subsequent event note 19 terms existing notes additional notes substantially existing notes additional notes issued pursuant indentures substantially notes bear interest rate 9 38 mature june 2005 net proceeds existing notes used prepay term loans outstanding existing credit agreement net proceeds additional notes used repay unsecured credit facility reduce revolving credit borrowings notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes unsecured credit facility october 1998 company obtained 30 million unsecured credit facility group commercial banks purpose financing rockwell acquisition december 31 1998 interest rate note 975 per annum january 1999 facility repaid proceeds additional note offering see subsequent event note 19 pulse note partial payment pulse acquisition company issued 170 million note due january 31 2004 interest payable semiannually accrues 95 february 1 2001 february 1 2001 january 31 2004 interest accrue prime rate charged chase manhattan bank december 31 2000 plus 1 comet notes connection comet acquisition company issued notes totaling 122 million unsecured notes totaling 62 million delivered company note amount 6 million delivered subsidiary company secured acquired assets notes bore interest rate 10 per annum scheduled mature october 8 1999 notes repaid january 1999 see note 19 capitalized debt issuance costs 48 million net accumulated amortization amortized terms borrowings 6 employee benefit plans company sponsors defined benefit pension plans cover substantially union employees certain nonunion canadian employees provide pension benefits stated amounts year service employee connection establishment esop see note 7 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys 401k savings plan also amended provide companys future matching contributions made esop form companys common stock companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method accompanying financial statements within analysis pension plan us salaried employees benefit obligation 22338 plan assets 20708 december 31 1998 1996 result early retirement package offered certain union employees company incurred charge 696000 reflected special event addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees conjunction establishment esop january 1995 see note 7 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 one percentage point increase assumed health care cost trend rates future year increases annual postretirement benefit expense 290832 accumulated postretirement benefit obligation 33 million one percentage point decrease assumed health care cost trend rates future year decreases annual postretirement benefit expense 230163 accumulated postretirement benefit obligation 26 million 7 employee stock ownership plan trust esop effective january 31 1995 company established esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described note 6 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements approximately 12 million company obligated contribute amounts sufficient repay esop loan esop uses company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occur simultaneously accounting purposes offset unearned esop shares 1285 million december 31 1998 reflected reduction shareholders equity accompanying financial statements amortized compensation expense coterminous esop loan total compensation expense recognized allocated esop shares 45 million 32 million 29 million 1998 1997 1996 respectively 8 income taxes provision income taxes consisted following 1998 provision excludes 20 million income tax effect extraordinary loss see note 9 related early extinguishment certain debt obligations components income taxes income us foreign operations primarily canada 499 million 226 million respectively 1998 479 million 127 million respectively 1997 424 million 113 million respectively 1996 reconciliation united states federal statutory income tax rate effective income tax rate provided sources deferred income taxes follows components deferred tax assets liabilities follows 9 extraordinary item june 1998 company refinanced credit agreement subsequently amended agreement october 1998 resulted write previously deferred financing costs approximately 33 million net tax 13 per diluted share reported extraordinary item 10 earnings per share computation earnings per share follows options purchase 2 million 5 million 22 million shares common stock outstanding 1998 1997 1996 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 11 stockbased compensation plans stock options 1995 stock incentive plan amended 1998 company may grant options employees westinghouse air brake company subsidiaries 47 million shares westinghouse air brake company common stock 1998 amendment increased number stock options available grant 31 million 47 million options purchase approximately 38 million shares westinghouse air brake company common stock plan granted employees westinghouse air brake company excess fair market value date grant generally options become exercisable three fiveyear vesting periods expire ten years date grant part longterm incentive program 1998 1996 company granted options purchase 500020 684206 shares respectively certain executives 1995 stock incentive plan option price per share greater market value stock date grant 20 14 respectively options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors company also nonemployee directors stock option plan 100000 shares common stock reserved issuance price less 14 yearend 1998 company granted nonstatutory stock options nonemployee directors purchase total 35000 shares employee stock purchase plan 1998 company adopted employee stock purchase plan espp 500000 shares available issuance participants purchase corporations common stock 85 lesser fair market value first last day offering period shares issued pursuant espp 1998 6998 shares average purchase price per share 16575 company applies apb 25 related interpretations accounting stockbased compensation plans accordingly compensation expense recognized plans compensation expense plans determined based fair value grant dates awards companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants would recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years ended december 31 follows exercise prices options outstanding december 31 1998 ranged 1100 2766 weightedaverage remaining contractual life options 8 years restricted stock award 1998 company granted 15000 shares restricted common stock officer shares vest according vesting schedule threeyear period grant date market value totaled 372 thousand amortized expense vesting period unamortized compensation recorded component shareholders equity executive retirement plan 1997 executive retirement plan company may award common stock certain employees including certain executives participate esop december 31 1998 19555 shares awarded fair market value approximately 400 thousand respect restricted stock award executive retirement plan compensation expense recognized consolidated statement operations 12 operating leases minimum annual rentals payable noncancelable leases next five years beyond follows rental expense leases approximately 38 million 33 million 28 million years ended december 31 1998 1997 1996 respectively operating leases relate principally facilities transportation equipment communication systems 13 stock repurchase march 1997 company repurchased scandinavian incentive holdings bv sih 4 million shares companys common stock aggregate purchase price 44 million plus fees expenses approximately 2 million redemption effected pursuant redemption agreement redemption agreement dated march 5 1997 among company sih incentive ab sole shareholder sih concurrently therewith sih sold remaining 6 million shares wabco common stock investors consisting vestar equity partners lp charlesbank capital partners llc fka harvard private capital holdings inc american industrial partners capital fund ii lp certain members management company management purchasers purchase price 11 per share cash pursuant stock purchase agreement dated march 5 1997 sale effective march 31 1997 sih purchase finance redemption company amended credit agreement increase revolving credit availability 15 million 125 million 140 million obtain waiver requirement make prepayment aggregate principal amount equal 50 excess cash flow 1996 approximately 115 million company obtained consents record owners march 3 1997 existing notes certain amendments covenant contained indenture dated june 20 1995 among company issuer bank new york trustee pursuant notes issued indenture company borrowed 46 million fund redemption related expenses following presents companys results year ended december 31 1997 pro forma basis stock repurchase occurred january 1 1997 14 stockholders voting trust agreements december 31 1998 approximate ownership interests companys common stock held management esop 58 investors referred note 13 17 others including public shareholders 25 investors referred note 13 certain members senior management purchased 6 million shares wabco common stock sih seller successor interest incentive ab swedish corporation acquired investment ab cardo original equity owner time 1990 acquisition railway products group american standard inc 1990 acquisition stockholders agreement exists management investors referred note 13 provides among things composition board directors long certain minimum stock ownership percentages maintained restrictions disposition shares rights request registration shares active original management owners entered amended voting trustdisposition agreement effective december 13 1995 amended agreement provides among matters stock voted one block restrictions sale transfer stock agreement expires january 1 2000 terminated affirmative vote twothirds stock shares held trust connection voting trust company entered indemnification agreement trustees covered companys directors officers liability insurance shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement esop described note 7 15 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 1998 1997 preferred stock issued outstanding 16 commitments contingencies terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expire various dates 2000 asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations asi disputed coverage reimbursement provisions company one operating subsidiaries named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes costs associated cleanup activities site may held responsible covered asi indemnification referred asi previously owned 50 subsidiary b related insurance policy expires january 2002 environmental claims provided former 50 owner involved operating subsidiary company submitted claim policy costs clean imposed incurred company connection old james landfill rocky mountain international insurance ltd acknowledged coverage policy subject stated policy exclusions addition management believes costs attributable company material therefore established reserve costs companys operations use products contain asbestos operations acquired company asi discontinued use asbestos 1980 company named codefendant asbestos claims filed third parties asi relating events occurring prior 1981 significantly prior 1990 acquisition claims covered indemnification agreement insurance policy referred asi taken complete responsibility administering defending settling claims company involved incurred costs related claims asi claimed company responsibility cases management believes claims related company costs attributable company material therefore financial statements accordingly reflect costs reserves claims opinion management based available information environmental matters asbestos claims presently represent material contingencies company february 12 1999 ge harris railway electronics llc ge harris railway electronic services llc collectively ge harris brought suit company alleged patent infringement unfair competition related communications system installed one companys products ge harris seeking prohibit company future infringement seeking unspecified amount money damages recover part royalties lawsuit earliest stages company believes technology developed company infringe ge harris patents time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity company historically required pay material liability claims 17 segment information wabco three reportable segments railroad group transit group molded products group key factors used identify reportable segments organization alignment companys internal operations nature products services customer type business segments railroad group consists products geared production freight cars locomotives including braking control equipment train coupler systems operating freight railroads revenues derived oem aftermarket sales repairs services transit group consists products passenger transit vehicles typically subways rail busses include braking monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services molded products group include manufacturing distribution brake shoes rubberized products revenues generally derived aftermarket company evaluates business segments operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 1998 follows segment financial information 1997 follows segment financial information 1996 follows following geographic area data include trade revenues based product shipment destination longlived assets consists plant property equipment net depreciation resident respective countries 18 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 5 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 19 subsequent event january 1999 wabco completed private placement 75 million 9 38 senior notes mature 2005 senior notes issued premium resulting effective rate 85 issuance improved wabcos financial liquidity using portion proceeds repay 30 million debt associated rre acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repay remaining unpaid principal 102 million comet acquisition result issuance company writeoff previously capitalized debt issuance costs approximately 02 per diluted share first quarter 1999 20 selected quarterly financial data second quarter 1998 company refinanced credit agreement wroteoff deferred financing costs approximately 27 million net tax 11 per diluted share fourth quarter 1998 company amended credit agreement wroteoff deferred financing costs approximately 6 million net tax 02 per diluted share charges recorded extraordinary items signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake company william e kassling william e kassling chief executive officer date february 18 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors westinghouse air brake company audited accordance generally accepted auditing standards consolidated financial statements westinghouse air brake company included form 10k issued report thereon dated february 17 1999 audits made purpose forming opinion statements taken whole schedule listed index item 14a2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial date required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania february 17 1999 schedule ii westinghouse air brake company valuation qualifying accounts three years ended december 31 1 reserves acquired companies 2 actual disbursements andor charges index exhibitsitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation delaware corporation subsidiaries december 31 2000 1999 related consolidated statements operations shareholders equity cashflows three years period ended december 31 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits year ended december 31 1998 audit consolidated financial statements motivepower industries inc company acquired 1999 transaction accounted poolingofinterests discussed note 4 statements included consolidated financial statements westinghouse air brake technologies corporation reflect total assets total revenues 38 percent 35 percent respectively related consolidated totals statements audited auditors whose report furnished us opinion insofar relates amounts included motivepower industries inc based solely report auditors conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states arthur andersen llp pittsburgh pennsylvania february 12 2001 independent auditors report stockholders board directors motivepower industries inc audited consolidated statements income stockholders equity cash flows motivepower industries inc subsidiaries year ended december 31 1998 separately presented herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements present fairly material respects results operations cash flows motivepower industries inc year ended december 31 1998 conformity accounting principles generally accepted united states america deloitte touche llp pittsburgh pennsylvania february 11 1999 march 2 1999 note 18 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business westinghouse air brake technologies corporation company one north americas largest manufacturers valueadded equipment locomotives railway freight cars passenger transit vehicles company formed november 1999 merger westinghouse air brake company motivepower industries inc major products intended enhance safety improve productivity reduce maintenance costs customers major product offerings include electronic controls monitors air brakes traction motors cooling equipment turbochargers lowhorsepower locomotives couplers door controls draft gears brake shoes aggressively pursue technological advances respect new product development product enhancements company headquarters wilmerding pennsylvania 6244 employees facilities throughout world portion companys freight groups operations revenue base generally dependent capital replacement cycles locomotives freight cars large north americanbased railroad companies companys passenger transit groups operations dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation prior period financial statements footnote disclosures restated accordance accounting principles board number 16 business combinations related merger wabco motivepower accounted poolingofinterests see note 4 certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead cores inventory defined inventory units designated unit exchange programs components inventory net reserves property plant equipment property plant equipment additions stated cost expenditures renewals betterments capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method following estimated useful lives plant property equipment accelerated depreciation methods utilized income tax purposes major classes depreciable assets follows intangible assets goodwill amortized straightline basis 40 years intangibles amortized straightline basis estimated economic lives goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations indicate remaining balance intangible asset may recoverable companys reviews impairment date resulted revision intangible assets related amortization periods see note 5 revenue recognition revenue recognized products shipped respective customers price product determined company recognizes revenues longterm contracts based percentage completion method accounting contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period known provisions made currently estimated losses uncompleted contracts costs estimated earnings excess billings underbillings billings excess costs estimated earnings overbillings contract progress recorded balance sheet classified noncurrent see note 20 december 1999 securities exchange commission released staff accounting bulletin 101 revenue recognition sab 101 provide guidance recognition presentation disclosure revenue financial statements sab 101 change existing literature revenue recognition rather explains clarifies sec staffs general framework revenue recognition sab 101 require company change existing revenue recognition policies therefore impact companys results operations financial condition december 31 2000 stockbased compensation company accounts stockbased compensation including stock options employee stock purchases apb opinion 25 accounting stock issued employees see note 11 related pro forma disclosures research development research development costs charged expense incurred years ended december 31 2000 1999 1998 company incurred costs approximately 325 million 345 million 304 million respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 164 million 108 million 14 million 2000 1999 1998 respectively warranty reserves 235 million 268 million december 31 2000 1999 respectively financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received accrued interest expense see note 6 company adopted statement financial accounting standards sfas 133 amended sfas 138 accounting derivative instruments hedging activities effective january 1 2001 application company concluded interest rate swap contracts qualify special cash flow hedge accounting permit recording fair value swap corresponding adjustment comprehensive income balance sheet creating volatility future earnings due market sensitivity ineffectiveness offsetting changes interest rates companys variable rate borrowings income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 9 foreign currency translation assets liabilities foreign subsidiaries except companys mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded companys consolidated financial statements based upon provisions statement financial accounting standards sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions longterm investment nature accumulated carried component shareholders equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 10 comprehensive income comprehensive income defined net income nonowner changes shareholders equity companys accumulated comprehensive income loss consists entirely foreign currency translation adjustments significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 companys consolidated net sales 2000 1999 1998 allowance doubtful accounts 39 million 4 million december 31 2000 1999 respectively employees december 31 2000 approximately 42 companys workforce covered collective bargaining agreements generally effective 2001 2002 2003 deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 issued adoption eitf 9714 required company record treasury stock historical value companys stock maintained deferred compensation plans 3 supplemental cash flow disclosures 4 mergers acquisitions november 19 1999 wabco completed merger motivepower industries inc leading manufacturer supplier locomotive components fleet overhauls related services company issued approximately 18 million shares common stock former motivepower shareholders reserved contingent exercise stock options approximately 2 million shares transaction accounted poolingofinterests accounting method accordingly prior period consolidated financial statements restated giving effect transaction occurred beginning earliest period presented combined results company separate results wabco motivepower periods preceding merger follows 2000 1999 company completed following acquisitions july 2000 company purchased certain assets iron fireman manufacturer transportation boiler equipment 650000 ii january 1999 company acquired certain assets gg locotronics privately held designer high voltage electrical cabinets control stands locomotives total consideration 178 million iii january 1999 company acquired 100 common stock qtron ltd privately held designer manufacturer locomotive electronics equipment total consideration 149 million iv february 1999 company acquired mass transit electrical inverter converter product line agc system technologies inc canada approximately 960000 acquisitions accounted purchase method accordingly results operations applicable acquisition included companys financial statements prospectively acquisition date excess purchase price fair value identifiable net assets approximately 26 million allocated goodwill amortized straightline basis 40 years october 5 1998 company purchased railway electronics business rockwell railroad electronics rockwell collins inc wholly owned subsidiary rockwell international corporation 80 million cash rockwell manufacturer supplier mobile electronics display positioning equipment data communications electronic braking equipment railroad industry acquisition accounted purchase method accounting accordingly results operations rockwell included companys consolidated financial statements date acquisition 70 million excess purchase price fair value net identifiable assets acquired recorded goodwill amortized straightline basis 40 years november 18 1998 company acquired 100 common stock young radiator company manufacturer radiators air coolers heat exchange equipment rail industrial powerrelated markets 677 million net cash marketable securities acquired acquisition accounted purchase method accounting accordingly results operations young included companys consolidated financial statements date acquisition 43 million excess purchase price fair value net identifiable assets acquired recorded goodwill amortized straightline basis 40 years following unaudited pro forma results operations including effects pro forma adjustments related acquisition rockwell young prepared transactions occurred beginning 1998 pro forma financial information purport present companys results operations would two acquisitions actually occurred january 1 1998 project companys results operations future period reflect anticipated cost savings combination operations 5 intangibles intangible assets company goodwill consist following december 31 2000 1999 goodwill totaled 2266 million 2338 million net accumulated amortization 297 million 234 million respectively 6 longterm debt longterm debt consisted following credit agreement november 1999 connection merger wabco terminated existing secured credit agreement refinanced existing unsecured motivepower credit agreement consortium commercial banks resulted unsecured credit agreement provided 275 million five year revolving credit facility expiring 2004 364day 275 million convertible revolving credit facility november 2000 company banks negotiated reduction 364day facility 275 million 213 million primarily due credit availability excess current forecasted needs effort reduce commitment costs related fees december 31 2000 company available borrowing capacity net letters credit approximately 106 million connection establishment new revolving credit facilities 1999 company wrote previously deferred financing costs approximately 850000 net tax 02 per diluted share reported extraordinary item accompanying financial statements credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 837 december 31 2000 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2000 notional value interest rate swaps outstanding totaled 85 million effectively changed companys interest rate variable rate fixed rate 829 interest rate swap agreements mature 2001 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay shortterm 30 million loan associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million loan prior acquisition result issuance company wrote previously capitalized debt issuance costs 469000 net tax approximately 01 per diluted share 1999 notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes pulse note partial payment 1995 pulse acquisition company issued 17 million note due january 31 2004 interest 95 former pulse shareholder january 2000 note repaid industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 provide financing purchase building used companys operations scheduled principal repayments outstanding loan balances required december 31 2000 follows 7 employee benefit plans 1 change assumed health care cost trend rate change amount expense recognized postretirement plans approximately 200000 future year change accu mulated postretirement benefit obligation approximately 25 million composition plan assets consists primarily equities corporate bonds governmental notes temporary investments 2000 result early retirement package offered certain union employees company incurred charge approximately 3 million reflected special termination benefit included table company 03 million pension plan benefit obligation excess plan assets december 31 2000 defined contribution plans costs recognized multiemployer defined contribution plans summarized follows company sponsors defined benefit pension plans cover certain us canadian employees provide benefits stated amounts year service employee connection establishment esop see note 8 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method applied accompanying financial statements addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees conjunction establishment esop january 1995 see note 8 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 company also participates variety defined contribution 401k multiemployer pension health welfare plans additionally company stock optionbased benefit plans described note 11 8 employee stock ownership plan trust esop effective january 31 1995 company established westinghouse air brake company employee stock ownership plan trust esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described note 7 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements approximately 12 million company obligated contribute amounts sufficient repay esop loan esop used company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occurred simultaneously accounting purposes offset allocated esop shares august 1 2000 approximately 11 million shares plan devised terminate esop order provide comparable retirement benefit structure former wabco motivepower employees company contributions esop ceased august 1 2000 due certain regulatory administrative constraints trust esop loan continue place voting rights unallocated esop shares continue governed trust termination effected accounting purposes unallocated shares considered treasury stock december 31 2000 effective august 1 2000 cash contributions made companys existing defined contribution 401k plan lieu company common stock previously contributed esop participants company anticipates making additional discretionary cash contributions former esop participants next three years company estimates costs 2 million per year also 2000 company incurred 51 million noncash charge writeoff related deferred tax asset due esop tax benefits otherwise would realized esop continued utilized future periods charge reported within caption income tax expense consolidated statement operations 9 income taxes provision income taxes consisted following 1999 1998 provision excludes 08 million 20 million respectively income tax effect extraordinary loss see note 6 components income taxes us foreign operations 234 million 242 million respectively 2000 387 million 328 million respectively 1999 812 million 401 million respectively 1998 reconciliation united states federal statutory income tax rate effective income tax rate provided components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized company established valuation allowance certain net operating loss carryforwards losses anticipated produce tax benefit although realization net deferred tax asset assured management believes likely net deferred tax asset realized companys net operating loss carryforward year ended december 31 2000 189 million expire 2010 10 earnings per share computation earnings per share follows options purchase approximately 42 million 700000 200000 shares common stock outstanding 2000 1999 1998 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 11 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year excluding shares held esop related trust added shares available grant 2000 plan based adjustment company approximately 18 million shares available 2000 grants available approximately 1150078 shares end fiscal 2001 shares available grants given date may exceed 15 wabtecs total common shares outstanding excluding shares held esop related trust generally options become exercisable three fiveyear vesting periods expire ten years date grant part longterm incentive program 1998 company granted options purchase 500020 certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors stock option plan 500000 shares common stock reserved issuance yearend 2000 company granted nonqualified stock options nonemployee directors purchase total 110000 shares employee stock purchase plan 1998 company adopted employee stock purchase plan espp 500000 shares available issuance participants purchase companys common stock 85 lesser fair market value first last day offering period stock issued plan thru december 31 2000 134241 shares company applies apb 25 related interpretations accounting stockbased compensation plans accordingly compensation expense recognized plans compensation expense plans determined based fair value grant dates awards companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants would recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2000 restricted stock award 1998 company granted 15000 shares restricted common stock officer shares vest according vesting schedule threeyear period grant date market value totaled 372188 amortized expense vesting period unamortized compensation recorded component shareholders equity executive retirement plan 1997 executive retirement plan company may award common stock certain employees including certain executives participate esop plan terminated august 2000 time 50031 shares awarded fair market value approximately 859027 respect restricted stock award executive retirement plan compensation expense recognized consolidated statement operations 12 operating leases company leases office manufacturing facilities operating leases terms ranging one fifteen years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2000 1999 1998 78 million 86 million 62 million respectively certain companys equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 43 million 57 million 76 million years 2000 1999 1998 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 13 stockholders agreements december 31 2000 approximate ownership interests companys common stock held management 13 esop 22 investors consisting vestar equity partners lp harvard private capital holdings inc american industrial partners capital fund ii lp 14 others including public shareholders 51 stockholders agreement exists management investors referred provides among things composition board directors long certain minimum stock ownership percentages maintained restrictions disposition shares rights request registration shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement although esop terminated unallocated shares remain trustee regulatory administrative actions completed esop described note 8 14 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 2000 1999 preferred stock issued outstanding 15 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applica ble business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expired various dates 2000 except claims timely asserted continue resolved asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations company one operating subsidiaries named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes unreimbursed costs associated cleanup activities site material result indemnification provisions referred insurance policy rocky mountain international insurance ltd acknowledged coverage currently paying claim company established reserve costs companys operations use products contain asbestos actions filed company certain affiliates cases involve products manufactured prior time company formed company incurred significant costs related asbestos claims indemnified companies manufactured products question covered insurance management believes claims material accordingly financial statements reflect costs reserves claims boise idaho company subject rcra part b closure permit issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent boise locomotive company facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring amount hazardous constituents company accrued 32 million december 31 2000 estimated remaining costs remediation company compliance permit december 31 2000 mountaintop pennsylvania foster wheeler energy corporation fwec seller mountaintop property predecessor one companys subsidiaries 1989 agreed indemnify companys predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior companys acquisition young radiator young agreed clean alleged contamination prior production site mattoon ill company process recharacterizing site state illinois estimates costs remediate site approximately 700000 accrued december 31 2000 racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 700000 december 31 2000 estimate remaining restoration costs ge harris november 3 2000 company settled suit brought geharris railway electronics llc geharris railway electronics services llc collectively geharris exchange settlement suit company agreed deliver 2 million worth products geharris de cember 15 2000 company expensed fourth quarter 2000 addition company pay geharris 7 million exchange license certain intellectual property company contingent obligations relating certain saleleaseback transactions reserves established time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 16 segment information wabtec two reportable segments freight group transit group key factors used identify reportable segments organization alignment companys internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment engines traction motors onboard electronic systems train coupler equipment revenues derived oem locomotive overhauls aftermarket sales freight car repairs services transit group consists products passenger transit vehicles typically subways rail busses include braking monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments operating results based income operations merger restructuring charges corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2000 follows segment financial information 1999 follows segment financial information 1998 follows following geographic area data include net sales based product shipment destination longlived assets consists plant property equipment net depreciation resident respective countries export sales companys united states operations 1351 million 1327 million 1118 million years ending december 31 2000 1999 1998 respectively following data reflects income operations including merger restructuring related charges major geographic area attributed companys operations within following countries regions 17 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 6 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 18 selected quarterly financial data amounts table differ previously reported form 10q 1999 due merger westinghouse air brake company motivepower industries inc application poolingofinterests accounting reporting method company recorded restructuringrelated costs approximately 23 million 003 first quarter 2000 56 million 008 134 million 020 78 million 012 net tax per diluted share second third fourth quarters 2000 respectively company also recorded 44 million 007 net tax per diluted share gain sale product line second quarter 2000 third quarter 2000 conjunction esop termination company incurred 51 million noncash 012 per diluted share charge writeoff related deferred tax asset also fourth quarter 2000 company recorded 2 million 003 net tax per diluted share charge legal settlement fourth quarter 1999 company recorded merger restructuring costs approximately 50 million 091 net tax per diluted share merger charge 1999 19 merger restructuring charges company previously announced merger restructuring plan pursuant merger company motivepower industries inc merger company estimates synergies plan yielded approximately 20 million pretax cost savings 2000 reached ongoing annualized savings 25 million pretax benefits realized reduced cost sales reduced selling general administrative expenses merger restructuring plan involves elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company estimates charges complete merger restructuring plan total 84 million pretax due acceleration refinement plan approximately 50 million charge previously expensed 1999 29 million 2000 company expects remaining charge 5 million incurred 2001 79 million charge date included following announced actions costs associated transaction items investment bankers legal fees accountant fees sec fees etc consolidation corporate headquarters wilmerding pa elimination duplicate corporate functions closing moving young radiators centerville ia plant consolidating young administrative offices companys jackson tn facility racine wi closing relocation several production operations san luis potosi mexico closing relocation several additional manufacturing operations eliminating duplicate sales functions december 31 2000 63 million merger restructuring charge still remaining accrued balance sheet table identifies significant components charge reflects accrual balance date lease impairment charges asset writedowns associated companys closing plants noted relocation corporate headquarters companys evaluation certain assets projected cash flows assets remaining useful lives estimated less carrying values category represents related costs incurred yet paid december 31 2000 20 contract underbillings company longterm contract provide maintenance locomotive services details relative cumulative costs incurred revenues recognized follows signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation gregory h davies gregory h davies chief executive officer date march 28 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accordance auditing standards generally accepted united states consolidated financial statements westinghouse air brake technologies corporation included form 10k issued report thereon dated february 12 2001 audit made purpose forming opinion basic financial statements taken whole schedule listed index item 14a 2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion based audits report auditors fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania february 12 2001 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquired companies 2 actual disbursements andor charges index exhibitsitem 14 controls procedures evaluation disclosure controls wabtecs principal executive officer principal financial officer based evaluation date within 90 days filing date report concluded wabtecs disclosure controls procedures defined exchange act rules 13a14c 15d14c adequate effective ensure material information relating company consolidated subsidiaries would made known others within entities b changes internal controls significant changes wabtecs internal controls factors could significantly affect controls procedures subsequent date evaluation part iv item 15nannannannannannannannannannannannannanitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit companys registration statement form s1 registration 3390866 filed exhibit companys annual report form 10k period ended december 31 1995 filed exhibit companys current report form 8k filed october 3 1996 report independent public accountants board directors westinghouse air brake company audited accompanying consolidated balance sheet westinghouse air brake company delaware corporation subsidiaries december 31 1996 1995 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake company subsidiaries december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles arthur andersen llp pittsburgh pennsylvania march 4 1997 westinghouse air brake company consolidated balance sheet december 31 1996 1995 dollars thousands accompanying notes integral part statement westinghouse air brake company consolidated statement operations three years ended december 31 dollars thousands except earnings per share accompanying notes integral part statement westinghouse air brake company consolidated statement cash flows three years ended december 31 dollars thousands accompanying notes integral part statement westinghouse air brake company consolidated statement shareholders equity three years ended december 31 dollars thousands accompanying notes integral part statement westinghouse air brake company notes consolidated financial statements 1 summary significant accounting principles organization westinghouse air brake company incorporated 1989 1990 acquired north american operations railway products group american standard inc 1990 acquisition january 31 1995 company 50 owned group comprised management private investment company 50 owned scandinavian incentive holding bv sih netherlands corporation 50 interest owned sih previously owned investment ab cardo acquired 1994 incentive ab swedish corporation affiliate sih companys equity debt structure significantly changed result recapitalization transaction january 31 1995 see note 2 initial public offering note offering completed june 1995 see note 3 operations company manufacturer railroad value added equipment related safety efficiency products locomotives freight cars passenger transit vehicles companys primary manufacturing operations united states canada companys revenues primarily north america nature similarity customers united states canada company considers represent one homogeneous market international revenues canada 9 4 3 1996 1995 1994 respectively companys customer base consists freight transportation railroad companies locomotive freight car original equipment manufacturers railroads transit car builders public transit systems companys operations revenue base generally dependent capital replacement cycles locomotives freight cars large north america based railroad companies passenger transit operations company dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates revenue recognition policy international sales company recognizes revenue products shipped respective customers price product determined sales returns infrequent material relation companys net sales inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead components inventory december 31 property plant equipment property plant equipment additions stated cost expenditures ordinary maintenance repairs expensed expenditures renewals betterments capitalized company provides book depreciation following estimated useful lives plant equipment principally straightline method accelerated depreciation methods utilized income tax purposes goodwill intangible assets goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations ensure appropriately valued goodwill amortized straight line basis 40 years intangibles amortized straight line basis estimated economic lives statement financial accounting standards 123 financial accounting standards board issued statement financial accounting standards 123 accounting stockbased compensation sfas 123 october 1995 statement established fair value based method financial accounting related reporting standards stockbased employee compensation plans companys 1995 stock incentive plan see note 11 sfas 123 became effective calendar year 1996 provides adoption income statement footnote disclosure company continued account 1995 stock incentive plan apb opinion 25 accounting stock issued employees permitted sfas 123 provided new disclosure footnotes see note 11 warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 5459000 8123000 4723000 1996 1995 1994 respectively ranges 19 11 net sales warranty reserve 8172000 3655000 december 31 1996 1995 respectively increase warranty reserves primarily due vapor acquisition foreign currency translation financial statements companys canadian subsidiaries translated us currency guidelines set forth sfas 52 foreign currency translation interest rate swap agreements company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate bank credit borrowings interest rate differential paid received accrued interest rates change recognized interest expense period change see note 4 significant customers group concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers railroad carriers commercial companies utilize rail cars operations utility companies chemical companies allowance doubtful accounts 1347000 831000 december 31 1996 1995 one customer accounted 10 companys sales 1996 1994 although one customer account 10 1995 research development research development costs charged expense incurred income taxes provision income taxes includes federal state foreign income taxes currently payable deferred prepaid temporary differences financial statement tax bases assets liabilities employee benefits company provides certain benefits substantially active employees medical insurance retirement benefits including pension postretirement medical benefits connection recapitalization transaction described note 2 company formed employee stock ownership plan esop connection recapitalization establishment esop january 1995 pension plan postretirement health care plan salaried employees modified effective march 31 1995 see notes 7 8 1994 company adopted financial accounting standards 112 employers accounting postemployment benefits prescribes employers recognize liabilities postemployment benefits provided former inactive employees dependents retirees employees december 31 1996 company employed 1020 persons 32 workforce covered collective bargaining agreements expire various times 1997 2001 disclosures regarding fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except companys 9 38 senior notes term debt fair value approximately 102 million carrying value 100 million 17 million 95 note payable issued connection pulse acquisition fair value 18 million carrying value 17 million fair value companys interest rate swaps see note 4 approximately 12 million represents estimated amount banks would receive terminate swap agreements december 31 1996 current creditworthiness swap counterparties supplemental cash flow disclosure earnings per share earnings per common equivalent share based upon weighted average common equivalent shares outstanding year common stock equivalents attributable outstanding common stock options primary fully diluted earnings per share 2 recapitalization companys debt capital structure substantially changed 1995 recapitalization transaction january 31 1995 described b initial public offering ipo related note offering june 1995 fully described note 3 c june 1995 amendment existing bank credit agreement fully described note 4 january 31 1995 equity recapitalization transaction consummated transaction resulted repurchase 20000000 shares 50 40000000 previously outstanding shares companys common stock made company 10664000 shares newly formed employee stock ownership plan trust esop 9336000 shares stock repurchase funded new bank borrowings subsequently refinanced part ipo related note offering see note 3 amended credit agreement see note 4 3 initial public stock offering note offering june 1995 company completed ipo whereby sold total 7426600 shares including 426600 shares pursuant underwriters overallotment provision common stock resulting aggregate net proceeds 954 million proceeds ipo used fully repay 739 million 13 senior subordinated notes see note 4 repay portion outstanding term loans connection ipo company completed public offering note offering 100 million principal amount senior notes due 2005 interest rate 9375 net proceeds note offering used prepay additional portion term loans outstanding existing credit agreement see note 4 longterm debt december 31 longterm debt consisted following companys revolving credit term loan borrowings made pursuant credit agreement credit agreement amended restated february 15 1995 june 9 1995 september 19 1996 consortium commercial banks credit agreement provides 125 million revolving credit loans 1706 million term loans consisting remaining 1995 term loan commitment 1056 million 1996 term loan commitment 65 million proceeds 1996 term loan used fund acquisition vapor group see note 10 credit agreement bears interest rates based several options including libor prime effective interest rate borrowings outstanding december 31 1996 approximated 746 credit agreement also provides swingline loans aggregate 5 million issuance letters credit aggregate face amount 15 million incurrence swingline loans issuance letters credit reduce 125 million borrowing availability revolving credit portion amended credit agreement december 31 1996 company outstanding letters credit aggregate amount 105 million primarily collateral contract performance guarantees credit agreement provides following scheduled term loan principal repayments addition accelerated principal repayments required company achieves certain excess annual cash flow defined result 1996 excess cash flow incremental accelerated principal repayment approximately 115 million required 1997 accelerated payment included current portion term debt maximum balances outstanding 1996 1995 revolving credit loans 859 million 874 million average balances outstanding 720 million 540 million respectively weighted average interest rates loans 69 82 borrowings outstanding revolving credit commitment due january 31 2001 substantially companys us assets 100 capital stock us subsidiaries 65 capital stock nonus subsidiaries pledged collateral pursuant credit agreement credit agreement contains covenants specifying customary events default includes restrictions including maintenance financial ratios limitations mergers dividend payments certain matters annual cash dividends limited 19 million result restrictions december 31 1996 company believes compliance applicable covenants amended credit agreement companys senior notes issued june 1995 bear interest rate 9375 mature june 2005 net proceeds note offering used prepay additional portion term loans outstanding existing credit agreement notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes collectively senior indebtedness companys indenture pursuant notes issued contains certain restrictive covenants among things limit ability company certain canadian subsidiaries incur indebtedness pay dividends redeem capital stock create restrictions investments unrestricted subsidiaries make distributions certain subsidiaries use proceeds sale assets subsidiary stock enter transactions affiliates create liens enter saleleaseback transactions companys indenture also restricts subject certain exceptions companys ability consolidate merge transfer substantially assets another person conjunction amended credit agreement senior note offering debt financing fees 120 million incurred amortized terms borrowings accumulated amortization debt issuance costs 2752000 908000 december 31 1996 december 31 1995 respectively 17 million note payable incurred conjunction acquisition pulse electronics see note 10 matures january 2004 bears interest rate 95 subject adjustment based prime plus l february 1998 2001 maximum rate 13 company entered interest rate swap agreements eliminate impact changes interest rates borrowings december 31 1996 company outstanding interest rate swap agreements commercial banks total notional principal amount 75 million agreements effectively change companys interest rate exposure 75 million loans variable fixed rates resulting effective interest rates ranging 722 837 interest rate swap agreements mature 1998 1999 company exposed credit loss event nonperformance parties interest rate swap agreements however company anticipate nonperformance counterparties see note 19 regarding subsequent amendment companys debt agreements conjunction stock repurchase 5 intangibles intangible assets amortized using straightline method respective estimated useful lives goodwill amortized 40 years accumulated amortization 4195000 2389000 december 31 1996 1995 respectively intangible assets company goodwill consist following company evaluates recoverability intangible assets including goodwill balance sheet date based forecasted future operations undiscounted cash flows subjective criteria based upon historical information management believes carrying amount intangible assets realizable respective amortization periods 6 income taxes reconciliation united states federal statutory income tax rate effective income tax rate provided provision income taxes consisted following 1995 total provision includes 960000 income tax effect extraordinary loss see note 14 related early extinguishment certain debt obligations components income taxes income us nonus primarily canada operations 42397000 11251000 1996 46594000 9213000 1995 50309000 12145000 1994 sources deferred income taxes follows following table highlights major components comprising deferred tax assets liabilities 7 retirement employee savings plans company defined benefit pension plan covers substantially union employees provides pension benefits stated amounts year service employee company also defined contribution plan prior march 31 1995 covered certain nonunion employees noncontributory defined benefit plan certain domestic repair center employees connection establishment esop see note 9 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys 401k savings plan also amended provide companys future matching contributions made esop form companys common stock separate plans maintained us canadian employees companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method accompanying financial statements result formation company described note 1 company recorded pension liability 4308000 connection us pension plan collectively bargained employees pension asset 5378000 connection canadian pension plans opening balance sheet net periodic pension expense us pension plans follows weighted average discount rates 75 90 used determining actuarial present value projected benefit obligation december 31 1996 1995 1994 expected longterm rates return assets measurement dates 10 1996 1995 1994 plan assets consist primarily common stocks corporate bonds us government obligations temporary investments 1996 result early retirement package offered certain union employees company incurred charge 696000 reflected special event following table sets forth us pension plans funded status amounts recognized december 31 companys canadian subsidiaries defined benefit retirement plans covering substantially employees net periodic pension expense canadian plans follows weighted average discount rates 85 10 used determining actuarial present value projected benefit obligation december 31 1996 1995 1994 expected longterm rates return assets measurement dates 925 10 1996 1995 1994 respectively following table sets forth canadian plans funded status amounts recognized december 31 result 1996 acquisitions futuris vapor see note 10 company sponsors defined benefit plans australia canada total 1996 pension expense plans approximately 175000 8 postretirement benefits addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially employees conjunction establishment esop january 1995 see note 9 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 result formation company discussed note 1 company obligated pay health care life insurance benefits individuals retired acquisition date part accounting 1990 acquisition liability active employees 5798000 established estimated unfunded postretirement health benefit obligation acquisition date part purchase accounting 1996 acquisition vapor see note 10 liability 17 million established postretirement medical benefits postretirement benefit expenses comprised following actual postretirement benefit payments 68000 67000 188000 1996 1995 1994 accumulated postretirement benefit obligation comprised following accumulated postretirement benefit transition obligation actuarially determined using method applied specific interest rates future cash flows discounting obligation present value interest rate associated future cash flows used discount accumulated postretirement benefit obligation present value 75 9 december 31 1996 1995 1994 assumed medical cost trend rate december 31 1996 10 grading ultimate rate 6 1998 one percentage point increase assumed health care cost trend rates future year increases annual postretirement benefit expense 221000 accumulated postretirement benefit obligation 2552000 9 employee stock ownership plan trust esop effective january 1 1995 company established esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described notes 7 8 esop contributions intended supplement replace salaried employee benefit plans connection transaction described note 2 company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 loan collateralized shares purchased esop company contributions esop used repay esop loan requires annual payments 12 million includes principal interest beginning december 31 1995 company obligated contribute amounts sufficient repay esop loan esop uses company contributions repay loan made esop company transactions occur simultaneously accounting purposes offset effect esop companys financial statements unearned esop shares 1339 million december 31 1996 reflected shareholders equity section accompanying financial statements amortized compensation expense coterminous esop loan addition difference market price companys common stock 15 per share purchase price paid esop also charged credited compensation expense offset additional paidin capital based annual allocation esop participants total compensation expense incurred 1996 1995 allocated esop shares 2578000 2597000 addition company incurred expenses approximately 1 million 1995 establish esop related trust initially approximately 187000 shares allocated annually participants 50year period result acquisition inclusion certain united states employees vapor annual esop allocation increase approximately 284000 corresponding reduction repayment term esop loan 10 acquisitions vapor group september 19 1996 company acquired mark iv industries inc vapor group vapor cash purchase price approximately 639 million transaction accounted purchase effective september 1 1996 accordingly results vapor included accompanying financial statements since september 1 1996 pursuant earn provision purchase price may increased 2 million based sales formula vapor leading manufacturer door controls transit rail cars metropolitan buses united states annual revenues recent fiscal year prior acquisition approximately 65 million net tangible assets vapor approximately 36 million date purchase fair market valuations allocation purchase price acquired tangible intangible assets based upon independent appraisal purchase price paid excess fair value acquired net tangible assets approximately 282 million allocated follows tradename goodwill amortized 40 years patents remaining lives noncompete agreements 5 years total annual expense 12 million conjunction integrating vapor operations company early retirement incentives severance programs offered vapor employees estimated cost restructuring 32 million accrued allocation vapor purchase price pro forma results operations including effect pro forma adjustments related acquisition vapor assuming transaction occurred january 1 1995 would follows pro forma financial information presented purport present companys results operations would acquisition vapor actually occurred january 1 1995 project companys results operations future period futuris industrial products pty ltd effective january 31 1996 company acquired futuris industrial products pty ltd futuris australian company cash purchase price approximately 15 million futuris leading manufacturer brake shoes disc brake pads railroads australia pacific rim annual revenues approximately 105 million acquisition accounted purchase method excess purchase price fair value net assets acquired approximately 10 million allocated primarily goodwill effect acquisition considered material consolidated results company pulse electronics effective january 31 1995 company purchased substantially assets related liabilities pulse electronics inc pulse 54900000 pulse manufactures variety electronic products rail industry including event recorders endoftrain devices engineman alertness monitors fuel measuring devices purchase price consisted 20 million cash payment b 17 million note payable matures january 2004 bears interest 95 adjusted new rate based prime interest rate plus 1 february l 1998 2001 maximum adjustment date 2 absolute maximum interest rate 13 c 1193333 shares companys common stock addition noncompete agreements entered two former owners pulse twoyear period employment company terminated net tangible assets pulse approximately 9 million date purchase fair market valuations allocation purchase price acquired tangible intangible assets based upon independent appraisal purchase price paid excess fair values acquired net tangible assets approximates 46 million allocated follows company selected 40year amortization period goodwill trade name company acquired businesses operate stable mature basic manufacturing environment companys products technology prone obsolescence adapted meet changing needs customer base company predecessors existence 125 years basic operating principles core products remained relatively unchanged see note 20 pro forma disclosure pulse acquisition occurred january l 1995 company acquired 50 ownership interest westcode incorporated manufacturer transit door equipment 1996 company disposed 50 interest westcode part obtaining federal department justice approval acquisition vapor transactions material companys operations 11 1995 stock incentive plan company adopted 1995 stock incentive plan may 26 1995 company may grant options employees westinghouse air brake company subsidiaries 3100000 shares westinghouse air brake company common stock options purchase approximately 1518000 shares westinghouse air brake company common stock plan granted employees westinghouse air brake company excess fair market value date grant currently range 11 14 per share generally options become exercisable three fiveyear vesting periods expire ten years date grant 1996 part longterm incentive program company granted options purchase 684206 shares certain executives 1995 stock incentive plan option price per share greater market value stock date grant 14 options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets fiscal years 1997 1998 1999 established compensation committee board directors effective november 1 1995 company adopted nonemployee directors stock option plan 100000 shares common stock reserved issuance price less 14 november 1995 company granted nonstatutory stock options members board directors purchase total 20000 shares price 14 company applies apb 25 related interpretations accounting stock option plans accordingly compensation cost recognized plans compensation cost companys stock option plan determined based fair value grant dates awards plan consistent method set forth fas 123 companys net income net income per share would decreased pro forma amounts indicated since compensation expense associated option grants recognized vesting period initial impact applying fas 123 pro forma net income representative potential impact pro forma net income future years effect recognition portion compensation expense multiple awards would reflected fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1996 1995 respectively dividend yields 32 0 riskfree interest rates 625 658 expected lives 73 years 75 years since company recent public registrant utilized recent trading activity 1996 determining expected stock price volatility 3043 weighted average fair value options granted year 405 247 net taxes 556 334 net taxes years ended december 31 1996 1995 respectively following summary stock option activity 1995 stock incentive plan following table summarizes information stock options outstanding december 31 1996 12 operating leases rental expense leases approximately 2786000 2773000 1941000 years ended december 31 1996 1995 1994 operating leases relate principally warehouse office space transportation equipment communication systems minimum annual rentals payable noncancelable leases next five years beyond follows 14 extraordinary item connection june 9 1995 amended credit agreement see note 4 company wrote approximately 2342000 previously capitalized cost relating previous credit agreement resulted net tax charge 1382000 05 per share reflected extraordinary item 15 stockholders voting trust agreements december 31 1996 approximate ownership interests companys common stock held management esop 43 scandinavian incentive holding bv sih 27 others including public shareholders 30 sih successor interest incentive ab swedish corporation acquired investment ab cardo investment ab cardo one original equity owners time companys 1990 acquisition railway products group american standard inc stockholders agreement exists management sih private investment group provides among things composition board directors long certain minimum stock ownership percentages maintained registration rights agreement also entered sih provides sih may make two requests company additional registration shares owned sih would enable sih sell common stock public market former pulse shareholders esop right request shares included registration requested sih company also right first refusal event sih decides sell shares private investor see note 19 regarding subsequent event completed change ownership percentages also amend restate stockholders agreements related registration rights agreement shareholders comprised active original management owners entered amended voting trustdisposition agreement effective december 13 1995 agreement provides among matters stock voted one block restrictions sale transfer stock agreement expires january 1 2000 terminated affirmative vote twothirds stock shares held trust connection voting trust company entered indemnification agreement trustees covered companys directors officers liability insurance shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement esop described note 9 16 preferred stock effective january 1995 companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action shareholders company rights preferences preferred stock would superior common stock december 31 1996 1995 preferred stock issued outstanding 17 commitments contingencies terms purchase agreement related documents 1990 acquisition described note 1 seller american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expire various dates 2000 environmental indemnification expires asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations asi disputed coverage reimbursement provisions company one operating subsidiaries named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina based upon discussions representative north carolina department environment health natural resources company believes total cleanup costs parties exceed 1 million company believes costs associated cleanup activities site may held responsible covered asi indemnification referred asi previously owned 50 subsidiary b related insurance policy expires january 2002 environmental claims provided former 50 owner involved operating subsidiary addition management believes costs attributable company material therefore established reserve costs march 1994 company retained environmental consultant study environmental conditions wilmerding pennsylvania property purpose study evaluate whether contaminants present property study undertaken companys sole initiative consultant identified four primary areas may require remediation elevated levels certain volatile organic compounds believed originated 1990 acquisition consultant also recommended several options address contamination remediation several areas currently conducted company evaluating option selected remaining areas company required conduct remediation property consent decree government order consultant anticipates cost remediation range 100000 1000000 depending upon final option selected company believes costs may responsible covered asi indemnification agreement referred costs material therefore established reserve costs companys operations use products contain asbestos operations acquired company asi discontinued use asbestos 1980 company named codefendant asbestos claims filed third parties asi relating events occurring prior 1981 significantly prior 1990 acquisition claims covered two indemnification agreements insurance policy referred asi taken complete responsibility administering defending settling claims company involved incurred costs related claims asi claimed company responsibility cases management believes claims related company costs attributable company material therefore financial statements accordingly reflect costs reserves claims opinion management based available information environmental matters asbestos claims presently represent material contingencies company december 31 1996 company contingently liable amount 105 million standby letters credit guarantees time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations company historically required pay material liability claims 18 related party transactions connection pulse acquisition company assumed lease agreement expires december 31 2002 pulse limited partnership principal partners former shareholders pulse rent payable monthly greater either 27603 per month january 1998 readjusted every five years reflect fair market value lease b debt service including related taxes bank financing agreement 144 million original loan used acquisition premises conjunction recapitalization transaction ipo formation esop acquisition pulse company paid 41 million investment advisory fees private investment company shareholder company see also notes 4 9 10 15 19 certain related party transactions 19 subsequent eventstock repurchase march 4 1997 agreement reached sih major shareholder whereby company agreed repurchase 4 million shares common stock held sih purchase price 11 per share total purchase price 44 million company bank group agreed amend companys credit facility increase revolving credit availability 15 million 125 million 140 million waive 1996 term excess cash flow payment approximately 115 million approval senior noteholders must still obtained complete transaction total fees involved transaction estimated 2 million capitalized amortized lives loan agreements company anticipates borrow 46 million fund transaction expected completed march 31 1997 conjunction transaction sih also agreed sell remaining 6 million shares companys common stock group investors consisting vestar equity partners lp harvard private capital group american industrial partners capital fund ii lp certain members senior management stockholders voting trust agreements described note 15 also amended restated result transactions following presents companys debt structure net income earnings per share pro forma basis stock repurchase occurred january 1 1996 20 unaudited pro forma information unaudited pro forma condensed income statement gives effect occurrence companys recapitalization transaction public stock offering refinancing notes 2 3 4 9 acquisition pulse electronics note 10 events occurred january 1 1995 unaudited pro forma income statement purport represent companys results operations actually would foregoing fact occurred date 21 selected quarterly financial data unaudited fourth quarter 1996 estimated annual income tax rate revised 39 decrease resulted primarily reductions tax rates several states establishment foreign sales corporation adjustment resulted 02 increase fourth quarter earnings per share signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake company william e kassling william e kassling chief executive officer date march 18 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors westinghouse air brake company audited accordance generally accepted auditing standards consolidated financial statements westinghouse air brake company included form 10k issued report thereon dated march 4 1997 audits made purpose forming opinion statements taken whole schedule listed index item 14a2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial date required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania march 4 1997 schedule ii westinghouse air brake company valuation qualifying accounts three years ended december 31 1 reserves acquired company index exhibits filed exhibit companys registration statement form s1 registration 3390866 filed exhibit companys annual report form 10k period ended december 31 1995 filed exhibit companys current report form 8k filed september 19 1996item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit companys registration statement form s1 3390866 filed exhibit companys annual report form 10k period ended december 31 1995 filed exhibit companys current report form 8k dated october 3 1996 filed exhibit companys registration statement form s8 33339159 report independent public accountants board directors westinghouse air brake company audited accompanying consolidated balance sheet westinghouse air brake company delaware corporation subsidiaries december 31 1997 1996 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake company subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles arthur andersen llp pittsburgh pennsylvania february 16 1998 westinghouse air brake company consolidated balance sheet accompanying notes integral part statement westinghouse air brake company consolidated statement operations accompanying notes integral part statement westinghouse air brake company consolidated statement cash flows accompanying notes integral part statement westinghouse air brake company consolidated statement shareholders equity accompanying notes integral part statement westinghouse air brake company notes consolidated financial statements 1 business westinghouse air brake company north americas largest manufacturer valueadded equipment locomotives railway freight cars passenger transit vehicles companys products sold original equipment manufacturer market aftermarket intended enhance safety improve productivity reduce maintenance costs customers companys products include electronic controls monitors air brakes couplers door controls draft gears brake shoes companys primary manufacturing operations united states canada companys revenues primarily north america companys customer base consists freight transportation railroad companies locomotive freight car original equipment manufacturers railroads transit car builders public transit systems companys operations revenue base generally dependent capital replacement cycles locomotives freight cars large north americanbased railroad companies companys passenger transit operations dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles intercompany accounts transactions eliminated consolidation certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead components inventory net reserves property plant equipment property plant equipment additions stated cost expenditures renewals betterments capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method following estimated useful lives plant equipment accelerated depreciation methods utilized income tax purposes intangible assets goodwill amortized straightline basis 40 years intangibles amortized straightline basis estimated economic lives goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations see note 4 revenue recognition revenue recognized products shipped respective customers price product determined sales returns infrequent material relation companys net sales stockbased compensation financial accounting standards board issued statement financial accounting standards 123 accounting stockbased compensation sfas 123 october 1995 statement established fair value based method financial accounting related reporting standards stockbased employee compensation plans companys 1995 stock incentive plan see note 11 sfas 123 became effective calendar year 1996 provides adoption income statement footnote disclosure company continued account 1995 stock incentive plan apb opinion 25 accounting stock issued employees permitted sfas 123 provided required disclosure footnotes see note 11 research development research development costs charged expense incurred costs totaled 244 million 182 million 146 million 1997 1996 1995 respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 99 million 55 million 81 million 1997 1996 1995 respectively warranty reserves 129 million 82 million december 31 1997 1996 respectively financial derivatives company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received accrued interest expense see note 5 income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 9 foreign currency translation financial statements companys foreign subsidiaries translated us currency guidelines set forth sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions longterm investment nature accumulated carried component shareholders equity earnings per share february 1997 financial accounting standards board issued sfas 128 earnings per share required company adopted standard 1997 financial statements periods presented sfas 128 sets forth requirements computing basic diluted earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 10 adoption sfas 128 material impact reported earnings per share significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 companys sales 1997 1996 1995 one customer accounted 10 allowance doubtful accounts 20 million 13 million december 31 1997 1996 respectively employees december 31 1997 approximately 29 companys workforce covered collective bargaining agreements expire various times 1998 2002 recent accounting pronouncements 1997 financial accounting standards board issued several statements financial accounting standards including following sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 statement establishes standards reporting display comprehensive income components comprehensive income includes net income changes shareholders equity except resulting investments distributions owners sfas 131 disclosures segments enterprise related information effective financial statements issued periods beginning december 15 1997 statement requires financial descriptive information entitys operating segments included annual financial statements neither standards implemented expected impact reported financial position results operations company 3 acquisitions effective july 31 1997 company acquired 100 stock hp sr1 hp italian company total purchase price 58 million included assumption 23 million debt hp located sassuolo italy leading supplier door controls transit rail cars buses italian market revenues approximated 9 million recent fiscal year acquisition accounted purchase method excess purchase price fair value net assets acquired approximately 35 million allocated goodwill effective may 1 1997 company purchased stone safety service corporation stone uk limited stone supplier transit air conditioning equipment enprotech corporation subsidiary itochu international stone located new jersey england june 27 1997 company acquired heavy rail air conditioning business thermo king corporation thermo king westinghouse electric thermo king purchase included certain inventory equipment drawings aggregate purchase price stone thermo king acquisitions approximately 77 million annual revenues stone thermo king acquisitions aggregate approximately 30 million acquisitions accounted purchase method excess purchase price fair value net assets acquired approximately 2 million allocated goodwill results operations hp stone thermo king included companys financial statements since date applicable acquisition effect acquisitions considered material consolidated results company september 19 1996 company acquired mark iv industries inc vapor group vapor cash purchase price approximately 639 million transaction accounted purchase effective september 1 1996 accordingly results vapor included accompanying financial statements since september 1 1996 pursuant earn provision purchase price may increased 2 million based sales formula vapor leading manufacturer door controls transit rail cars metropolitan buses united states annual revenues recent fiscal year prior acquisition totaled 65 million net tangible assets vapor approximately 36 million date purchase fair market valuations allocation purchase price acquired tangible intangible assets based upon independent appraisal purchase price paid excess fair value acquired net tangible assets approximately 285 million allocated follows tradename goodwill amortized 40 years patents remaining lives noncompete agreements 5 years annual amortization expense intangible assets 12 million conjunction integrating vapor operations company early retirement incentives severance programs offered vapor employees estimated cost restructuring 32 million accrued allocation vapor purchase price pro forma results operations including effect pro forma adjustments related acquisition vapor assuming transaction occurred january 1 1995 follows pro forma financial information presented purport present companys results operations would acquisition vapor actually occurred january 1 1995 project companys results operations future period effective january 31 1996 company acquired futuris industrial products pty ltd futuris australian company cash purchase price 15 million futuris leading manufacturer brake shoes disc brake pads railroads australia pacific rim acquisition accounted purchase method excess purchase price fair value net assets acquired 10 million allocated primarily goodwill effect acquisition considered material consolidated results company 4 intangibles intangible assets company goodwill consist following december 31 1997 1996 goodwill net accumulated amortization 54 million 42 million respectively totaled 666 million 605 million respectively company evaluates recoverability intangible assets including goodwill balance sheet date based forecasted future operations undiscounted cash flows subjective criteria based upon historical information management believes carrying amount intangible assets realizable respective amortization periods 5 longterm debt longterm debt consisted following companys revolving credit term loan borrowings made pursuant credit agreement credit agreement consortium commercial banks credit agreement provides 1400 million revolving credit loans provided 1706 million term loans 1455 million outstanding december 31 1997 credit agreement also provides 5 million swingline loans issuance 50 million letters credit incurrence swingline loans issuance letters credit reduce 140 million borrowing availability revolving credit portion credit agreement borrowings credit agreement bear variable rates interest indexed several options including libor prime december 31 1997 contractual interest rate borrowings outstanding credit agreement 736 company entered interest rate swap agreements alter impact changes interest rates variable rate borrowings yearend 1997 notional value interest rate swaps outstanding totaled 100 million swap agreements effectively change companys interest rate exposure 100 million loans variable fixed rates result effective interest rate 767 borrowings credit agreement yearend 1997 interest rate swap agreements mature 1998 2000 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance maximum balances outstanding revolving credit loans 1054 million 859 million 1997 1996 respectively average balances outstanding 877 million 720 million respectively borrowings outstanding revolving credit commitment due january 31 2001 scheduled term loan principal repayments follows december 31 1997 company outstanding letters credit aggregate amount 171 million primarily collateral contract performance guarantees substantially companys us assets 100 capital stock us subsidiaries 65 capital stock nonus subsidiaries pledged collateral pursuant credit agreement companys indenture pursuant notes issued contains certain restrictive covenants among things limit ability company certain canadian subsidiaries incur indebtedness pay dividends limited 19 million annually redeem capital stock create restrictions investments unrestricted subsidiaries make distributions certain subsidiaries use proceeds sale assets subsidiary stock enter transactions affiliates create liens enter sale leaseback transactions companys indenture also restricts subject certain exceptions companys ability consolidate merge transfer substantially assets another person companys senior notes issued june 1995 bear interest rate 9375 mature june 2005 net proceeds used prepay additional portion term loans outstanding existing credit agreement notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv provided obligations subordinate right payment notes conjunction credit agreement senior note offering borrowings debt issuance costs 140 million incurred amortized terms borrowings accumulated amortization debt issuance costs 47 million 28 million december 31 1997 1996 respectively 17 million note payable incurred conjunction acquisition pulse electronics matures january 2004 bears interest 95 per annum subject adjustment based prime plus 1 february 1998 2001 maximum rate 13 6 retirement employee savings plans company defined benefit pension plan covers substantially union employees provides pension benefits stated amounts year service employee company also defined contribution plan prior march 31 1995 covered certain nonunion employees noncontributory defined benefit plan certain domestic service center employees connection establishment esop see note 8 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys 401k savings plan also amended provide companys future matching contributions made esop form companys common stock companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method accompanying financial statements net periodic pension expense us pension plans follows weighted average discount rates 725 75 used determining actuarial present value projected benefit obligation december 31 1997 1996 1995 respectively expected longterm rates return assets 10 1997 1996 1995 plan assets consist primarily common stocks corporate bonds us government obligations temporary investments 1996 result early retirement package offered certain union employees company incurred charge 696000 reflected special event following table sets forth us pension plans funded status amounts recognized companys canadian subsidiaries defined benefit retirement plans covering substantially employees net periodic pension expense canadian plans follows weighted average discount rates 725 85 used determining actuarial present value projected benefit obligation december 31 1997 1996 1995 expected longterm rates return assets measurement dates 925 10 1997 1996 1995 respectively following table sets forth canadian plans funded status amounts recognized 7 postretirement benefits addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees conjunction establishment esop january 1995 see note 8 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 postretirement benefit expenses comprised following accumulated postretirement benefit obligation comprised following accumulated postretirement benefit obligation actuarially determined using method applied specific interest rates future cash flows discounting obligation present value interest rate associated future cash flows used discount accumulated postretirement benefit obligation present value 725 75 december 31 1997 1996 1995 assumed medical cost trend rate december 31 1997 575 one percentage point increase assumed health care cost trend rates future year increases annual postretirement benefit expense 256000 accumulated postretirement benefit obligation 27 million 8 employee stock ownership plan trust esop effective january 31 1995 company established esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described notes 6 7 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements 12 million company obligated contribute amounts sufficient repay esop loan esop uses company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occur simultaneously accounting purposes offset unearned esop shares 1313 million december 31 1997 reflected reduction shareholders equity accompanying financial statements amortized compensation expense coterminous esop loan addition difference market price companys common stock 15 per share purchase price paid esop also charged credited compensation expense offset additional paidin capital based annual allocation esop participants total compensation expense recognized allocated esop shares 32 million 26 million 26 million 1997 1996 1995 respectively addition company incurred expenses approximately 1 million 1995 establish esop related trust 9 income taxes reconciliation united states federal statutory income tax rate effective income tax rate provided provision income taxes consisted following 1995 provision includes 960000 income tax effect extraordinary loss see note 13 related early extinguishment certain debt obligations components income taxes income us foreign operations primarily canada 479 million 127 million respectively 1997 424 million 113 million respectively 1996 466 million 92 million respectively 1995 sources deferred income taxes follows components deferred tax assets liabilities follows 10 earnings per share computation earnings per share follows options purchase 5 million 22 million 13 million shares common stock outstanding 1997 1996 1995 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 11 1995 stock incentive plan company adopted 1995 stock incentive plan may 26 1995 company may grant options employees westinghouse air brake company subsidiaries 31 million shares westinghouse air brake company common stock options purchase approximately 29 million shares westinghouse air brake company common stock plan granted net forfeitures employees westinghouse air brake company excess fair market value date grant generally options become exercisable three fiveyear vesting periods expire ten years date grant 1996 part longterm incentive program company granted options purchase 684206 shares certain executives 1995 stock incentive plan option price per share greater market value stock date grant 14 options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors effective november 1 1995 company adopted nonemployee directors stock option plan 100000 shares common stock reserved issuance price less 14 yearend 1997 company granted nonstatutory stock options nonemployee directors purchase total 25000 shares company applies apb 25 related interpretations accounting stock option plans accordingly compensation expense recognized plans compensation expense companys stock option plan determined based fair value grant dates awards plan consistent method set forth sfas 123 companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years ended december 31 follows exercise prices options outstanding december 31 1997 ranged 1100 2138 weightedaverage remaining contractual life options 8 years 12 operating leases minimum annual rentals payable noncancelable leases next five years beyond follows rental expense leases approximately 33 million 28 million 28 million years ended december 31 1997 1996 1995 operating leases relate principally several manufacturing locations warehouse office space transportation equipment communication systems 13 extraordinary item connection amendment credit agreement see note 5 company wrote approximately 23 million previously capitalized cost relating previous credit agreement 1995 resulted tax charge 14 million 05 per share reflected extraordinary item 14 stock repurchase march 1997 company repurchased scandinavian incentive holdings bv sih 4000000 shares companys common stock aggregate purchase price 44 million plus fees expenses approximately 2 million redemption effected pursuant redemption agree ment redemption agreement dated march 5 1997 among company sih incentive ab sole shareholder sih concurrently therewith sih sold remaining 6000000 shares wabco common stock investors consisting vestar equity partners lp vestar harvard private capital holdings inc harvard american industrial partners capital fund ii lp aip certain members management company management purchasers purchase price 11 per share cash pursuant stock purchase agreement dated march 5 1997 sale effective march 31 1997 sih purchase finance redemption company amended credit agreement increase revolving credit availability 15 million 125 million 140 million obtain waiver requirement make prepayment aggregate principal amount equal 50 excess cash flow 1996 approximately 115 million company obtained consents record owners march 3 1997 senior notes certain amendments covenant contained indenture dated june 20 1995 among company issuer bank new york trustee pursuant notes issued indenture company borrowed 46 million fund redemption related expenses upon companys receipt requisite consents indenture amended permit additional restricted payments amount approximately 22 million order complete redemption ii permit 2 million additional restricted payments made advance would otherwise permitted following presents companys results year ended december 31 1997 pro forma basis stock repurchase occurred january 1 1997 15 stockholders voting trust agreements december 31 1997 approximate ownership interests companys common stock held management esop 45 investors referred note 14 16 others including public shareholders 39 investors referred note 14 certain members senior management purchased 6 million shares wabco common stock sih seller successor interest incentive ab swedish corporation acquired investment ab cardo original equity owner time 1990 acquisition railway products group american standard inc 1990 acquisition stockholders agreement exists management investors referred note 14 provides among things composition board directors long certain minimum stock ownership percentages maintained restrictions disposition shares rights request registration shares active original management owners entered amended voting trustdisposition agreement effective december 13 1995 amended agreement provides among matters stock voted one block restrictions sale transfer stock agreement expires january 1 2000 terminated affirmative vote twothirds stock shares held trust connection voting trust company entered indemnification agreement trustees covered companys directors officers liability insurance shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement esop described note 8 16 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 1997 1996 preferred stock issued outstanding 17 commitments contingencies terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expire various dates 2000 environmental indemnification expires asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations asi disputed coverage reimbursement provisions company one operating subsidiaries named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes costs associated cleanup activities site may held responsible covered asi indemnification referred asi previously owned 50 subsidiary b related insurance policy expires january 2002 environmental claims provided former 50 owner involved operating subsidiary company submitted claim policy costs clean imposed incurred company connection old james landfill international insurance ltd acknowledged coverage policy subject stated policy exclusions addition management believes costs attributable company material therefore established reserve costs companys operations use products contain asbestos operations acquired company asi discontinued use asbestos 1980 company named codefendant asbestos claims filed third parties asi relating events occurring prior 1981 significantly prior 1990 acquisition claims covered indemnification agreement insurance policy referred asi taken complete responsibility administering defending settling claims company involved incurred costs related claims asi claimed company responsibility cases management believes claims related company costs attributable company material therefore financial statements accordingly reflect costs reserves claims opinion management based available information environmental matters asbestos claims presently represent material contingencies company time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations company historically required pay material liability claims 18 international sales following table sets forth geographic sales distribution 19 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 5 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 20 selected quarterly financial data unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake company william e kassling william e kassling chief executive officer date february 26 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors westinghouse air brake company audited accordance generally accepted auditing standards consolidated financial statements westinghouse air brake company included form 10k issued report thereon dated february 16 1998 audits made purpose forming opinion statements taken whole schedule listed index item 14a2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial date required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania february 16 1998 schedule ii westinghouse air brake company valuation qualifying accounts three years ended december 31 1 reserves acquired companies index exhibits filed herewith filed exhibit companys registration statement form s1 registration 3390866 filed exhibit companys annual report form 10k period ended december 31 1995 filed exhibit companys current report form 8k filed september 19 1996 filed exhibit companys registration statement form s8 registration 33339159item 14 principal accountant fees services incorporated herein reference company’s definitive proxy statement annual meeting stockholders held may 17 2006 definitive proxy statement filed securities exchange commission later 120 days december 31 2005 information relating executive officers company set forth part wabtec adopted code ethics senior officers applicable executive officers described item 1 report code ethics senior officers posted website wwwwabteccom event make amendments waivers code disclose amendment waiver reasons website part iv item 15nannannanitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation delaware corporation subsidiaries december 31 1999 1998 related consolidated statements operations shareholders equity cashflows three years period ended december 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits years ended december 31 1998 1997 audit consolidated financial statements motivepower industries inc company acquired 1999 transaction accounted poolingofinterests discussed note 4 statements included consolidated financial statements westinghouse air brake technologies corporation reflect total assets total revenues 38 percent 35 percent 1998 41 percent 35 percent 1997 respectively related consolidated totals statements audited auditors whose report furnished us opinion insofar relates amounts included motivepower industries inc based solely upon report auditors conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states arthur andersen llp pittsburgh pennsylvania february 15 2000 independent auditors report stockholders board directors motivepower industries inc audited consolidated balance sheets motivepower industries inc subsidiaries december 31 1998 related consolidated statements income cash flows stockholders equity two years period ended december 311998 separately presented herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position motivepower industries inc subsidiaries december 31 1998 results operations cash flows two years period ended december 31 1998 conformity generally accepted accounting principles deloitte touche llp pittsburgh pennsylvania february 11 1999 march 2 1999 note 18 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business westinghouse air brake technologies corporation company one north americas largest manufacturers valueadded equipment locomotives railway freight cars passenger transit vehicles company formed november 1999 merger westinghouse air brake company motivepower industries inc major products intended enhance safety improve productivity reduce maintenance costs customers major product offerings include electronic controls monitors air brakes traction motors cooling equipment turbochargers lowhorsepower locomotives couplers door controls draft gears brake shoes aggressively pursue technological advances respect new product development product enhancements company headquarters wilmerding pennsylvania approximately 6500 employees facilities throughout world portion companys freight groups operations revenue base generally dependent capital replacement cycles locomotives freight cars large north americanbased railroad companies companys passenger transit groups operations dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation prior period financial statements footnote disclosures restated accordance accounting principles board number 16 business combinations related merger wabco motivepower accounted poolingofinterests see note 4 certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead cores inventory defined inventory units designated unit exchange programs components inventory net reserves conjunction merger wabco motivepower companies previously utilized lastin firstout method determining inventory cost adopted fifo method effect current year consolidated financial statements significant consolidated financial statements taken whole property plant equipment property plant equipment additions stated cost expenditures renewals betterments capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method following estimated useful lives plant property equipment accelerated depreciation methods utilized income tax purposes major classes depreciable assets follows intangible assets goodwill amortized straightline basis 40 years intangibles amortized straightline basis estimated economic lives goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations see note 5 revenue recognition revenue recognized products shipped respective customers price product determined company recognizes revenues longterm contracts based percentage completion method accounting contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period known provisions made currently estimated losses uncompleted contracts costs estimated earnings excess billings underbillings billings excess costs estimated earnings overbillings contract progress recorded balance sheet classified noncurrent see note 20 stockbased compensation company accounts stockbased compensation including stock options employee stock purchases apb opinion 25 accounting stock issued employees see note 11 related pro forma disclosures research development research development costs charged expense incurred years ended december 31 1999 1998 1997 company incurred costs approximately 345 million 304 million 244 million respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 108 million 14 million 141 million 1999 1998 1997 respectively warranty reserves 268 million 23 million december 31 1999 1998 respectively financial derivatives company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received accrued interest expense see notes 6 17 addition company periodically enters foreign exchange forward contracts legal agreements two parties purchase sell foreign currency specified price contract date delivery settlement future company uses contracts hedge risk foreign currency exchange rates associated certain assets obligations changes market value forward contracts recognized income related changes price hedged item recognized income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 9 foreign currency translation assets liabilities foreign subsidiaries except companys mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded companys consolidated financial statements based upon provisions statement financial accounting standards sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions longterm investment nature accumulated carried component shareholders equity effects currency exchange rate changes intercompany transactions non us dollar amounts charged credited earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 10 comprehensive income 1998 company adopted statement financial accounting standards sfas 130 reporting comprehensive income established standards reporting displaying comprehensive income components financial statements comprehensive income defined net income nonowner changes shareholders equity companys accumulated comprehensive income loss consists entirely foreign currency translation adjustments significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 companys consolidated net sales 1999 1998 1997 allowance doubtful accounts 4 million 35 million december 31 1999 1998 respectively employees december 31 1999 approximately 36 companys workforce covered collective bargaining agreements generally effective 2001 2002 deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 issued adoption eitf 9714 required company record treasury stock historical value companys stock maintained deferred compensation plans recent accounting pronouncements june 1998 statement financial accounting standards sfas 133 accounting derivative instruments hedging activity issued sfas 133 amended sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 amendment fasb statement 133 effective financial statements fiscal quarters fiscal years beginning june 15 2000 company yet determined effect standard financial statements 3 supplemental cash flow disclosures 4 mergers acquisitions november 19 1999 wabco completed merger motivepower industries inc leading manufacturer supplier locomotive components fleet overhauls related services company issued approximately 18 million shares companys common stock former motivepower shareholders reserved contingent exercise stock options approximately 2 million shares valued approximately 354 million transaction accounted poolingofinterests accounting method accordingly consolidated financial statements restated giving effect transaction occurred beginning earliest period presented combined results company separate results wabco motivepower periods preceding merger follows 1999 company completed following acquisitions january 1999 company acquired certain assets gg locotronics privately held designer high voltage electrical cabinets control stands locomotives total consideration 178 million 1998 gg locotronics sales approximately 22 million ii january 1999 company acquired 100 common stock qtron ltd privately held designer manufacturer locomotive electronics equipment total consideration 149 million 1998 qtron sales 10 million iii february 1999 company acquired mass transit electrical inverter converter product line agc system technologies inc canada approximately 960000 1999 acquisitions accounted purchase method accordingly results operations applicable acquisition included companys financial statements prospectively acquisition date excess purchase price fair value identifiable net assets 25 million allocated goodwill amortized straightline basis 40 years october 5 1998 company purchased railway electronics business rockwell railroad electronics rockwell collins inc wholly owned subsidiary rockwell international corporation 80 million cash rockwell manufacturer supplier mobile electronics display positioning equipment data communications electronic braking equipment railroad industry acquisition accounted purchase method accounting accordingly results operations rockwell included companys consolidated financial statements date acquisition 70 million excess purchase price fair value net identifiable assets acquired recorded goodwill amortized straightline basis 40 years november 18 1998 company acquired 100 common stock young radiator company manufacturer radiators air coolers heat exchange equipment rail industrial powerrelated markets 677 million net cash marketable securities acquired acquisition accounted purchase method accounting accordingly results operations young included companys consolidated financial statements date acquisition 43 million excess purchase price fair value net identifiable assets acquired recorded goodwill amortized straightline basis 40 years following unaudited pro forma results operations including effects pro forma adjustments related acquisition rockwell young prepared transactions occurred beginning 1997 pro forma financial information purport present companys results operations would two acquisitions actually occurred january 1 1997 project companys results operations future period reflect anticipated cost savings combination operations 5 intangibles intangible assets company goodwill consist following december 31 1999 1998 goodwill totaled 2338 million 2114 million net accumulated amortization 234 million 153 million respectively 6 longterm debt longterm debt consisted following credit agreement november 1999 connection merger wabco terminated existing credit agreement refinanced existing motivepower credit agreement consortium commercial banks credit agreement provides 275 million fiveyear revolving loan 364day 275 million convertible revolving credit facility connection establishment two new revolving facilities company wrote previously deferred financing costs approximately 850000 net tax 02 per diluted share reported extraordinary item accompanying financial statements december 31 1999 company available borrowing capacity net letters credit approximately 158 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions whether cash property securities combination thereof one exception restriction company may make repurchases redemptions pay dividends net dividends unallocated shares common stock company returned company aggregate amount exceed 50 companys accumulated consolidated net income fiscal year credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 736 december 31 1999 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 1999 notional value interest rate swaps outstanding totaled 50 million effectively changed companys interest rate variable rate fixed rate 733 interest rate swap agreements mature 2000 2001 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9 38 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9 38 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay 30 million debt associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million comet acquisition result issuance company wrote previously capitalized debt issuance costs 469000 net tax approximately 01 per diluted share first quarter 1999 notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes unsecured credit facility october 1998 company obtained 30 million unsecured credit facility group commercial banks purpose financing rockwell acquisition january 1999 facility repaid proceeds 1999 notes offering pulse note partial payment pulse acquisition company issued 17 million note due january 31 2004 interest 95 january 2000 note repaid revolving credit facility comet notes connection comet acquisition company issued notes totaling 122 million unsecured notes totaling 62 million delivered company note amount 6 million delivered subsidiary company secured acquired assets notes repaid january 1999 proceeds 1999 notes offering industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 provide financing purchase building used companys operations scheduled principal repayments outstanding loan balances required december 31 1999 follows 7 employee benefit plans 1 change assumed health care cost trend rate change amount expense recognized postretirement plans approximately 200000 future year change accumulated postretirement benefit obligation approximately 2 million defined contribution plans costs recognized multiemployer defined contribution plans summarized follows company sponsors defined benefit pension plans cover certain us canadian employees provide benefits stated amounts year service employee connection establishment esop see note 8 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 connection acquisition young radiator company november 1998 company assumed liability youngs defined benefit pension plan young plan covering substantially employees young benefits young plan based years service company suspended future benefits accruing plan april 1 1999 proceeding merging young plan existing company defined benefit plan companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method applied accompanying financial statements addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees conjunction establishment esop january 1995 see note 8 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 company also participates variety defined contribution 401k esop multiemployer pension health welfare plans regard 401k savings esop 1999 company match substantially form wabtec common stock cash additionally company stock option based plans described note 11 8 employee stock ownership plan trust esop effective january 31 1995 company established esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described note 7 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements approximately 12 million company obligated contribute amounts sufficient repay esop loan esop uses company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occur simultaneously accounting purposes offset unearned esop shares 1255 million december 31 1999 reflected reduction shareholders equity accompanying financial statements amortized compensation expense coterminous esop loan allocated esop shares december 31 1999 1998 approximately 970000 771000 shares respectively 9 income taxes provision income taxes consisted following 1999 1998 provision excludes 08 20 million income tax effect extraordinary loss see note 6 components income taxes us foreign operations 387 million 328 million respectively 1999 812 million 401 million respectively 1998 690 million 236 million respectively 1997 reconciliation united states federal statutory income tax rate effective income tax rate provided components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized company established valuation allowance certain net operating loss carryforwards losses anticipated produce tax benefit although realization net deferred tax asset assured management believes likely net deferred tax asset realized companys net operating loss carryforward year ended december 31 1999 24 million net operating losses expire various amounts follows 10 earnings per share computation earnings per share follows options purchase approximately 700000 200000 500000 shares common stock outstanding 1999 1998 1997 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 11 stockbased compensation plans stock options 1995 stock incentive plan amended 1998 company may grant options employees former westinghouse air brake company motivepower industries inc subsidiaries 65 million shares common stock options purchase approximately 58 million shares common stock plans granted employees excess fair market value date grant generally options become exercisable three fiveyear vesting periods expire ten years date grant part longterm incentive program 1998 1996 company granted options purchase 500020 684206 shares respectively certain executives 1995 stock incentive plan option price per share greater market value stock date grant 20 14 respectively options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors company also nonemployee directors stock option plan 100000 shares common stock reserved issuance yearend 1999 company granted nonstatutory stock options nonemployee directors purchase total 40000 shares employee stock purchase plan 1998 company adopted employee stock purchase plan espp 500000 shares available issuance participants purchased companys common stock 85 lesser fair market value first last day offering period plan suspended 1999 reinstated starting april 2000 company applies apb 25 related interpretations accounting stockbased compensation plans accordingly compensation expense recognized plans compensation expense plans determined based fair value grant dates awards companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants would recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 1999 restricted stock award 1998 company granted 15000 shares restricted common stock officer shares vest according vesting schedule threeyear period grant date market value totaled 372000 amortized expense vesting period unamortized compensation recorded component shareholders equity executive retirement plan 1997 executive retirement plan company may award common stock certain employees including certain executives participate esop december 31 1999 35556 shares awarded fair market value approximately 704000 respect restricted stock award executive retirement plan compensation expense recognized consolidated statement operations 12 operating leases company leases office manufacturing facilities operating leases terms ranging one fifteen years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 1999 1998 1997 86 million 62 million 61 million respectively certain companys equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 57 million 76 million 72 million years 1999 1998 1997 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 13 stockholders voting trust agreements december 31 1999 approximate ownership interests companys common stock held management 14 esop 22 investors consisting vestar equity partners lp harvard private capital holdings inc american industrial partners capital fund ii lp 13 others including public shareholders 51 stockholders agreement exists management investors referred provides among things composition board directors long certain minimum stock ownership percentages maintained restrictions disposition shares rights request registration shares active original management owners entered amended voting trustdisposition agreement effective december 13 1995 amended agreement provided among matters stock voted one block restrictions sale transfer stock agreement expired january 1 2000 individual stockholders vote shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement esop described note 8 14 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 1999 1998 preferred stock issued outstanding 15 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expire various dates 2000 except claims timely asserted continue resolved asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations company one operating subsidiaries named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes costs associated cleanup activities site may held responsible covered asi indemnification referred asi previously owned 50 subsidiary b related insurance policy expires january 2002 environmental claims provided former 50 owner involved operating subsidiary active claims conditions existing prior july 1992 continue covered beyond date company submitted claim received recoveries policy costs clean imposed incurred company connection old james landfill rocky mountain international insurance ltd acknowledged coverage made payments policy subject stated policy exclusions claims made expiration date policy continue covered beyond policy expiration date addition management believes costs attributable company material therefore established reserve costs companys operations use products contain asbestos actions filed company rfpc vapor corporation cases involve products manufactured prior time company acquired rfpc stocks vapor assets company prior ownership respect actions filed company asi responsible administering defending paying liability associated claims respect actions filed rfpc claims covered insurance respect actions filed vapor corporation company seeks indemnity liability defense costs prior owner vapor assets company involved incurred costs related asbestos claims minimal processing costs management believes claims related company material financial statements accordingly reflect costs reserves claims boise idaho company subject rcra part b closure permit issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent boise locomotive company facility compliance permit company drilled wells onsite retrieve treat contaminated groundwater onsite offsite monitor amount hazardous constituents company estimated expected aggregate discounted liability december 31 1999 using discount rate 6 approximately 4 million accrued company compliance permit december 31 1999 mountaintop pennsylvania foster wheeler energy corporation fwec named potentially responsible party respect companys mountaintop pennsylvania plant listed epa database potential hazardous substances fwec seller mountaintop property companys predecessor 1989 agreed indemnify companys predecessor certain identified liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior acquisition young radiator young agreed clean alleged contamination prior production site mattoon il company accrued 1 million matter managements best estimate restoration costs racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company process determining extent contamination ge harris february 12 1999 ge harris railway electronics llc ge harris railway electronic services llc collectively ge harris brought suit company alleged patent infringement unfair competition related communications system installed one companys products ge harris seeking prohibit company future infringement seeking unspecified amount money damages recover part royalties lawsuit early stages company unable estimate cost resolving litigation thus costs provided matter time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 16 segment information wabtec two reportable segments freight group transit group key factors used identify reportable segments organization alignment companys internal operations nature products services customer type financial information segments restated conjunction operational realignment organization pursuant merger wabco motivepower business segments freight group manufactures products services geared production operation freight cars locomotives including braking control equipment engines traction motors onboard electronic systems train coupler equipment revenues derived oem locomotive overhauls aftermarket sales freight car repairs services transit group consists products passenger transit vehicles typically subways rail busses include braking monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments operating results based income operations merger restructuring charges corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 1999 follows segment financial information 1998 follows segment financial information 1997 follows following geographic area data include net sales based product shipment destination longlived assets consists plant property equipment net depreciation resident respective countries export sales companys united states operations 1327 million 1118 million 868 million years ending december 31 1999 1998 1997 respectively following data reflects income operations including merger restructuring related charges major geographic area attributed companys operations within following countries regions 17 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 6 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 18 selected quarterly financial data amounts table differ previously reported form 10q due merger westinghouse air brake company motivepower industries inc application poolingofinterests accounting reporting method fourth quarter 1999 company recorded merger restructuring costs approximately 50 million 092 net tax per diluted share without effect charge fourth quarter 1999 would 039 per diluted share fourth quarter 1998 company sold entire argentine investment trenes de buenos aires sa recognized nonrecurring investment gain 84 million 012 net tax per diluted share without effect gain fourth quarter 1998 would 035 per diluted share 19 merger restructuring charges company incurred merger restructuringrelated charges approximately 50 million fourth quarter 1999 expects incur additional 20 million merger restructuringrelated expenses 2000 501 million charge included income statement following items 436 million charge included separate line item income statement operating expense 52 million included component cost sales 13 million 850000 net tax shown extraordinary item 50 million charge included following announced actions costs associated transaction items investment bankers legal fees accountant fees sec fees etc consolidation corporate headquarters wilmerding pa elimination duplicate corporate functions closing moving young radiators centerville ia plant downsizing young administrative offices companys jackson tn facility closing gg locotronics plant itasca il moving production nearby elk grove il facility san luis potosi mexico implementing national sales force eliminating duplicate sales functions december 31 1999 87 million 50 million merger restructuringrelated charge accrued balance sheet table identifies significant components charge shows accrual balance december 31 1999 transaction severance termination benefits accrual approximately 183 employees comprising salaried hourly personnel various locations noted accrual represents calculation severance package based employees salary tenure company lease impairment charges asset write downs associated companys closing plants noted relocation corporate headquarters companys evaluation certain assets category represents related costs incurred yet paid december 31 1999 20 underbillings company longterm contract provide maintenance locomotive services details relative cumulative costs incurred revenues recognized follows signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation william e kassling william e kassling chief executive officer date march 22 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accordance auditing standards generally accepted united states consolidated financial statements westinghouse air brake technologies corporation included form 10k issued report thereon dated february 15 2000 audit made purpose forming opinion basic financial statements taken whole schedule listed index item 14a2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania february 15 2000 index exhibits schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquired companies 2 actual disbursements andor chargesitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation delaware corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders equity cashflows three years period ended december 31 2001 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states arthur andersen llp pittsburgh pennsylvania february 18 2002 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business westinghouse air brake technologies corporation company one north americas largest manufacturers valueadded equipment locomotives railway freight cars passenger transit vehicles company formed november 1999 merger westinghouse air brake company motivepower industries inc major products intended enhance safety improve productivity reduce maintenance costs customers major product offerings include electronic controls monitors air brakes cooling equipment switcher commuter locomotives couplers door controls draft gears brake shoes aggressively pursue technological advances respect new product development product enhancements company headquarters wilmerding pennsylvania 4436 full time employees facilities throughout world portion companys freight groups operations revenue base generally dependent capital replacement cycles locomotives freight cars large north americanbased railroad companies companys transit groups operations dependent budgeting expenditure appropriation process federal state local governmental units mass transit needs established public policy 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead cores inventory defined inventory units designated unit exchange programs see note 6 property plant equipment property plant equipment additions stated cost expenditures renewals betterments capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method following estimated useful lives property plant equipment accelerated depreciation methods utilized income tax purposes see note 7 intangible assets goodwill amortized straightline basis 40 years intangibles amortized straightline basis estimated economic lives goodwill intangible assets including patents tradenames periodically reviewed impairment based assessment future operations indicate remaining balance intangible asset may recoverable companys reviews impairment date resulted revision intangible assets related amortization periods see note 8 revenue recognition revenue recognized products shipped respective customers price product determined company recognizes revenues longterm contracts based percentage completion method accounting contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period known provisions made currently estimated losses uncompleted contracts costs estimated earnings excess billings underbillings billings excess costs estimated earnings overbillings contract progress recorded balance sheet classified noncurrent see note 23 stockbased compensation company accounts stockbased compensation including stock options employee stock purchases apb opinion 25 accounting stock issued employees see note 14 related pro forma disclosures research development research development costs charged expense incurred years ended december 31 2001 2000 1999 company incurred costs approximately 332 million 323 million 344 million respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced several new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 141 million 112 million 73 million 2001 2000 1999 respectively warranty reserves 154 235 million december 31 2001 2000 respectively financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received accrued interest expense see note 9 company adopted statement financial accounting standards sfas 133 amended sfas 138 accounting derivative instruments hedging activities effective january 1 2001 resulting recording current assets 266000 long term assets 399000 current liabilities 760000 long term liabilities 11 million decrease comprehensive loss 12 million application company concluded interest rate swap contracts qualify special cash flow hedge accounting permit recording fair value swap corresponding adjustment comprehensive income balance sheet creating volatility future earnings due market sensitivity ineffectiveness offsetting changes interest rates companys variable rate borrowings income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 12 foreign currency translation assets liabilities foreign subsidiaries except companys mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded companys consolidated financial statements based upon provisions statement financial accounting standards sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions longterm investment nature accumulated carried component shareholders equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 13 comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders equity companys accumulated comprehensive income loss consists foreign currency translation adjustments unrealized losses derivatives designated qualified cash flow hedges pension related adjustments significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 11 companys consolidated net sales 2001 one customer accounted 10 companys consolidated net sales 2000 1999 allowance doubtful accounts 23 million 39 million december 31 2001 2000 respectively employees december 31 2001 approximately 29 companys workforce covered collective bargaining agreements generally effective 2002 2003 2004 deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 issued adoption eitf 9714 required company record treasury stock historical value companys stock maintained deferred compensation plans recent accounting pronouncements june 2001 financial accounting standards board issued sfas 142 goodwill intangible assets provisions goodwill intangible assets indefinite lives longer routinely amortized straightline basis estimated useful life instead subject assessments impairment applying fairvaluebased test sfas 142 effective fiscal years beginning december 15 2001 upon adoption company cease record approximately 8 million goodwill amortization company completed process evaluating whether impairment result adopting august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets provisions tangible longlived assets whether held used disposed sale means tested recoverability whenever events changes circumstances indicate carrying amount may recoverable sfas 144 effective fiscal years beginning december 15 2001 company early adopted sfas 144 third quarter 2001 3 discontinued operations november 1 2001 company completed sale certain assets ge transportation systems gets 240 million cash subject adjustment finalization value net assets sold assets sold primarily include locomotive aftermarket products services wabtec original equipment manufacturer terms sales agreement company agreed indemnify gets among things certain potential third party site environmental cleanup remediation costs company purchased insurance policy mitigate exposure environmental indemnities company reported 487 million tax gain sale 2001 fourth quarter 2001 company decided exit businesses put businesses sale net amount businesses written estimated realizable value classified assets held sale balance sheet company reported 72 million tax loss writedown entities accordance sfas 144 operating results businesses classified discontinued operations years presented summarized december 31 follows proforma condensed balance sheet removing discontinued operations balance sheets december 31 2000 follows 4 supplemental cash flow disclosures 5 mergers acquisitions november 19 1999 wabco completed merger motivepower industries inc leading manufacturer supplier locomotive components fleet overhauls related services company issued approximately 18 million shares common stock former motivepower shareholders reserved contingent exercise stock options approximately 2 million shares transaction accounted poolingofinterests accounting method 2001 2000 1999 company completed following acquisitions october 2001 company purchased certain assets milufab supplier door panels subway trains 37 million ii june 2001 company purchased certain assets core systems company provides repair billings rail industry 743000 iii july 2000 company purchased certain assets iron fireman manufacturer transportation boiler equipment 650000 iv february 1999 company acquired mass transit electrical inverter converter product line agc system technologies inc canada approximately 960000 v january 1999 company acquired 100 common stock qtron ltd privately held designer manufacturer locomotive electronics equipment total consideration 149 million acquisitions accounted purchase method accordingly results operations applicable acquisition included companys financial statements prospectively acquisition date excess purchase price fair value identifiable net assets approximately 14 million allocated goodwill amortized straightline basis 40 years effective january 1 2002 goodwill amortized upon adoption sfas 142 see note 2 6 inventory components inventory net reserves adjusted 2000 column represents removal discontinued operations see note 3 7 property plant equipment major classes depreciable assets follows adjusted 2000 column represents removal discontinued operations see note 3 8 intangibles intangible assets company goodwill consist following december 31 2001 2000 goodwill totaled 198 million 2266 million net accumulated amortization 326 million 297 million respectively 9 longterm debt longterm debt consisted following credit agreement november 1999 connection merger wabco terminated existing secured credit agreement refinanced existing unsecured motivepower credit agreement consortium commercial banks resulted unsecured credit agreement provided 275 million five year revolving credit facility expiring 2004 364day 275 million convertible revolving credit facility november 2000 company banks negotiated reduction 364day facility 275 million 213 million primarily due credit availability excess current forecasted needs effort reduce commitment costs related fees november 2001 company banks negotiated reduction 364day facility 213 million 100 million december 31 2001 company available bank borrowing capacity net letters credit approximately 288 million connection establishment new revolving credit facilities 1999 company wrote previously deferred financing costs approximately 850000 net tax 02 per diluted share reported extraordinary item accompanying financial statements credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 358 million 2727 million 638 respectively 2001 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2001 notional value interest rate swaps outstanding totaled 60 million effectively changed companys interest rate variable rate fixed rate 870 interest rate swap agreements mature 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay shortterm 30 million loan associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million loan prior acquisition result issuance company wrote previously capitalized debt issuance costs 469000 net tax approximately 01 per diluted share 1999 notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 payable monthly principal interest installments proceeds bond provided financing purchase building used companys operations scheduled principal repayments outstanding loan balances required december 31 2001 follows 10 employee benefit plans 1 change assumed health care cost trend rate change amount expense recognized postretirement plans approximately 466000 future year change accumulated postretirement benefit obligation approximately 28 million composition plan assets consists primarily equities corporate bonds governmental notes temporary investments 2001 2000 result early retirement package offered certain union employees company incurred charges approximately 16 million 3 million respectively reflected special termination benefit included table company benefit plans 14 million plan assets excess pension plan benefit obligations december 31 2001 total pension plan benefit obligation excess plan assets 03 million pension plan benefit obligation excess plan assets december 31 2000 total plan assets excess pension plan benefit obligation defined contribution plans costs recognized multiemployer defined contribution plans summarized follows company sponsors defined benefit pension plans cover certain us canadian employees provide benefits stated amounts year service employee connection establishment employee stock ownership plan trust see note 11 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method applied accompanying financial statements addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees conjunction establishment esop january 1995 see note 11 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 company also participates variety defined contribution 401k multiemployer pension health welfare plans additionally company stock optionbased benefit plans described note 14 11 employee stock ownership plan trust esop effective january 31 1995 company established westinghouse air brake company employee stock ownership plan trust esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described note 10 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements approximately 12 million company obligated contribute amounts sufficient repay esop loan esop used company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occurred simultaneously accounting purposes offset allocated esop shares august 1 2000 approximately 11 million shares company terminated contributions esop effective august 1 2000 received regulatory approvals whereby allocated shares distributed participants 401k accounts unallocated shares returned company exchange forgiveness esop loan also 2000 company incurred 51 million noncash charge writeoff related deferred tax asset due esop tax benefits would realized esop continued utilized future periods charge reported within caption income tax expense consolidated statement operations 12 income taxes components income continuing operations provision income taxes companys domestic foreign operations years ended december 31 provided consolidated provision credit income taxes included statement income years ended december 31 consisted following consolidated income tax provision credit included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided research development credit related credits claimed current period refund claims filed amended returns prior periods components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized company established valuation allowance certain net operating loss carryforwards losses anticipated produce tax benefit although realization net deferred tax asset assured management believes likely net deferred tax asset realized companys net operating loss carryforward year ended december 31 2001 86 million expire 2010 13 earnings per share computation earnings per share follows options purchase approximately 28 million 42 million 700000 shares common stock outstanding 2001 2000 1999 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 14 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year excluding shares held esop related trust added shares available grant 2000 plan based adjustment company approximately 12 million shares available 2001 grants available approximately 1432980 shares end fiscal 2002 shares available grants given date may exceed 15 wabtecs total common shares outstanding excluding shares held esop related trust generally options become exercisable threeyear vesting period expire ten years date grant part longterm incentive program 1998 company granted options purchase 500020 certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors stock option plan 500000 shares common stock reserved issuance yearend 2001 company granted nonqualified stock options nonemployee directors purchase total 110000 shares employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants purchase companys common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2001 157951 shares company applies apb 25 related interpretations accounting stockbased compensation plans accordingly compensation expense recognized plans compensation expense plans determined based fair value grant dates awards companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants would recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2001 restricted stock award february 2001 company awarded two officers 4920 shares restricted common stock lieu cash bonus 2000 shares must held one year sold 15 operating leases company leases office manufacturing facilities operating leases terms ranging one fifteen years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2001 2000 1999 57 million 63 million 68 million respectively certain companys equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 28 million 4 million 45 million years 2001 2000 1999 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 stockholders agreements december 31 2001 approximate ownership interests companys common stock held management 11 esop 21 investors consisting vestar equity partners lp charlesbank equity fund ii limited partnership american industrial partners capital fund ii lp 13 others including public shareholders 55 stockholders agreement exists management investors referred provides among things composition board directors long certain minimum stock ownership percentages maintained restrictions disposition shares rights request registration shares held esop established january 31 1995 subject terms related esop loan agreement employee stock ownership trust agreement employee stock ownership plan pledge agreement although esop terminated unallocated shares remain trustee regulatory administrative actions completed esop described note 11 17 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 2001 2000 preferred stock issued outstanding 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expired various dates 2000 except claims timely asserted continue resolved asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations company named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes unreimbursed costs associated cleanup activities site material result indemnification provisions referred insurance policy rocky mountain international insurance ltd acknowledged coverage currently paying claim company established reserve costs companys affiliates operations use products contain asbestos actions filed company certain affiliates consistent experience others number claims increased recent years however important note asbestos claims involve products sold prior 1990 formation company affiliates incurred significant costs related asbestos claims covered insurance subject indemnity companies manufactured sold products question management believes claims material accordingly financial statements reflect costs reserves claims boise idaho company subject rcra part b closure permit issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent boise locomotive company facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents company accrued 11 million december 31 2001 estimated remaining costs remediation company compliance permit december 31 2001 mountaintop pennsylvania foster wheeler energy corporation fwec seller mountaintop property predecessor one companys subsidiaries 1989 agreed indemnify companys predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior companys acquisition young radiator young agreed clean alleged contamination prior production site mattoon ill company process remediating site state illinois estimates costs remediate site approximately 613000 accrued december 31 2001 racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 546000 december 31 2001 estimate remaining restoration costs ge harris november 3 2000 company settled suit brought geharris railway electronics llc geharris railway electronics services llc collectively geharris exchange settlement suit company agreed deliver 2 million worth products geharris december 15 2000 company expensed fourth quarter 2000 addition company paid geharris 7 million exchange license certain intellectual property company contingent obligations relating certain sales leaseback transactions reserves established time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segments freight group transit group key factors used identify reportable segments organization alignment companys internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment engines onboard electronic systems train coupler equipment revenues derived oem locomotive overhauls aftermarket sales freight car repairs services assets sold gets part freight group transit group consists products passenger transit vehicles typically subways rail buses include braking monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments operating results based income operations merger restructuring charges corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2001 follows segment financial information 2000 follows segment financial information 1999 follows 2001 2000 530000 2 million 152 million 235000 merger restructuring costs related freight group transit group respectively 1999 merger restructuring charge primarily related costs merger wabco motivepower consolidation corporate headquarters elimination duplicate corporate functions following geographic area data include net sales based product shipment destination longlived assets consists plant property equipment net depreciation resident respective countries export sales companys united states operations 903 million 989 million 936 million years ending december 31 2001 2000 1999 respectively following data reflects income operations including merger restructuring related charges major geographic area attributed companys operations within following countries regions 20 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 9 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 21 selected quarterly financial data results restated 2001 sale certain locomotive assets ge businesses company exiting businesses classified discontinued operations company recorded restructuringrelated costs approximately 854000 001 first quarter 2001 11 million 002 16 million 002 192000 000 net tax per diluted share second third fourth quarters 2001 respectively company also recorded 2 million 005 per diluted share research development tax credit third quarter 2001 fourth quarter 2001 company recorded 93 million 014 net tax per diluted share charge asset writedowns consisting primarily asset impairment related locomotive lease fleet 52 million writeoff 18 million investment argentina 15 million writedown facility estimated realizable value 17 million 003 net tax per diluted share charge severance related ten percent salary headcount reduction 685000 001 net tax per diluted share gain sale unused facilities company recorded restructuringrelated costs approximately 19 million 003 first quarter 2000 48 million 007 69 million 010 45 million 007 net tax per diluted share second third fourth quarters 2001 respectively company also recorded 44 million 007 net tax per diluted share gain sale product line second quarter 2001 third quarter 2001 conjunction esop termination company incurred 51 million noncash 012 per diluted share charge writeoff related deferred tax asset also fourth quarter 2001 company recorded 2 million 003 net tax per diluted share charge legal settlement 22 merger restructuring charge 2001 company completed merger restructuring plan charges totaling 71 million pretax approximately 49 million charge expensed 1999 20 million 2000 2 million 2001 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company december 31 2001 32 million merger restructuring charge still remaining accrued balance sheet table identifies significant components charge reflects accrual balance date lease impairment charges asset writedowns associated companys closing plants noted relocation corporate headquarters companys evaluation certain assets projected cash flows assets remaining lives estimated less carrying values category represents related costs incurred yet paid december 31 2001 company began completed new restructuring plan transit rail business 2001 company estimates synergies plan yield approximately 3 million pretax cost savings 2002 beyond benefits realized reduced cost sales reduced selling general administrative expenses restructuring plan involved operational realignment related workforce reductions charges complete restructuring plan totaled 2 million pretax 2 million charge included costs associated relocating several production operations chicago montreal including severance costs approximately 103 employees 23 contract underbillings company longterm contract provide maintenance locomotive services part assets sold ge details relative cumulative costs incurred revenues recognized follows signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation gregory h davies gregory h davies chief executive officer date march 26 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accordance auditing standards generally accepted united states consolidated financial statements westinghouse air brake technologies corporation included form 10k issued report thereon dated february 18 2002 audit made purpose forming opinion basic financial statements taken whole schedule listed index item 14a 2 form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp pittsburgh pennsylvania february 18 2002 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies 2 actual disbursements andor charges exhibitsnan item 7 managements discussion analysis financial condition results operations overview westinghouse air brake company formed 1990 acquisition railway products group american standard inc company north americas largest manufacturer valueadded equipment locomotives railway freight cars passenger transit vehicles companys primary manufacturing operations united states canada revenues historically predominantly north america recent years proportion international sales increased significantly line companys strategy expand business outside north america companys customer base consists freight transportation companies locomotive freight car original equipment manufacturers transit car builders public transit systems companys business comprised three principal business segments railroad transit molded products see note 17 notes consolidated financial statements companys strategy growth focused using technological advancements develop new products expanding range aftermarket products services penetrating international markets addition management continually evaluates acquisition opportunities meet companys criteria complement companys operating strategies product offerings company completed number strategic acquisitions since 1995 following summary acquisitions october 1998 company purchased railroad electronics business rockwell collins inc rockwell total purchase price approximately 800 million october 1998 company purchased air brake repair business comet industries inc comet total purchase price approximately 132 million july 1998 company acquired assets lokring corporation lokring total purchase price 51 million acquired products include fitting connects nonwelded joints april 1998 company completed acquisition transit coupler product line hadady corporation hadady total purchase price 46 million included amounts designs drawings april 1998 company acquired railway repair business united kingdom rfse limited rfse total purchase price approximately 100 million october 1997 company purchased rail products business related assets sloan valve company sloan 25 million acquired products included slack adjusters angle cocks retainer valves july 1997 company acquired 100 stock hp srl hp total purchase price 58 million included assumption 23 million debt hp srl leading supplier door controls transit rail cars buses italian market may 1997 company purchased stone safety services corporation stone uk limited collectively stone one worlds leading suppliers air conditioning equipment transit industry established product base north america europe far east connection acquisition june 1997 company acquired heavy rail air conditioning business thermo king corporation thermo king aggregate purchase price acquisitions approximately 77 million september 1996 company acquired vapor group vapor passenger transit door manufacturer united states europe 639 million january 1996 company acquired futuris industrial products pty ltd futuris australian friction products manufacturer approximately 150 million january 1995 company acquired pulse electronics pulse privatelyheld manufacturer endoftrain monitors electronic products railway industry 549 million also march 1997 agreement reached one companys major shareholders scandina vian incentive holding bv sih whereby company repurchased 4 million shares common stock held sih 44 million 11 per share conjunction transaction sih also sold remaining 6 million shares companys common stock vestar equity partners lp vestar charlesbank capital partners llc fka harvard private capital holdings inc charles american industrial partners capital fund ii lp aip certain members senior management fiscal year 1998 compared fiscal year 1997 summary results operations nmnot meaningful income extraordinary item 1998 increased 77 million 206 compared period year ago 33 million extraordinary charge writeoff certain previously capitalized debt issuance costs net income increased 44 million compared 1997 diluted earnings per share extraordinary item increased 207 175 diluted earnings per share increased 141 162 income operations earnings interest taxes depreciation amortization increased comparison primarily due revenue growth related gross profit number events occurred comparative period impacted companys results operations financial condition including company completed several acquisitions complement enhance mix existing products markets acquisitions completed timeframe rockwell comet lokring hadady rfse sloan hp stone thermo king aggregate incremental revenues acquisitions 637 million 1998 june 1998 company refinanced credit agreement subsequently amended agreement october 1998 resulted write previously deferred financing costs approximately 33 million net tax 13 per share reported extraordinary item march 1997 company repurchased 4 million shares common stock held major shareholder 44 million plus 2 million related fees net sales following table sets forth companys net sales business segment net sales 1998 increased 1065 million 189 6709 million increase primarily attributable incremental revenue 1998 approximately 432 million acquisitions referred within railroad group increased sales volumes railroad group also reflect strong oem market freight cars approximately 76000 freight cars delivered 1998 compared 50000 1997 increases partially offset lower sales electronics portion railroad group prior year period product sales benefited federal mandate certain monitoring equipment installed trains july 1997 incremental revenue 1998 acquisitions referred approximately 205 million primary reason increase revenues transit group company anticipates new freight car deliveries 1999 lower 1998 however railroad oem aftermarket sales expected reasonably strong foreseeable future gross profit gross profit increased 178 2192 million 1998 compared 1861 million 1997 gross margin percentage sales 327 compared 330 gross margin dependent number factors including sales volume product mix incremental revenue recent acquisitions lower margins compared companys historical results primary reason lower margins periodtoperiod comparison lower margins partially offset favorable margins increased sales railroad molded product groups operating expenses total operating expenses percentage net sales 171 1998 compared 170 1997 total operating expenses increased 1998 184 million periodtoperiod comparison incremental expenses acquired businesses totaled 102 million 55 increase addition higher operating expenses reflect costs associated computer system upgrades includes year 2000 compliant computer software approximately 35 million additional engineering efforts associated new product development company anticipates cost savings 1999 consolidation several facilities related net reduction employees recently acquired businesses integrated companys core operations income operations operating income totaled 1047 million 1998 compared 900 million 1997 higher operating income results higher sales volume related higher gross profit percentage revenue operating income 156 substantially consistent prior year favorable volume changes railroad molded products groups partially offset lower profits percentage sales transit group interest expense interest expense increased 15 million 312 million 1998 primarily due financing costs recent acquisitions partially offset debt repayments expense 1998 totaled 09 million primarily reflecting effects changes foreign currency exchange rates associated loan wholly owned subsidiary company effect subsequent changes exchange rates reflected future periods income taxes provision income taxes increased 42 million 276 million 1998 compared 1997 effective tax rate declined 38 1998 385 year ago resulting additional benefits foreign sales corporation lower overall effective state tax rates fiscal year 1997 compared fiscal year 1996 summary results operations nm meaningful net income 1997 increased 46 million 141 compared 1996 diluted earnings per share increased 235 142 per diluted share higher earnings base reflects benefits associated acquisitions new products 4 million share repurchase income operations earnings interest taxes depreciation amortization increased comparison primarily due revenue growth related gross profit net sales following table sets forth companys net sales business segment net sales year ended december 31 1997 increased 1109 million 245 5644 million transit group acquisitions vapor stone thermo king hp contributed 855 million increase addition increased volumes groups favorably affected comparison gross profit gross profit increased 214 1861 million 1997 compared 1533 million 1996 gross margin percentage sales 330 1997 338 1996 effect lower margins recently acquired businesses primary factor change operating expenses total operating expenses increased 225 million yeartoyear comparison primarily reflecting effect acquisitions completed 1997 1996 incremental expenses 1997 acquired businesses totaled 153 million addition higher operating expenses reflect costs associated certain strategic initiatives including expanded international marketing activities additional engineering efforts associated new product development income operations operating income totaled 900 million 1997 compared 797 million year ago higher operating income reflects higher sales volume related gross profit interest expense interest expense increased 36 million 297 million 1997 primarily due funding costs associated repurchases common stock acquisitions partially offset debt repayments income taxes provision income taxes increased 24 million 233 million 1997 compared 209 million 1996 effective tax rate declined 385 1997 390 1996 due establishment foreign sales corporation latter part 1996 liquidity capital resources liquidity provided primarily operating cash flow borrowings companys credit facilities companys cash flow operating activities approximately 42 million 67 million 59 million 1998 1997 1996 respectively decrease operating cash flow 1997 1998 primarily related increase working capital due higher accounts receivables increased inventory levels associated increased sales growth acquired businesses large working capital requirements additional working capital requirements resulted increased borrowings companys credit facilities companys acquisitions businesses also resulted increased borrowing based cash flow provided operations 1998 forecasted 1999 results credit available credit agreement company believes able make 1999 planned capital expenditures required debt payments 1998 company completed rockwell comet lokring rfse hadady acquisitions aggregate purchase price 1129 million consisting debt cash 1997 company completed stone thermo king sloan hp acquisitions aggregate purchase price 160 million including 23 million assumed debt 1996 company acquired vapor futuris aggregate purchase price 789 million transactions utilized borrowings purchase price also 1995 company acquired pulse 549 million consisting 20 million bank borrowings 170 million note payable companys common stock valued 179 million time acquisition march 1997 sih sold 10 million shares companys common stock company purchased 4 million shares 11 per share total 44 million plus 2 million related fees investors consisting vestar charles aip certain members companys management acquired remaining 6 million shares price company financed 4 million share repurchase borrowings credit facility gross capital expenditures 290 million 296 million 132 million 1998 1997 1996 respectively majority capital expenditures reflect spending replacement equipment well increased capacity efficiency company expects capital expenditures 1999 approximate 25 30 million following table sets forth companys outstanding indebtedness credit agreement june 1998 company refinanced credit facility consortium commercial banks amended october 1998 connection rockwell acquisition amended credit agreement credit agreement provides aggregate credit facility 350 million consisting 170 million june 1998 term loans 40 million september 1998 term loans 140 million revolving loans addition credit agreement provides swingline loans aggregate amount 5 million issuance letters credit aggregate face amount 50 million swingline loans issuance letters credit reduce amount revolving loans may incurred revolving credit facility december 31 1998 company available borrowing capacity net letters credit approximately 12 million company repaid portion borrowings credit agreement january 1999 proceeds offering 75 million 9 38 senior notes described resulting increased borrowing capacity 47 million credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 671 december 31 1998 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 1998 notional value interest rate swaps outstanding totaled 50 million effectively changed companys interest rate variable rate fixed rate 709 interest rate swap agreements mature 2000 2001 principal repayments term loan borrowings due semiannual installments maturity december 2003 see note 5 notes consolidated financial statements credit agreement limits company respect declaring making cash dividend payments prohibits company declaring making distributions whether cash property securities combination thereof respect shares companys capital stock subject certain exceptions including exception pursuant company permitted pay cash dividends common stock fiscal year aggregate amount 15 million minus aggregate amount prepayments pulse note fiscal year long default payment interest fees occurred thereunder credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions mergers consolidations certain subsidiaries sales assets ordinary course business acquisitions consideration paid company exceed 50 million individually 150 million aggregate limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum leverage ratio debt incurred credit agreement secured substantially assets company domestic subsidiaries guaranteed companys domestic subsidiaries credit agreement contains customary events default including payment defaults failure representations true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company 9 38 senior notes due june 2005 june 1995 company issued 100 million 9 38 senior notes due june 2005 existing notes january 1999 company issued additional 75 million 9 38 senior notes due june 2005 additional notes existing notes additional notes collectively notes see subsequent event terms existing notes additional notes substantially existing notes additional notes issued pursuant indentures substantially notes bear interest rate 9 38 mature june 2005 net proceeds existing notes used prepay term loans outstanding existing credit agreement net proceeds additional notes used repay unsecured credit facility reduce revolving credit borrowings notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes indentures pursuant notes issued contain certain restrictive covenants among things limit ability company certain subsidiaries incur indebtedness pay dividends redeem capital stock create restrictions investments unrestricted subsidiaries make distributions certain subsidiaries use proceeds sale assets subsidiary stock enter transactions affiliates create liens enter saleleaseback transactions companys indenture also restricts subject certain exceptions companys ability consolidate merge transfer substantially assets another person unsecured credit facility october 1998 company obtained 30 million unsecured credit facility group commercial banks purpose financing rockwell acquisition december 31 1998 interest rate note 975 per annum january 1999 facility repaid proceeds additional note offering pulse note partial payment pulse acquisition company issued 170 million note due january 31 2004 interest payable semiannually accrues 95 february 1 2001 february 1 2001 january 31 2004 interest accrue prime rate charged chase manhattan bank december 31 2000 plus 1 maximum adjustment 2 comet notes connection comet acquisition company issued notes totaling 122 million unsecured notes totaling 62 million delivered company note amount 6 million delivered subsidiary company secured acquired assets notes bore interest rate 10 per annum scheduled mature october 8 1999 notes repaid january 1999 see subsequent event esop connection establishment esop january 1995 company made 140 million loan esop loan used purchase 9336000 shares companys outstanding common stock esop loan original term 50 years annual payments principal interest approximately 12 million esop loan bears interest 85 per annum esop repay esop loan using contributions company obligated contribute amounts sufficient repay esop loan net effect esop companys common stock allocated employees lieu retirement plan previously cashbased defined benefit plan accordingly results reduced annual cash outlays estimated 3 4 million subsequent event january 1999 company issued additional notes premium resulting effective rate 85 result issuance payoff unsecured credit facility company write previously capitalized debt issuance costs approximately 02 per diluted share first quarter 1999 management believes based upon current levels operations forecasted earnings cash flow operations together borrowings credit agreement adequate make payments principal interest debt including notes make required contributions esop permit anticipated capital expenditures fund working capital requirements cash needs foreseeable future including 1999 issuance additional notes increased companys liquidity reducing outstanding revolving credit borrowings thereby increasing available borrowing capacity nevertheless company remain leveraged significant extent debt service obligations continue substantial debt company requires dedication substantial portion future cash flows payment principal interest indebtedness thereby reducing funds available capital expenditures future business opportunities company believes available cash flow liquidity sufficient meet debt service requirements companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place company intends 1999 reduce indebtedness generating operating income reducing working capital requirements measures effects year 2000 company information system improvement initiatives process include new computer hardware software applications new system substantially operational year 2000 compliant estimated cost project expected 8 10 million range majority costs approximately 8 million previously incurred majority expenditures incurred hardware purchased software related project capitalized amortized estimated useful lives costs training advisory consulting expensed incurred expenditures expected significant impact companys future results operations financial condition company identified equipment uses operations noninformation system characteristics embedded technology components items internal clocks company need replace type equipment believe possible year 2000 failure significant impact companys operations estimated cost replacement equipment considered significant company received written assurances suppliers customers providers acknowledging year 2000 issues stating present intention compliant however customers vendors providers provided assurances company evaluate ongoing basis whether necessary practical establish contingency plans respect year 2000 issues however large scale systems failures occur could significant adverse effect companys financial condition future results operations liquidity companys products generally sold limited warranty defects company reviewed products currently use customers sold believe material increases warranty liability claims arising year 2000 noncompliance however material increase claims could material adverse effect companys financial condition future results operations liquidity effects inflation seasonality general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant companys business seasonal although third quarter results generally tend slightly lower quarters reflecting vacation time major customers period conversion euro currency january 1 1999 certain members european union established fixed conversion rates existing currencies european unions common currency euro company conducts business member countries transition period introduction euro january 1 1999 june 30 2002 company assessing issues involved introduction euro however expect conversion euro material impact operations financial results forward looking statements believe statements historical facts included report including certain statements business managements discussion analysis financial condition results operations may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations prove correct forwardlooking statements subject various risks uncertainties assumptions us including among things interest rates demand services freight passenger rail industry consolidations rail industry demand products services gains losses market share demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment continued outsourcing customers governmental funding customers future regulationderegulation customers andor rail industry general economic conditions markets compete including north america south america europe australia successful introduction new products successful integration newly acquired companies year 2000 concerns labor relations completion additional acquisitions factors company undertakes obligation publicly update revise forwardlooking statements whether result new information future events otherwise recent accounting pronouncement june 1998 financial accounting standards board issued statement accounting standards 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards requiring every derivative instrument measured fair value changes fair value recorded currently earnings unless specific hedge accounting criteria met statement 133 effective fiscal years beginning june 15 1999 accordingly company anticipates adopting standard january 1 2000 management continues evaluate impact standard results operations financial condition item 7aitem 7 managements discussion analysis financial condition results operations overview net sales decreased 83 11 billion 1999 10 billion 2000 major causes change effect companys 2000 results operations financial condition include decreases component sales due slowdown north american freight car locomotive deliveries severe downturn locomotive overhaul market offsetting improved sales backlog transit business due increased governmental spending transit equipment net income 2000 254 million 059 per diluted share compared 366 million 083 per diluted share 1999 results 2000 include 291 million restructuring related charge 44 million gain disposition product line 51 million writeoff deferred tax asset relating termination esop 2 million legal settlement 1999 results include 501 million merger restructuring related charge excluding items earnings per diluted share would 110 174 2000 1999 respectively merger restructuring plan company previously announced merger restructuring plan pursuant merger company motivepower industries inc merger company estimates synergies plan yielded approximately 20 million pretax cost savings 2000 reached ongoing annualized savings 25 million pretax benefits realized reduced cost sales reduced selling general administrative expenses merger restructuring plan involves elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company estimates charges complete merger restructuring plan total 84 million pretax due acceleration refinement plan approximately 50 million charge previously expensed 1999 29 million 2000 company expects remaining charge 5 million incurred 2001 79 million charge date included following announced actions costs associated transaction items investment bankers legal fees accountant fees sec fees etc consolidation corporate headquarters wilmerding pa elimination duplicate corporate functions closing moving young radiators centerville ia plant consolidating young administrative offices companys jackson tn facility racine wi closing relocation several production operations san luis potosi mexico closing relocation several additional manufacturing operations eliminating duplicate sales functions december 31 2000 63 million merger restructuring charge still remaining accrued balance sheet accrual balance sheet discussed greater detail note 19 notes consolidated financial statements included part ii item 8 report results operations following table sets forth wabtecs consolidated statements operations years indicated enhance comparability results prior periods 2000 adjusted column represents reported income statement excluding restructuring related charges legal settlement charge writeoff deferred tax asset gain sale product line 1999 adjusted column represent reported income statement excluding effects merger restructuring related charges 2000 compared 1999 following table sets forth companys net sales business segment net sales decreased 931 million 83 1 billion 2000 11 billion 1999 overall decrease primarily attributable decreased north american oem freight car locomotive component sales volumes lower locomotive overhauls within freight group sales volumes within freight group reflect softening oem market freight cars 55821 freight cars delivered 2000 compared 74223 1999 partially offsetting decreases increases transit group sales due increased shipments mta contract company estimates oem freight car locomotive industries deliver 45000 freight cars 1200 locomotives respectively 2001 gross profit decreased 2778 million 2000 compared 3332 million period 1999 gross margin percentage sales 27 compared 297 1999 gross margin dependent number factors including pricing sales volume product mix decrease gross profit margins largely attributed effect decrease sales volumes approximately 40 million offsetting approximately 10 million synergies realized result recent restructuring integration efforts balance principally result changes sales mix primarily increased oem component sales transit group products lower margins compared companys overall historical results pricing pressures manufacturing inefficiencies primarily related merger integration efforts total operating expenses percentage net sales 183 2000 194 period year ago excluding 2000 271 million 1999 436 million merger restructuring charges operating expenses would 157 155 net sales respectively without merger restructuring charges periods operating expenses would decreased 111 million 2000 compared 1999 reduction primarily result continuing cost reduction programs realization approximately 10 million synergies 1999 merger income operations totaled 895 million 2000 compared 116 million 1999 operating margins 87 103 respectively excluding merger restructuring related charges periods operating income would 1206 million 1649 million 2000 1999 respectively 2000 operating margins percentage sales decreased 117 147 1999 lower adjusted operating income resulted decreased sales volumes freight group changes product mix see note 16 notes consolidated financial statements included part ii item 8 report interest expense increased 25 455 million 2000 444 million 1999 debt net cash equivalents 5341 million december 31 2000 versus 5615 million end 1999 increase interest expense even though net debt balance decreased fourth quarter 2000 primarily due higher interest rates february 2000 company disposed transit electrification product line 55 million cash recognized gain 44 million reported income effective income tax rate 2000 467 compared 469 1999 wabtec expects ongoing rate approximately 36 2000 rate includes effect one time noncash writeoff deferred tax asset 51 million relating termination esop excluding effect rate would 36 1999 excluding assumed tax benefit component merger restructuring charge effective tax rate would 356 company consolidated united states federal net operating loss carryforwards 189 million expiring various times year 2010 1999 469000 extraordinary loss net tax incurred extinguishment certain term debt well 850000 extraordinary loss net tax writeoff deferred financing fees refinancing companys principal credit facility november 1999 connection merger 1999 compared 1998 following table sets forth companys net sales business segment net sales increased 82 11 billion 1999 1 billion 1998 increase driven acquisitions primarily within freight group contributed 113 million sales 1999 incremental revenue acquisitions along increase transit group sales partially offset slowdown locomotive overhaul market us freight car deliveries decreased slightly 1999 74223 75685 1998 cost sales increased 73 7879 million 1999 7344 million 1998 gross margin increased 297 compared 291 1998 excluding cost sales component merger restructuring charge gross margin would increased 302 compared 291 1998 increase attributed volume favorable product mix freight group component companies increased volume transit group selling general administrative expenses increased 74 122 million 1136 million 1998 cost reductions lower incentiverelated expenses offset operating expenses acquired companies 18 million engineering expenses increased 13 357 million 316 million primarily result rockwell acquisition october 1998 new product development efforts amortization expense increased 38 158 million 1999 115 million 1998 increase primarily attributable acquisitions made late 1998 rockwell railroad electronics division rockwell october 1998 young radiator young november 1998 acquisitions made early 1999 gg locotronics qtron january 1999 agc technologies february 1999 income operations totaled 116 million 1999 compared 145 million 1998 operating margins 103 14 respectively excluding operating expense component merger restructuring charge operating income 1999 would 1649 million operating margins percentage sales 1999 increased 147 slightly higher 14 prior year higher adjusted operating income resulted higher sales volume related gross profit favorable aftermarket sales volume relatively strong operating margins transit group component companies freight group primary reasons increase operating income see note 16 notes consolidated financial statements included part ii item 8 report interest expense increased 197 444 million 1999 371 million 1998 debt net cash equivalents 562 million december 31 1999 versus 565 million december 31 1998 increase interest expense even though net debt balance decreased due wabtec carrying higher average debt balance 1999 result late 1998 acquisitions rockwell 80 million young 68 million 1999 acquisitions gg locotronics qtron agc technologies 32 million wabtec also funded cash transaction costs associated merger totaled approximately 29 million investment income argentina represents income recognized related investment argentina sold 1998 cash secured note receivable expense 90000 recorded 1999 versus income 3 million 1998 fluctuation due foreign exchange gainslosses foreign exchange loss virtually offsetting 1999 compared foreign exchange gain 2 million 1998 company recorded income tax expense 336 million compared 421 million 1998 effective tax rate 1999 469 compared 347 1998 excluding assumed tax benefit component merger restructuring charge wabtec incurred income tax expense 43 million 1999 effective tax rate 356 compared 347 1998 rate lower due nonrecurring deferred tax liability reversal wabtec expects ongoing rate approximately 36 company consolidated mexican united states federal net operating loss carryforwards 5 million 19 million expiring various times year 2005 2010 respectively 1999 469000 extraordinary loss net tax incurred extinguishment certain term debt well 850000 extraordinary loss net tax writeoff deferred financing fees refinancing companys principal credit facility november 1999 connection merger 1998 wabtec incurred 53 million extraordinary loss net tax related amending certain credit facilities liquidity capital resources liquidity provided primarily operating cash flow borrowings companys credit facilities consortium commercial banks credit agreement following summary selected cash flow information relevant data operating cash flow 2000 602 million compared 774 million period year ago working capital increased 57 since 1999 primarily due increase accounts receivable 2000 1999 cash outlays merger restructuring activities approximately 28 million 29 million respectively reported reduction cash provided operating activities excluding cash outlays cash provided operating activities would approximately 887 1067 million respectively decrease operating cash flow 2000 primarily result lower operating income cash used investing activities declined 2000 215 million 664 million year ago 2000 1999 1998 company used 7 million 322 million 1802 million respectively certain business acquisitions capital expenditures 263 million 308 million 578 million 2000 1999 1998 respectively majority capital expenditures periods relates upgrades existing equipment replacement existing equipment purchases new equipment due expansion wabtecs operations company believes overall cost savings achieved increasing efficiencies company expects 2001 capital expenditures equipment purchased similar purposes approximate 35 million cash used financing activities 38 million 2000 versus 117 million 1999 2000 company reduced longterm debt 284 million company issued 75 million senior notes first quarter 1999 repay amounts outstanding certain unsecured bank term debt repaid portion companys previous revolving credit facility historically company financed purchase significant businesses utilizing cash flow generated operations amounts available credit facilities addition issuance 1999 notes increased companys liquidity reducing outstanding revolving credit borrowings thereby increasing available borrowing capacity company estimates charges completion merger restructuring plan total approximately 84 million pretax approximately 79 million incurred date company adopted plan may repurchase 75 million company common stock open market purchases company believes advantageous proceed projected results alternatives utilizing primarily cash generated operations equity forward contracts following table sets forth companys outstanding indebtedness average interest rates december 31 2000 revolving credit note term loan interest rates variable dependent market conditions credit agreement november 1999 connection merger wabco terminated existing secured credit agreement refinanced existing unsecured motivepower credit agreement consortium commercial banks unsecured credit agreement currently provides 275 million fiveyear revolving credit facility expiring 2004 364 day 213 million convertible revolving credit facility maturing november 2001 november 2000 company banks negotiated reduction 364day facility 275 million 213 million primarily due credit availability excess current forecasted needs effort reduce commitment costs related fees december 31 2000 company available borrowing capacity net letters credit approximately 106 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 837 december 31 2000 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2000 notional value interest rate swaps outstanding totaled 85 million effectively changed companys interest rate variable rate fixed rate 829 interest rate swap agreements mature 2001 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay shortterm 30 million loan associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million loan prior acquisition notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes pulse note partial payment 1995 pulse acquisition company issued 17 million note due january 31 2004 interest 95 former pulse shareholder january 2000 note repaid industrial revenue bond july 1998 subsidiary company entered 10year 75 million debt obligation bears interest rate 55 provide financing purchase building used companys operations principal repayments outstanding loan balances due various intervals maturity see note 6 notes consolidated financial statements included part ii item 8 report company highly leveraged debt service obligations continue substantial debt company requires dedication substantial portion future cash flows payment principal interest indebtedness thereby reducing funds available capital expenditures future business opportunities company believes available company believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effects inflation general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant conversion euro currency january 1 1999 certain members european union established fixed conversion rates existing currencies european unions common currency euro company conducts business member countries transition period introduction euro january 1 1999 june 30 2002 company assessing issues involved introduction euro however expect conversion euro material impact operations financial results forward looking statements believe statements historical facts included report including certain statements business managements discussion analysis financial condition results operations may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia demand services freight passenger rail industry consolidations rail industry demand products services continued outsourcing customers demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment fluctuations interest rates operating factors supply disruptions technical difficulties changes operating conditions costs successful introduction new products labor relations completion integration additional acquisitions development use new technology competitive factors actions competitors politicalgovernmental factors political stability relevant areas world future regulationderegulation customers andor rail industry governmental funding customers political developments laws regulations forced divestiture assets restrictions production imports exports price controls tax increases retroactive tax claims expropriation property cancellation contract rights environmental regulations transaction commercial factors outcome negotiations partners governments suppliers customers others company undertakes obligation publicly update revise forwardlooking statements whether result new information future events otherwise item 7aitem 7 managements discussion analysis financial condition results operations overview november 2001 wabtec sold certain assets ge transportation systems 238 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer results businesses along several small noncore businesses company decided exit classified discontinued operations throughout report net sales ongoing operations decreased 112 7837 million 2001 6962 million 2002 major causes change decreases component sales due continuation weak freight market downturn locomotive overhaul market completion major transit contract third quarter 2002 without nonrecurring nonoperating items noted earnings continuing operations 175 million 040 per diluted share 2002 211 million 049 per diluted share 2001 results 2002 include 617 million net tax write goodwill accordance sfas 142 12 million net tax loss early extinguishment debt 126000 loss discontinued operations 2001 results include 478 million income discontinued operations including 415 million gain net tax sale assets ge transportation systems noted writedown certain businesses classified discontinued operations 93 million charge asset writedowns 37 million restructuringrelated charge 685000 gain disposition excess facilities 2 million research development tax credit 17 million charge severance costs related 10 percent salary workforce reduction merger restructuring plan 2001 company completed merger restructuring plan charges totaling 71 million pretax approximately 2 million charge expensed 2001 20 million 2000 49 million 1999 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company december 31 2002 647000 merger restructuring charge still remained accrued balance sheet part accrued liabilities accrual balance sheet discussed greater detail note 24 notes consolidated financial statements included part iv item 15 report company began completed new restructuring plan transit rail business 2001 restructuring plan involved operational realignment related workforce reductions charges 2001 restructuring plan move totaled 2 million pretax 2002 operations still included much cost integration normal operations 2 million charge 2001 included costs associated relocating several production operations chicago montreal including severance costs approximately 103 employees results operations following table sets forth wabtecs consolidated statements operations years indicated 2002 operations included adjustments enhance comparability results prior periods 2001 adjusted column represents reported income statement excluding restructuringrelated charges asset writedowns severance costs related 10 percent salary workforce reduction research development tax credits gain sale excess facilities 2000 adjusted column represents reported income statement excluding restructuringrelated charges legal settlement charge writeoff deferred tax asset gain sale product line 2002 compared 2001 following table sets forth companys net sales business segment net sales 2002 decreased 875 million 112 6962 million compared prior period freight group transit group lower sales freight groups decreased sales reflected lower sales components new freight cars locomotives 2002 industry deliveries new freight cars decreased 17736 units compared 34247 period 2001 2002 industry deliveries new locomotives decreased 940 compared 1085 period 2001 transit groups decreased sales primarily due completion supply contract new york city subway cars third quarter 2002 gross profit decreased 1795 million 258 sales 2002 compared 2099 million 268 sales period 2001 gross profit dependent number factors including pricing sales volume product mix decrease gross profit margin largely attributed effect decrease sales volumes approximately 35 million gross profit resulting favorable balance principally result cost reductions operating expenses improved 23 million 2002 compared 2001 excluding goodwill amortization due required adoption financial accounting standard 142 7 million 93 million asset writedowns 37 million merger restructuring charges 17 million severance costs 2001 decrease operating expenses due decrease selling general administrative expenses income operations totaled 475 million 2002 compared 541 million 2001 operating income would 758 million 2001 excluding adjustments shown prior paragraph lower operating income resulted decreased sales volumes 2002 see note 21 notes consolidated financial statements included part iv item 15 report interest expense decreased 516 2002 compared 2001 primarily due decrease debt interest rates debt net cash equivalents 1759 million december 31 2002 versus 1879 million end 2001 company recorded foreign exchange losses 12 million 17 million respectively 2002 2001 due continued strength dollar also 2002 company wrote facility held sale resulting 2 million charge items reported income expense effective income tax rate 2002 32 compared 242 2001 company expects ongoing rate approximately 3536 2002 rate includes effect research development foreign tax credits 772000 2001 rate includes effect substantial research development tax credits 2 million excluding tax credits rate would 35 2002 2001 compared 2000 following table sets forth companys net sales business segment net sales decreased 275 million 34 7837 million 2001 8112 million 2000 overall decrease primarily attributable decreased north american oem freight car locomotive component sales volumes lower locomotive overhauls within freight group sales volumes within freight group reflected softening oem market freight cars 34247 freight cars delivered 2001 compared 55821 2000 partially offsetting decreases increases transit group sales due increased shipments new york city mta contract gross profit decreased 2099 million 268 sales 2001 compared 2357 million 291 sales period 2000 gross margin dependent number factors including pricing sales volume product mix decrease gross profit margin largely attributed effect decrease sales volumes approximately 11 million gross profit balance principally result changes sales mix primarily drop freight group 8 offset increase transit group 5 overall pricing pressures many product lines total operating expenses percentage net sales 199 2001 195 period year ago excluding 93 million asset writedowns 37 million merger restructuring charges 17 million severance costs 2001 182 million 2000 merger restructuring charges operating expenses would 18 172 net sales respectively without adjustments operating expenses would increased 15 million 2001 compared 2000 income operations totaled 541 million 2001 compared 778 million 2000 excluding merger restructuringrelated charges periods asset writedowns severance costs 2001 2 million legal settlement 2000 operating income would 687 million 100 million 2001 2000 respectively lower adjusted operating income resulted decreased sales volumes freight group changes product mix see note 21 notes consolidated financial statements included part iv item 15 report interest expense decreased 232 335 million 2001 436 million 2000 debt net cash equivalents 1879 million december 31 2001 versus 5341 million end 2000 decrease interest expense primarily due lower debt amount result working capital management sale proceeds gets received november 2001 taxes gain deferred 2002 2001 company recorded foreign exchange losses 17 million february 2000 company disposed transit electrification product line 55 million cash recognized gain 44 million items reported income expense effective income tax rate 2001 242 compared 494 2000 2001 rate includes effect substantial research development tax credits 2 million excluding tax credit rate would 35 2000 rate includes effect onetime noncash writeoff deferred tax asset 51 million relating termination 1995 established esop excluding effect rate would 36 liquidity capital resources liquidity provided primarily operating cash flow borrowings companys credit facilities consortium commercial banks credit agreement following summary selected cash flow information relevant data operating cash flow 2002 157 million compared 1191 million period year ago working capital decreased 6 million 2002 inventory decreased 16 million payables accruals decreased 10 million 2001 working capital decreased significantly primarily due decrease accounts receivable inventory 2002 2001 cash outlays merger restructuring activities approximately 25 million 68 million respectively reported reduction cash provided operating activities also 2002 30 million paid taxes related gain sale locomotive aftermarket assets gets 2001 operating cash flow 2002 excluding 30 million tax payment 2001 approximately 46 million cash used investing activities 108 million versus cash provided investing activities 2274 million year ago adjusting 2001 amount sale businesses ge 238 million cash used investing activities would approximately 106 million 2002 2001 2000 company used 17 million 37 million 650000 respectively certain business acquisitions see note 5 notes consolidated financial statements included part iv item 15 report information capital expendi tures continuing operations 141 million 207 million 232 million 2002 2001 2000 respectively majority capital expenditures periods relates upgrades existing equipment replacement existing equipment cash used financing activities 441 million 2002 versus 2972 million 2001 2002 company reduced longterm debt 459 million 2001 company reduced longterm debt 2983 million company repaid 175 million senior notes third quarter 2002 take advantage lower interest rates companys revolving credit agreement historically company financed purchase significant businesses utilizing cash flow generated operations amounts available credit facilities ebitda defined earnings deducting interest expense income taxes depreciation amortization although ebitda measure performance calculated accordance generally accepted accounting principles management believes useful investor evaluating wabtec widely used measure evaluate companys operating performance ability service debt financial covenants credit facility include ratios based ebitda purport represent cash generated operating activities considered isolation substitute measures performance accordance generally accepted accounting principles addition ebitda calculated identically companies presentation may comparable similarly titled measures companies managements discretionary use funds depicted ebitda may limited working capital debt service capital expenditure requirements restrictions related legal requirements commitments uncertainties following table sets forth companys outstanding indebtedness december 31 2002 2001 revolving credit note term loan interest rates variable dependent market conditions credit agreement november 1999 wabtec refinanced existing unsecured motivepower credit agreement consortium commercial banks unsecured credit agreement currently provides 275 million fiveyear revolving credit facility expiring november 2004 364day 95 million convertible revolving credit facility maturing november 2004 annual renewal november 2003 november 2001 company banks negotiated reduction 364day facility 213 million 100 million result 208 million net tax cash proceeds sale locomotive businesses ge november 2002 company negotiated reduction 364day facility 100 million 95 million december 31 2002 company available bank borrowing capacity net letters credit approximately 159 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater lasalle bank national associations prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios current margin 150 basis points cost funds rate fluctuating interest rate based lasalle bank national associations cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed indexes described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 2177 million 1337 million 331 respectively 2002 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2002 notional value interest rate swaps outstanding totaled 60 million effectively changed companys interest rate variable rate fixed rate 87 interest rate swap agreements mature june 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted extraordinary noncash loss 12 million net tax relating writeoff deferred debt issuance costs see note 25 notes consolidated financial statements included part iv item 15 report industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 payable monthly principal interest installments proceeds bond provided financing purchase building used companys operations principal repayments outstanding loan balances due various intervals maturity see note 9 notes consolidated financial statements included part iv item 15 report company believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place company currently expects refinance replace existing bank facility least twelve months prior november 2004 expiration effects inflation general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant conversion euro currency january 1 1999 certain members european union established fixed conversion rates existing currencies european unions common currency euro company conducts business member countries transition period introduction euro january 1 1999 june 30 2002 transition euro material impact operations financial results forward looking statements believe statements historical facts included report including certain statements business managements discussion analysis financial condition results operations may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia demand services freight passenger rail industry consolidations rail industry demand products services continued outsourcing customers demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment fluctuations interest rates operating factors supply disruptions technical difficulties changes operating conditions costs successful introduction new products labor relations completion integration additional acquisitions development use new technology competitive factors actions competitors politicalgovernmental factors political stability relevant areas world future regulationderegulation customers andor rail industry governmental funding customers political developments laws regulations forced divestiture assets restrictions production imports exports price controls tax increases retroactive tax claims expropriation property cancellation contract rights environmental regulations transaction commercial factors outcome negotiations partners governments suppliers customers others company undertakes obligation publicly update revise forwardlooking statements whether result new information future events otherwise critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare companys financial statements given time despite inherent limitations management believes managements discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes consolidated financial statements included part iv item 15 report summary companys significant accounting policies included note 2 notes consolidated financial statements included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information companys operating results financial condition 2002 wabtec adopted new standard accounting goodwill intangible assets indefinite lives cumulative effect adjustment recognized january 1 2002 upon adoption new standard charge 617 million tax also 2002 amortization ceased goodwill intangible assets indefinite lives total amortization expense recognized 53 million 2002 13 million 2001 126 million 2000 additionally goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model dcf model determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair values could realized actual transaction may differ used evaluate impairment goodwill areas significant judgments estimates include liabilities expenses pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets recent declines equity markets interest rates negative impact wabtecs pension plan liability fair value plan assets result accumulated benefit obligation exceeded fair value plan assets end 2002 resulted 71 million net tax charge comprehensive loss fourth quarter global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount management believe charge would material item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually locomotives freight cars passenger transit vehicles us well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations nine countries 2003 79 percent company’s revenues came north american operations wabtec also sold products services 62 countries around world management review 2003 future outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy addition management monitors company’s shortterm operational performance measures quality ontime delivery 2003 achieved following • generated cash 56 million double net income 23 million • debt net cash 120 million dec 31 2003 compared 176 million end 2002 • gross margin increased 264 compared 258 2002 favorable product mix cost reductions offset negative impact foreign currency exchange rates • revenues increased 3 higher sales freight car original equipment north america higher international sales combined offset lower sales aftermarket components transit original equipment • product quality measured firsttime pass rate improved 40 • ontime delivery increased 8 achieved results despite continued weakness demand aftermarket products services 23 drop sales transit group completed several major contracts 2002 addition foreign currency exchange rates negative impact company’s canadian operations expect increased demand products us economy recovers government transit spending increases class railroads utilities leasing companies begin reinvest fleets deferring capital spending difficult us economic environment since 2001 anticipate increased capital spending positively impact rail industry fundamentals shown gradual improvement past quarters evidenced betterthanexpected freight car orders backlog example freight car deliveries increased 9170 fourth quarter 2003 increase 11 prior quarter 91 prior year table demonstrates improving trends freight car segment rail industry source railway supply institute freight car locomotive transit car deliveries industry expected trend upwards providing expanding market company based company estimates 2004 expect demand improve two key markets components new freight cars new locomotives expect growth aftermarket represents 56 sales looking beyond 2004 expect generate increases sales earnings executing fourpoint growth strategy see page 5 details • expand sales systems offerings “tier 1” supplier • accelerate new product service development • expand globally • continuous improvement lean principles 2004 beyond continue face many challenges including increased costs raw materials especially steel higher costs medical insurance premiums foreign currency fluctuations addition face general economic risks well risk customers could curtail spending new existing equipment risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2003 compared 2002 following table summarizes results operations period 2002 completed fair value assessments goodwill wrote carrying value goodwill 90 million 832 million freight group 68 million transit group accordance adoption sfas 142 “goodwill intangible assets” total impact writedown net taxes 617 million following table shows company’s net sales business segment net sales net sales 2003 increased 217 million 31 compared 2002 increased sales freight group offset lower sales transit group freight group’s increased sales reflected higher sales components new freight cars locomotives commuter locomotives well higher international sales industry deliveries new freight cars 2003 increased 31400 units compared 17700 2002 transit group’s decreased sales due completion contract supply components new york city subway cars 2002 lower aftermarket sales gross profit gross profit increased 1895 million 2003 compared 1795 million 2002 gross profit dependent number factors including pricing sales volume product mix gross profit percentage sales 264 compared 258 2002 increase gross profit percentage primarily due higher sales favorable product mix offset negative impact weakening us dollar versus canadian dollar following table shows operating expenses operating expenses operating expenses increased 58 million 2003 compared 2002 due writeoff nonoperating assets 16 million higher medical insurance premiums partially offset reduced amortization expense amortization expense decreased due certain intangible assets fully amortized income operations income operations totaled 517 million 72 sales 2003 compared 475 million 68 sales 2002 higher operating income resulted increased sales gross margins partially offset increased operating expenses 2003 interest expense interest expense decreased 426 2003 compared 2002 primarily due substantial decrease debt expense company recorded foreign exchange losses translation balance sheet accounts 28 million 12 million respectively 2003 2002 income taxes effective income tax rate 365 2003 32 2002 change effective tax rate due higher effective state tax rate increased statutory rates foreign jurisdictions also increased income reduced significance favorable impact company’s utilization foreign tax credits effective tax rate net income net income 2003 increased 682 million compared 2002 included 617 million net tax write goodwill income cumulative effect accounting change increased 65 million compared 2002 increase due increased sales improved margins lower interest expense 2002 compared 2001 following table summarizes results operations period number events occurred comparative period impacted results operations financial condition including • 2002 completed fair value assessments goodwill wrote carrying value goodwill 90 million 832 million freight group 68 million transit group accordance adoption sfas 142 “goodwill intangible assets” total impact writedown net tax 617 million • july 2002 redeemed par face 175 million 9375 senior notes due 2005 use cash hand additional borrowings credit agreement redemption resulted noncash loss 19 million relating writeoff deferred debt issuance costs recorded interest expense • november 2001 sold certain assets ge transportation systems 238 million cash assets sold primarily included locomotive aftermarket products services oem sale resulted aftertax gain 487 million reflected income statement gain net tax sale discontinued operations • fourth quarter 2001 decided exit certain businesses net amount businesses written estimated realizable value resulted pretax charge 93 million aftertax charge 72 million merger restructuring plan 2001 company completed merger restructuring plan costs totaling 71 million pretax approximately 2 million charge expensed 2001 20 million 2000 49 million 1999 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company following table shows company’s net sales business segment net sales net sales 2002 decreased 875 million 112 6962 million compared prior period freight group transit group lower sales freight group’s decreased sales reflected lower sales components new freight cars locomotives 2002 industry deliveries new freight cars decreased 17717 units compared 34247 period 2001 2002 industry deliveries new locomotives decreased 969 compared 1085 period 2001 transit group’s decreased sales primarily due completion supply contract new york city subway cars third quarter 2002 gross profit gross profit decreased 1795 million 258 sales 2002 compared 2099 million 268 sales period 2001 decrease gross profit margin largely attributed effect decrease sales volumes negative impact 35 million following table shows operating expenses period operating expenses operating expenses improved 239 million 2002 compared 2001 included operating expenses 2001 goodwill amortization 7 million 93 million asset writedowns 37 million merger restructuring charges 17 million severance costs 2001 remaining decrease operating expenses due decrease selling general administrative expenses income operations income operations totaled 475 million 2002 compared 541 million 2001 operating income would 758 million 2001 excluding adjustments discussed prior paragraph lower operating income resulted decreased sales volumes 2002 see note 20 “notes consolidated financial statements” included part iv item 15 report interest expense interest expense decreased 461 2002 compared 2001 primarily due decrease debt interest rates expense company recorded foreign exchange losses 12 million 17 million respectively 2002 2001 due exchange rate fluctuations also 2002 company wrote facility held sale resulting 2 million charge income taxes effective income tax rate 2002 32 compared 242 2001 rate includes effect research development foreign tax credits 772000 2 million respectively 2002 2001 excluding tax credits rate would 35 2002 2001 net income net income decreased 1073 million 1736 compared period prior year however adjusting 2001 gain sale certain businesses 415 million 2002 goodwill writedown 617 million net tax net income declined 41 million principally result overall lower sales activity 2002 compared 2001 income taxes next three years cash outlays income taxes less income tax expense due amortization goodwill intangible assets continue amortized tax purposes company’s current level pretax income sufficient utilize deferred tax assets 2003 company utilized previous federal net operating losses portion reported federal credits amount 32 million realized carry back regardless current income generated company engages diverse foreign activity whereby certain funds could repatriated us would afford company opportunity utilize certain assets quickly management believes tax planning opportunities exist various foreign countries allow company utilize foreign net operating loss carryforwards tax assets uncertain regarding realization valuation allowance full amount asset management believes remaining assets realized normal course business significant differences pretax earnings financial reporting purposes taxable income tax purposes consist following liquidity capital resources liquidity provided primarily operating cash flow borrowings credit facilities consortium commercial banks “credit agreement” following summary selected cash flow information relevant data following reconciliation ebitda net income loss ebitda defined earnings deducting interest expense income taxes depreciation amortization although ebitda measure performance calculated accordance generally accepted accounting principles management believes useful investor evaluating wabtec widely used measure evaluate company’s operating performance ability service debt financial covenants credit facility include ratios based ebitda purport represent cash generated operating activities considered isolation substitute measures performance accordance generally accepted accounting principles addition ebitda calculated identically companies presentation may comparable similarly titled measures companies management’s discretionary use funds depicted ebitda may limited working capital debt service capital expenditure requirements restrictions related legal requirements commitments uncertainties operating activities operating cash flow 2003 559 million compared 157 million 2002 working capital remained relatively unchanged receivables inventory increased 132 million accounts payable increased 141 million operating cash flow 2002 157 million compared 1191 million period year ago working capital decreased 6 million 2002 inventory decreased 16 million payables accruals decreased 10 million cash operating activities 2001 positively impacted sale certain businesses corresponding reduction working capital 2002 2001 cash outlays merger restructuring activities approximately 25 million 68 million respectively reported reduction cash provided operating activities also 2002 30 million paid taxes related gain sale locomotive aftermarket assets 2001 operating cash flow 2002 excluding 30 million tax payment 2001 approximately 46 million investing activities 2003 2002 cash used investing activities 125 108 million respectively consisting almost entirely capital expenditures net disposals 2001 cash provided investing activities 2274 million adjusting 2001 gross proceeds sale certain businesses 238 million cash used investing activities would approximately 106 million 2002 2001 used 17 million 37 million certain business acquisitions see note 5 “notes consolidated financial statements” included part iv item 15 report information capital expenditures continuing operations 175 million 141 million 207 million 2003 2002 2001 respectively majority capital expenditures periods relates upgrades replacement existing equipment financing activities 2003 cash provided financing activities 92 million compared cash used financing activities 441 million 2002 2003 issued 150 million senior notes due august 2013 “the notes” notes issued par interest accrues 6875 payable semiannually january 31 july 31 year commencing january 31 2004 proceeds used repay debt outstanding company’s existing bank credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens november 2003 issued common stock connection registration sale stock certain selling shareholders issued 726900 shares common stock realizing total proceeds 10 million see “prospectus summary recent development” cash used financing activities 441 million 2002 versus 2972 million 2001 2002 reduced longterm debt 459 million 2001 reduced longterm debt 2983 million repaid 175 million senior notes third quarter 2002 take advantage lower interest rates revolving credit agreement historically financed purchase significant businesses utilizing cash flow generated operations amounts available credit facilities following table shows outstanding indebtedness december 31 2003 2002 revolving credit note term loan interest rates variable dependent market conditions cash balance december 31 2003 2002 703 million 192 million respectively financial statements prepared based terms refinanced credit agreement credit agreements november 1999 refinanced existing unsecured motivepower credit agreement “credit agreement” consortium commercial banks unsecured credit agreement provided 275 million fiveyear revolving credit facility expiring november 2004 364day 275 million convertible revolving credit facility maturing november 2004 november 2001 banks negotiated reduction 364day facility 100 million result 208 million net tax cash proceeds sale locomotive businesses ge november 2002 negotiated reduction 364day facility 100 million 95 million july 2003 banks negotiated reduction facilities total 225 million result issuance senior notes 225 million facility provided reduced fiveyear facility 1672 million reduced 364day facility 578 million november 2003 allowed 578 million 364day facility expire december 31 2003 available bank borrowing capacity net 196 million letters credit approximately 1077 million credit agreement may elect base rate interest rate based london interbank offered rates interest “libor” cost funds rate bid rate base rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending consolidated total indebtedness cash flow ratios current margin 1375 basis points cost funds rate fluctuating interest rate based lasalle bank national association’s cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits ability declare pay cash dividends prohibits us declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company credit agreement borrowings bear variable interest rates indexed indices described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 209 million 1293 million 268 respectively 2003 reduce impact interest rate changes portion variablerate debt entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2003 notional value interest rate swaps outstanding totaled 40 million effectively changed interest rate variable rate fixed rate 398 interest rate swap agreements mature february 2006 exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions anticipate nonperformance january 2004 refinanced credit agreement consortium commercial banks “refinancing credit agreement” currently provides 175 million fiveyear revolving credit facility expiring january 2009 refinancing credit agreement may elect base rate interest rate based london interbank offered rates interest “libor” base rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 100 200 basis points depending consolidated total indebtedness cash flow ratios current margin 175 basis points refinancing credit agreement limits ability declare pay cash dividends prohibits us declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company financial covenants include minimum interest coverage ratio maximum total debt ebitda ratio minimum net worth measurement capital expenditures limitations company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report believe based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy cash requirements may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place extinguishment debt june 1995 company issued 100 million 9375 senior notes due 2005 “1995 notes” january 1999 company issued additional 75 million 9375 senior notes due 2005 “1999 notes” 1995 notes 1999 notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted noncash loss 19 million relating writeoff deferred debt issuance costs july 1998 subsidiary company entered 10 year 75 million debt obligation purchase building used company’s operations debt repaid september 2003 effects inflation general price inflation material impact company’s results operations labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause labor cost automatically increase inflation become significant contractual obligations offbalance sheet arrangements obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2003 1 unconditional purchase obligations purposes disclosure defined contractual obligation purchase utilities electricity natural gas excess 100000 annually 200000 total longterm purchase obligations purposes disclosure defined contractual obligation purchase raw materials supplies noncancelable excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments funding expected continue foreseeable future amounts ranges noted pension funding payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments funding expected continue foreseeable future amounts ranges noted estimate funding requirements historical benefit payments utilized assuming 22 percent rate inflation see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 scheduled principal repayments outstanding loan balances refinanced subsequent december 31 2003 disclosed year note 9 “notes consolidated financial statements” included part iv item 15 report 6 shareholder dividends subject approval company’s board directors currently annual rate 18 million 7 annual capital expenditure budget subject approval board directors 2004 budget amount 20 million approved february 2004 board directors meeting 8 company 196 million outstanding letters credit performance bid bond purposes expire 2004 9 guarantee debt former operating unit sold 2001 obligations operating activities entered material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 57 million 56 million 2003 2002 respectively benefits paid post retirement plans 21 million 19 million 2003 2002 respectively expect minimum levels funding continue future periods obligations financing activities cash requirements financing activities consist primarily longterm debt repayments dividend payments shareholders historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate 18 million annually 2001 sold subsidiary unit’s management team part sale guaranteed approximately 3 million bank debt buyer used purchase financing event purchaser cannot repay refinance debt without guarantee us subsidiary would returned us debt due 2004 reason believe debt repaid refinanced obligations investing activities historically typically spend approximately 1520 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control expect annual capital expenditures future within range 2004 two properties currently contract sale expect generate approximately 5 million sale proceeds transactions close forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia • demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • recovery industry particular orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates operating factors • supply disruptions • technical difficulties • changes operating conditions costs • successful introduction new products • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found note 2 “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition 2002 adopted new standard accounting goodwill intangible assets indefinite lives cumulative effect adjustment recognized january 1 2002 upon adoption new standard charge 617 million tax also 2002 amortization ceased goodwill intangible assets indefinite lives total amortization expense intangible assets recognized 34 million 2003 4 million 2002 additionally goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair values could realized actual transaction may differ used evaluate impairment goodwill allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence areas significant judgments estimates include liabilities expenses pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount management believe charge would material item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 11 countries 2006 34 company’s revenues came outside us 22 came outside north america management review outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management monitors company’s shortterm operational performance measures quality ontime delivery freight rail industry statistics carloadings orders new freight cars increased 2006 based preliminary figures deliveries new freight cars increased 9 orders increased 14 compared period 2005 result december 31 2006 backlog freight cars ordered 85826 sales freight segment benefited trend following quarterly freight car statistics past three years source railway supply institute management estimates figures roll forward period reflect minor adjustments subsequent period figures reported railway supply institute carloadings intermodal units originated increased past three years reflecting higher rail traffic ultimately better opportunities maintenance aftermarket sales company carloadings originated thousands intermodal units originated thousands source association american railroadsweekly rail traffic deliveries transit cars 738 918 years ended december 31 2006 2005 respectively deliveries locomotives 1244 1106 years ended december 31 2006 2005 respectively 2007 company expects conditions remain generally favorable freight rail passenger transit rail markets demand new locomotives expected slightly higher 2006 demand new freight cars expected slightly lower rail traffic volumes set record 2006 started slightly lower january 2007 due part weather conditions passenger transit rail market company believes increases ridership federal funding continue positive effect demand new equipment aftermarket parts addition company strong backlog transitrelated projects expected generate increased revenues 2007 beyond continue face many challenges including increased costs raw materials higher costs medical insurance premiums foreign currency fluctuations addition face general economic risks well risk customers could curtail spending new existing equipment risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks july 19 2006 board directors approved restructuring plan improve profitability efficiency certain business units part plan wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing wabtec recorded expenses 68 million pretax 2006 restructuring expenses result approval plan expenses comprised following components 12 million employee severance costs associated approximately 240 salaried hourly employees located wallaceburg stoney creek locations 22 million pension curtailment employees 29 million related asset impairments structures machinery equipment 541000 goodwill impairment specific wallaceburg facility december 31 2006 employees associated restructuring program terminated none severance paid severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees restructuring plan result additional charges 2007 primarily pensionrelated settlement charges pension funding subject regulatory review approval funding anticipated made 2007 results operations following table shows consolidated statements operations years indicated 2006 compared 2005 following table summarizes results operations period net sales increased 536 million 10876 million 2006 10340 million 2005 increase primarily related increased sales services radiator electronics business units 41 million increased sales contracts build locomotives 27 million increased revenues 22 million related higher industry freight car deliveries incremental sales related acquisitions consummated fourth quarter 10 million increased transit sales 6 million result increased spending transit authorities increases partially offset volume decreases 30 million due lower industry sales intermodal cars 21 million certain uk operations primarily related overhaul contracts company realize significant net sales improvement price increases foreign exchange net income 2006 848 million 173 per diluted share net income 2005 558 million 117 per diluted share part restructuring plan wabtec recognized 68 million pretax 2006 restructuring charges net income improved primarily due sales increases improvement total operating costs percentage sales lower interest expense 71 million reduced expense 17 million reduction overall effective income tax rate 2006 317 356 2005 result reversal previously established valuation allowances related deferred state tax assets offsetting improvements increase 59 million related stock based compensation expense net sales segment beginning 2006 company transferred certain operations freight transit groups reflect shift markets customers served operations prior period results adjusted comparability purposes following table shows company’s net sales business segment industry deliveries new freight cars 2006 increased 74943 units compared 68657 2005 transit group sales higher due increased commuter locomotive revenues gross profit gross profit increased 2968 million 2006 compared 2596 million 2005 gross profit dependent number factors including pricing sales volume product mix 2006 gross profit percentage sales 27 compared 25 2005 restructuring plan charges impacted gross margin 63 million recorded cost sales addition specific reserves transit related excess obsolete inventory 36 million also recorded cost sales 2006 gross profit improvement due variety factors including improved performance locomotive module contract profitable 2006 compared loss prior year remaining improvement due cost savings realized sourcing raw materials lower cost suppliers reduced labor costs continuing improvements manufacturing processes provision warranty expense 31 million higher 2006 compared 2005 negatively impacted gross profit part increase due 18 million reductions 2005 specific reserves related certain overhaul contracts transit door components established 2004 deemed longer necessary also specific reserves 14 million established 2006 bus door components north america operations overall warranty reserve increased december 31 2006 compared december 31 2005 12 million following table shows operating expenses operating expenses operating expenses increased 88 million 2006 compared 2005 expenses 154 153 sales 2006 2005 respectively increase primarily due increase 59 million 2006 related stockbased compensation expense well incremental costs associated higher sales volumes increase stockbased compensation expense 2006 primarily result 25 million expense related nonvested restricted stock granted 2006 incremental expense 18 million related incentive stock awards 13 million expense incurred stock options result adoption statement financial accounting standard sfas 123 revised 2004 “sharebased payment” sfas 123 r addition 2006 operating expenses included 657000 related 2006 acquisitions occurred fourth quarter income operations income operations totaled 1296 million 119 sales 2006 compared 1013 million 98 sales 2005 higher operating income resulted primarily higher sales improved operating performance 2006 interest expense net interest expense decreased 817 2006 compared 2005 primarily due company’s lower debt level 2006 higher interest income due improved cash balances expense net company recorded foreign exchange loss 11 million 33 million respectively 2006 2005 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate year ended december 31 2006 317 compared 356 year ended december 31 2005 lower effective rate 2006 primarily related reversal previously established valuation allowances deferred state tax assets net income net income 2006 increased 290 million compared 2005 increase due large part higher sales improved gross profit performance result continuing improvements manufacturing process 2005 compared 2004 following table summarizes results operations period net sales increased 212 million 822 million 2004 1034 million 2005 primarily result volume increases 85 million related increasing freight car deliveries strong demand locomotive components acquisition friction product assets rutgers rail spa “cofren” resulting additional sales 25 million incremental sales 48 million rampup locomotive module contract 2005 aftermarket parts sales also increased 53 million strong carloadings intermodal units originated company realize significant net sales improvement price increases foreign exchange net income 2005 558 million 117 per diluted share net income 2004 324 million 071 per diluted share increase net income primarily due increased sales net sales segment beginning 2006 company transferred certain operations freight transit group reflect shift markets customers served operations prior period results adjusted comparability purposes following table shows company’s net sales business segment industry deliveries new freight cars 2005 increased 68657 units compared 46292 2004 transit group sales slightly higher mostly due increased oem demand gross profit gross profit increased 2596 million 2005 compared 2052 million 2004 gross profit dependent number factors including pricing sales volume product mix increase gross profit primarily due increased sales related aftermarket sales increases volume increases freight car deliveries gross profit 41 million cofren acquisition first quarter 2005 decreased warranty expense 7 million positive factors offset reduced gross profit rampup locomotive modules contract 2 million certain discrete restructuring costs 31 million 2005 gross profit percentage sales 25 compared 25 2004 provision warranty expense 71 million lower prioryear positively impacted gross profit significant reason reduction due nonrecurring specific reserves established 2004 canadian transit door contracts certain electronic products overall warranty reserve decreased 2005 13 million claims paid related 2004 specific reserves discussed following table shows operating expenses operating expenses operating expenses increased 86 million 2005 compared 2004 operating expenses higher 2005 due addition cofren 1 million reserve note receivable considered uncollectible overall higher costs inflation sales activity 4 million year ended december 31 2004 included 32 million unfavorable litigation ruling getsgs settled 2006 percentage sales total operating expense declined 153 2005 182 2004 due company keeping operating expenses relatively consistent 2005 sales increased 26 income operations income operations totaled 1013 million 98 sales 2005 compared 554 million 67 sales 2004 higher operating income resulted primarily higher sales 2005 interest expense net interest expense decreased 247 2005 compared 2004 primarily due company’s lower debt level 2005 higher interest income expense net company recorded foreign exchange loss 33 million 12 million respectively 2005 2004 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 356 2005 2004 wabtec recorded 49 million tax benefit resolving certain tax issues prior years without benefit overall effective income tax rate 365 2004 2005 rate lower due increased income lower tax jurisdictions net income net income 2005 increased 233 million compared 2004 increase due higher sales liquidity capital resources liquidity provided primarily operating cash flow borrowings company’s unsecured credit facility consortium commercial banks “credit agreement” following summary selected cash flow information relevant data operating activities operating cash flow 2006 1510 million compared 843 million 2005 667 million increase result increased earnings well certain changes operating assets liabilities net income company increased 290 million result higher sales volumes gross profit accounts receivable increased cash flows 2006 992 million primarily result collection large milestone payments related longterm locomotive contracts 2006 negatively impacting operating cash flows 2006 use cash 461 million accrued liabilities customer deposits majority relate longterm locomotive contracts discussed also negatively impacting operating cash flows 93 million result increased inventory compared 2005 operating cash flow 2005 843 million compared 535 million 2004 308 million increase result increased earnings well certain changes operating assets liabilities net income company increased 234 million primarily result higher sales volume 2005 accrued income taxes increased operating cash flows 16 million 2005 due timing tax payments 2004 particular tax liabilities recognized 2003 liquidated 2004 accrued liabilities customer deposits generated operating cash flows 366 million prior year particular customer deposits certain locomotive contracts accounted majority increase net assets liabilities generated approximately 139 million cash related increasing liability balances related pensions post retirement healthcare long term incentive plan liabilities negatively impacting operating cash flows accounts receivable used operating cash 388 million accounts payable decreased using cash approximately 208 million accounts receivable increased result correspondingly higher sales 2005 accounts payable decreased company reduced trade payables investing activities 2006 2005 cash used investing activities 1048 million 576 million respectively 2006 acquired 100 stock schaefer equipment becorit 363 million 509 million respectively net cash received remaining use cash consisted almost entirely capital expenditures net disposals 2005 acquired assets rutgers rail spa 359 million net cash received remaining use cash consisted almost entirely capital expenditures net disposals capital expenditures continuing operations 209 million 227 million 193 million 2006 2005 2004 respectively majority capital expenditures periods relates upgrades replacement existing equipment financing activities 2006 cash used financing activities 18 million compared cash provided financing activities 278 million 2005 decrease relates reduced proceeds received related stock option exercises 2006 result overall decrease options exercised 2006 compared 2005 also july 31 2006 company’s board directors authorized repurchase 50 million company’s outstanding shares december 31 2006 company repurchased 673900 shares aggregate cost 189 million company realized proceeds 146 million 298 million exercise stock options 2006 2005 respectively 2004 long term debt reduced 401 million company also realized proceeds 228 million exercise stock options 2004 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities following table shows outstanding indebtedness december 31 2006 2005 revolving credit agreement term loan interest rates variable dependent market conditions cash balance december 31 2006 2005 1880 million 1414 million respectively refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 december 31 2006 company available bank borrowing capacity net 239 million letters credit approximately 1511million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement year ended december 31 2006 refinancing credit agreement may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place company entered amendment refinancing credit agreement february 2007 prior amendment refinancing credit agreement prohibited company making acquisitions past certain dollar limit without prior approval bank consortium refinancing credit agreement permits company complete acquisitions long certain financial parameters ratios met effects inflation general inflation material impact company’s results operations labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause labor cost automatically increase inflation become significant however higher costs metals reduced gross margin areas higher costs include medical benefits active retired employees contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2006 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 137 million pension plan investments 2007 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6 78 150 million senior notes due 2013 6 scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 19 million 8 annual capital expenditure budget subject approval board directors 2007 budget amount approved december 2006 board directors meeting 9 company 239 million outstanding letters credit performance bid bond purposes expire various dates 2010 obligations operating activities company entered 282 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 78 million 75 million 2006 2005 respectively benefits paid post retirement plans 22 million 27 million 2006 2005 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 19 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2006 initial value performance bonds issued company’s behalf 1033 million obligations investing activities company typically spends approximately 15 million 25 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia • demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectibility troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory description judgments uncertainties effect actual results differ assumptions goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed additional impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period description judgments uncertainties effect actual results differ assumptions income taxes global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts revenue recognized products shipped respective customers title passed price product determined longterm contracts revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 12 countries 2007 40 company’s revenues came customers outside us management review outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s shortterm operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotive freight cars growth us economy slowed 2007 led slight decrease rail traffic year deliveries new locomotives increased 10 year part due strong international demand usbuilt locomotives company expects demand new locomotives remain strong 2008 deliveries new freight cars decreased 15 2007 due part decrease rail traffic 20 company’s revenues directly related deliveries new freight cars dec 31 2007 industry backlog freight cars ordered 75860 compared 85826 end prior year north american transit rail industry primarily driven government spending ridership increased 8 2 respectively 2007 2008 company expects conditions remain generally favorable freight rail passenger transit rail markets demand new locomotives expected slightly higher 2007 demand new freight cars expected lower passenger transit rail market company believes increases ridership federal funding continue positive effect demand new equipment aftermarket parts addition company strong backlog transitrelated projects expected generate increased revenues 2008 beyond continue face many challenges including increased costs raw materials higher costs medical insurance premiums foreign currency fluctuations addition face general economic risks well risk customers could curtail spending new existing equipment risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing years ended december 31 2007 2006 wabtec recorded charges 36 million 68 million respectively total charges restructuring expenses recorded date 104 million comprised 29 million employee severance costs associated approximately 330 salaried hourly employees 41 million pension postretirement benefit curtailment employees 29 million related asset impairments structures machinery equipment 541000 goodwill impairment specific wallaceburg facility severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2007 12 million amount paid year ended december 31 2007 additional severance pension asset impairment charges 15 million recorded related canadian operations 276000 costs paid december 31 2007 results operations following table shows consolidated statements operations years indicated 2007 compared 2006 following table summarizes results operations period net sales increased 2725 million 13601 million 2007 10876 million 2006 increase primarily due internal growth increased sales 694 million locomotives 303 million refurbishing transit cars 381 million heat exchangers 206 million contracts related transit authorities 994 million acquisitions completed fourth quarter 2006 second quarter 2007 offsetting increases decrease 223 million freight segment primarily related lower industry deliveries freight cars company realize net sales improvement 227 million due foreign exchange net earnings mostly impacted foreign exchange net income 2007 1096 million 223 per diluted share net income 2006 848 million 173 per diluted share net income improved primarily due sales increases higher operating margins net sales segment following table shows company’s net sales business segment freight group sales increased 248 million 35 due increased sales heat exchangers 381 million sales 180 million acquisition completed fourth quarter 2006 net sales improvement 16 million due foreign exchange offsetting increases decreases 140 million locomotive component repair refurbishment services decreases 223 million primarily related lower industry deliveries freight cars transit group sales increased 2477 million 655 due increased commuter locomotive sales 834 million increased sales 417 million related refurbishment transit cars contracts related transit authorities 204 million sales 814 million acquisitions completed fourth quarter 2006 second quarter 2007 net sales improvement 211 million due foreign exchange gross profit gross profit increased 3696 million 2007 compared 2968 million 2006 gross profit dependent number factors including pricing sales volume product mix 2007 gross profit percentage sales 272 compared 273 2006 gross profit percentage flat due changing mix revenues freight transit margins tend lower freight offset ongoing efficiency cost saving initiatives 2007 restructuring plan expenses 55 million recorded cost sales 2007 gross profit percentage sales excluding charges would 276 2006 restructuring plan expenses 63 million recorded cost sales 2006 gross profit percentage sales excluding charges would 279 provision warranty expense 180000 less 2007 compared 2006 warranty reserve increased december 31 2007 compared december 31 2006 49 million due 47 million acquisition completed second quarter 2007 operating expenses following table shows operating expenses selling general administrative expenses increased 181 million 2007 compared 2006 mostly due acquisitions completed fourth quarter 2006 second quarter 2007 addition 2007 company recorded provision 44 million settlement bombardier see note 18 “notes condensed consolidated financial statements” engineering expenses increased 47 million 2007 compared 2006 mostly due acquisitions total operating expenses 140 153 sales 2007 2006 respectively income operations income operations totaled 1797 million 132 sales 2007 compared 1302 million 120 sales 2006 income operations improved primarily due sales increases higher operating margins interest expense net interest expense net increased 14 million 2007 compared 2006 primarily due company’s overall lower cash balances resulting lower interest income expense net company recorded foreign exchange expense 32 million 11 million respectively 2007 2006 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 366 317 2007 2006 respectively increase effective tax rate primarily result company’s 2007 adoption fin 48 well reversal certain valuation allowances 2006 approximately 31 million 53 million tax benefits recognized 2007 2006 respectively related reversal deferred tax valuation allowances net income net income 2007 increased 248 million compared 2006 net income improved primarily due sales increases higher operating margins 2006 compared 2005 following table summarizes results operations period net sales increased 536 million 10876 million 2006 10340 million 2005 increase primarily related increased sales services radiator electronics business units 41 million increased sales contracts build locomotives 27 million increased revenues 22 million related higher industry freight car deliveries incremental sales related acquisitions consummated fourth quarter 10 million increased transit sales 6 million result increased spending transit authorities increases partially offset volume decreases 30 million due lower industry sales intermodal cars 21 million certain uk operations primarily related overhaul contracts company realize significant net sales improvement price increases foreign exchange net income 2006 848 million 173 per diluted share net income 2005 558 million 117 per diluted share part restructuring plan wabtec recognized 68 million pretax 2006 restructuring charges net income improved primarily due sales increases improvement total operating costs percentage sales lower interest expense 71 million reduced expense 17 million reduction overall effective income tax rate 2006 317 356 2005 result reversal previously established valuation allowances related deferred state tax assets offsetting improvements increase 59 million related stock based compensation expense net sales segment following table shows company’s net sales business segment freight group sales increased 323 million 48 due increased sales heat exchangers 201 million increased sales electronics 200 million increased sales 220 million related higher orders freight car customers sales 67 million acquisition completed fourth quarter 2006 offsetting increases volume decreases 30 million due lower industry sales intermodal cars transit group sales increased 213 million 60 due increased sales contracts build locomotives 27 million contracts related transit authorities 99 million offsetting increases decrease sales 160 million certain uk operations primarily related overhaul contracts gross profit gross profit increased 2968 million 2006 compared 2596 million 2005 gross profit dependent number factors including pricing sales volume product mix 2006 gross profit percentage sales 27 compared 25 2005 restructuring plan charges impacted gross margin 63 million recorded cost sales addition specific reserves transit related excess obsolete inventory 36 million also recorded cost sales 2006 gross profit improvement due variety factors including improved performance locomotive module contract profitable 2006 compared loss prior year remaining improvement due cost savings realized sourcing raw materials lower cost suppliers reduced labor costs continuing improvements manufacturing processes provision warranty expense 31 million higher 2006 compared 2005 negatively impacted gross profit part increase due 18 million 2005 benefits reduction specific reserves certain overhaul contracts transit door components deemed longer necessary also specific reserves 14 million established 2006 bus door components north america operations overall warranty reserve increased december 31 2006 compared december 31 2005 12 million following table shows operating expenses operating expenses operating expenses increased 89 million 2006 compared 2005 expenses 153 sales 2006 2005 increase primarily due increase 59 million 2006 related stockbased compensation expense well incremental costs associated higher sales volumes increase stockbased compensation expense 2006 primarily result adoption statement financial accounting standard sfas 123 revised 2004 “sharebased payment” sfas 123 r addition 2006 operating expenses included 657000 related 2006 acquisitions occurred fourth quarter income operations income operations totaled 1302 million 120 sales 2006 compared 1019 million 99 sales 2005 higher operating income resulted primarily higher sales improved operating performance 2006 interest expense net interest expense decreased 767 2006 compared 2005 primarily due company’s lower debt level 2006 higher interest income due improved cash balances expense net company recorded foreign exchange loss 11 million 33 million respectively 2006 2005 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate year ended december 31 2006 317 compared 356 year ended december 31 2005 lower effective rate 2006 primarily related reversal previously established valuation allowances deferred state tax assets net income net income 2006 increased 290 million compared 2005 increase due large part higher sales improved gross profit performance result continuing improvements manufacturing process liquidity capital resources liquidity provided primarily operating cash flow borrowings company’s unsecured credit facility consortium commercial banks “credit agreement” following summary selected cash flow information relevant data operating activities cash provided operations 2007 1425 million compared 1510 million 2006 85 million decrease result increased earnings offset certain changes operating assets liabilities net income company increased 248 million primarily result increased sales higher operating margins accounts receivable decreased operating cash flows 772 million due large customer receivables collected certain locomotive contracts 2006 accounts payable provided cash 401 million due increased purchases new businesses accrued liabilities used cash 93 million result applying customer deposits customer contract revenue 2007 assets liabilities used cash 782000 operating cash flow 2006 1510 million compared 843 million 2005 667 million increase result increased earnings well certain changes operating assets liabilities net income company increased 290 million result higher sales volumes gross profit accounts receivable increased cash flows 2006 992 million primarily result collection large milestone payments related longterm locomotive contracts 2006 negatively impacting operating cash flows 2006 use cash 461 million accrued liabilities customer deposits majority relate longterm locomotive contracts discussed also negatively impacting operating cash flows 93 million result increased inventory compared 2005 investing activities 2007 2006 cash used investing activities 935 million 1048 million respectively 2007 wabtec acquired 100 stock ricon corporation 736 million net cash received 2006 wabtec acquired 100 stock schaefer equipment becorit 363 million 509 million respectively net cash received 2005 wabtec acquired assets rutgers rail spa 359 million net cash received capital expenditures 204 million 209 million 227 million 2007 2006 2005 respectively 2006 company sold noncore division 14 million financing activities 2007 cash used financing activities 130 million included 75 million proceeds exercise stock options benefit plan activity offset 19 million dividend payments 179 million repurchase 509800 shares stock 2006 cash used financing activities 18 million compared cash provided financing activities 278 million 2005 following table shows outstanding indebtedness december 31 2007 2006 cash balance december 31 2007 2006 2347 million 1880 million respectively refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 company entered amendment refinancing credit agreement february 2007 permits company complete acquisitions without prior approval bank consortium long certain financial parameters ratios met december 31 2007 company available bank borrowing capacity net 591 million letters credit approximately 1159 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement 2007 2006 refinancing credit agreement company may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effects inflation general inflation material impact company’s results operations labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause labor cost automatically increase inflation become significant however higher costs metals reduced gross margin areas higher costs include medical benefits active certain retired employees contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2007 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 67 million pension plan investments 2008 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6 78 150 million senior notes due 2013 6 scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 19 million 8 annual capital expenditure budget subject approval board directors 2008 budget amount approved december 2007 board directors meeting 9 company 591 million outstanding letters credit performance bid bond purposes expire various dates 2010 table reflect uncertain tax positions 172 million timing uncertain except 509000 may become payable 2008 refer note 11 consolidated financial statements additional information uncertain tax positions obligations operating activities company entered 533 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 104 million 78 million 2007 2006 respectively benefits paid post retirement plans 22 million 2007 2006 obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 19 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2007 initial value performance bonds issued company’s behalf 1051 million obligations investing activities company typically spends approximately 15 million 25 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia • demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested use combination guideline public company market approach management considers historical experience available information description judgments uncertainties effect actual results differ assumptions impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed additional impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period income taxes global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance statement financial accounting standards 109 “accounting income taxes” financial accounting standards board interpretation 48 “accounting uncertainty income taxes” “fin 48” estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets 2007 company adopted fin 48 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions see note 11 consolidated financial statements additional analysis management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description judgments uncertainties effect actual results differ assumptions revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined longterm contracts revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 104 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 16 countries 2008 41 company’s revenues came customers outside us management review outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s shortterm operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotive freight cars growth us economy slowed 2008 led decrease rail traffic year deliveries new locomotives increased 25 year part due strong international demand usbuilt locomotives deliveries new freight cars decreased 50 2008 due part slowing economic conditions resulting decrease rail traffic 20 company’s revenues directly related deliveries new freight cars december 31 2008 industry backlog freight cars ordered 31921 compared 75860 end prior year north american transit rail industry primarily driven government spending ridership increased 8 5 respectively 2008 february 2009 us federal government passed new spending legislation designed stimulate us economy 789 billion spending package 20 billion spent freight passenger transportation follows 84 billion public transportation 8 billion highspeed rail 15 billion discretionary intermodal projects 13 billion amtrak majority money spent september 2010 wabtec expects benefit additional spending transit authorities invest expansion new equipment related projects 2009 company expects conditions slow freight rail remain generally stable passenger transit rail markets demand new freight cars expected lower passenger transit rail market company believes increases ridership federal funding continue positive effect demand new equipment aftermarket parts addition company strong backlog transitrelated projects expected generate increased revenues 2009 response current market conditions wabtec expects take certain actions reduce costs including plant consolidations work force reductions general spending cuts management believes actions affect company’s ability continue invest strategic growth initiatives 2009 beyond continue face many challenges including weaker economy higher costs medical insurance premiums foreign currency fluctuations unfavorable general economic market conditions united states internationally could negative impact sales operations extent factors result continued instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing years ended december 31 2008 2007 2006 wabtec recorded charges 46 million 36 million 68 million respectively year ended december 31 2007 additional severance pension asset impairment charges 15 million recorded related canadian operations costs paid december 31 2008 total charges restructuring expenses recorded date 165 million comprised 57 million employee severance costs associated approximately 400 salaried hourly employees 55 million pension postretirement benefit curtailment employees 48 million related asset impairments structures machinery equipment 541000 goodwill impairment severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2008 39 million amount paid results operations following table shows consolidated statements operations years indicated 2008 compared 2007 following table summarizes results operations period net sales increased 2147 million 15748 million 2008 13601 million 2007 increase primarily due internal growth increased sales 553 million brake products 368 million contracts related transit authorities 218 million remanufacturing overhaul build locomotives 166 million heat exchangers sales related acquisitions also contributed 593 million increase sales related international expansion also contributed 18 million increase offsetting increases company realize net sales decrease 122 million due foreign exchange net earnings mostly impacted foreign exchange net income 2008 1306 million 267 per diluted share net income 2007 1096 million 223 per diluted share net income improved primarily due sales increases net sales segment following table shows company’s net sales business segment freight group sales increased 394 million 54 due increased sales international expansion 18 million increased sales heat exchangers 166 million sales 112 million aftermarket brake products sales 111 million acquisition completed fourth quarter 2008 offsetting increases decreases 209 million locomotive component repair refurbishment services transit group sales increased 1753 million 28 due increased sales brake products 521 million contracts related transit authorities 376 million increased sales 218 million related refurbishment transit cars sales 48 million full year results acquisitions completed 2007 acquisitions completed second quarter 2008 gross profit gross profit increased 4272 million 2008 compared 3696 million 2007 gross profit dependent number factors including pricing sales volume product mix 2008 gross profit percentage sales 271 compared 272 2007 gross profit percentage flat due changing mix revenues freight transit margins tend lower freight offset ongoing efficiency cost saving initiatives provision warranty expense generally established specific losses along historical estimates customer claims percentage sales provision warranty expense 107 2008 compared 2007 increased sales particularly large transit authority contracts ramped 2008 warranty reserve increased december 31 2008 compared december 31 2007 84 million due 4 million acquisitions completed 2008 primarily customer claims transit authority contracts operating expenses following table shows operating expenses selling general administrative expenses increased 222 million 2008 compared 2007 mostly due acquisitions completed fourth quarter 2008 engineering expenses increased 15 million 2008 compared 2007 mostly due acquisitions amortization expense increased 10 million due acquisitions total operating expenses 136 140 sales 2008 2007 respectively income operations income operations totaled 2125 million 135 sales 2008 compared 1797 million 132 sales 2007 income operations improved primarily due sales increases interest expense net interest expense net increased 49 million 2008 compared 2007 primarily due company’s overall lower cash balances resulting lower interest income acquisition financing incurred fourth quarter connection acquisition standard car truck expense net expense net decreased 39 million 2008 compared 2007 company recorded foreign exchange expense 300000 32 million respectively 2008 2007 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 361 366 2008 2007 respectively decrease effective tax rate primarily result 10 million net tax benefit recognized 2008 due expiration statutory review periods current examinations various tax jurisdictions net income net income 2008 increased 210 million compared 2007 net income improved primarily due sales increases 2007 compared 2006 following table summarizes results operations period net sales increased 2725 million 13601 million 2007 10876 million 2006 increase primarily due internal growth increased sales 694 million locomotives 303 million refurbishing transit cars 381 million heat exchangers 206 million contracts related transit authorities 994 million acquisitions completed fourth quarter 2006 second quarter 2007 offsetting increases decrease 223 million primarily related lower industry deliveries freight cars company realize net sales improvement 227 million due foreign exchange net earnings mostly impacted foreign exchange net income 2007 1096 million 223 per diluted share net income 2006 848 million 173 per diluted share net income improved primarily due sales increases higher operating margins net sales segment following table shows company’s net sales business segment freight group sales increased 248 million 35 due increased sales heat exchangers 381 million sales 180 million acquisition completed fourth quarter 2006 net sales improvement 16 million due foreign exchange offsetting increases decreases 140 million locomotive component repair refurbishment services decreases 223 million primarily related lower industry deliveries freight cars transit group sales increased 2477 million 655 due increased commuter locomotive sales 834 million increased sales 417 million related refurbishment transit cars contracts related transit authorities 204 million sales 814 million acquisitions completed fourth quarter 2006 second quarter 2007 net sales improvement 211 million due foreign exchange gross profit gross profit increased 3696 million 2007 compared 2968 million 2006 gross profit dependent number factors including pricing sales volume product mix 2007 gross profit percentage sales 272 compared 273 2006 gross profit percentage flat due changing mix revenues freight transit margins tend lower freight offset ongoing efficiency cost saving initiatives 2007 restructuring plan expenses 55 million recorded cost sales 2007 gross profit percentage sales excluding charges would 276 2006 restructuring plan expenses 63 million recorded cost sales 2006 gross profit percentage sales excluding charges would 279 provision warranty expense 180000 less 2007 compared 2006 warranty reserve increased december 31 2007 compared december 31 2006 49 million due 47 million acquisition completed second quarter 2007 operating expenses following table shows operating expenses selling general administrative expenses increased 181 million 2007 compared 2006 mostly due acquisitions completed fourth quarter 2006 second quarter 2007 addition 2007 company recorded provision 44 million settlement bombardier see note 19 “notes condensed consolidated financial statements” engineering expenses increased 47 million 2007 compared 2006 mostly due acquisitions total operating expenses 140 153 sales 2007 2006 respectively income operations income operations totaled 1797 million 132 sales 2007 compared 1302 million 120 sales 2006 income operations improved primarily due sales increases higher operating margins interest expense net interest expense net increased 14 million 2007 compared 2006 primarily due company’s overall lower cash balances resulting lower interest income expense net expense net increased 22 million 2007 compared 2006 company recorded foreign exchange expense 32 million 11 million respectively 2007 2006 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 366 317 2007 2006 respectively increase effective tax rate primarily result company’s 2007 adoption fin 48 well reversal certain valuation allowances 2006 approximately 31 million 53 million tax benefits recognized 2007 2006 respectively related reversal deferred tax valuation allowances net income net income 2007 increased 248 million compared 2006 net income improved primarily due sales increases higher operating margins liquidity capital resources liquidity provided primarily operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2008 1594 million compared 1425 million 2007 169 million increase result increased earnings offset certain changes operating assets liabilities net income company increased 210 million primarily result increased sales although account receivable continued increase due higher overall sales increase less increase 2007 resulted 108 million improvement inventories increased 2008 284 million 2007 due higher inventory hand large contracts requirements overall higher sales activity accounts payable increased less 2008 compared 2007 184 million resulting less cash generated customer deposits accruals increased compared 2007 resulting cash increase 358 million cash generated due collection large customer deposits certain long term contracts assets liabilities including accrued income taxes used cash 91 million compared 2007 cash provided operations 2007 1425 million compared 1510 million 2006 85 million decrease result increased earnings offset certain changes operating assets liabilities net income company increased 248 million primarily result increased sales higher operating margins accounts receivable decreased operating cash flows 772 million due large customer receivables collected certain locomotive contracts 2006 accounts payable provided cash 401 million due increased purchases new businesses accrued liabilities used cash 93 million result applying customer deposits customer contract revenue 2007 assets liabilities used cash 782000 investing activities 2008 2007 cash used investing activities 4174 million 935 million respectively 2008 wabtec acquired 100 stock poli spa standard car truck 823 million 3029 million respectively net cash received investments include 84 million certain operations china 45 million certain assets support train management business 2007 wabtec acquired 100 stock ricon corporation 736 million net cash received 2006 wabtec acquired 100 stock schaefer equipment becorit 363 million 509 million respectively net cash received capital expenditures 197 million 204 million 209 million 2008 2007 2006 respectively 2006 company sold noncore division 14 million financing activities 2008 cash provided financing activities 1897 million included 2360 million borrowings new credit facility offset 458 million wabtec stock repurchases 2007 cash used financing activities 130 million compared cash used financing activities 18 million 2006 following table shows outstanding indebtedness december 31 2008 2007 cash balance december 31 2008 2007 1418 million 2347 million respectively 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2008 weighted average interest rate company’s variable rate debt 332 december 31 2008 company available bank borrowing capacity net 573 million letters credit approximately 2427 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points initial alternate rate margin 175 basis points 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement extended expiration agreement company entered another amendment refinancing credit agreement february 2007 permitted company complete acquisitions without prior approval bank consortium long certain financial parameters ratios met refinancing credit agreement variable interest rates indexed certain indices company may elected base interest rate interest rate based libor base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios margin 625 basis points company borrow refinancing credit agreement 2007 2006 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2008 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 91 million pension plan investments 2009 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6 78 150 million senior notes due 2013 interest payments term loan facility revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 19 million 8 annual capital expenditure budget subject approval board directors 2009 budget amount approved december 2008 board directors meeting 9 company 573 million outstanding letters credit performance bid bond purposes expire various dates 2011 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 171 million timing uncertain except 484000 may become payable 2009 refer note 11 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 367 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 148 million 104 million 2008 2007 respectively benefits paid post retirement plans 20 million 22 million 2008 2007 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 19 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2008 initial value performance bonds issued company’s behalf 1901 million obligations investing activities company typically spends approximately 20 million 30 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 19 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory description judgments uncertainties effect actual results differ assumptions goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed additional impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period description judgments uncertainties effect actual results differ assumptions income taxes global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance statement financial accounting standards 109 “accounting income taxes” financial accounting standards board interpretation 48 “accounting uncertainty income taxes” “fin 48” estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets fin 48 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined longterm contracts revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts description judgments uncertainties effect actual results differ assumptions certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well approximately 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 17 countries 2009 40 company’s revenues came customers outside us management review outlook wabtec’s longterm financial goals generate cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s shortterm operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotives freight cars 2009 us economy general company specifically impacted global economic recession year particularly true company’s freight segment us example freight revenue tonmiles carloadings 151 161 respectively although improve slightly second half year rail traffic significantly railroads put portion locomotive freight car fleets storage reduced purchases new equipment result 2009 deliveries new freight locomotives decreased 50 deliveries new freight cars decreased 65 although less 15 company’s revenues directly related deliveries new freight locomotives freight cars decline markets material impact company’s financial results mitigate impact wabtec initiated series restructuring actions included plant consolidations work force reduction cost reduction efforts north american transit rail industry driven government spending ridership spending increased 6 2009 ridership decreased 4 due economy february 2009 us federal government passed new spending legislation designed stimulate us economy 789 billion spending package 20 billion spent freight passenger transportation follows 84 billion public transportation 8 billion highspeed rail 15 billion discretionary intermodal projects 13 billion amtrak wabtec expects benefit additional spending transit authorities invest expansion new equipment related projects 2010 company expects conditions remain challenging freight rail market generally stable passenger transit market demand new freight cars locomotives expected lower due railroads’ amount surplus equipment passenger transit market company believes increases federal funding stable ridership continue beneficial effect demand new equipment aftermarket parts response current market conditions wabtec may continue take certain actions reduce costs including plant consolidations work force reductions general spending cuts management believes actions affect company’s ability continue invest strategic growth initiatives 2010 beyond unfavorable general economic market conditions united states internationally could negative impact sales operations extent economy slow recover results continued instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks wabtec downsized canadian operations moving certain products lowercost facilities outsourcing freight segment wabtec recorded charges 46 million 36 million years ended december 31 2008 2007 respectively charges operations restructuring plan recorded year ended december 31 2009 operations cumulative expenses restructuring expenses recorded since 2006 165 million comprised 57 million employee severance costs approximately 400 employees 55 million pension postretirement benefit curtailment employees 53 million related fixed asset goodwill impairment goodwill impairment recorded amortization expense charges recorded cost sales severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2009 42 million amount paid results operations following table shows consolidated statements operations years indicated 2009 compared 2008 following table summarizes results operations period net sales decreased 1732 million 14016 million 2009 15748 million 2008 decrease due recession experienced previous twelve months contributed lower rail traffic lower freight group sales related acquisitions 1149 million partially offset decrease company realized net sales reduction 351 million due unfavorable effects foreign exchange net earnings generally impacted foreign exchange net income 2009 1151 million 239 per diluted share net income 2008 1306 million 266 per diluted share net income decreased due lower freight group sales severance costs related downsizing consolidation actions partially offset costsaving initiatives lower income taxes net income also decreased 39 million royalty charge included selling general administrative expenses related final award arbitration proceeding faiveley transport malmo ab wabtec net sales segment following table shows company’s net sales business segment freight group sales decreased 1852 million 239 due lower sales 1457 million specialty products 1073 million brake products 215 million remanufacturing overhaul manufacturing locomotives offsetting reductions increase sales 1031 million acquisitions transit group sales increased 120 million 15 due increased sales 171 million brake products 250 million transit related products 118 million acquisitions offsetting increases decrease sales 100 million remanufacturing overhaul build locomotives transit group net sales reduced 309 million due unfavorable effects foreign exchange sales mentioned gross profit gross profit decreased 3933 million 2009 compared 4272 million 2008 gross profit dependent number factors including pricing sales volume product mix 2009 gross profit percentage sales 281 compared 271 2008 gross profit percentage increased due realized cost savings downsizing consolidation actions increased gross profit transit segment due efficiencies realized certain longterm contracts provision warranty expense generally established specific losses along historical estimates customer claims percentage sales provision warranty expense 34 2009 compared 2008 due primarily specific reserves certain transit products warranty reserve decreased december 31 2009 compared december 31 2008 15 million due claims paid certain freight products operating expenses following table shows operating expenses selling general administrative expenses decreased 96 million 2009 compared 2008 due costsaving initiatives partially offset increased expenses acquisitions engineering expenses increased 34 million 2009 compared 2008 due acquisitions offset partially costsaving initiatives amortization expense increased 48 million due acquisitions 2009 company sold facility net cash proceeds 36 million unrelated third party certain portions building leased back transaction resulted gain 21 million deferred gain 06 million deferred gain recognized five years total operating expenses 152 136 sales 2009 2008 respectively income operations income operations totaled 1800 million 128 sales 2009 compared 2125 million 135 sales 2008 income operations decreased due lower freight group sales severance costs related downsizing consolidation actions royalty payment faiveley transport malmo ab partially offset costsaving initiatives interest expense net interest expense net increased 81 million 2009 compared 2008 due acquisition financing expense net expense net decreased 03 million 2009 compared 2008 company recorded foreign exchange expense 13 million due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings offset 10 million miscellaneous income taxes effective income tax rate 296 361 2009 2008 respectively decrease effective tax rate primarily due settlement examinations various taxing jurisdictions 2009 net income net income 2009 decreased 155 million compared 2008 decrease net income due primarily lower sales 2008 compared 2007 following table summarizes results operations period net sales increased 2147 million 15748 million 2008 13601 million 2007 increase due internal growth increased sales 553 million brake products 368 million contracts related transit authorities 218 million remanufacturing overhaul build locomotives 166 million heat exchangers sales related acquisitions also contributed 593 million increase sales related international expansion also contributed 18 million increase offsetting increases company realize net sales decrease 122 million due foreign exchange net earnings mostly impacted foreign exchange net income 2008 1306 million 266 per diluted share net income 2007 1096 million 224 per diluted share net income improved primarily due sales increases net sales segment following table shows company’s net sales business segment freight group sales increased 394 million 54 due increased sales international expansion 18 million increased sales heat exchangers 166 million sales 112 million aftermarket brake products sales 111 million acquisition completed fourth quarter 2008 offsetting increases decreases 209 million locomotive component repair refurbishment services transit group sales increased 1753 million 28 due increased sales brake products 521 million contracts related transit authorities 376 million increased sales 218 million related refurbishment transit cars sales 48 million full year results acquisitions completed 2007 acquisitions completed second quarter 2008 gross profit gross profit increased 4272 million 2008 compared 3696 million 2007 gross profit dependent number factors including pricing sales volume product mix 2008 gross profit percentage sales 271 compared 272 2007 gross profit percentage flat due changing mix revenues freight transit margins tend lower freight offset ongoing efficiency cost saving initiatives provision warranty expense generally established specific losses along historical estimates customer claims percentage sales provision warranty expense 107 2008 compared 2007 increased sales particularly large transit authority contracts ramped 2008 warranty reserve increased december 31 2008 compared december 31 2007 84 million due 4 million acquisitions completed 2008 primarily customer claims transit authority contracts operating expenses following table shows operating expenses selling general administrative expenses increased 222 million 2008 compared 2007 mostly due acquisitions completed fourth quarter 2008 engineering expenses increased 15 million 2008 compared 2007 mostly due acquisitions amortization expense increased 10 million due acquisitions total operating expenses 136 140 sales 2008 2007 respectively income operations income operations totaled 2125 million 135 sales 2008 compared 1797 million 132 sales 2007 income operations improved primarily due sales increases interest expense net interest expense net increased 49 million 2008 compared 2007 primarily due company’s overall lower cash balances resulting lower interest income acquisition financing incurred fourth quarter connection acquisition standard car truck expense net expense net decreased 39 million 2008 compared 2007 company recorded foreign exchange expense 399000 32 million respectively 2008 2007 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 361 366 2008 2007 respectively decrease effective tax rate primarily result 10 million net tax benefit recognized 2008 due expiration statutory review periods current examinations various tax jurisdictions net income net income 2008 increased 210 million compared 2007 net income improved primarily due sales increases liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2009 1605 million compared 1594 million 2008 11 million increase cash provided operations resulted net decrease working capital offset lower net income decrease accounts receivables resulted improvement 1014 million decrease inventories resulted improvement 761 million accounts payable used cash 625 million due reduction purchasing changes result overall reduced volume sales accrued liabilities customer deposits used cash 877 million due reduction customer deposits contracts assets liabilities including accrued income taxes used cash 64 million net income company decreased 155 million primarily result decreased sales due economic recession cash provided operations 2008 1594 million compared 1425 million 2007 169 million increase result increased earnings offset certain changes operating assets liabilities net income company increased 210 million primarily result increased sales although account receivable continued increase due higher overall sales increase less increase 2007 resulted 108 million improvement inventories increased 2008 284 million 2007 due higher inventory hand large contracts requirements overall higher sales activity accounts payable increased less 2008 compared 2007 184 million resulting less cash generated customer deposits accruals increased compared 2007 resulting cash increase 358 million cash generated due collection large customer deposits certain long term contracts assets liabilities including accrued income taxes used cash 91 million compared 2007 investing activities 2009 2008 cash used investing activities 1152 million 4174 million respectively 2009 wabtec acquired unifin international lp affiliate cardinal pumps exchangers inc 929 million net cash received 2009 company also paid 47 million part working capital settlement poli acquisition 34 million acquire certain assets 2009 company sold facility net cash proceeds 36 million unrelated third party 2008 wabtec acquired 100 stock poli spa standard car truck 823 million 3029 million respectively net cash received investments include 84 million certain operations china 45 million certain assets support train management business 2007 wabtec acquired 100 stock ricon corporation 736 million net cash received capital expenditures 183 million 197 million 197 million 2009 2008 2007 respectively financing activities 2009 cash used financing activities 130 million included 1975 million proceeds debt 1625 million repayments debt revolving credit facility 308 million debt repayments term loan debt 19 million dividend payments 197 million wabtec stock repurchases 2008 cash provided financing activities 1897 million included 2360 million borrowings new credit facility offset 458 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2009 2008 cash balance december 31 2009 2008 1887 million 1418 million respectively 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2009 weighted average interest rate company’s variable rate debt 149 december 31 2009 company available bank borrowing capacity net 286 million letters credit approximately 2004 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios base rate margin zero basis points initial alternate rate margin 125 basis points reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract december 31 2009 notional value interest rate swap outstanding 925 million effectively changed company’s interest rate bank debt december 31 2009 variable rate fixed rate 184 interest rate swap agreement matures january 2010 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution company anticipate nonperformance 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2009 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 94 million pension plan investments 2010 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6875 150 million senior notes due 2013 interest payments term loan facility revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 19 million 8 annual capital expenditure budget subject approval board directors 2010 budget amount approved december 2009 board directors meeting 9 company 286 million outstanding letters credit performance bid bond purposes expire various dates 2013 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 100 million timing uncertain except 589000 may become payable 2010 refer note 11 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 366 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 160 million 148 million 2009 2008 respectively benefits paid post retirement plans 19 million 20 million 2009 2008 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 19 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2009 initial value performance bonds issued company’s behalf 1539 million obligations investing activities company typically spends approximately 20 million 30 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range recent accounting pronouncements information regarding impact certain recent accounting pronouncements consolidated financial statements see note 2 “notes consolidated financial statements” included part iv item 15 report forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 19 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost description judgments uncertainties effect actual results differ assumptions inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level company’s reporting units reportable segments evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes fourth quarter 2009 company used discount rate reporting units ranging 14 20 terminal growth 3 difference discount rates based underlying markets risks associated reporting unit management considers historical experience available information time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed additional impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses description judgments uncertainties effect actual results differ assumptions accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period income taxes wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance asc605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles description judgments uncertainties effect actual results differ assumptions company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined longterm contracts revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 19 countries 2012 50 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec performance system increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity north america freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotives freight cars aar compiles statistics gauge level activity freight rail industry including revenue tonmiles carloadings generally referred “rail traffic” 2012 us revenue tonmiles decreased 24 carloadings decreased 31 intermodal carloadings increased 32 generally reflecting sluggish economy reduced coal traffic anticipation increased future demand railroads increased purchases new locomotives freight cars favorable effect company’s freight segment 2013 expect demand new locomotives remain 2012 expect demand new freight cars slightly lower future demand depends largely strength overall economy rail traffic volumes 2008 us federal government enacted rail safety bill mandates use ptc technology includes onboard locomotive computer related software majority locomotives track us electronic train management system® leading supplier onboard train control equipment working us class railroads commuter rail authorities industry suppliers implement technology december 31 2015 deadline set rail safety bill part new surface transportation funding bill house committee proposed extending deadline extension deadline could affect rate industry spending technology ptc revenue 215 million 2012 north american transit rail industry driven government spending ridership 2012 us congress passed new twoyear funding bill maintained spending level 107 billion prior years ridership provides fare box revenues transit authorities use funds along state local money primarily equipment system maintenance based preliminary figures american public transportation association ridership us transit vehicles increased 25 2012 2 increase 2011 spending 2013 expected remain current levels 2012 market conditions mixed north america freight rail market demand new freight cars locomotives higher revenue tonmiles carloadings lower 2012 us revenue tonmiles decreased 24 carloadings decreased 31 intermodal carloadings increased 32 generally reflecting sluggish economy reduced coal traffic passenger transit market 2012 company believes existing levels federal funding ridership resulted consistent demand new equipment aftermarket parts compared previous years however government entities levels facing budget issues could negative effect demand company’s products services wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america europe majority rail system serves passenger transit market larger transit market us presence uk germany italy positioned company take advantage market asiapacific growth market various joint ventures direct exports china positioned company take advantage growth economic growth australia area expansion company commodity suppliers use products meet demands regional customers company delivering ptc contract expanding locations completed two acquisitions brazil allowing us increase sales market 2013 beyond general economic market conditions united states internationally could impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2012 compared 2011 following table summarizes results operations period following table shows major components change sales 2012 2011 net sales increased 4235 million 23911 million 2012 19676 million 2011 increase due higher sales 1539 million specialty products electronics increased demand freight original equipment rail products positive train control electronics aftermarket products 1383 million acquisitions 977 million remanufacturing overhaul build sales increased demand freight original equipment locomotives aftermarket services locomotives 408 million brake products sales due higher demand original equipment brakes 86 million products company net sales decreased 199 million income operations decreased 24 million due unfavorable effects foreign exchange net income 2012 2517 million 519 per diluted share net income increased due higher sales volume freight segment sales increased 2919 million 241 due higher sales 1329 million specialty products electronics primarily resulting increased demand original equipment rail products positive train control electronics aftermarket rail products 657 million acquisitions 461 million increased demand freight original equipment locomotives aftermarket services locomotives 414 million brake products 77 million products freight segment net sales decreased 20 million due unfavorable effects foreign exchange transit segment sales increased 1316 million 174 due 726 million acquisitions higher sales 516 million remanufacturing overhaul build increased demand overhaul aftermarket services 209 million higher specialty products electronics sales increased demand transit positive train control electronics 42 million transit products transit segment net sales decreased 179 million due unfavorable effects foreign exchange cost sales gross profit cost sales increased 2993 million 16965 million 2012 13972 million 2011 cost sales percentage sales 710 2012 2011 2012 raw material costs decreased percentage sales approximately 43 2012 44 2011 labor costs increased percentage sales approximately 12 2012 11 2011 overhead costs percentage sales approximately 16 2012 2011 freight segment raw material costs decreased percentage sales approximately 43 2012 44 2011 freight segment labor costs increased percentage sales approximately 11 2012 10 2011 overhead costs percentage sales approximately 15 2012 2011 transit segment raw material costs percentage sales approximately 43 2012 2011 transit segment labor costs increased percentage sales approximately 13 2012 12 2011 overhead costs percentage sales 19 2012 2011 general raw material costs percentage sales decreased labor costs percentage sales increased reflecting higher mix revenue generated positive train control electronics aftermarket services lower raw material component higher labor component cost sales included costs sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 31 million higher 2012 compared 2011 due increased sales increased provisions certain transit contracts percentage sales warranty expense 10 2012 2011 gross profit increased 6946 million 2012 compared 5704 million 2011 due higher sales volume reasons discussed 2012 2011 gross profit percentage sales 290 operating expenses following table shows operating expenses selling general administrative expenses decreased 18 million 2012 compared 2011 prior year included 181 million charge court ruling recorded second quarter 2011and decrease 30 million corporate expenses offset 180 million expenses acquisitions 17 million increase incentive noncash compensation engineering expense increased 41 million 2012 compared 2011 company focused engineering resources product development costs related engineering specific customer contracts included cost sales amortization expense increased 2012 compared 2011 due amortization intangibles 2012 associated acquisitions total operating expenses 126 152 sales 2012 2011 respectively following table shows segment operating expenses segment operating expenses consist specific segment costs sales marketing information technology insurance audit tax fees allocated corporate costs segment specific discrete charges corporate costs allocated freight transit segments based segment revenues certain corporate departmental expenses allocated freight segment operating expenses increased 103 million 2012 compared 2011 64 million expenses acquisitions increase 07 million expenses allocated operating segments increase 32 million selling general administrative expense supporting higher sales volume freight segment operating expenses 105 121 sales 2012 2011 respectively transit segment operating expenses increased 134 million 2012 compared 2011 131 million expenses acquisitions benefit 24 million settlement related prior acquisition recorded second quarter 2011 increase 06 million expense allocated operating segments partially offset decrease 27 million selling general administrative expense cost saving initiatives transit segment operating expenses 144 151 sales 2012 2011 respectively corporate nonallocated operating expenses decreased 211 million 2012 compared 2011 charge court ruling discussed decreases nonallocated departmental expenses income operations income operations totaled 3923 million 164 sales 2012 compared 2707 million 138 sales 2011 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased due lower interest rates lower debt balances expense net company recorded foreign exchange gains 01 million 2012 foreign exchange losses 20 million 2011 due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 333 334 2012 2011 respectively net income net income 2012 increased 816 million compared 2011 increase net income due higher sales volume partially offset increased operating expenses 2011 compared 2010 following table summarizes results operations period following table shows major components change sales 2011 2010 net sales increased 4606 million 19676 million 2011 15070 million 2010 increase due higher sales 3066 million specialty products electronics increased demand freight original equipment rail products positive train control electronics aftermarket products 1283 million acquisitions 393 million brake products sales due higher demand original equipment brakes 91 million products partially offsetting increases lower sales 263 million transit products 261 million remanufacturing overhaul build completion certain transit locomotive build contracts lower sales certain transit original equipment contracts company realized net sales increase 296 million income operations increase 41 million due favorable effects foreign exchange net income 2011 1701 million 351 per diluted share net income increased due higher sales volume operating margins freight segment sales increased 4256 million 542 due higher sales 2815 million specialty products electronics primarily resulting increased demand original equipment rail products original equipment heat exchange products aftermarket rail products 477 million brake products resulting higher car build increased rail traffic 476 million acquisitions 266 million remanufacturing overhaul build increased demand freight overhaul remanufacturing services 88 million products freight segment net sales improved 133 million due favorable effects foreign exchange transit segment sales increased 351 million 49 due increased sales 807 million acquisitions 251 million specialty products electronics resulting increased demand transit positive train control electronics partially offset decreased sales 527 million remanufacturing overhaul build 263 million transit products 84 million brake products completion certain transit locomotive build contracts lower sales certain transit original equipment contracts transit segment net sales improved 163 million due favorable effects foreign exchange cost sales gross profit cost sales increased 3393 million 13972 million 2011 10579 million 2010 2011 cost sales percentage sales 710 compared 702 period 2010 increase result increased costs transit segment related certain longterm contracts partially offset higher margin product sales freight aftermarket increased percentage total sales compared products 2011 raw material costs increased percentage sales approximately 44 2011 41 2010 labor costs percentage sales approximately 11 2011 2010 overhead costs decreased percentage sales approximately 16 2011 18 2010 freight segment raw material costs increased percentage sales approximately 44 2011 40 2010 freight segment labor costs decreased percentage sales approximately 10 2011 11 2010 overhead costs decreased percentage sales approximately 15 2011 18 2010 transit segment raw material costs percentage sales approximately 43 2011 2010 transit segment labor costs increased percentage sales approximately 12 2011 11 2010 overhead costs increased percentage sales 19 2011 18 2010 general raw material costs percentage sales increased reflecting higher mix revenue generated freight original equipment sales aftermarket services higher raw material component cost sales overhead costs vary percentage sales depending product mix changes sales volume included costs sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 30 million lower 2011 compared 2010 completion certain transit contracts required creating initial warranty reserves gross profit increased 5704 million 2011 compared 4491 million 2010 reasons discussed 2011 gross profit percentage sales 290 compared 298 2010 operating expenses following table shows operating expenses selling general administrative expenses increased 516 million 2011 compared 2010 190 million expenses acquisitions growth initiatives 181 million charge court ruling 119 million increase incentive noncash compensation 40 million certain onetime charges partially offset benefit 24 million settlement related prior acquisition engineering expense decreased 30 million 2011 compared 2010 company focused engineering resources completing original equipment contracts caused related engineering costs charged cost sales amortization expense increased 2011 compared 2010 due amortization intangibles associated acquisitions total operating expenses 152 163 sales 2011 2010 respectively following table shows segment operating expenses segment operating expenses consist specific segment costs sales marketing information technology insurance audit tax fees allocated corporate costs segment specific discrete charges corporate costs allocated freight transit segments based segment revenues certain corporate departmental expenses allocated freight segment operating expenses increased 232 million 2011 compared 2010 113 million expenses acquisitions increase 107 million expenses allocated operating segments increase 12 million selling general administrative expense supporting higher sales volume freight segment operating expenses 121 154 sales 2011 2010 respectively transit segment operating expenses increased 68 million 2011 compared 2010 77 million expenses acquisitions increase 18 million expense allocated operating segments partially offset decrease 27 million selling general administrative expense cost saving initiatives transit segment operating expenses 151 148 sales 2011 2010 respectively corporate nonallocated operating expenses increased 235 million charge court ruling discussed increases nonallocated departmental expenses income operations income operations totaled 2707 million 138 sales 2011 compared 2028 million 135 sales 2010 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased due higher interest income realized higher invested cash balances expense net company recorded foreign exchange losses 20 million 2011 foreign exchange losses 10 million 2010 due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 334 341 2011 2010 respectively decrease effective tax rate primarily due tax benefit approximately 19 million due primarily settlement examinations various tax jurisdictions net income net income 2011 increased 470 million compared 2010 increase net income due higher sales volume partially offset increased operating expenses liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2012 2011 2010 cash provided operations 2377 million 2486 million 1761 million respectively comparison 2011 decrease cash provided operations 2012 resulted higher working capital offset higher net income higher noncash items 2012 following working capital items used cash accounts receivable increased 230 million primarily due higher sales inventory increased 325 million support higher sales due certain long term contracts accounts payable accrued income taxes decreased 346 million due timing payments operating assets liabilities net provided cash 134 million due payment timing certain accrued liabilities comparison 2010 cash provided operations 2011 increased higher net income higher noncash items partially offset increase working capital 2011 accounts receivable increased 687 million primarily due higher sales inventory increased 795 million prior year support higher sales level certain locomotive build contracts increases offset increase accounts payable 600 million related increased inventory purchases timing payments increase customer deposits 414 million certain transit freight contracts increase accrued income taxes 315 million due payment timing increase operating assets liabilities net provided cash 501 million due accrual court ruling payment timing certain accrued liabilities investing activities 2012 2011 2010 cash used investing activities 1849 million 1462 million 1563 million respectively net cash paid acquisitions 1499 million 1090 million 1382 million years ended december 31 2012 2011 2010 respectively refer note 3 “notes consolidated financial statements” additional information acquisitions capital expenditures 360 million 380 million 208 million 2012 2011 2010 respectively financing activities 2012 cash used financing activities 1247 million included 2334 million proceeds debt 3114 million repayments debt revolving credit facility 01 million debt repayments debt 77 million dividend payments 466 million wabtec stock repurchases 2011 cash used financing activities 468 million included 2570 million proceeds debt 2435 million repayments debt revolving credit facility 397 million debt repayments term loan debt 38 million dividend payments 260 million wabtec stock repurchases 2010 cash provided financing activities 258 million included 2484 million proceeds debt 1854 million repayments debt revolving credit facility 327 million debt repayments term loan debt 19 million dividend payments 84 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2012 2011 cash balances december 31 2012 2011 2158 million 2856 million respectively 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provides company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility expires november 7 2016 2011 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2012 company available bank borrowing capacity net 325 million letters credit approximately 4005 million subject certain financial covenant restrictions 2011 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted libor rates plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2012 weighted average interest rate company’s variable rate debt 121 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement convert portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2011 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2011 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities see note 8 “notes consolidated financial statements” included part iv item 15 report 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provided company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities set expire january 2013 2008 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company intent ability refinance notes maturing august 2013 long term basis utilizing capacity 2011 refinancing credit agreement 2011 refinancing credit agreement provide available bank borrowing capacity sufficient refinance notes longterm basis notes included longterm portion debt december 31 2012 company compliance restrictions covenants indenture notes issued expects restrictions covenants type limiting factor executing operating activities additional information regarding notes see note 6 “notes condensed consolidated financial statements” included part iv item 15 report management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available may costly burdensome debt agreements currently place contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2012 1 purchase obligations represent noncancelable contractual obligations december 31 2012 addition company 2654 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 49 million pension plan investments 2012 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6875 150 million senior notes due 2013 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 96 million 8 annual capital expenditure budget subject approval board directors 2013 budget amount approved december 2012 board directors meeting 9 company 325 million outstanding letters credit performance bid bond purposes expire various dates 2019 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 113 million timing uncertain except 31 million may become payable 2013 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 460 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 129 million 125 million 2012 2011 respectively benefits paid post retirement plans 15 million 19 million 2012 2011 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 96 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2012 initial value performance bonds issued company’s behalf 2827 million obligations investing activities company typically spends approximately 40 million 50 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost description judgments uncertainties effect actual results differ assumptions inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based last quantitative analysis performed october 1 2010 decline terminal growth rate greater 50 basis points would decrease fair market value 1333 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 3734 million even changes fair value reporting units would greater net book values valuation date october 1 2010 necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing description judgments uncertainties effect actual results differ assumptions warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 25 million decrease expense 22 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 367 million decrease obligation310 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 18 million respectively actual asset values december 31 2011 1 lower amortization losses following year would increase 02 million 1 decrease increase health care cost trend rate used determining postretirement description judgments uncertainties effect actual results differ assumptions expense would decrease increase expense 04 million 1 decrease increase health care cost trend rate used determining postretirement obligation would decrease obligation 40 million increase obligation 47 million respectively stockbased compensation company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently commenced cycle 20122014 incentive stock awards vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock awards vested range 0 200 shares granted significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed update quarterly basis assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 12 million 03 million respectively income taxes wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded description judgments uncertainties effect actual results differ assumptions asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance asc605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2012 estimated higher lower 1 would increased decreased revenue gross profit year approximately 87 million contracts expected completed loss position provisions made description judgments uncertainties effect actual results differ assumptions negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 19 countries 2013 48 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec performance system increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity north america freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotives freight cars aar compiles statistics gauge level activity freight rail industry including revenue tonmiles carloadings generally referred “rail traffic” 2013 north american carloadings increased 21 including 44 increase intermodal carloadings 2014 expect demand new locomotives 2013 expect demand new freight cars slightly higher future demand depends largely strength overall economy rail traffic volumes 2008 us federal government enacted rail safety bill mandates use ptc technology includes onboard locomotive computer related software majority locomotives track us electronic train management system® leading supplier onboard train control equipment working us class railroads commuter rail authorities industry suppliers implement technology december 31 2015 deadline set rail safety bill recent years railroads transit authorities stated cannot achieve full implementation ptc deadline various bills introduced extend date change deadline extension deadline could affect rate industry spending technology wabtec’s ptc revenue 235 million 2013 north american transit rail industry driven government spending ridership 2012 us congress passed new twoyear funding bill maintained spending level 107 billion prior years ridership provides fare box revenues transit authorities use funds along state local money primarily equipment system maintenance based preliminary figures american public transportation association ridership us transit vehicles increased slightly 02 2013 25 increase 2012 spending 2014 expected remain current levels wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america gauge activity markets monitor trends rail traffic spending plans customers europe majority rail system serves passenger transit market larger transit market us presence uk germany italy positioned company take advantage market unife projects western european rail market grow 2 next years united kingdom france expected invest new rolling stock asiapacific growth market various joint ventures direct exports china positioned company take advantage growth driven continued urbanization countries china investment freight rail infrastructure serve mining natural resources markets countries well australia china expected increase spending rail infrastructure equipment 2014 resumes investment highspeed rail programs economic growth australia area expansion company commodity suppliers use products meet demands regional customers company delivering ptc contract expanding locations completed two acquisitions brazil allowing us increase sales market 2014 beyond general economic market conditions united states internationally could impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2013 compared 2012 following table summarizes results operations period following table shows major components change sales 2013 2012 net sales increased 1753 million 25664 million 2013 23911 million 2012 increase due sales related acquisitions 1579 million higher brake products sales 355 million due higher demand transit original equipment brakes higher remanufacturing overhaul build sales 748 million increased demand transit original equipment locomotives aftermarket services locomotives increase transit products 59 million increases partially offset 849 million decrease specialty products electronics sales lower demand freight original equipment rail products lower demand heat exchange products partially offset increased demand positive train control products company net sales decreased 156 million income operations decreased 07 million due unfavorable effects foreign exchange net income 2013 2922 million 301 per diluted share net income increased due higher sales volume freight segment sales decreased 1038 million 69 due decrease 277 million freight original equipment locomotives contract mix shifted transit locomotives 1117 million decrease specialty products electronics sales lower demand freight original equipment rail products heat exchange products 161 million decreased demand original equipment brake products decreases partially offset 724 million sales acquisitions freight segment net sales decreased 202 million due unfavorable effects foreign exchange transit segment sales increased 2791 million 314 due higher sales 1025 million original equipment transit locomotives contract mix shifted freight locomotives 855 million acquisitions 516 million increased demand original equipment brakes 268 million primarily increased demand positive train control electronics increase 59 million certain transit car build contracts transit segment net sales increased 46 million due favorable effects foreign exchange cost sales gross profit cost sales increased 1059 million 18024 million 2013 16965 million 2012 cost sales percentage sales 702 2013 710 2012 raw material costs approximately 43 percentage sales 2013 2012 labor costs approximately 12 percentage sales 2013 2012 overhead costs percentage sales approximately 15 2013 16 2012 freight segment raw material costs decreased percentage sales approximately 40 2013 43 2012 freight segment labor costs approximately 11 percentage sales 2013 2012 overhead costs percentage sales approximately 15 2013 2012 transit segment raw material costs increased percentage sales approximately 46 2013 43 2012 transit segment labor costs decreased percentage sales approximately 12 2013 13 2012 overhead costs percentage sales 17 2013 19 2012 freight segment material costs decreased percentage sales transit segment material costs increased percentage sales due shift contract mix original equipment locomotives freight transit overhead costs vary percentage sales depending product mix changes sales volume included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 02 million higher 2013 compared 2012 due increased sales percentage sales warranty expense 09 2013 10 2012 gross profit increased 7640 million 2013 compared 6946 million 2012 due higher sales volume reasons discussed 2013 2012 gross profit percentage sales 298 290 respectively operating expenses following table shows operating expenses selling general administrative expenses increased 170 million 2013 compared 2012 primarily due 174 million expenses acquisitions partially offset release 39 million certain legal reserves court ruling addition selling general administrative expenses increased support higher sales volumes engineering expense increased 50 million 2013 compared 2012 primarily acquisitions costs related engineering specific customer contracts included cost sales amortization expense increased 2013 compared 2012 due amortization intangibles 2013 associated acquisitions total operating expenses 127 126 sales 2013 2012 respectively following table shows segment operating expenses segment operating expenses consist specific segment costs sales marketing information technology insurance audit tax fees allocated corporate costs segment specific discrete charges corporate costs allocated freight transit segments based segment revenues certain corporate departmental expenses allocated operating expenses decreased 21 million 2013 compared 2012 mostly due decrease allocated legal expenses freight segment operating expenses increased 08 million 2013 compared 2012 52 million expenses acquisitions partially offset decrease 40 million expenses allocated operating segments freight segment operating expenses 113 105 sales 2013 2012 respectively transit segment operating expenses increased 254 million 2013 compared 2012 122 million expenses acquisitions increase 18 million expense allocated operating segments addition transit segment selling general administrative expenses increased support higher sales volumes transit segment operating expenses 131 144 sales 2013 2012 respectively corporate nonallocated operating expenses decreased 18 million 2013 compared 2012 primarily due release 28 million certain allocated legal reserves court ruling partially offset increase certain nonallocated administrative expenses income operations income operations totaled 4373 million 170 sales 2013 compared 3923 million 164 sales 2012 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net increased due higher debt balances expense net company recorded foreign exchange losses 35 million 01 million 2013 2012 respectively due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 306 333 2013 2012 respectively decrease effective rate primarily due retroactive extension rd tax credit increase foreign income taxed lower statutory rates benefit recorded enacted reduction foreign statutory tax rate net income net income 2013 increased 405 million compared 2012 increase net income due higher sales volume lower effective tax rate partially offset higher operating expenses 2012 compared 2011 following table summarizes results operations period following table shows major components change sales 2012 2011 net sales increased 4235 million 23911 million 2012 19676 million 2011 increase due higher sales 1539 million specialty products electronics increased demand freight original equipment rail products positive train control electronics aftermarket products 1383 million acquisitions 977 million remanufacturing overhaul build sales increased demand freight original equipment locomotives aftermarket services locomotives 408 million brake products sales due higher demand original equipment brakes 86 million products company net sales decreased 199 million income operations decreased 24 million due unfavorable effects foreign exchange net income 2012 2517 million 260 per diluted share net income increased due higher sales volume freight segment sales increased 2919 million 241 due higher sales 1329 million specialty products electronics primarily resulting increased demand original equipment rail products positive train control electronics aftermarket rail products 657 million acquisitions 461 million increased demand freight original equipment locomotives aftermarket services locomotives 414 million brake products 77 million products freight segment net sales decreased 20 million due unfavorable effects foreign exchange transit segment sales increased 1316 million 174 due 726 million acquisitions higher sales 516 million remanufacturing overhaul build increased demand overhaul aftermarket services 209 million higher specialty products electronics sales increased demand transit positive train control electronics 42 million transit products transit segment net sales decreased 179 million due unfavorable effects foreign exchange cost sales gross profit cost sales increased 2993 million 16965 million 2012 13972 million 2011 cost sales percentage sales 710 2012 2011 2012 raw material costs decreased percentage sales approximately 43 2012 44 2011 labor costs increased percentage sales approximately 12 2012 11 2011 overhead costs percentage sales approximately 16 2012 2011 freight segment raw material costs decreased percentage sales approximately 43 2012 44 2011 freight segment labor costs increased percentage sales approximately 11 2012 10 2011 overhead costs percentage sales approximately 15 2012 2011 transit segment raw material costs percentage sales approximately 43 2012 2011 transit segment labor costs increased percentage sales approximately 13 2012 12 2011 overhead costs percentage sales 19 2012 2011 general raw material costs percentage sales decreased labor costs percentage sales increased reflecting higher mix revenue generated positive train control electronics aftermarket services lower raw material component higher labor component cost sales included costs sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 31 million higher 2012 compared 2011 due increased sales increased provisions certain transit contracts percentage sales warranty expense 10 2012 2011 gross profit increased 6946 million 2012 compared 5704 million 2011 due higher sales volume reasons discussed 2012 2011 gross profit percentage sales 290 operating expenses following table shows operating expenses selling general administrative expenses decreased 18 million 2012 compared 2011 prior year included 181 million charge court ruling recorded second quarter 2011 decrease 30 million corporate expenses offset 180 million expenses acquisitions 17 million increase incentive noncash compensation engineering expense increased 41 million 2012 compared 2011 company focused engineering resources product development costs related engineering specific customer contracts included cost sales amortization expense increased 2012 compared 2011 due amortization intangibles 2012 associated acquisitions total operating expenses 126 152 sales 2012 2011 respectively following table shows segment operating expenses segment operating expenses consist specific segment costs sales marketing information technology insurance audit tax fees allocated corporate costs segment specific discrete charges corporate costs allocated freight transit segments based segment revenues certain corporate departmental expenses allocated freight segment operating expenses increased 103 million 2012 compared 2011 64 million expenses acquisitions increase 07 million expenses allocated operating segments increase 32 million selling general administrative expense supporting higher sales volume freight segment operating expenses 105 121 sales 2012 2011 respectively transit segment operating expenses increased 134 million 2012 compared 2011 131 million expenses acquisitions benefit 24 million settlement related prior acquisition recorded second quarter 2011 increase 06 million expense allocated operating segments partially offset decrease 27 million selling general administrative expense cost saving initiatives transit segment operating expenses 144 151 sales 2012 2011 respectively corporate nonallocated operating expenses decreased 211 million 2012 compared 2011 charge court ruling discussed decreases nonallocated departmental expenses income operations income operations totaled 3923 million 164 sales 2012 compared 2707 million 138 sales 2011 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased due lower interest rates lower debt balances expense net company recorded foreign exchange gains 01 million 2012 foreign exchange losses 20 million 2011 due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 333 334 2012 2011 respectively net income net income 2012 increased 816 million compared 2011 increase net income due higher sales volume partially offset increased operating expenses liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2013 2012 2011 cash provided operations 2357 million 2374 million 2486 million respectively comparison 2012 cash provided operations 2013 resulted higher operating results offset higher cash outflows working capital major components higher cash outflows follows negative change accounts receivable 1267 million number days collect cash increased slightly sales increased negative change customer deposits due completion certain large contracts 158 million payment prior year court ruling cash outflows partially offset following cash inflows favorable change accounts payable 609 million due payment timing favorable change decrease 586 million inventory days’ supply inventory dsi decreased 63 days 72 days end 2012 due completion certain original equipment contracts comparison 2011 decrease cash provided operations 2012 resulted higher working capital offset higher net income higher noncash items 2012 following working capital items used cash accounts receivable increased 230 million primarily due higher sales inventory increased 325 million support higher sales due certain long term contracts accounts payable accrued income taxes decreased 346 million due timing payments operating assets liabilities net provided cash 134 million due payment timing certain accrued liabilities investing activities 2013 2012 2011 cash used investing activities 2587 million 1849 million 1462 million respectively major components cash outflow follows planned additions property plant equipment 412 million continued investments facilities manufacturing processes acquisitions 2235 million compares 360 million property plant equipment 1499 million net cash paid acquisitions 2012 refer note 3 “notes condensed consolidated financial statements” additional information acquisitions financing activities 2013 cash provided financing activities 930 million included 7116 million proceeds revolving credit facility debt proceeds 2474 million issuance 4375 senior notes net issuance costs 6796 million repayments debt revolving credit facility 1500 million payment maturity 2003 senior notes 126 million dividend payments 330 million wabtec stock repurchases 2012 cash used financing activities 1247 million included 2334 million proceeds debt 3114 million repayments debt revolving credit facility 77 million dividend payments 466 million wabtec stock repurchases 2011 cash used financing activities 468 million included 2570 million proceeds debt 2435 million repayments debt revolving credit facility 397 million debt repayments term loan debt 38 million dividend payments 260 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2013 2012 cash balances december 31 2013 2012 2858 million 2158 million respectively 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 800 million fiveyear revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2013 company available bank borrowing capacity net 598 million letters credit approximately 5402 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 0 basis points alternate rate margin 100 basis points december 31 2013 weighted average interest rate company’s variable rate debt 117 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provides company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted libor rates plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2013 1 purchase obligations represent noncancelable contractual obligations december 31 2013 addition company 3026 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 52 million pension plan investments 2013 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 154 million 8 annual capital expenditure budget subject approval board directors 2014 budget amount approved december 2013 board directors meeting 9 company 598 million outstanding letters credit performance bid bond purposes expire various dates 2019 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 105 million timing uncertain except 03 million may become payable 2014 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 272 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 101 million 129 million 2013 2012 respectively benefits paid postretirement plans 29 million 15 million 2013 2012 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 154 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2013 initial value performance bonds issued company’s behalf 2465 million obligations investing activities company typically spends approximately 40 million 60 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based last quantitative analysis performed october 1 2013 decline terminal growth rate greater 50 basis points would decrease fair market value 1752 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 4829 million even changes fair value reporting units would greater net book values valuation date october 1 2013 necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 37 million decrease expense 19 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 380 million decrease obligation 300 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 20 million respectively actual asset values december 31 2012 1 lower amortization losses following year would increase 02 million 1 decrease increase health care cost trend rate used determining postretirement expense would decrease increase expense 04 million 1 decrease increase health care cost trend rate used determining postretirement obligation would decrease obligation 31 million increase obligation 36 million respectively stockbased compensation description company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently commenced cycle 20122014 incentive stock awards vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock awards vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 08 million 08 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc605 “revenue recognition” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts judgments uncertainties revenue recognized products shipped respective customers title passed price product determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2013 estimated higher lower 1 would increased decreased revenue gross profit year approximately 83 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 20 countries 2014 50 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec performance system increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarly government funding passenger ridership changes market drivers cause fluctuations demand wabtec’s product services unife projects growth 27 worldwide rail supply market next several years highest expected growth rates africa middle east latin america north america aar compiles statistics gauge level activity freight rail industry including revenue tonmiles carloadings generally referred “rail traffic” based changes rail traffic trends railroads increase decrease purchases new locomotives freight cars 2014 north american carloadings increased 44 including 54 increase intermodal carloadings deliveries new locomotives new freight cars increased 15 27 respectively 2015 expect demand new locomotives slightly lower 2014 expect demand new freight cars higher unife projects growth rate 30 north america north america american public transportation association apta compiles ridership statistics trends based preliminary figures 2014 ridership increased 09 us 14 canada ridership provides fare box revenues transit authorities use funds along state local money primarily equipment maintenance 2014 us congress passed budget expected increase spending transit projects 11 billion 2015 increase 2 2014 levels majority federal money used transit agencies purchase new equipment infrastructure wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america gauge activity markets monitor trends rail traffic spending plans customers europe majority rail system serves passenger transit market larger transit market us presence uk germany italy positioned company take advantage market unife projects western european rail market grow 20 next years united kingdom france expected invest new rolling stock unife projects market asiapacific world’s second largest according study grow 40 next several years primarily reflecting strong spending china recent years growth markets around world according unife include latin america expected grow 50 commonwealth independent states expected grow 10 wholly owned subsidiaries joint ventures wabtec presence every key freight rail passenger transit market around world 2015 beyond general economic market conditions united states internationally impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2014 compared 2013 following table summarizes results operations period following table shows major components change sales 2014 2013 net sales increased 4781 million 30445 million 2014 25664 million 2013 increase due sales related acquisitions 2294 million 1847 million specialty products electronics sales higher demand freight original equipment products aftermarket electronic products 842 million brake products sales due higher demand original equipment products freight customers aftermarket brakes certain transit authorities increases partially offset lower sales original equipment locomotives favorable foreign exchange increased sales 112 million freight segment sales increased 3334 million 238 primarily due 1845 million specialty products electronics sales higher demand freight original equipment rail products positive train control electronics aftermarket rail products acquisitions 933 million 555 million brake products due higher demand original equipment brakes unfavorable foreign exchange decreased sales 122 million transit segment sales increased 1447 million 124 due acquisitions 1361 million 287 million increased demand aftermarket brakes certain transit authorities increases partially offset 399 million lower sales original equipment transit locomotives favorable foreign exchange increased net sales 234 million cost sales gross profit cost sales increased 3061 million 21085 million 2014 18024 million 2013 cost sales percentage sales 693 2014 702 2013 raw material costs approximately 43 percentage sales 2014 2013 labor costs decreased approximately 11 percentage sales 2014 12 2013 overhead costs percentage sales decreased approximately 14 2014 15 2013 freight segment raw material costs increased percentage sales approximately 42 2014 40 2013 due higher mix revenue generated freight transit original equipment sales aftermarket services higher raw material component cost sales freight segment labor costs decreased approximately 10 percentage sales 2014 11 2013 overhead costs percentage sales approximately 13 2014 14 2013 transit segment raw material costs decreased percentage sales approximately 45 2014 46 2013 primarily due lower original equipment locomotive sales higher raw material component transit segment labor costs increased percentage sales approximately 13 2014 12 2013 overhead costs remained unchanged 15 2014 2013 general overhead costs vary percentage sales depending product mix changes sales volume included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 111 million higher 2014 compared 2013 due increased sales percentage sales warranty expense 06 2014 09 2013 gross profit increased 9360 million 2014 compared 7640 million 2013 due higher sales volume reasons discussed 2014 2013 gross profit percentage sales 307 298 respectively operating expenses following table shows operating expenses total operating expenses 134 127 sales years ending december 31 2014 2013 respectively selling general administrative expenses increased 618 million 235 primarily due 301 million expenses acquisitions 92 million expenses related higher incentive noncash compensation expense addition selling general administrative expenses increased support higher sales volumes engineering expense increased 156 million 337 primarily due 75 million expenses acquisitions remainder increase attributed company concentrating resources new product development specifically electronics market costs related engineering specific customer contracts included cost sales amortization expense increased 47 million due amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses increased 308 million 195 2014 decreased 40 basis points 109 sales increase primarily relates 84 million incremental operating expenses acquisitions 82 million higher corporate allocations mainly due increased incentive compensation expense 82 million engineering attributable company concentrating resources new product development transit segment operating expenses increased 436 million 285 2014 increased 190 basis points 150 sales increase primarily related 339 million incremental operating expenses related acquisitions addition transit segment engineering expenses increased support new product development corporate nonallocated operating expenses increased 77 million 2014 primarily due higher administrative costs associated growing business income operations income operations totaled 5271 million 173 sales 2014 compared 4373 million 170 sales 2013 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net increased 22 million 2014 due higher debt balances resulting acquisitions partially offset lower average interest rates expense net expense net increased 08 million 17 million 2014 compared 2013 income taxes effective income tax rate 308 306 2014 2013 respectively 2014 positive effect increase foreign income taxed lower statutory rates offset tax reserves required uncertain tax positions several jurisdictions net income net income 2014 increased 594 million 3517 million compared 2013 increase net income due higher sales volume lower effective tax rate partially offset higher operating expenses 2013 compared 2012 following table summarizes results operations period following table shows major components change sales 2013 2012 net sales increased 1753 million 25664 million 2013 23911 million 2012 increase due sales related acquisitions 1579 million higher brake products sales 355 million due higher demand transit original equipment brakes higher remanufacturing overhaul build sales 748 million increased demand transit original equipment locomotives aftermarket services locomotives increase transit products 59 million increases partially offset 849 million decrease specialty products electronics sales lower demand freight original equipment rail products lower demand heat exchange products partially offset increased demand positive train control products company net sales decreased 156 million income operations decreased 07 million due unfavorable effects foreign exchange net income 2013 2922 million 301 per diluted share net income increased due higher sales volume freight segment sales decreased 1038 million 69 due decrease 277 million freight original equipment locomotives contract mix shifted transit locomotives 1117 million decrease specialty products electronics sales lower demand freight original equipment rail products heat exchange products 161 million decreased demand original equipment brake products decreases partially offset 724 million sales acquisitions freight segment net sales decreased 202 million due unfavorable effects foreign exchange transit segment sales increased 2791 million 314 due higher sales 1025 million original equipment transit locomotives contract mix shifted freight locomotives 855 million acquisitions 516 million increased demand original equipment brakes 268 million primarily increased demand positive train control electronics increase 59 million certain transit car build contracts transit segment net sales increased 46 million due favorable effects foreign exchange cost sales gross profit cost sales increased 1059 million 18024 million 2013 16965 million 2012 cost sales percentage sales 702 2013 710 2012 raw material costs approximately 43 percentage sales 2013 2012 labor costs approximately 12 percentage sales 2013 2012 overhead costs percentage sales approximately 15 2013 16 2012 freight segment raw material costs decreased percentage sales approximately 40 2013 43 2012 freight segment labor costs approximately 11 percentage sales 2013 2012 overhead costs percentage sales approximately 15 2013 2012 transit segment raw material costs increased percentage sales approximately 46 2013 43 2012 transit segment labor costs decreased percentage sales approximately 12 2013 13 2012 overhead costs percentage sales 17 2013 19 2012 freight segment material costs decreased percentage sales transit segment material costs increased percentage sales due shift contract mix original equipment locomotives freight transit overhead costs vary percentage sales depending product mix changes sales volume included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 02 million higher 2013 compared 2012 due increased sales percentage sales warranty expense 09 2013 10 2012 gross profit increased 7640 million 2013 compared 6946 million 2012 due higher sales volume reasons discussed 2013 2012 gross profit percentage sales 298 290 respectively operating expenses following table shows operating expenses selling general administrative expenses increased 170 million 2013 compared 2012 primarily due 174 million expenses acquisitions partially offset release 39 million certain legal reserves court ruling addition selling general administrative expenses increased support higher sales volumes engineering expense increased 50 million 2013 compared 2012 primarily acquisitions costs related engineering specific customer contracts included cost sales amortization expense increased 2013 compared 2012 due amortization intangibles 2013 associated acquisitions total operating expenses 127 126 sales 2013 2012 respectively following table shows segment operating expenses segment operating expenses consist specific segment costs sales marketing information technology insurance audit tax fees allocated corporate costs segment specific discrete charges corporate costs allocated freight transit segments based segment revenues certain corporate departmental expenses allocated operating expenses decreased 21 million 2013 compared 2012 mostly due decrease allocated legal expenses freight segment operating expenses increased 08 million 2013 compared 2012 52 million expenses acquisitions partially offset decrease 40 million expenses allocated operating segments freight segment operating expenses 113 105 sales 2013 2012 respectively transit segment operating expenses increased 254 million 2013 compared 2012 122 million expenses acquisitions increase 18 million expense allocated operating segments addition transit segment selling general administrative expenses increased support higher sales volumes transit segment operating expenses 131 144 sales 2013 2012 respectively corporate nonallocated operating expenses decreased 18 million 2013 compared 2012 primarily due release 28 million certain allocated legal reserves court ruling partially offset increase certain nonallocated administrative expenses income operations income operations totaled 4373 million 170 sales 2013 compared 3923 million 164 sales 2012 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net increased due higher debt balances expense net company recorded foreign exchange losses 35 million 01 million 2013 2012 respectively due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 306 333 2013 2012 respectively decrease effective rate primarily due retroactive extension rd tax credit increase foreign income taxed lower statutory rates benefit recorded enacted reduction foreign statutory tax rate net income net income 2013 increased 405 million compared 2012 increase net income due higher sales volume lower effective tax rate partially offset higher operating expenses liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2014 2013 2012 cash provided operations 4724 million 2357 million 2374 million respectively comparison 2013 cash provided operations 2014 increased due reduced working capital compared prior year coupled higher operating results major components higher cash inflows follows positive change accounts receivable 1323 million number days collect cash decreased positive change accrued liabilities customer deposits 1176 million positive change accrued income taxes due payment timing cash inflows partially offset following cash outflows unfavorable change accounts payable 56 million due payment timing unfavorable change increase 901 million inventory company held inventory support higher backlog orders 2015 comparison 2012 cash provided operations 2013 resulted higher operating results offset higher cash outflows working capital major components higher cash outflows follows negative change accounts receivable 1267 million number days collect cash increased slightly sales increased negative change customer deposits due completion certain large contracts 158 million payment 2012 court ruling cash outflows partially offset following cash inflows favorable change accounts payable 609 million due payment timing favorable change decrease 586 million inventory days’ supply inventory dsi decreased 63 days 72 days end 2012 due completion certain original equipment contracts investing activities 2014 2013 2012 cash used investing activities 3477 million 2587 million 1849 million respectively major components cash outflow 2014 planned additions property plant equipment 476 million continued investments facilities manufacturing processes 3004 million net cash paid acquisitions compares 412 million property plant equipment 2235 million net cash paid acquisitions refer note 3 “notes condensed consolidated financial statements” additional information acquisitions financing activities 2014 cash provided financing activities 255 million included 5634 million proceeds revolving credit facility debt 4934 million repayments debt revolving credit facility 192 million dividend payments 268 million wabtec stock repurchases 2013 cash provided financing activities 930 million included 7116 million proceeds revolving credit facility debt proceeds 2474 million issuance 4375 senior notes net issuance costs 6796 million repayments debt revolving credit facility 1500 million payment maturity 2003 senior notes following table shows outstanding indebtedness december 31 2014 2013 cash balances december 31 2014 2013 4258 million 2858 million respectively 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 800 million fiveyear revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2013 company available bank borrowing capacity net 291 million letters credit approximately 5009 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points december 31 2014 weighted average interest rate company’s variable rate debt 175 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit ratings history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provided company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted libor rates plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2014 1 purchase obligations represent noncancelable contractual obligations december 31 2014 addition company 3661 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 61 million pension plan investments 2014 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 231 million 8 annual capital expenditure budget subject approval board directors 2015 budget amount approved december 2014 board directors meeting 9 company 608 million outstanding letters credit performance bid bond purposes expire various dates 2022 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 126 million timing uncertain except 07 million may become payable 2015 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 1169 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 127 million 101 million 2014 2013 respectively benefits paid postretirement plans 10 million 29 million 2014 2013 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 231 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2014 initial value performance bonds issued company’s behalf 1672 million obligations investing activities company typically spends approximately 50 million 75 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based last quantitative analysis performed october 1 2013 decline terminal growth rate greater 50 basis points would decrease fair market value 1752 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 4829 million even changes fair value reporting units would greater net book values necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description company provides pension postretirement benefits employees amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 29 million decrease expense 23 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 510 million decrease obligation 411 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 22 million respectively actual asset values december 31 2014 1 lower amortization losses following year would decrease 01 million 1 decrease increase health care cost trend rate used determining postretirement expense would decrease increase expense 04 million 1 decrease increase health care cost trend rate used determining postretirement obligation would decrease obligation 46 million increase obligation 54 million respectively stockbased compensation description company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently commenced cycle 20122014 incentive stock awards vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock awards vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 08 million 08 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc605 “revenue recognition” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts judgments uncertainties revenue recognized products shipped respective customers title passed price product determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2014 estimated higher lower 1 would increased decreased revenue gross profit year approximately 83 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 20 countries 2015 47 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec performance system increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtec’s product services 2014 2019 study unife projected annual growth 27 worldwide rail supply market next several years highest expected growth rates africa middle east latin america north america aar compiles statistics gauge level activity freight rail industry including revenue tonmiles carloadings generally referred “rail traffic” based changes rail traffic trends railroads increase decrease purchases new locomotives freight cars 2015 north american carloadings decreased 22 including 58 decrease commodity carloadings 21 increase intermodal carloadings deliveries new locomotives decreased 20 deliveries new freight cars increased 22 2016 expect locomotive freight car deliveries lower 2015 unife projected annual growth rate 30 north america actual figure depends growth economy north america american public transportation association apta compiles ridership statistics trends based preliminary figures 2015 ridership decreased 10 us 10 canada ridership provides fare box revenues transit authorities use funds along state local money primarily equipment maintenance 2015 us congress passed new fiveyear transportation funding bill includes increase spending 100 first year smaller increases future years majority money transit agencies spend purchase new equipment infrastructure comes federal government wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america gauge activity markets monitor trends rail traffic spending plans customers europe majority rail system serves passenger transit market larger transit market us presence uk germany italy positioned company take advantage market unife projected western european rail market grow annually 20 next years united kingdom france expected invest new rolling stock unife projected market asiapacific world’s second largest according study grow annually 40 primarily reflecting strong spending china recent years growth markets around world according unife include latin america projected grow 50 commonwealth independent states projected grow 10 actual growth rates affected general global economic conditions specific economic conditions market wholly owned subsidiaries joint ventures wabtec presence every key freight rail passenger transit market around world 2016 beyond general economic market conditions united states internationally impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks proposed transaction faiveley transport sa july 27 2015 company announced plans acquire faiveley transport sa faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valuedadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured three steps • wabtec made irrevocable offer owners approximately 51 faiveley transport’s shares purchase price €100 per share payable 25 cash 75 wabtec preferred stock preferred stock 1 annual dividend greater annual dividend assuming full conversion common shares must converted three years wabtec common shares implied ratio one faiveley transport common share 1125 wabtec common shares shareholders owning 51 faiveley transport entered exclusive discussions wabtec • upon completion required labor group consultations october 6 2015 51 shareholders entered definitive share purchase agreement faiveley transport entered acquisition agreement wabtec • upon completing share purchase wabtec commence tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash wabtec preferred stock preferred stock portion consideration subject cap 75 faiveley transport’s common shares wabtec intends delist faiveley transport euronext tender offer minority interests represent less 5 total purchase price offered 18 billion including assumed debt wabtec plans fund cash portion transaction cash hand existing credit facilities potentially credit debt financing prior december 31 2015 wabtec set aside €1869 million escrow deposit faiveley transport purchase combination wabtec faiveley transport would create one world’s largest public rail equipment companies revenues 45 billion presence key freight rail passenger transit geographies worldwide closing transaction subject various conditions including completion regulatory requirements steps currently ongoing timing completion unknown results operations following table shows consolidated statements operations years indicated 2015 compared 2014 following table summarizes results operations period following table shows major components change sales 2015 2014 net sales increased 2635 million 33080 million 2015 30445 million 2014 increase primarily due 1565 million increase specialty products electronics sales higher demand freight original equipment products aftermarket electronic ptc electronic products acquisitions increased sales 2628 million unfavorable foreign exchange decreased sales 1518 million freight segment sales increased 3232 million 187 primarily due 1457 million increase specialty products electronics sales higher demand freight original equipment rail products ptc electronics aftermarket rail products 804 million remanufacturing overhaul build products due higher demand aftermarket locomotive builds acquisitions increased sales 1455 million unfavorable foreign exchange decreased sales 496 million transit segment sales decreased 597 million 45 due decrease 1023 million related unfavorable foreign exchange 539 million decrease remanufacturing overhaul build lower demand original transit locomotive multiyear project substantially completed 2014 231 million decrease brake products lower demand braking products europe braking systems north america decreases partially offset 1173 million sales acquisitions cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 1517 million 22602 million 2015 compared 21085 million period 2014 twelve months ended 2015 cost sales percentage sales 683 compared 693 period 2014 decrease cost sales percentage sales due lower material costs primarily due lower original equipment transit locomotive sales higher specialty product electronics sales freight segment cost sales increased 05 percentage sales 663 2015 compared 658 period 2014 increase primarily related slightly lower margins related recent acquisitions cost overruns project nearing completion partially offset higher specialty products electronics sales transit segment cost sales decreased 22 percentage sales 717 2015 compared 739 period 2014 decrease 2015 primarily due lower material costs associated lower original equipment locomotive sales lower original equipment aftermarket brake product sales carry higher raw material content partially offset additional costs incurred closeout several projects included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense twelve months ended december 31 2015 increased 13 million 354 million 341 million 2014 primarily due increased sales gross profit twelve months ended december 31 2015 increased 1118 million 10478 million 9360 million twelve months ended december 2014 gross profit margin increased 100 basis points 317 307 december 31 2014 increases due higher sales volume favorable sales mix reasons discussed operating expenses following table shows operating expenses total operating expenses 134 years ending december 31 2015 2014 selling general administrative expenses increased 228 million 70 primarily due 247 million expenses acquisitions partially offset lower incentive noncash compensation expense effects foreign exchange engineering expense increased 93 million 151 primarily due 35 million expenses acquisitions remainder increase attributed company concentrating resources new product development specifically electronics market costs related engineering specific customer contracts included cost sales amortization expense decreased 08 million due lower amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses increased 198 million 105 2015 decreased 70 basis points 102 sales increase primarily relates 84 million incremental operating expenses acquisitions 79 million engineering attributable company concentrating resources new product development transit segment operating expenses increased 86 million 44 2015 increased 140 basis points 164 sales increase primarily related 198 million incremental operating expenses related acquisitions increase partially offset lower operating expenses due foreign exchange corporate nonallocated operating expenses increased 29 million 2015 primarily due higher administrative transaction costs associated growing business income operations income operations totaled 6076 million 184 sales 2015 compared 5271 million 173 sales 2014 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased 07 million 2015 due lower average debt balances expense net expense net increased 36 million 53 million 2015 compared 2014 primarily due foreign exchange adjustments income taxes effective income tax rate 319 308 2015 2014 respectively increase effective rate primarily result higher earnings mix higher tax rate jurisdictions net income net income 2015 increased 133 469 million 3986 million compared 2014 increase net income due reasons discussed 2014 compared 2013 following table summarizes results operations period following table shows major components change sales 2014 2013 net sales increased 4781 million 30445 million 2014 25664 million 2013 increase due sales related acquisitions 2294 million 1847 million specialty products electronics sales higher demand freight original equipment products aftermarket electronic products 842 million brake products sales due higher demand original equipment products freight customers aftermarket brakes certain transit authorities increases partially offset lower sales original equipment locomotives favorable foreign exchange increased sales 112 million freight segment sales increased 3334 million 238 primarily due 1845 million specialty products electronics sales higher demand freight original equipment rail products positive train control electronics aftermarket rail products acquisitions 933 million 555 million brake products due higher demand original equipment brakes unfavorable foreign exchange decreased sales 122 million transit segment sales increased 1447 million 124 due acquisitions 1361 million 287 million increased demand aftermarket brakes certain transit authorities increases partially offset 399 million lower sales original equipment transit locomotives favorable foreign exchange increased net sales 234 million cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 3061 million 21085 million 2014 18024 million 2013 cost sales percentage sales 693 2014 702 2013 raw material costs approximately 43 percentage sales 2014 2013 labor costs decreased approximately 11 percentage sales 2014 12 2013 overhead costs percentage sales decreased approximately 14 2014 15 2013 freight segment raw material costs increased percentage sales approximately 42 2014 40 2013 due higher mix revenue generated freight transit original equipment sales aftermarket services higher raw material component cost sales freight segment labor costs decreased approximately 10 percentage sales 2014 11 2013 overhead costs percentage sales approximately 13 2014 14 2013 transit segment raw material costs decreased percentage sales approximately 45 2014 46 2013 primarily due lower original equipment locomotive sales higher raw material component transit segment labor costs increased percentage sales approximately 13 2014 12 2013 overhead costs remained unchanged 15 2014 2013 general overhead costs vary percentage sales depending product mix changes sales volume included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 111 million higher 2014 compared 2013 due increased sales percentage sales warranty expense 06 2014 09 2013 gross profit increased 9360 million 2014 compared 7640 million 2013 due higher sales volume reasons discussed 2014 2013 gross profit percentage sales 307 298 respectively operating expenses following table shows operating expenses total operating expenses 134 127 sales years ending december 31 2014 2013 respectively selling general administrative expenses increased 618 million 235 primarily due 301 million expenses acquisitions 92 million expenses related higher incentive noncash compensation expense addition selling general administrative expenses increased support higher sales volumes engineering expense increased 156 million 337 primarily due 75 million expenses acquisitions remainder increase attributed company concentrating resources new product development specifically electronics market costs related engineering specific customer contracts included cost sales amortization expense increased 47 million due amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses increased 308 million 195 2014 decreased 40 basis points 109 sales increase primarily relates 84 million incremental operating expenses acquisitions 82 million higher corporate allocations mainly due increased incentive compensation expense 82 million engineering attributable company concentrating resources new product development transit segment operating expenses increased 436 million 285 2014 increased 190 basis points 150 sales increase primarily related 339 million incremental operating expenses related acquisitions addition transit segment engineering expenses increased support new product development corporate nonallocated operating expenses increased 77 million 2014 primarily due higher administrative costs associated growing business income operations income operations totaled 5271 million 173 sales 2014 compared 4373 million 170 sales 2013 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net increased 22 million 2014 due higher debt balances resulting acquisitions partially offset lower average interest rates expense net expense net increased 08 million 17 million 2014 compared 2013 income taxes effective income tax rate 308 306 2014 2013 respectively 2014 positive effect increase foreign income taxed lower statutory rates offset tax reserves required uncertain tax positions several jurisdictions net income net income 2014 increased 594 million 3517 million compared 2013 increase net income due higher sales volume lower effective tax rate partially offset higher operating expenses liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2015 2014 2013 cash provided operations 4483 million 4724 million 2357 million respectively comparison 2014 cash provided operations 2015 decreased due unfavorable working capital requirements partially offset higher operating results unfavorable working capital requirements primarily related unfavorable change accounts payable accrued liabilities 1320 million 869 million respectively cash outflows partially offset favorable change accounts receivable 389 million driven collections due achieving certain project related milestones favorable change inventory 842 million due successful efforts control amount inventory hand comparison 2013 cash provided operations 2014 increased due reduced working capital compared prior year coupled higher operating results major components higher cash inflows follows positive change accounts receivable 1323 million number days collect cash decreased positive change accrued liabilities customer deposits 1176 million positive change accrued income taxes due payment timing cash inflows partially offset following cash outflows unfavorable change accounts payable 56 million due payment timing unfavorable change increase 901 million inventory company held inventory support higher backlog orders 2015 investing activities 2015 2014 2013 cash used investing activities 3801 million 3477 million 2587 million respectively major components cash outflow 2015 planned additions property plant equipment 494 million continued investments facilities manufacturing processes 1296 million net cash paid acquisitions compares 477 million property plant equipment 3004 million net cash paid acquisitions 2014 refer note 4 “notes condensed consolidated financial statements” additional information acquisitions financing activities 2015 cash used financing activities 2489 million included 7874 million proceeds revolving credit facility debt 6127 million repayments debt revolving credit facility 270 million dividend payments 3878 million wabtec stock repurchases 2014 cash provided financing activities 255 million included 5634 million proceeds revolving credit facility debt 4938 million repayments debt revolving credit facility 192 million dividend payments 268 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2015 2014 cash balances december 31 2015 2014 2262 million 4258 million respectively 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 8000 million five year revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2015 company available bank borrowing capacity net 219 million letters credit approximately 3331 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 basis points 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 basis points 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 0 basis points alternate rate margin 75 basis points december 31 2015 weighted average interest rate company’s variable rate debt 110 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit rating history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provided company 6000 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 basis points 075 basis points alternate rate based quoted libor rates plus margin ranged 075 basis points 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 31 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 31 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2015 1 purchase obligations represent noncancelable contractual obligations december 31 2015 addition company 2543 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 62 million pension plan investments 2016 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 294 million 8 annual capital expenditure budget subject approval board directors 2016 budget amount approved december 2015 board directors meeting 9 543 million standby letters credit comprised 538 million outstanding letters credit performance bid bond purposes 05 million interest expire various dates 2050 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 106 million timing uncertain except 21 million may become payable 2016 refer note 11 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 1180 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 117 million 127 million 2015 2014 respectively benefits paid postretirement plans 16 million 10 million 2015 2014 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 294 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2015 initial value performance bonds issued company’s behalf 2034 million obligations investing activities company typically spends approximately 50 million 75 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed canceled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 3 19 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 3 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring writedowns adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based last quantitative analysis performed october 1 2013 decline terminal growth rate greater 50 basis points would decrease fair market value 1752 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 4829 million even changes fair value reporting units would greater net book values necessitating step 2 calculations see note 3 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description company provides pension postretirement benefits employees amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 20 million decrease expense 23 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 347 million decrease obligation 426 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 21 million respectively actual asset values december 31 2015 1 lower amortization losses following year would decrease 01 million 1 decrease increase health care cost trend rate used determining postretirement expense would increase expense 004 million decrease expense 002 million 1 decrease increase health care cost trend rate used determining postretirement obligation would increase decrease obligation 03 million respectively stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently commenced cycle 20132015 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 14 million 14 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc605 “revenue recognition” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts judgments uncertainties revenue recognized products shipped respective customers title passed price product determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2015 estimated higher lower 1 would increased decreased revenue gross profit year approximately 122 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 31 countries 2017 66 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec excellence program increase revenues focused growth strategy including product innovation new technologies global market expansion aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company primarily serves worldwide freight transit rail industries operating results largely dependent level activity financial condition capital spending plans railroads passenger transit agencies around world transportation equipment manufacturers serve markets many factors influence industries including general economic conditions traffic volumes measured freight carloadings passenger ridership government spending public transportation investment new technologies general trends increasing urbanization focus sustainability environmental awareness aging equipment fleet growth global trade expected drive continued investment freight transit rail company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtecs products services according 2016 edition market study unife association european rail industry accessible global market railway products services 100 billion expected grow 32 annually 2021 three largest geographic markets represented 80 total accessible market europe north america asia pacific unife projected aboveaverage growth asia pacific europe due overall economic growth trends urbanization increasing mobility deregulation investments new technologies energy environmental issues increasing government support largest product segments market rolling stock services infrastructure represented almost 90 accessible market unife projected spending rolling stock grow aboveaverage rate due increased investment passenger transit vehicles unife estimated global installed base locomotives 114000 units 32 asia pacific 25 north america 18 russiacis commonwealth independent states wabtec estimates 2600 new locomotives delivered worldwide 2017 expects deliveries 2700 2018 unife estimated global installed base freight cars 55 million units 37 north america 26 russiacis 20 asia pacific wabtec estimates 155000 new freight cars delivered worldwide 2017 expects deliveries 148000 2018 unife estimated global installed base passenger transit vehicles 569000 units 43 asia pacific 32 europe 14 russiacis wabtec estimates 34000 new passenger transit vehicles delivered worldwide 2017 expects deliveries 44000 2018 europe majority rail system serves passenger transit market expected continue growing energy environmental factors encourage continued investment public mass transit according unife france germany united kingdom largest western european transit markets representing almost twothirds industry spending european union unife projected western european rail market grow 36 annually led investments new rolling stock france germany significant investments also expected turkey largest market eastern europe 75 freight traffic europe hauled truck rail accounts 20 largest freight markets europe germany poland united kingdom recent years european commission adopted series measures designed increase efficiency european rail network standardizing operating rules certification requirements unife believes adoption measures positive effect ridership investment public transportation time north america railroads carry 40 intercity freight measured tonmiles mode transportation direct ownership operating partnerships us railroads part integrated network includes railroads canada mexico forming regarded world’s mostefficient lowestcost freight rail service 500 railroads operating north america largest railroads referred “class i” accounting 90 industry’s revenues railroads carry wide variety commodities goods including coal metals minerals chemicals grain petroleum commodities represent 50 total rail carloadings intermodal carloads accounting rest railroads operate competitive environment especially trucking industry always seeking ways improve safety cost reliability new technologies offered wabtec others industry provide benefits demand freight related products services north america driven number factors including rail traffic production new locomotives new freight cars us passenger transit industry dependent largely funding federal state local governments fare box revenues demand north american passenger transit products driven number factors including government funding deliveries new subway cars buses ridership us federal government provides money local transit authorities primarily fund purchase new equipment infrastructure transit systems growth asia pacific market driven mainly continued urbanization china india investments freight rail rolling stock infrastructure australia serve mining natural resources markets india making significant investments rolling stock infrastructure modernize rail system example country awarded 1000unit locomotive order us manufacturer unife expected increased spending india offset decreased spending veryhighspeed rolling stock china key geographic markets include russiacis africamiddle east 14 million freight cars 20000 locomotives russiacis among largest freight rail markets world it’s expected invest freight transit rolling stock prasa passenger rail agency south africa expected continue invest new transit cars new locomotives according unife emerging markets expected grow aboveaverage rates global trade led increased freight volumes urbanization led increased demand efficient masstransportation systems growth occurs wabtec expects additional opportunities provide products services markets study unife also said expected increased investment digital tools data asset management rail control technologies would improve efficiency global rail industry unife said datadriven asset management tools potential reduce equipment maintenance costs improve asset utilization rail control technologies focused increasing track capacity improving operational efficiency ensuring safer railway traffic wabtec offers products services help customers make ongoing investments initiatives 2018 beyond general global economic market conditions impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks acquisition faiveley transport sa november 30 2016 company acquired majority ownership faiveley transport sa “faiveley transport” terms share purchase agreement “share purchase agreement” faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valueadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured step acquisition follows • november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest terms share purchase agreement directed company pay €100 per share faiveley transport payable 25 45 cash election shareholders remainder payable wabtec stock faiveley family’s ownership interest acquired company represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport upon completion share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash 11538 shares wabtec common stock per share faiveley transport common stock portion consideration subject cap issuance wabtec common shares equivalent rates cash stock elected 51 owners • february 3 2017 initial cash tender offer closed resulted company acquiring approximately 27 additional outstanding share capital voting rights faiveley transport approximately 4118 million cash 252 million wabtec stock initial cash tender offer company owned approximately 78 outstanding share capital 76 voting rights • march 6 2017 final cash tender offer closed resulted company acquiring approximately 21 additional outstanding share capital 22 additional outstanding voting rights faiveley transport approximately 3032 million cash 03 million wabtec stock final cash tender offer company owned approximately 99 share capital 98 voting rights faiveley transport • march 21 2017 mandatory squeezeout procedure finalized resulted company acquiring faiveley transport shares tendered offers approximately 175 million cash resulted company owning 100 share capital voting rights faiveley transport november 30 2016 date company acquired 51 share capital 49 voting interest faiveley transport faiveley transport consolidated variable interest entity model company concluded primary beneficiary faiveley transport possessed power direct activities faiveley transport significantly impact economic performance possessed obligation right absorb losses benefits faiveley transport purchase price paid 100 ownership faiveley transport 1507 million 7447 million included deposits escrow consolidated balance sheet december 31 2016 cash designated use consideration tender offers results operations following table shows consolidated statements operations years indicated 2017 compared 2016 following table summarizes results operations period following table shows major components change sales 2017 2016 net sales increased 9506 million 38818 million 2017 29312 million 2016 increase due sales acquisitions 11832 million majority related faiveley transport acquisition increase partially offset 1560 million decrease specialty products electronics due lower demand freight original equipment rail products train control signaling products services 686 million decrease remanufacturing overhaul build primarily due absence large locomotive rebuild contract completed 2016 491 million decrease brake products due lower demand original equipment brakes freight transit customers unfavorable foreign exchange decreased sales 53 million freight segment sales decreased 1465 million 95 primarily due 1645 million decrease specialty products electronics sales lower demand freight original equipment rail products train control signaling products attributable lower freight car locomotive builds decrease 791 million remanufacturing overhaul build sales due large locomotive rebuild contract completed 2016 516 million decrease brake products sales lower demand original equipment brakes aftermarket services acquisitions increased sales 1481 million favorable foreign exchange increased sales 11 million transit segment sales increased 10971 million 790 primarily due increase sales acquisitions 10351 million majority related faiveley transport acquisition additionally transit products sales increased 455 million increased demand original train doors air conditioning systems transit electronics overhaul build sales increased 105 million due increase transit overhaul demand specialty products electronics sales increased 85 million due increased demand transit train control signaling products services unfavorable foreign exchange decreased sales 64 million cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 8095 million 28164 million 2017 compared 20069 million period 2016 twelve months ended 2017 cost sales percentage sales 725 compared 684 period 2016 increase percentage sales due product mix largely attributable higher transit segment sales due acquisitions along unfavorable product mix within freight segment also contributing increase higher project adjustments 445 million recorded certain existing contracts 118 million restructuring integration costs related recent acquisitions freight segment cost sales increased 25 percentage sales 683 2017 compared 658 period 2016 increase primarily related lower demand freight original equipment rail products train control signaling products services typically offer higher margin higher project adjustments 69 million certain existing contracts related labor material warranty costs 45 million restructuring integration costs related recent acquisitions transit segment cost sales increased 34 percentage sales 748 2017 compared 714 period 2016 increase primarily related product mix largely attributable acquisition faiveley transport lower overall margins higher project adjustments 376 million certain existing contracts primarily related material warranty costs 73 million restructuring integration costs related recent acquisitions included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 504 million 2017 compared 289 million 2016 increase warranty expense primarily related increase sales contract adjustments noted operating expenses following table shows operating expenses total operating expenses 166 159 sales 2017 2016 respectively selling general administrative expenses increased 1401 million 377 primarily due 1747 million incremental expense acquisitions partially offset lower costs due cost saving initiatives lower organic sales volumes engineering expense increased 238 million 333 primarily due additional expenses acquisitions remained relatively consistent percentage sales amortization expense increased 138 million due amortization intangibles associated new acquisitions following table shows segment operating expenses freight segment operating expenses decreased 53 million 29 2017 increased 150 basis points 127 sales decrease primarily attributable reduced sales volumes realized benefits associated cost saving initiatives undertaken 2017 partially offset 197 million incremental operating expenses acquisitions 32 million related integration restructuring costs transit segment operating expenses increased 2091 million 927 2017 increased 290 basis points 175 sales increase primarily related 191 million incremental operating expenses related acquisitions 20 million related integration restructuring costs related recent acquisitions corporate nonallocated operating expenses decreased 261 million 2017 primarily due decrease faiveley transport transaction integration costs well benefits cost savings initiatives undertaken 2017 2016 interest expense net overall interest expense net increased 261 million 2017 due higher overall debt balance 2017 compared 2016 primarily related faiveley transport acquisition higher interest rates expense net expense net decreased 20 million 10 million 2017 compared 2016 primarily due increase equity income earned unconsolidated subsidiaries income taxes effective income tax rate 255 241 2017 2016 respectively december 22 2017 us government enacted comprehensive tax legislation commonly referred tax cuts jobs act us tax reform bill december 23 2017 french government enacted finance act 2018 published official bulletin december 31 2017 result tax expense increased 550 million related us tax reform bill see note 10 notes consolidated financial statements included part iv item 8 report explanation offset decreases 507 million primarily due revaluation net us french deferred tax liabilities result tax law enactments result lower earnings mix higher tax rate jurisdictions net favorable deferred tax benefits related adjustment deferred tax liabilities originally established prior periods 2016 compared 2015 following table summarizes results operations period following table shows major components change sales 2016 2015 net sales decreased 3768 million 29312 million 2016 33080 million 2015 decrease primarily due lower sales specialty products electronics 4027 million lower brake products sales 551 million due decreased demand freight products attributable lower freight car locomotive builds train control signaling products services lower products sales 269 million decreased demand freight spare part kits acquisitions increased sales 1892 million unfavorable foreign exchange decreased sales 711 million freight segment sales decreased 5116 million 249 primarily due 4383 million decrease specialty products electronics sales lower demand freight original equipment rail products train control signaling products attributable lower freight car locomotive builds decrease 507 million brake products sales lower demand original equipment brakes aftermarket services decrease 337 million remanufacturing overhaul build sales due large locomotive rebuild contract completed 2016 decrease 269 million product sales decreased demand freight spare part kits acquisitions increased sales 551 million unfavorable foreign exchange decreased sales 172 million transit segment sales increased 1348 million 108 primarily due 356 million increase specialty products electronics higher demand original equipment conduction systems current collectors increase 227 million remanufacturing overhaul build sales higher demand aftermarket locomotive builds acquisitions increased sales 1341 million unfavorable foreign exchange decreased sales 539 million cost sales gross profit following table shows major components cost sales periods indicated cost sales decreased 2532 million 20069 million 2016 compared 22602 million period 2015 twelve months ended 2016 cost sales percentage sales 684 compared 683 period 2015 freight segment cost sales decreased 05 percentage sales 658 2016 compared 663 period 2015 decrease percentage sales primarily related sales lower material content lower overall material costs due ongoing sourcing efforts decreases various commodity prices partially offset increase overhead costs percentage sales primarily due certain fixed overhead costs transit segment cost sales decreased 03 percentage sales 714 2016 compared 717 period 2015 decrease primarily due better margin performance prior year acquisitions ongoing sourcing savings benefits partially offset 138 million costs related adjustments certain longterm contracts included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 289 million 2016 compared 354 million 2015 operating expenses following table shows operating expenses total operating expenses 159 134 sales 2016 2015 respectively selling general administrative expenses increased 244 million 70 primarily due 389 million costs related faiveley acquisition 54 million costs related restructuring activity costs partially offset lower incentive noncash compensation expense effects foreign exchange engineering expense consistent prior year amortization expense increased 10 million due amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses decreased 261 million 125 2016 increased 160 basis points 118 sales decrease primarily attributable reduced sales volumes realized benefits associated cost saving initiatives undertaken 2016 partially offset 88 million incremental operating expenses acquisitions transit segment operating expenses increased 202 million 98 2016 decreased 10 basis points 163 sales increase primarily related 262 million incremental operating expenses related acquisitions 71 million related faiveley transport transaction increase partially offset lower operating expenses due foreign exchange corporate nonallocated operating expenses increased 315 million 2016 primarily due 318 million costs related faiveley acquisition partially offset realized benefits cost saving initiatives 2016 interest expense net overall interest expense net increased 257 million 2016 due higher overall debt balance 2016 compared 2015 primarily related faiveley transport acquisition 149 million debt refinancing costs refer note 8 notes condensed consolidated financial statements included part iv item 15 report additional information debt expense net expense net decreased 23 million 30 million 2016 compared 2015 primarily due foreign exchange adjustments income taxes effective income tax rate 241 319 2016 2015 respectively decrease effective rate primarily result enacted tax rate change reduces corporate income tax rate france higher earnings mix lower tax rate jurisdictions partially offset 2016 transaction charges related acquisition faiveley transport deductible liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2017 1888 million compared 4505 million 2016 comparison 2016 cash provided operations decreased due unfavorable working capital performance lower net income 511 million major components working capital follows unfavorable change 884 million accounts receivable primarily due higher sales unfavorable change accounts payable 728 million due timing payments suppliers unfavorable change 254 million assets liabilities primarily due unfavorable change accrued liabilities due payments related contract liabilities accrued expenses acquisition costs 2017 unfavorable change inventory 543 million due efforts ramp production anticipation stronger product demand 2018 cash provided operations 2016 4505 million compared 4508 million 2015 comparison 2015 cash provided operations 2016 changed due favorable working capital requirements partially offset lower operating results favorable working capital requirements primarily related 577 million favorable change accounts payable principally due timing payments 252 million favorable change inventory driven successful efforts control amount inventory hand favorable changes working capital partially offset unfavorable change accrued income taxes 335 million driven lower income taxes owed end 2016 given decrease pretax income investing activities 2017 2016 2015 cash used investing activities 2757 million 7751 million 3801 million respectively major components cash outflow 2017 planned additions property plant equipment 895 million continued investments facilities manufacturing processes 9215 million net cash paid acquisitions outflows partially offset 7340 million cash released escrow related faiveley acquisition compares 502 million property plant equipment 1831 million net cash paid acquisitions 2016 additionally 2016 7447 million cash deposited escrow finance purchase noncontrolling interest faiveley transport partially offset 2029 million cash deposited escrow finance purchase controlling interest faiveley transport 2015 subsequently released escrow 2016 refer note 3 “notes condensed consolidated financial statements” included part iv item 15 report additional information acquisitions financing activities 2017 cash used financing activities 974 million included 12167 million proceeds revolving credit facility 12695 million repayments debt 422 million dividend payments 2016 cash provided financing activities 5230 million included 11250 million proceeds revolving credit facility debt 7700 million repayments debt revolving credit facility 3327 million repayments debt primarily driven repayments debt acquired purchase faiveley transport 7500 million new borrowings 2026 senior notes 324 million dividend payments 2122 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2017 2016 wabtecs acquisition controlling stake faiveley transport triggered early repayment syndicated loan mandatory offer investors repay us schuldschein private placements syndicated loan us private placements repaid full december 2016 345 senior notes due 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 27 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provides company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement facility expires june 22 2021 2016 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2017 company available bank borrowing capacity net 354 million letters credit approximately 6790 million subject certain financial covenant restrictions term loan drawn november 25 2016 company incurred 10 basis point commitment fee june 22 2016 initial draw november 25 2016 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points december 31 2016 weighted average interest rate company’s variable rate debt 292 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converted portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit ratings history performance company currently believes risk nonperformance negligible 2016 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2016 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt ebitda ratio 325 company compliance restrictions covenants 2016 refinancing credit agreement expect measurements limit company executing operating activities schuldschein loan due 2016 conjunction acquisition faiveley transport wabtec acquired 1372 million schuldshein private placement loan originally issued faiveley transport march 5 2014 germany approximately 20 international investors participated loan denominated euros subsequent acquisition faiveley transport company repaid 1253 million outstanding schuldschein loan remaining balance 120 million december 31 2017 matures march 5 2024 bears fixed rate 400 contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2017 1 purchase obligations represent noncancelable contractual obligations december 31 2017 addition company 3683 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 73 million pension plan investments 2018 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable may november year 345 750 million senior notes due 2026 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 461 million 8 368 million standby letters credit comprised 353 million outstanding letters credit performance bid bond purposes 15 million interest expire various dates 2050 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 69 million timing uncertain except 52 million may become payable 2017 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 1486 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 160 million 133 million 2017 2016 respectively benefits paid postretirement plans 12 million 09 million 2017 2016 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 461 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2017 initial value performance bonds issued company’s behalf 461 million forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed canceled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers • industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental matters asbestosrelated matters pension liabilities warranties product liabilities intellectual property claims • completion integration acquisitions including acquisition faiveley transport • development use new technology competitive factors • actions competitors • outcome negotiations partners suppliers customers others politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome negotiations governments statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 17 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring writedowns adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based quantitative analysis performed october 1 2017 decline terminal growth rate 50 basis points would decrease fair market value 334 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 984 million even changes fair value reporting units would greater net book values necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description company provides pension postretirement benefits employees amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 12 million decrease expense 18 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 531 million decrease obligation 672 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 30 million actual asset values december 31 2017 1 lower amortization losses following year would decrease 02 million 1 decrease increase health care cost trend rate used determining postretirement expense would increase decrease expense less 01 million 1 decrease increase health care cost trend rate used determining postretirement obligation would increase decrease obligation 03 million stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently completed cycle 20152017 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 07 million 07 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc 605 “revenue recognition” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts judgments uncertainties revenue recognized products shipped respective customers title passed price product determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenue determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2017 estimated higher lower 1 would increased decreased revenue gross profit year approximately 298 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 30 countries 2018 67 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec excellence program increase revenues focused growth strategy including product innovation new technologies global market expansion aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company primarily serves worldwide freight transit rail industries operating results largely dependent level activity financial condition capital spending plans railroads passenger transit agencies around world transportation equipment manufacturers serve markets many factors influence industries including general economic conditions traffic volumes measured freight carloadings passenger ridership government spending public transportation investment new technologies general trends increasing urbanization focus sustainability environmental awareness aging equipment fleet growth global trade expected drive continued investment freight transit rail company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtecs products services according 2018 biannual edition market study unife association european rail industry accessible global market railway products services 100 billion expected grow compounded annual growth rate 26 2023 three largest geographic markets represented 80 total accessible market europe north america asia pacific unife projected aboveaverage growth rates north america latin america africamiddle east asia pacific europe growing industry average unife said trends urbanization increasing mobility deregulation investments new technologies energy environmental issues increasing government support continue drive investment largest product segments market rolling stock services infrastructure represent almost 90 accessible market unife projected spending turnkey management projects infrastructure grow aboveaverage rates unife estimated global installed base locomotives 114000 units 33 asia pacific 26 north america 18 russiacis commonwealth independent states wabtec estimates 2500 new locomotives delivered worldwide 2018 expect deliveries 2900 2019 unife estimated global installed base freight cars 51 million 33 north america 26 asia pacific 24 russiacis wabtec estimates 175000 new freight cars delivered worldwide 2018 expect deliveries 174000 2019 unife estimated global installed base passenger transit vehicles 600000 units 45 asia pacific 33 europe 12 russiacis wabtec estimates 30000 new passenger transit vehicles ordered worldwide 2018 expect orders number 2019 europe majority rail system serves passenger transit market expected continue growing energy environmental factors encourage continued investment public mass transit according unife france germany united kingdom largest western european transit markets representing almost twothirds industry spending european union unife projected accessible western european rail market grow 23 annually led investments new rolling stock france germany 75 freight traffic europe hauled truck rail accounts 20 largest freight markets europe germany poland united kingdom recent years european commission adopted series measures designed increase efficiency european rail network standardizing operating rules certification requirements unife believes adoption measures positive effect ridership investment public transportation time north america railroads carry 40 intercity freight measured tonmiles mode transportation direct ownership operating partnerships us railroads part integrated network includes railroads canada mexico forming regarded world’s mostefficient lowestcost freight rail service 500 railroads operating north america largest railroads referred “class i” accounting 90 industry’s revenues railroads carry wide variety commodities goods including coal metals minerals chemicals grain petroleum commodities represent 50 total rail carloadings intermodal carloads accounting rest railroads operate competitive environment especially trucking industry always seeking ways improve safety cost reliability new technologies offered wabtec others industry provide benefits demand freight related products services north america driven number factors including rail traffic production new locomotives new freight cars us passenger transit industry dependent largely funding federal state local governments fare box revenues demand north american passenger transit products driven number factors including government funding deliveries new subway cars buses ridership us federal government provides money local transit authorities primarily fund purchase new equipment infrastructure transit systems growth asia pacific market driven mainly continued urbanization china india investments freight rail rolling stock infrastructure australia serve mining natural resources markets india making significant investments rolling stock infrastructure modernize rail system example country awarded 1000unit locomotive order ge transportation key geographic markets include russiacis africamiddle east 12 million freight cars 20000 locomotives russiacis among largest freight rail markets world it’s expected invest freight transit rolling stock prasa passenger rail agency south africa expected continue invest new transit cars new locomotives according unife emerging markets expected grow aboveaverage rates global trade led increased freight volumes urbanization led increased demand efficient masstransportation systems growth occurs wabtec expects additional opportunities provide products services markets study unife also said expected increased investment digital tools data asset management rail control technologies would improve efficiency global rail industry unife said datadriven asset management tools potential reduce equipment maintenance costs improve asset utilization rail control technologies focused increasing track capacity improving operational efficiency ensuring safer railway traffic wabtec offers products services help customers make ongoing investments initiatives 2019 beyond general global economic market conditions impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks merger wabtec ge transportation wabtec ge spinco newly formed wholly owned subsidiary ge merger sub newly formed wholly owned subsidiary company entered original merger agreement may 20 2018 ge spinco wabtec us rail holdings inc direct sale purchaser entered original separation agreement may 20 2018 together provided combination wabtec ge transportation original merger agreement original separation agreement subsequently amended january 25 2019 merger completed february 25 2019 connection direct sale certain assets ge transportation including equity interests certain pretransaction subsidiaries ge compose part ge transportation sold direct sale purchaser cash payment 2875 billion direct sale purchaser assumed certain liabilities ge transportation connection purchase thereafter ge transferred spinco business spinco subsidiaries extent already held spinco subsidiaries spinco issued ge shares spinco class preferred stock spinco class b preferred stock spinco class c preferred stock additional shares spinco common stock spinco transfer following issuance additional spinco common stock ge immediately prior distribution ge owned 8700000000 shares spinco common stock 15000 shares spinco class preferred stock 10000 shares spinco class b preferred stock one share spinco class c preferred stock constituted outstanding stock spinco following direct sale ge distributed distribution shares spinco spinoff transaction immediately distribution merger sub merged spinco whereby separate corporate existence merger sub ceased spinco continued surviving company wholly owned subsidiary wabtec except respect shares spinco class preferred stock held ge merger subject adjustment accordance merger agreement share spinco common stock converted right receive number shares wabtec common stock based common stock exchange ratio set forth merger agreement share spinco class c preferred stock converted right receive 10000 shares wabtec convertible preferred stock b number shares wabtec common stock equal 99 fullydiluted pro forma wabtec shares immediately prior merger wabtec paid 100 million cash ge exchange shares spinco class b preferred stock upon consummation merger calculated based wabtec’s outstanding common stock fullydiluted asconverted asexercised basis december 31 2018 approximately 492 outstanding shares wabtec common stock would held collectively ge spinoff record date holders ge common stock 99 held ge directly shares wabtec common stock 15 underlying shares wabtec convertible preferred stock held ge approximately 508 outstanding shares wabtec common stock would held premerger wabtec stockholders following effective time merger ge also 15000 shares spinco class preferred stock wabtec hold 10000 shares spinco class b preferred stock shares wabtec common stock wabtec convertible preferred stock held ge subject ge’s obligations shareholders agreement including among things case subject certain exceptions restrictions ability sell transfer otherwise divest shares period 30 days ii obligation sell transfer otherwise divest later 120 days following closing date merger ge’s affiliates’ ownership wabtec common stock andor wabtec convertible preferred stock ge together affiliates beneficially owns less 149 199 number shares wabtec common stock outstanding immediately closing merger b later one year following closing date merger ge’s affiliates’ ownership wabtec common stock andor wabtec convertible preferred stock ge together affiliates beneficially owns 185 number shares wabtec common stock outstanding immediately closing merger case clauses b treating wabtec convertible preferred stock wabtec common stock convertible purposes determining number shares wabtec common stock owned purposes determining number shares wabtec common stock outstanding c later third anniversary closing date merger subject shares ge together affiliates beneficially owns iii obligation vote shares wabtec common stock proportion required shareholders agreement estimated total value consideration paid wabtec transactions subject market price shares wabtec common stock date closing using wabtec’s closing stock price nyse february 22 2019 total value consideration transactions approximately 102 billion including direct sale purchase price contingent consideration assumed debt net cash acquired september 14 2018 wabtec completed public offering sale 500 million aggregate principal amount floating rate senior notes ii 750 million aggregate principal amount 2024 senior notes iii 125 billion aggregate principal amount 2028 senior notes company used net proceeds offering sale notes combined proceeds 400 million delayed draw term loan entered june 8 2018 finance 2875 billion direct sale wabtec used portion proceeds september 14 2018 notes pay debt associated revolving credit facility remaining proceeds classified restricted cash consolidated balance sheet company used cash amounts finance direct sale refer footnote 10 information regarding debt merger spinco wabtec’s wholly owned subsidiary except respect shares spinco class preferred stock held ge holds spinco business direct sale purchaser also wabtec’s wholly owned subsidiary holds assets purchased liabilities assumed connection direct sale together spinco direct sale purchaser operate posttransaction ge transportation shares company’s common stock including issued merger listed nyse company’s current trading symbol “wab” date distribution ge subsidiaries spinco transferred subsidiaries entered additional agreements relating among things intellectual property employee matters tax matters research development transition services acquisition faiveley transport sa november 30 2016 company acquired majority ownership faiveley transport terms share purchase agreement faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valueadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured step acquisition follows • november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest terms share purchase agreement directed company pay €100 per share faiveley transport payable 25 45 cash election shareholders remainder payable wabtec stock faiveley family’s ownership interest acquired company represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport upon completion share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash 11538 shares wabtec common stock per share faiveley transport common stock portion consideration subject cap issuance wabtec common shares equivalent rates cash stock elected 51 owners • february 3 2017 initial cash tender offer closed resulted company acquiring approximately 27 additional outstanding share capital voting rights faiveley transport approximately 4118 million cash 252 million wabtec stock initial cash tender offer company owned approximately 78 outstanding share capital 76 voting rights • march 6 2017 final cash tender offer closed resulted company acquiring approximately 21 additional outstanding share capital 22 additional outstanding voting rights faiveley transport approximately 3032 million cash 03 million wabtec stock final cash tender offer company owned approximately 99 share capital 98 voting rights faiveley transport • march 21 2017 mandatory squeezeout procedure finalized resulted company acquiring faiveley transport shares tendered offers approximately 175 million cash resulted company owning 100 share capital voting rights faiveley transport november 30 2016 date company acquired 51 share capital 49 voting interest faiveley transport faiveley transport consolidated variable interest entity model company concluded primary beneficiary faiveley transport possessed power direct activities faiveley transport significantly impact economic performance possessed obligation right absorb losses benefits faiveley transport purchase price paid 100 ownership faiveley transport 1507 million 7447 million included deposits escrow consolidated balance sheet december 31 2016 cash designated use consideration tender offers results operations following table shows consolidated statements operations years indicated 2018 compared 2017 following table summarizes results operations period following table shows major components change sales 2018 2017 net sales increased 4818 million 43635 million 2018 38818 million 2017 increase primarily due organic increase 1589 million specialty products electronics higher demand freight transit original equipment rail products train control signaling products services 1262 million increase brake products due increased demand original equipment brakes freight transit customers additionally sales acquisitions increased sales 1347 million favorable foreign exchange increased sales 623 million freight segment sales increased 1677 million 120 mostly organic increase 851 million specialty products electronics due higher demand freight original equipment rail products train control signaling products services additionally products sales increased 332 million increased spare parts demand resulting increase rail traffic acquisitions increased sales 509 million transit segment sales increased 3141 million 126 primarily due 1046 million increase brake products higher demand original equipment brakes 838 million sales related acquisitions 738 million specialty products electronics higher demand train control signaling products services favorable foreign exchange increased sales 635 million cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 3132 million 31297 million 2018 compared 28164 million 2017 2018 cost sales percentage sales 717 compared 725 2017 cost sales 2018 includes 176 million restructuring costs primarily transit segment cost sales 2017 includes 445 million project adjustments certain projects 118 million restructuring integration costs related recent acquisitions primarily transit segment excluding restructuring costs contract adjustments years cost sales increased 02 percentage sales freight segment cost sales decreased 11 percentage sales 672 2018 compared 683 2017 decrease primarily related favorable product mix saw increase sales train control signaling products services freight car products due increase freight cars built higher margin train control signaling products services lower material content higher labor content contributed decrease material costs percentage revenue subsequent increase labor percentage additionally 114 million project adjustments restructuring costs 2017 recur 2018 transit segment cost sales decreased 06 percentage sales 742 2018 compared 748 2017 cost sales 2018 includes 159 million restructuring costs primarily related downsizing operations uk consolidation certain operations us china cost sales 2017 includes 376 million project adjustments certain contracts primarily related material warranty cost 73 million restructuring integration costs related recent acquisitions excluding restructuring costs contract adjustments years transit segment cost sales increased 05 percentage sales increase result additional costs projects primarily uk included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 580 million 2018 compared 504 million 2017 increase warranty expense primarily related increase sales operating expenses following table shows operating expenses total operating expenses percentage sales increased 08 174 2018 compared 166 2017 selling general administrative expenses increased 1207 million 235 primarily due 213 million costs related ge transportation transaction 203 million restructuring costs related exit certain operations headcount reductions across company 72 million costs related goods service tax law change india 148 million increased employee benefit costs 180 million incremental expense acquisitions changes foreign currency rates increased selling general administrative expenses 141 million organic sales volume increases contributed remainder change 2017 selling general administrative expenses included 297 million faiveley transport transaction restructuring costs engineering expense decreased 77 million 138 primarily due timing research development expenses amortization expense increased 31 million due amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses increased 288 million 162 2018 increased 50 basis points 132 sales increase primarily attributable increased sales marketing expenses 40 million attributable increased sales volumes increased employee benefit costs 54 million 111 million incremental operating expenses prior year acquisitions transit segment operating expenses increased 595 million 137 2018 increased 20 basis points 177 sales operating expense included 183 million 200 million restructuring integration charges 2018 2017 respectively 2018 restructuring charges related exit certain operations headcount reductions 2017 restructuring charges related faiveley transportation integration costs additionally 2018 operating expenses includes 72 million costs related goods service tax law change india excluding restructuring integration costs years impact goods service tax law change 2018 transit operating expenses increased 541 million increase primarily due increased sales volumes increase employee benefits costs 95 million 110 million incremental operating expenses acquisitions addition changes foreign currency rates increased operating expenses 158 million corporate nonallocated operating expenses increased 279 million 2018 due primarily costs related ge transportation transaction 213 million increased litigation costs 67 million prior year operating costs included 57 million related faiveley integration interest expense net overall interest expense net increased 344 million 2018 interest expense associated proposed ge transportation transaction 293 million addition net interest expense prior year included 22 million benefit related prepayment debt assumed faiveley transport acquisition expense net expense net decreased 25 million 64 million 2018 compared 2017 income taxes effective income tax rate 206 255 2018 2017 respectively december 22 2017 us government enacted comprehensive tax legislation commonly referred tax act us tax reform bill lowered federal statutory tax rate 35 21 beginning january 1 2018 decrease effective tax twelve months ended december 31 2018 result higher earnings mix lower tax jurisdictions well benefit completion accounting income tax effects tax act adjustment provisional amounts previously recorded accordance sec staff accounting bulletin 118 partially offset reversal nonrecurring tax benefits recorded twelve months ended december 31 2018 2017 compared 2016 following table summarizes results operations period following table shows major components change sales 2017 2016 net sales increased 9506 million 38818 million 2017 29312 million 2016 increase due sales acquisitions 11832 million majority related faiveley transport acquisition increase partially offset 1560 million decrease specialty products electronics due lower demand freight original equipment rail products train control signaling products services 686 million decrease remanufacturing overhaul build primarily due absence large locomotive rebuild contract completed 2016 491 million decrease brake products due lower demand original equipment brakes freight transit customers unfavorable foreign exchange decreased sales 53 million freight segment sales decreased 1465 million 95 primarily due 1645 million decrease specialty products electronics sales lower demand freight original equipment rail products train control signaling products attributable lower freight car locomotive builds decrease 791 million remanufacturing overhaul build sales due large locomotive rebuild contract completed 2016 516 million decrease brake products sales lower demand original equipment brakes aftermarket services acquisitions increased sales 1481 million favorable foreign exchange increased sales 11 million transit segment sales increased 10971 million 790 primarily due increase sales acquisitions 10351 million majority related faiveley transport acquisition additionally transit products sales increased 455 million increased demand original train doors air conditioning systems transit electronics overhaul build sales increased 105 million due increase transit overhaul demand specialty products electronics sales increased 85 million due increased demand transit train control signaling products services unfavorable foreign exchange decreased sales 64 million cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 8095 million 28164 million 2017 compared 20069 million period 2016 twelve months ended 2017 cost sales percentage sales 725 compared 684 period 2016 increase percentage sales due product mix largely attributable higher transit segment sales due acquisitions along unfavorable product mix within freight segment also contributing increase higher project adjustments 445 million recorded certain existing contracts 118 million restructuring integration costs related recent acquisitions freight segment cost sales increased 25 percentage sales 683 2017 compared 658 period 2016 increase primarily related lower demand freight original equipment rail products train control signaling products services typically offer higher margin higher project adjustments 69 million certain existing contracts related labor material warranty costs 45 million restructuring integration costs related recent acquisitions transit segment cost sales increased 34 percentage sales 748 2017 compared 714 period 2016 increase primarily related product mix largely attributable acquisition faiveley transport lower overall margins higher project adjustments 376 million certain existing contracts primarily related material warranty costs 73 million restructuring integration costs related recent acquisitions included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 504 million 2017 compared 289 million 2016 increase warranty expense primarily related increase sales contract adjustments noted operating expenses following table shows operating expenses total operating expenses 166 159 sales 2017 2016 respectively selling general administrative expenses increased 1390 million 372 primarily due 1747 million incremental expense acquisitions partially offset lower costs due cost saving initiatives lower organic sales volumes engineering expense increased 238 million 333 primarily due additional expenses acquisitions remained relatively consistent percentage sales amortization expense increased 138 million due amortization intangibles associated new acquisitions following table shows segment operating expenses freight segment operating expenses decreased 58 million 32 2017 increased 80 basis points 127 sales decrease primarily attributable reduced sales volumes realized benefits associated cost saving initiatives undertaken 2017 partially offset 197 million incremental operating expenses acquisitions 32 million related integration restructuring costs transit segment operating expenses increased 2085 million 921 2017 increased 120 basis points 175 sales increase primarily related 191 million incremental operating expenses related acquisitions 20 million related integration restructuring costs related recent acquisitions corporate nonallocated operating expenses decreased 261 million 2017 primarily due decrease faiveley transport transaction integration costs well benefits cost savings initiatives undertaken 2017 2016 interest expense net overall interest expense net increased 276 million 2017 due higher overall debt balance 2017 compared 2016 primarily related faiveley transport acquisition higher interest rates expense income net income net increased 23 million 89 million 2017 compared 2016 primarily due increase equity income earned unconsolidated subsidiaries income taxes effective income tax rate 255 241 2017 2016 respectively december 22 2017 us government enacted comprehensive tax legislation commonly referred tax cuts jobs act us tax reform bill december 23 2017 french government enacted finance act 2018 published official bulletin december 31 2017 result tax expense increased 550 million related us tax reform bill see note 12 notes consolidated financial statements included part iv item 8 report explanation offset decreases 507 million primarily due revaluation net us french deferred tax liabilities result tax law enactments result lower earnings mix higher tax rate jurisdictions net favorable deferred tax benefits related adjustment deferred tax liabilities originally established prior periods liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2018 3147 million compared 1888 million 2017 comparison 2017 cash provided operations increased due favorable working capital performance higher net income 294 million major components increase cash provided operations follows favorable change accounts payable 1405 million due timing payments suppliers favorable change taxes 224 million due revaluation deferred taxes caused tax cut jobs act tax act timing income tax payments favorable change accrued liabilities customer deposits 506 million due increase customer advances 2018 favorable changes working capital offset unfavorable change inventory 999 million due efforts ramp production anticipation stronger product demand 2019 cash provided operations 2017 1888 million compared 4505 million 2016 comparison 2016 cash provided operations decreased due unfavorable working capital performance lower net income 511 million major components working capital follows unfavorable change 884 million accounts receivable primarily due higher sales unfavorable change accounts payable 728 million due timing payments suppliers unfavorable change 254 million assets liabilities primarily due unfavorable change accrued liabilities due payments related contract liabilities accrued expenses acquisition costs 2017 unfavorable change inventory 543 million due efforts ramp production anticipation stronger product demand 2018 investing activities 2018 2017 2016 cash used investing activities 1473 million 10335 million 2330 million respectively major components cash outflow 2018 planned additions property plant equipment 933 million continued investments facilities manufacturing processes 512 million net cash paid acquisitions outflows partially offset 113 million proceeds disposal property plant equipment compares 895 million property plant equipment 9453 million net cash paid acquisitions 2017 primarily related acquisition faiveley transport 2016 502 million cash used purchase property plant equipment net cash paid acquisitions 1831 million financing activities 2018 cash provided financing activities 19781 million included 25000 million proceeds new borrowings 9807 million proceeds revolving credit facility 14539 million repayments debt 463 million dividend payments 2017 cash used financing activities 974 million included 12167 million proceeds revolving credit facility debt 12695 million repayments debt revolving credit facility dividend payments 422 million 2016 cash provided financing activities 5230 million included 11250 million proceeds revolving credit facility debt 7700 million repayments debt revolving credit facility 3327 million repayments debt primarily driven repayments debt acquired purchase faiveley transport 7500 million new borrowings 2026 senior notes 324 million dividend payments 2122 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2018 2017 september 14 2018 company issued 25 billion senior notes three different maturities • floating rate senior notes due 2021 company issued 5000 million floating rate senior notes due 2021 floating rate notes floating rate notes noncallable one year issued 100 face value interest floating rate notes accrues floating rate per annum equal threemonth libor plus 105 basis points interest rate floating rate notes initial interest period threemonth libor plus 105 basis points determined september 12 2018 payable quarterly december 15 march 15 june 15 september 15 year company incurred 35 million deferred financing costs related issuance floating rate notes • 4150 senior notes due 2024 company issued 7500 million 4150 senior notes due 2024 notes 2024 notes issued 99805 face value interest 2024 notes accrues rate 4150 per annum payable semiannually march 15 september 15 year company incurred 74 million deferred financing costs related issuance 2024 notes • 470 senior notes due 2028 company issued 12500 million 470 senior notes due 2028 notes together floating rate notes 2024 notes senior notes 2028 notes issued 99889 face value interest 2028 notes accrues rate 4700 per annum payable semiannually march 15 september 15 year company incurred 106 million deferred financing costs related issuance 2028 notes net proceeds issuance sale senior notes used finance cash portion ge transportation acquisition principal balances due full maturity senior notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture senior notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sales assets change control mergers consolidations incurrence liens february 12 2019 rating assigned moodys decreased ba1 accordingly pursuant respective terms senior notes issued september 14 2018 interest rate increased 025 interest rate increase take effect next interest period following february 12 2019 company compliance restrictions covenants indenture senior notes issued expects restrictions covenants type limiting factor executing operating activities 345 senior notes due november 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 27 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2018 refinancing credit agreement june 8 2018 company entered credit agreement “2018 refinancing credit agreement” replaced company’s thenexisting “2016 refinancing credit agreement” part 2018 refinancing credit agreement company entered 12 billion revolving credit facility “revolving credit facility” replaced company’s revolving credit facility 2016 refinancing credit agreement includes letter credit subfacility 4500 million swing line subfacility 750 million ii 3500 million term loan “refinancing term loan” refinanced term loan 2016 refinancing credit agreement iii new 4000 million delayed draw term loan “delayed draw term loan” 2018 refinancing credit agreement also provided bridge loan facility “bridge loan facility” amount exceed 25 billion facility become effective company’s request commitments respect bridge loan facility terminated upon issuance sale senior notes september 14 2018 addition 2018 refinancing credit agreement contains uncommitted accordion feature allowing company request aggregate amount exceed 6000 million increases borrowing commitments revolving credit facility new incremental term loan commitment december 31 2018 company available bank borrowing capacity net 292 million letters credit approximately 11708 million subject certain financial covenant restrictions revolving credit facility matures june 8 2023 unsecured refinancing term loan matures june 8 2021 unsecured delayed draw term loan matures third anniversary date borrowed unsecured applicable interest rate borrowings 2018 refinancing credit agreement includes interest rate spreads based lower pricing corresponding company’s ratio total debt less unrestricted cash 3000 million ebitda “leverage ratio” ii company’s public rating case range 1000 1875 liborcdorbased borrowings 00 0875 alternate base rate based borrowings obligations company 2018 refinancing credit agreement guaranteed certain company’s subsidiaries 2018 refinancing credit agreement contains customary representations warranties company subsidiaries including customary use materiality material adverse effect knowledge qualifiers company subsidiaries also subject customary affirmative covenants impose certain reporting obligations company subsidiaries ii customary negative covenants including limitations indebtedness liens restricted payments fundamental changes business activities transactions affiliates restrictive agreements changes fiscal year use proceeds addition company required maintain interest coverage ratio least 300 100 period four consecutive fiscal quarters ending last day fiscal quarter ii leverage ratio calculated last day fiscal quarter period four consecutive fiscal quarters 325 100 less provided event company completes direct sale merger material acquisition cash consideration paid exceeds 5000 million maximum leverage ratio permitted 375 100 end fiscal quarter acquisition consummated three fiscal quarters immediately following fiscal quarter 350 100 end fourth fifth full fiscal quarters consummation acquisition company compliance restrictions covenants 2018 refinancing credit agreement expect measurements limit company executing operating activities december 31 2018 weighted average interest rate company’s variable rate debt 368 june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provided company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement 2016 refinancing credit agreement borrowings bore variable interest rates indexed described 2016 refinancing credit agreement company could elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2018 1 purchase obligations represent noncancelable contractual obligations december 31 2018 addition company 4419 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 16 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 64 million pension plan investments 2019 see disclosure note 11 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 11 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable march june september december year rate based contractual terms floating senior notes due 2021 interest payments payable may september year 415 750 million senior notes due 2024 interest payments payable march september year 47 1250 million senior note due 2028 interest payments payable may november year 345 750 million senior notes due 2026 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility borrowings based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 10 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 464 million 8 3542 million standby letters credit comprised outstanding letters credit performance bid bond purposes expire various dates 2025 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 95 million timing uncertain refer note 12 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 1496 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 169 million 160 million 2018 2017 respectively benefits paid postretirement plans 10 million 12 million 2018 2017 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 464 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2018 initial value performance bonds issued company’s behalf 507 million forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed canceled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers • industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental matters asbestosrelated matters pension liabilities warranties product liabilities intellectual property claims • completion integration acquisitions including acquisition faiveley transport ge transportation • development use new technology competitive factors • actions competitors • outcome negotiations partners suppliers customers others politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome negotiations governments statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 19 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring writedowns adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based quantitative analysis performed october 1 2018 decline terminal growth rate 50 basis points would decrease fair market value 398 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 1156 million even changes fair value reporting units would greater net book values necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description company provides pension postretirement benefits employees amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 11 million decrease expense 19 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 438 million decrease obligation 548 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 28 million actual asset values december 31 2018 1 lower amortization losses following year would decrease 02 million stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new three year performance cycle recently completed cycle 20162018 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 15 million 15 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc 606 “revenue contracts customers” company recognizes revenues longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation judgments uncertainties accounting longterm customer agreements involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontracts may associated contract factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements generally pricing defined contracts may contain include estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts liquidating damages performance bonuses effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2018 estimated higher lower 1 would increased decreased revenue gross profit year approximately 300 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts item 7aitem 7management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers locomotives valueadded technologybased equipment systems services global freight rail passenger transit industries products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity efficiency reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 50 countries 2019 net sales aftermarket parts services represented 55 total net sales 60 company’s net sales came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec excellence program increase revenues focused growth strategy including product innovation new technologies global market expansion aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company primarily serves worldwide freight transit rail industries operating results largely dependent level activity financial condition capital spending plans railroads passenger transit agencies around world transportation equipment manufacturers serve markets many factors influence industries including general economic conditions traffic volumes measured freight carloadings passenger ridership government spending public transportation investment new technologies general trends increasing urbanization focus sustainability environmental awareness aging equipment fleet growth global trade expected drive continued investment freight transit rail company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtecs products services according 2018 biannual edition market study unife association european rail industry accessible global market railway products services 100 billion expected grow compounded annual growth rate 26 2023 three largest geographic markets represented 80 total accessible market europe north america asia pacific unife projected aboveaverage growth rates north america latin america africamiddle east asia pacific europe growing industry average unife said trends urbanization increasing mobility deregulation investments new technologies energy environmental issues increasing government support continue drive investment largest product segments market rolling stock services infrastructure represent almost 90 accessible market unife projected spending turnkey management projects infrastructure grow aboveaverage rates unife estimated global installed base diesel electric locomotives 114800 units 33 asia pacific 26 north america 18 russiacis commonwealth independent states wabtec estimates 2900 new locomotives delivered worldwide 2019 unife estimated global installed base freight cars 51 million 33 north america 26 asia pacific 24 russiacis wabtec estimates 174000 new freight cars delivered worldwide 2019 unife estimated global installed base passenger transit vehicles 600000 units 45 asia pacific 33 europe 12 russiacis wabtec estimates 35000 new passenger transit vehicles ordered worldwide 2019 europe majority rail system serves passenger transit market expected continue growing energy environmental policies encourage continued investment public mass transit modal shift car rail according unife france germany united kingdom largest western european transit markets representing almost twothirds industry spending european union unife projected accessible western european rail market grow 23 annually led investments new rolling stock france germany 75 freight traffic europe hauled truck rail accounts 20 largest freight markets europe germany poland united kingdom recent years european commission adopted series measures designed increase efficiency european rail network standardizing operating rules certification requirements unife believes adoption measures positive effect ridership investment public transportation time north america railroads carry 40 intercity freight measured tonmiles mode transportation direct ownership operating partnerships us railroads part integrated network includes railroads canada mexico forming regarded world’s mostefficient lowestcost freight rail service 500 railroads operating north america largest railroads referred “class i” accounting 90 industry’s revenues railroads carry wide variety commodities goods including coal metals minerals chemicals grain petroleum commodities represent 50 total rail carloadings intermodal carloads accounting rest railroads operate competitive environment especially trucking industry always seeking ways improve safety cost reliability new technologies offered wabtec others industry provide benefits demand freight related products services north america driven number factors including rail traffic production new locomotives new freight cars us passenger transit industry dependent largely funding federal state local governments fare box revenues demand north american passenger transit products driven number factors including government funding deliveries new subway cars buses ridership us federal government provides money local transit authorities primarily fund purchase new equipment infrastructure transit systems growth asia pacific market driven mainly continued urbanization china india investments freight rail rolling stock infrastructure australia serve mining natural resources markets india making significant investments rolling stock infrastructure modernize rail system example country awarded 1000unit locomotive order ge transportation key geographic markets include russiacis africamiddle east 12 million freight cars 20000 locomotives russiacis among largest freight rail markets world it’s expected invest freight transit rolling stock prasa passenger rail agency south africa expected continue invest new transit cars new locomotives according unife emerging markets expected grow aboveaverage rates global trade led increased freight volumes urbanization led increased demand efficient masstransportation systems growth occurs wabtec expects additional opportunities provide products services markets study unife also said expected increased investment digital tools data asset management rail control technologies would improve efficiency global rail industry unife said datadriven asset management tools potential reduce equipment maintenance costs improve asset utilization rail control technologies focused increasing track capacity improving operational efficiency ensuring safer railway traffic wabtec offers products services help customers make ongoing investments initiatives 2020 beyond general global economic market conditions impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks merger wabtec ge transportation wabtec general electric company ge transportation wabtec company formerly known transportation system holdings inc spinco newly formed wholly owned subsidiary ge wabtec us rail holdings inc merger sub newly formed wholly owned subsidiary company entered original merger agreement may 20 2018 ge spinco wabtec us rail inc direct sale purchaser entered original separation agreement may 20 2018 together provided combination wabtec ge transportation original merger agreement original separation agreement subsequently amended january 25 2019 merger completed february 25 2019 part merger certain assets ge transportation including equity interests certain pretransaction subsidiaries ge compose part ge transportation sold direct sale purchaser cash payment 2875 billion direct sale purchaser assumed certain liabilities ge transportation connection purchase direct sale thereafter ge transferred spinco business spinco subsidiaries extent already held spinco subsidiaries spinco issued ge shares spinco class preferred stock spinco class b preferred stock spinco class c preferred stock additional shares spinco common stock following issuance additional spinco common stock ge immediately prior distribution defined ge owned 8700000000 shares spinco common stock 15000 shares spinco class preferred stock 10000 shares spinco class b preferred stock one share spinco class c preferred stock constituted outstanding stock spinco following direct sale ge distributed distribution shares spinco spinoff transaction stockholder distribution immediately distribution merger sub merged spinco merger whereby separate corporate existence merger sub ceased spinco continued surviving company wholly owned subsidiary wabtec except respect shares spinco class preferred stock held ge merger subject adjustment accordance merger agreement share spinco common stock converted right receive number shares wabtec common stock based common stock exchange ratio set forth merger agreement share spinco class c preferred stock converted right receive 10000 shares wabtec convertible preferred stock b number shares wabtec common stock equal 99 fullydiluted pro forma wabtec shares immediately prior merger wabtec paid 100 million cash ge exchange shares spinco class b preferred stock upon consummation merger wabtec issued 46763975 shares common stock holders ge common stock 19018207 shares common stock ge 10000 shares preferred stock ge made cash payment ge 2885 billion result calculated based wabtec’s outstanding common stock fullydiluted asconverted asexercised basis february 25 2019 approximately 492 outstanding shares wabtec common stock held collectively ge holders ge common stock 99 held ge directly shares wabtec common stock 15 underlying shares wabtec convertible preferred stock held ge approximately 508 outstanding shares wabtec common stock held premerger wabtec stockholders case calculated fullydiluted asconverted asexercised basis following merger ge also retained 15000 shares spinco class nonvoting preferred stock wabtec held 10000 shares spinco class b nonvoting preferred stock merger spinco wabtec’s wholly owned subsidiary except respect shares spinco class preferred stock held ge direct sale purchaser also wabtec’s wholly owned subsidiary together operate posttransaction ge transportation shares company’s common stock including issued merger listed nyse company’s current trading symbol “wab” date distribution ge spinco directly subsidiaries entered additional agreements relating among things intellectual property employee matters tax matters research development transition services may 6 2019 ge completed sale approximately 8780 shares wabtecs series preferred stock converted upon sale 25300000 shares wabtecs common stock august 9 2019 ge completed sale remaining shares series preferred stock outstanding converted approximately 3515500 shares common stock well 16969656 shares common stock owned directly ge finally september 12 2019 ge completed sale remaining shares common stock wabtec approximately 2048515 shares conjunction secondary offerings company waived requirements shareholders agreement ge maintain certain ownership levels wabtecs stock following closing date merger company receive proceeds sale shares total future consideration paid wabtec ge includes fixed payment 4700 million directly related timing tax benefits expected realized wabtec result acquisition ge transportation payment considered contingent consideration timing cash payments ge directly related future timing tax benefits received company result acquisition ge transportation estimated total value consideration paid wabtec acquisition transaction approximately 103 billion including cash paid direct sales assets equity transferred spinco contingent consideration assumed debt net cash acquired estimated consideration based company’s closing share price 7336 february 22 2019 preliminary fair value contingent consideration value preliminary purchase price consideration could change company completed detailed valuation contingent consideration necessary calculations results operations consolidated results 2019 compared 2018 following table shows consolidated statements operations years indicated segment change company two reportable segmentsthe freight segment transit segment initiatives integrate ge transportation operations wabtec including recent restructuring programs announced late 2019 resulted changes companys organizational structure financial reporting utilized companys chief operating decision maker assess performance allocate resources result certain asset groups reorganized freight segment transit segment vice versa change company’s reportable segments effective fourth quarter 2019 reflected 2019 retrospective revision 2018 2017 segment information company believes changes better present managements new view business following table shows major components change net sales 2019 2018 net sales net sales increased 38 billion 879 82 billion 2019 44 billion 2018 increase primarily due net sales acquisitions 39 billion mainly acquisition ge transportation ge transportation contributed 38 billion net sales year primarily locomotive equipment products services additionally transit segment net sales increased 162 million due increased original equipment project deliveries hvac door brake coupler systems higher aftermarket deliveries brake coupler spare parts door systems increases partially offset organic decrease 148 million freight segment primarily components due lower carbuild 2019 electronics due lower ptc hardware demand unfavorable changes foreign currency exchange rates reduced net sales 154 million cost sales cost sales increased 28 billion 59 billion 2019 compared 31 billion 2018 increase primarily due 28 billion incremental costs acquisitions mainly ge transportation 2019 cost sales percentage net sales 722 compared 717 2018 cost sales 2019 includes 185 million nonrecurring costs related purchase price accounting stepup inventory ge transportation date acquisition 38 million restructuring charges related certain plant consolidations cost sales 2018 included 18 million restructuring costs primarily transit segment excluding nonrecurring costs cost sales percentage net sales 695 2019 713 2018 representing 18 improvement margin improvement attributed overall product mix shifting away lower margin transit sales higher margin freight sales operating expenses total operating expenses increased 1123 197 net sales 2019 compared 174 2018 selling general administrative expenses increased 533 million 842 primarily due 369 million incremental expense acquisitions mainly ge transportation 230 million incremental ge transportation transaction restructuring costs well certain litigation costs prior year selling general administrative expenses included 58 million costs related ge transportation transaction restructuring costs related exit certain operations headcount reductions across company costs related goods service tax law change india engineering expense increased 122 million amortization expense increased 199 million due incremental expense acquisition ge transportation interest expense net interest expense net increased 107 million 2019 attributable higher overall debt balances related acquisition ge transportation income taxes effective income tax rate 269 206 2019 2018 respectively increase effective tax rate 2019 primarily result nondeductible transaction related expenses incurred result acquisition ge transportation higher earnings mix higher tax jurisdictions increased estimated liabilities resulting provision 2017 tax cuts jobs act tax act well benefit completion accounting income tax effects tax act recorded 2018 freight segment following table shows consolidated statements operations freight segment following table shows major components change net sales freight segment 2019 2018 net sales freight segment net sales increased 37 billion 2081 54 billion due acquisition ge transportation contributed 38 billion net sales year primarily locomotive equipment products services increase partially offset lower net sales components due lower freight carbuild 2019 certain restructuring plant consolidation efforts digital electronics due lower ptc hardware demand unfavorable foreign currency exchange rate changes decreased net sales 18 million cost sales freight segment cost sales increased 27 billion 39 billion 2019 increase primarily due 28 billion incremental cost sales services acquisition ge transportation 2019 total cost sales percentage total net sales 709 compared 679 2018 total cost sales 2019 includes 185 million nonrecurring costs related purchase price accounting stepup inventory ge transportation date acquisition 34 million restructuring costs related integrating combined business excluding nonrecurring costs total cost sales percentage net sales 669 10 lower 2018 decrease attributed higher mix freight services sales offset decrease higher margin sales digital electronics operating expenses freight segment operating expenses increased 706 million 3040 2019 increased 172 net sales selling general administrative expenses increased 397 million due 368 million incremental expense acquisition ge transportation 33 million transaction restructuring costs related ge transportation transaction engineering expense increased 116 million amortization expense increased 200 million due acquisition ge transportation transit segment following table shows consolidated statements operations transit segment following table shows major components change net sales transit segment 2019 2018 net sales transit segment net sales increased 162 million 62 primarily due increased original equipment project deliveries hvac door brake coupler systems higher aftermarket deliveries brake coupler spare parts door systems unfavorable foreign currency exchange rate changes decreased net sales 137 million cost sales transit segment cost sales increased 132 million 21 billion 2019 cost sales percentage net sales 747 compared 743 2018 total cost sales includes 5 million restructuring charges primarily related severance plant consolidations total cost sales 2018 included 16 million restructuring costs excluding costs total cost sales percentage net sales 746 2019 737 2018 increase attributed unfavorable product mix consisting lower margin overhaul contracts less original equipment aftermarket brake coupler systems operating expenses transit segment operating expenses increased 7 million 482 million 16 2019 decreased 80 basis points 175 net sales operating expenses includes 13 million restructuring costs current year compared 26 million prior year decrease percentage net sales attributed effect prior year restructuring plans headcount reductions current year 2018 compared 2017 following table summarizes results operations period following table shows major components change net sales 2018 2017 net sales net sales increased 482 million 44 billion 2018 39 billion 2017 increase primarily due organic increase 113 million higher demand freight rail components increase 76 million train control signaling products increase 124 million due transit original equipment aftermarket brake coupler products partially offset lower door hvac sales additionally sales acquisitions increased net sales 135 million favorable foreign exchange increased net sales 62 million cost sales cost sales increased 3132 million 31 billion 2018 compared 28 billion 2017 2018 cost sales percentage net sales 717 compared 725 2017 cost sales 2018 includes 18 million restructuring costs primarily transit segment cost sales 2017 includes 45 million project adjustments certain projects 12 million restructuring integration costs related recent acquisitions primarily transit segment excluding restructuring costs contract adjustments years cost sales increased 02 percentage net sales operating expenses total operating expenses percentage net sales increased 08 174 2018 compared 166 2017 selling general administrative expenses increased 121 million 235 primarily due 21 million costs related ge transportation transaction 20 million restructuring costs related exit certain operations headcount reductions across company 7 million costs related goods service tax law change india 15 million increased employee benefit costs 18 million incremental expense acquisitions changes foreign currency rates increased selling general administrative expenses 14 million organic sales volume increases contributed remainder change 2017 selling general administrative expenses included 30 million faiveley transport transaction restructuring costs engineering expense decreased 8 million 81 primarily due timing research development expenses amortization expense increased 3 million due amortization intangibles associated acquisitions interest expense net overall interest expense net increased 34 million 2018 interest expense associated ge transportation transaction 29 million addition net interest expense prior year included 2 million benefit related prepayment debt assumed faiveley transport acquisition income taxes effective income tax rate 206 255 2018 2017 respectively december 22 2017 us government enacted comprehensive tax legislation commonly referred tax act us tax reform bill lowered federal statutory tax rate 35 21 beginning january 1 2018 decrease effective tax twelve months ended december 31 2018 result higher earnings mix lower tax jurisdictions well benefit completion accounting income tax effects tax act adjustment provisional amounts previously recorded accordance sec staff accounting bulletin 118 partially offset reversal nonrecurring tax benefits recorded twelve months ended december 31 2018 freight segment following table shows consolidated statements operations freight segment periods indicated following table shows major components change net sales freight segment 2018 2017 net sales freight segment net sales increased 228 million 148 primarily due organic increase 113 million higher demand freight rail components increase 76 million train control signaling products acquisitions increased net sales 51 million cost sales freight segment cost sales decreased 17 percentage net sales 679 2018 compared 696 2017 decrease primarily related favorable product mix saw increase net sales train control signaling products services freight car products due increase freight cars built higher margin additionally 11 million project adjustments restructuring costs 2017 recur 2018 operating expenses freight segment operating expenses increased 37 million 188 2018 increase primarily attributable increased sales marketing expenses attributable increased sales volumes increased employee benefit costs 11 million incremental operating expenses prior year acquisitions transit segment following table shows consolidated statements operations transit segment following table shows major components change net sales transit segment 2018 2017 net sales transit segment net sales increased 254 million 108 primarily due 84 million sales related acquisitions 61 million increase primarily original equipment brake products favorable foreign exchange 64 million cost sales transit segment cost sales decreased 02 percentage net sales 743 2018 compared 745 2017 cost sales 2018 includes 16 million restructuring costs primarily related downsizing operations uk consolidation certain operations us china cost sales 2017 includes 38 million project adjustments certain contracts primarily related material warranty cost 7 million restructuring integration costs related recent acquisitions excluding restructuring costs contract adjustments years transit segment cost sales increased 11 percentage net sales increase result additional costs projects primarily uk operating expenses transit segment operating expenses increased 54 million 128 2018 increased 30 basis points 183 net sales operating expense included 18 million 20 million restructuring integration charges 2018 2017 respectively 2018 restructuring charges related exit certain operations headcount reductions 2017 restructuring charges related faiveley transportation integration costs additionally 2018 operating expenses includes 7 million costs related goods service tax law change india excluding restructuring integration costs years impact goods service tax law change 2018 transit operating expenses increased 49 million increase primarily due increased sales volumes increased employee benefit costs 10 million 11 million incremental operating expenses acquisitions addition changes foreign currency rates increased operating expenses 16 million liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2019 1016 million compared 315 million 2018 comparison 2018 cash provided operations increased due favorable working capital performance higher net income 35 million major components increase cash provided operations follows favorable change inventories 365 million attributable improved controls inventory management directed reducing inventory levels liquidation acquired inventory related acquisition ge transportation improved performance collection accounts receivable 48 million favorable change noncash items 228 million related primarily increased depreciation amortization result acquisition ge transportation favorable change assets liabilities 259 million primarily due timing payments related accrued expenses favorable changes working capital offset unfavorable change accounts payable 193 million due timing payments suppliers cash provided operations 2018 315 million compared 189 million 2017 comparison 2017 cash provided operations increased due favorable working capital performance higher net income 29 million major components increase cash provided operations follows favorable change accounts payable 141 million due timing payments suppliers favorable change taxes 22 million due revaluation deferred taxes caused tax act timing income tax payments favorable change accrued liabilities customer deposits 51 million due increase customer advances 2018 favorable changes working capital offset unfavorable change inventory 100 million due efforts ramp production anticipation stronger product demand 2019 investing activities 2019 2018 2017 cash used investing activities 3178 million 147 million 1034 million respectively major components cash outflow 2019 2996 million net cash paid primarily ge transportation acquisition planned additions property plant equipment 185 million continued investments facilities manufacturing processes compares 93 million property plant equipment additions 51 million net cash paid acquisitions 2018 2017 90 million cash used purchase property plant equipment net cash paid acquisitions 945 million primarily related acquisition faiveley transport financing activities 2019 cash provided financing activities 462 million included net proceeds debt 559 million 82 million dividend payments 2018 cash provided financing activities 1978 million included net proceeds debt 2027 million dividend payments 46 million 2017 cash used financing activities 97 million included net repayments debt 53 million dividend payments 42 million following table shows outstanding indebtedness december 31 2019 2018 senior notes september 14 2018 order fund ge acquisition related fees expenses issued total 25 billion aggregate principal amount unsecured senior notes two separate series fixed rate unsecured senior notes “senior notes” one series floating rate unsecured senior notes “floating senior notes” collectively refer floating senior notes senior notes “notes” upon issuance notes reflected consolidated balance sheets net discount 29 million net capitalized debt issuance costs including commissions offering expenses 180 million amortized interest expense respective maturity dates series unsecured senior notes using effective interest method floating senior notes bear interest floating rate equal threemonth libor rate plus 105 per year senior notes due 2024 bear interest 415 per year senior notes due 2028 bear interest 470 per year interest rate payable notes subject adjustment based certain rating events interest senior notes payable semiannually arrears march 15th september 15th year commencing march 15 2019 interest floating senior notes payable quarterly arrears december 15 march 15 june 15 september 15 year commencing december 15 2018 uk financial conduct authority fca regulates libor announced fca longer persuade compel banks submit rates calculation libor 2021 continuation libor cannot guaranteed 2021 indenture floating senior notes provides upon permanent discontinuation libor floating senior notes remain outstanding alternative reference rate used subject adjustments consistent industryaccepted practice alternative reference rate issuance comprised following three series notes consistent companys existing senior notes newly issued notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indentures notes issued contain covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sales assets change control mergers consolidations incurrence liens covenants require company maintain financial ratios specified levels net worth liquidity company may redeem series notes time whole time part accordance provisions indentured series notes issued upon occurrence change control repurchase event respect notes holder notes right require company purchase holder’s notes price equal 101 principal amount thereof plus accrued unpaid interest unless company exercised option redeem notes february 12 2019 rating assigned moodys decreased ba1 accordingly pursuant respective terms senior notes issued september 14 2018 interest rate increased 025 interest rate increase took effect next interest period following february 12 2019 company compliance restrictions covenants indenture notes issued expects restrictions covenants type limiting factor executing operating activities term loan agreement june 8 2018 company arranged 3500 million term loan proceeds used refinance existing loans “refinancing term loan” ii new 4000 million delayed draw term loan order fund ge acquisition related fees expenses “delayed draw term loan” company collectively refers refinance term loans delayed draw term loans “term loans” consistent debt securities term loan agreement includes covenants among things limit liens certain consolidated subsidiaries addition requires us maintain financial maintenance covenants discussed loans term loan bear interest variable rate based company’s option either abr rate libor rate defined term loan agreement plus applicable margin determined based credit ratings company’s ratio total debt less unrestricted cash 3000 million ebitda “leverage ratio” december 31 2019 applicable margin 0375 base rate loans 1375 eurodollar rate loans senior credit facility june 8 2018 company entered credit agreement “senior credit facility” replaced company’s thenexisting “2016 refinancing credit agreement” senior credit facility syndicate lenders provides borrowings consisting term loans denominated euros us dollars ii multicurrency revolving loan facility providing equivalent us dollars 12000 million multicurrency revolving loans inclusive swingline loans 750 million letters credit 4500 million multicurrency revolving loan facility mature june 8 2023 term loans mature june 8 2021 subject mandatory optional prepayments term loans required repaid quarterly basis amount equal 25 principal amount drawn final payment due maturity following table presents availability credit facilities senior credit facility elect receive advances bearing interest based either abr rate libor rate defined credit agreement plus applicable margin determined based credit ratings company’s leverage ratio december 31 2019 applicable margin 0375 base rate advances 1375 libor rate advances company also pays fees related senior credit facility largest fees commitment fee unused portion multicurrency revolving loan facility 010 030 per annum currently 015 per annum depending credit ratings leverage ratio none fees material interest expense obligations senior credit facility guaranteed wabtec’s wholly owned subsidiaries collectively “subsidiary guarantors” addition senior credit facility contains number customary affirmative negative covenants addition customary covenants senior credit facility term loan require maintain financial covenants listed end fiscal quarter period four fiscal quarters ended company compliance covenants credit agreement term loans december 31 2019 1 interest coverage ratio defined ebitda defined credit agreement term loan agreement net interest expense four quarters ended 2 leverage ratio defined net debt last day fiscal quarter ebitda defined amendment credit agreement term loan agreement four quarters ended 2018 senior credit facility contains uncommitted accordion feature allowing company request establishment aggregate amount exceed 6000 million incremental borrowing commitments revolving credit facility incremental term loan commitment fca regulates libor announced fca longer persuade compel banks submit rates calculation libor 2021 continuation libor cannot guaranteed 2021 senior credit agreement provides upon permanent discontinuation libor alternate rate interest established administrative agent company giving due consideration prevailing us market convention december 31 2019 weighted average interest rate company’s variable rate debt 308 cash pooling wabtec aggregates companys domestic cash position daily basis outside united states company uses cash pooling arrangements banks help manage liquidity requirements pooling arrangements wabtec subsidiaries “participants” agree single bank cash balances pool participants bank subject full right setoff amounts participants owe bank provides overdrafts long net balance participants exceed agreedupon level typically participant pays interest outstanding overdrafts receives interest cash balances companys consolidated balance sheets reflect cash net bank overdrafts pooling arrangements contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2019 1purchase obligations represent noncancelable contractual obligations december 31 2019 addition company 15 billion open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 109 million pension plan investments 2020 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs 5interest payments payable march june september december year rate based contractual terms floating senior notes due 2021 interest payments payable may september year 415 750 million senior notes due 2024 interest payments payable march september year 47 1250 million senior note due 2028 interest payments payable may november year 345 750 million senior notes due 2026 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility borrowings based contractual terms company’s current interest rates 6scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7shareholder dividends subject approval company’s board directors currently annual rate approximately 920 million 8the 7140 million standby letters credit comprised outstanding letters credit performance bid bond purposes expire various dates 2034 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 172 million timing uncertain refer note 11 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 3873 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 160 million 170 million 2019 2018 respectively benefits paid postretirement plans 09 million 10 million 2019 2018 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 920 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2019 initial value performance bonds issued company’s behalf 619 million forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions •prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa •decline demand freight cars locomotives passenger transit cars buses related products services •reliance major original equipment manufacturer customers •original equipment manufacturers’ program delays •demand services freight passenger rail industry •demand products services •orders either delayed canceled returning historical levels reduced combination foregoing •consolidations rail industry •continued outsourcing customers •industry demand faster efficient braking equipment •fluctuations interest rates foreign currency exchange rates •availability credit operating factors •supply disruptions including limited disease outbreak fires earthquakes explosions floods tornadoes hurricanes weather conditions •technical difficulties •changes operating conditions costs •increases raw material costs •successful introduction new products •performance material longterm contracts •labor relations •the outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental matters asbestosrelated matters pension liabilities warranties product liabilities competition antitrust matters intellectual property claims •completion integration acquisitions including acquisition ge transportation •the development use new technology competitive factors •the actions competitors •the outcome negotiations partners suppliers customers others politicalgovernmental factors •political stability relevant areas world •future regulationderegulation customers andor rail industry •levels governmental funding transit projects including customers •political developments laws regulations including related positive train control •federal state income tax legislation •the outcome negotiations governments statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring writedowns adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory business combinations description company accounts business acquisitions accordance asc 805 business combinations requires purchase price acquired business allocated tangible intangible assets acquired liabilities assumed based respective fair values amount purchase price excess fair values assets acquired liabilities assumed recognized goodwill judgments uncertainties discounted cash flow models used estimate fair values acquired contract backlog customer relationships intellectual property intangibles belowmarket customer contract liabilities significant assumptions used estimate value intangible assets offmarket customer contract liabilities included revenue growth rates projected profit margins discount rates royalty rates customer attrition rates revenue obsolescence rates market participant profit margins significant assumptions forwardlooking could affected future economic market conditions effect actual results differ assumptions different assumptions may result materially different values assets acquired liabilities assumed may impact companys financial position future results operations goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based quantitative analysis performed october 1 2019 decline terminal growth rate 50 basis points would decrease fair market value 794 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 2168 million even changes fair value reporting units would greater net book values see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may exposed expense increasing reserves warranty expense stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently completed cycle 20172019 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 15 million income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc 606 “revenue contracts customers” company recognizes revenues longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use without significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation judgments uncertainties accounting longterm customer agreements involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontracts may associated contract factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements generally pricing defined contracts may contain include estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts liquidating damages performance bonuses effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods contracts expected completed loss position provisions made currently estimated losses uncompleted contracts item 7aitem 7management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers locomotives valueadded technologybased equipment systems services global freight rail passenger transit industries highly engineered products intended enhance safety improve productivity reduce maintenance costs customers found locomotives freight cars passenger transit cars buses around world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 50 countries products found 100 countries throughout world 2020 approximately 58 company’s net sales came customers outside us covid19 update march 11 2020 world health organization designated outbreak novel strain coronavirus known covid19 global pandemic governments businesses around world taken unprecedented actions mitigate spread covid19 including limited shelterinplace orders quarantines significant restrictions travel well restrictions prohibit many employees going work top concern remains health wellbeing employees around world date covid19 surfaced nearly regions around world impacted sales channels supply chain manufacturing operations workforce key aspects operations outbreak preventive measures taken help curb spread including temporary plant closures china india italy countries outbreaks stayathome orders prevalent adverse impact operations business results year ended december 31 2020 continue monitor situation guidance international domestic authorities including federal state local public health authorities may take additional actions based recommendations however numerous uncertainties including duration severity pandemic availability effectiveness vaccines actions may taken governmental authorities private industry including preventing curtailing operations plants potential impact global economic activity global supply chain operations employees customers supplier endmarkets consequences could negatively impact business also face possibility government policies may become restrictive especially covid19 transmission rates increase certain areas result numerous uncertainties unable specifically predict extent length time covid19 pandemic negatively impact business covid19 materially adverse impact operations business results yearended december 31 2020 discussed results operations section expect covid19 continue materially adverse impact operations business results 2021 future adverse impact may include reduced demand products reduced cash operations volatile effective tax rate driven changes earnings mix across company’s different jurisdictions continue work employees customers suppliers navigate impacts covid19 also continue assess possible implications business customers supply chain endmarkets take actions effort mitigate adverse consequences management review future outlook wabtec’s longterm financial goals drive strong cash flow conversion maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls drive improved efficiencies across business increase revenues focused growth strategy including product innovation new technologies global market expansion aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company primarily serves worldwide freight transit rail industries operating results largely dependent level activity financial condition capital spending plans railroads passenger transit agencies around world transportation equipment manufacturers serve markets many factors influence industries including general economic conditions traffic volumes measured freight carloads passenger ridership government spending public transportation investment new technologies general trends increasing urbanization focus sustainability environmental awareness aging equipment fleet growth global trade expected drive continued investment freight transit rail company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtecs products services 2021 beyond general global economic market conditions impact sales operations covid19 pandemic increased uncertainty around global economic market conditions extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies address changes market conditions risks acquisition ge transportation wabtec acquired ge transportation former business unit ge february 25 2019 additional information related acquisition refer note 3 notes consolidated financial statements included part iv item 15 report results operations consolidated results 2020 compared 2019 following table shows consolidated statements operations years indicated following table shows major components change net sales 2020 2019 results operations negatively impacted year ended december 31 2020 result covid19 pandemic management’s discussion includes analysis impact covid19 pandemic could explicitly identified however many instances difficult quantify high level certainty negative impact covid19 pandemic results operations following discussion compares results year ended december 31 2020 year ended december 31 2019 discussion comparing results year ended december 31 2019 year ended december 31 2018 included within managements discussion analysis financial condition results operation annual report form 10k year ended december 31 2019 filed sec february 24 2020 net sales net sales decreased 644 million 79 7556 million decrease primarily attributable organic decrease 833 million freight segment due lower locomotive equipment sales lower sales components reduction freight carbuilds 2020 compared 2019 decrease services sales due lower freight rail volumes increase parking locomotives particularly north america lower freight rail volumes increased parking locomotives partially due covid19 pandemic impact economy transit segment experienced organic decrease sales 307 million primarily due covid19 related production delays reduced passenger traffic decrease partially offset sales acquisitions 546 million mainly acquisition ge transportation unfavorable changes foreign currency exchange rates reduced net sales 50 million cost sales cost sales decreased 503 million 5419 million 2020 compared 5922 million 2019 decrease primarily due sales decreases discussed cost sales 2020 includes 44 million restructuring costs primarily footprint rationalization related headcount reductions part ongoing integration actions related ge transportation acquisition response covid19 pandemic cost sales 2019 included 185 million charge related purchase price accounting stepup ge transportation inventory 38 million restructuring costs primarily footprint rationalization related headcount actions excluding charges years cost sales percentage sales 711 2020 695 2019 representing 16 increase attributed unfavorable sales mix lower absorption overhead costs due decrease sales volumes increased parking locomotives lower rail passenger traffic partially offset increased synergy savings related ge transportation acquisition actions taken reduce costs response covid19 pandemic operating expenses total operating expenses decreased 222 million 184 net sales 2020 compared 197 2019 restructuring transaction costs primarily headcount actions costs related acquisition ge transportation included sga 71 million 192 million year ended december 31 2020 2019 respectively additionally sga expenses decreased 155 million related acquisition synergy savings reduced employee benefit costs cost reduction initiatives lower sales volumes partially offset 57 million incremental expense acquisitions engineering expense decreased 48 million due cost control measures research development projects partially offset incremental expense acquisitions amortization expense increased 44 million due acquisition ge transportation interest expense net interest expense net decreased 20 million 2020 period 2019 attributable lower variable interest rates lower overall average debt balances 2020 income expense net expense net 12 million income 2020 compared 3 million income period 2019 variance primarily driven lower foreign exchange losses current year increase income equity method investments income taxes effective income tax rate 260 269 2020 2019 respectively decrease effective tax rate 2020 primarily result nondeductible transaction related expenses incurred 2019 result ge transportation acquisition recur 2020 decrease estimated liabilities resulting provisions tax cuts jobs act recognized 2019 freight segment following table shows consolidated statements operations freight segment following table shows major components change net sales freight segment 2020 2019 net sales freight segment sales decreased 359 million 66 5082 million primarily due organic decrease 833 million due lower locomotive equipment sales lower sales components reduction freight carbuilds 2020 compared 2019 decrease services sales due lower freight rail volumes increase parking locomotives particularly north america lower freight rail volumes increased parking locomotives partially due covid19 pandemic impact economy decreases partially offset sales acquisitions 543 million primarily related ge transportation unfavorable foreign currency exchange rates decreased sales 69 million cost sales freight segment cost sales decreased 266 million 3594 million 2020 decrease attributable organic sales decrease discussed partially offset 391 million incremental cost sales acquisitions mainly acquisition ge transportation included cost sales 2020 30 million restructuring costs primarily costs footprint rationalization related headcount actions part ongoing integration actions related ge transportation acquisition response covid19 pandemic cost sales 2019 includes 185 million charge related purchase price accounting stepup ge transportation inventory 34 million restructuring costs primarily costs footprint rationalization related headcount reductions integrate combined businesses excluding charges cost sales percentage sales 701 2020 669 2019 representing 32 percentage point increase attributed unfavorable sales mix lower absorption overhead costs due decrease organic sales volumes partially offset increased synergy savings related ge transportation acquisition efforts reduce costs response covid19 pandemic operating expenses freight segment operating expenses decreased 34 million 36 2020 178 sales restructuring transaction costs primarily headcount actions costs related acquisition ge transportation included sga 46 million 33 million years ended december 31 2020 2019 respectively sga expenses excluding restructuring transaction costs years decreased 116 million primarily due synergy savings reduction employee benefit costs lower sales volumes partially offset 56 million incremental expense acquisitions primarily ge transportation additionally engineering expense decreased 32 million due cost control measures research development projects partially offset incremental expense acquisitions amortization expense increased 44 million due acquisition ge transportation transit segment following table shows consolidated statements operations transit segment following table shows major components change net sales transit segment 2020 2019 net sales transit segment net sales decreased 285 million 103 primarily due disruptions operations caused covid19 pandemic particularly asia europe impact felt original equipment manufacturing aftermarket product lines pandemic lead shutdowns affected factory output ridership levels favorable foreign currency exchange rate changes increased net sales 19 million cost sales transit segment cost sales decreased 237 million 1825 million 2020 primarily due reduction sales cost sales 2020 includes 14 million restructuring costs primarily footprint rationalization uk cost sales 2019 included 5 million restructuring costs primarily related headcount actions footprint rationalization excluding costs cost sales percentage sales 732 14 percentage point decrease comparable period 2019 attributable improved operational performance operating expenses transit segment operating expenses decreased 63 million 419 million 129 2020 170 net sales sga expenses decreased 47 million 2020 primarily due lower sales cost saving initiatives put place offset adverse impact covid19 reduced employee benefit costs sga included restructuring charges mainly severance 14 million 13 million year ended december 31 2020 2019 respectively engineering expense decreased 16 million due cost savings measures put place result covid19 pandemic amortization expense remained consistent year combination improved operational performance cost saving initiatives mentioned resulted 200 basis point operating margin improvement 2020 2019 liquidity capital resources liquidity provided operating cash flow borrowings company’s senior notes unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2020 784 million compared 1016 million 2019 comparison 2019 cash provided operations decreased due unfavorable change assets liabilities 492 million primarily due timing payments related accrued expenses including litigation settlements unfavorable change accounts payable 125 million due timing payments suppliers unfavorable change accrued liabilities customer deposits 80 million primarily related timing accrued compensation payments unfavorable change inventory 75 million unfavorable changes offset higher net income 86 million favorable change noncash items 35 million related primarily increased depreciation amortization result acquisition ge transportation favorable change accounts receivable 321 million due improved collections acceleration collections due newly implemented revolving receivable program investing activities 2020 2019 cash used investing activities 155 million 3178 million respectively major components cash outflow 2020 planned additions property plant equipment 136 million continued investments facilities manufacturing processes 40 million net cash paid various small acquisitions major components cash outflow 2019 185 million additions property plant equipment 2996 million net cash paid various acquisitions primarily ge transportation financing activities 2020 cash used financing activities 619 million included net debt payments 199 million 115 million contingent consideration payments 93 million dividend payments 207 million share repurchases 2019 cash provided financing activities 462 million included net proceeds debt 559 million dividend payments 82 million covid19 pandemic adverse impact cash operating activities year ended december 31 2020 management expects covid19 pandemic negatively impact cash operations 2021 extent length time company’s cash operations negatively impacted uncertain uncertainty company took prudent measures decrease cash used investing activities 2020 additionally company implemented new debt arrangements receivables securitization program described part liquidity planning measures strengthen liquidity position address impacts covid19 pandemic management continues monitor rapidly evolving situation periodically reassess adjust company’s cash management strategy circumstances dictate december 31 2020 company held approximately 599 million cash equivalents amount approximately 108 million held within united states approximately 491 million held outside united states primarily europe india china repatriation cash held outside united states may restricted local laws company’s foreign cash could repatriated united states additional information respect senior notes credit facilities longterm debt included note 8 notes consolidated financial statements” included part iv item 15 report revolving receivables program may 2020 company entered revolving agreement transfer 1500 million certain receivables certain subsidiaries company originators bankruptcyremote subsidiary financial institution recurring basis exchange cash equal gross receivables transferred additional information respect revolving receivables program included note 2 notes consolidated financial statements included part iv item 15 report referenced herein supply chain financing program company entered supply chain financing arrangements thirdparty financial institutions provide vendors enhanced payment options arrangement change payable terms negotiated company vendors result change classification amounts due accounts payable consolidated balance sheet guarantor summarized financial information obligations companys senior notes senior credit facility 364 day facility fully unconditionally guaranteed certain companys us subsidiaries guarantor 100 owned parent company exception ge transportation wabtec company 15000 shares outstanding class nonvoting preferred stock held general electric company following tables present summarized financial information parent guarantor subsidiaries combined basis combined summarized financial information eliminates intercompany balances transactions among parent guarantor subsidiaries equity earnings investments guarantor subsidiaries nonguarantor subsidiaries summarized financial information provided accordance reporting requirements rule 1301 sec regulation sx issuer guarantor subsidiaries summarized statement income summarized balance sheet following description transactions combined westinghouse air brake technologies corp guarantor subsidiaries nonguarantor subsidiaries contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2020 1purchase obligations represent noncancelable contractual obligations december 31 2020 addition company 11 billion open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 73 million pension plan investments 2021 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs 5interest payments payable february august year 4375 250 million senior notes due 2023 interest payments payable may september year 415 750 million senior notes due 2024 interest payments payable june december year 320 500 million senior notes due 2025 interest payments payable may november year 345 750 million senior notes due 2026 interest payments payable march september year 47 1250 million senior note due 2028 interest payments revolving credit facility borrowings based contractual terms company’s current interest rates 6scheduled principal repayments outstanding loan balances disclosed note 9 “notes consolidated financial statements” included part iv item 15 report 7shareholder dividends subject approval company’s board directors currently annual rate approximately 907 million 8the 7366 million standby letters credit comprised outstanding letters credit performance bid bond purposes expire various dates 2039 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 164 million timing uncertain refer note 11 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 985 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 173 million 160 million 2020 2019 respectively benefits paid postretirement plans 09 million 10 million 2020 2019 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 907 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2020 initial value performance bonds issued company’s behalf 878 million forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions •prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa •decline demand freight cars locomotives passenger transit cars buses related products services •reliance major original equipment manufacturer customers •original equipment manufacturers’ program delays •demand services freight passenger rail industry •demand products services •orders either delayed canceled returning historical levels reduced combination foregoing •consolidations rail industry •continued outsourcing customers •industry demand faster efficient braking equipment •fluctuations interest rates foreign currency exchange rates •availability credit operating factors •supply disruptions including limited disease outbreak fires earthquakes explosions floods tornadoes hurricanes weather conditions •technical difficulties •changes operating conditions costs •increases raw material costs •successful introduction new products •performance material longterm contracts •labor relations •the outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental matters asbestosrelated matters pension liabilities warranties product liabilities competition antitrust matters intellectual property claims •completion integration acquisitions including acquisition ge transportation •the development use new technology •unexpected costs charges expenses resulting ge transportation acquisition •failure realize anticipated benefits ge transportation acquisition including result integrating ge transportation wabtec •the severity duration evolving covid19 pandemic resulting impact global economy competitive factors •the actions competitors •the outcome negotiations partners suppliers customers others politicalgovernmental factors •political stability relevant areas world •future regulationderegulation customers andor rail industry •levels governmental funding transit projects including customers •political developments laws regulations including related positive train control •federal state income tax legislation •the outcome negotiations governments statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories business combinations testing goodwill intangibles impairment warranty reserves stock based compensation income taxes revenue recognition management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate expected losses inherent receivable portfolio determined basis historical experience relevant credit forecast information changes customers solvency currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed estimated losses may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost net realizable value reviewed ensure adequate provision recognized excess slow moving obsolete inventories net realizable value reserves judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence decline market value loss customer specific inventory effect actual results differ assumptions market value demand products decrease due changing market conditions company could risk incurring writedowns adjust inventory value net realizable value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory business combinations description company accounts business acquisitions accordance asc 805 business combinations requires purchase price acquired business allocated tangible intangible assets acquired liabilities assumed based respective fair values amount purchase price excess fair values assets acquired liabilities assumed recognized goodwill judgments uncertainties discounted cash flow models used estimate fair values acquired contract backlog customer relationships intellectual property intangibles belowmarket customer contract liabilities significant assumptions used estimate value intangible assets belowmarket customer contract liabilities included revenue growth rates projected profit margins discount rates royalty rates customer attrition rates revenue obsolescence rates market participant profit margins significant assumptions forwardlooking could affected future economic market conditions effect actual results differ assumptions different assumptions may result materially different values assets acquired liabilities assumed may impact companys financial position future results operations goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level company identified three reporting units purposes testing goodwill impairment two reporting units exist within freight segment transit segment also reporting unit evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based quantitative analysis performed october 1 2020 decline terminal growth rate 100 basis points would decrease fair market value 1218 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 2031 million even changes fair value reporting units would greater net book values december 31 2020 three company’s reporting units fair values substantially excess carrying values see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may exposed expense increasing reserves warranty expense stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently completed cycle 20182020 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts upon initial grant performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 25 million income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period new information changes expected outcome uncertain tax position deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc 606 “revenue contracts customers” company recognizes portion revenues longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use without significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation judgments uncertainties accounting longterm customer agreements involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontracts may associated contract factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements generally pricing defined contracts may include estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts liquidating damages performance bonuses effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgments estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods contracts expected completed loss position provisions made currently estimated losses uncompleted contracts item 7aitem 7 managements discussion analysis financial condition results operations overview number significant events occurred 1996 1995 impacted companys results operations financial condition september 1996 company acquired vapor group passenger transit door manufacturer cash purchase price 639 million funded additional term borrowings companys credit facility acquisition contributed 30 million 1996 revenues january 1996 company acquired futuris industrial products pty australian friction products manufacturer cash purchase price 15 million funded borrowing companys revolving credit facility acquisition contributed revenue 11 million 1996 january 1995 company acquired pulse electronics 549 million consisting 20 million cash 17 million debt common stock valued 179 million acquisition contributed revenue 49 million 31 million 1996 1995 respectively january 1995 company completed recapitalization transaction whereby repurchased 20 million shares 50 outstanding common stock 300 million transaction financed term revolving debt significantly increased companys debt interest expense prior year conjunction recapitalization company established esop turn purchased 93 million 20 million shares described exchange 140 million loan company june 1995 company completed initial public stock offering whereby received net proceeds approximately 95 million used reduce outstanding debt also public debt offering 100 million completed proceeds used reduce outstanding bank debt june 1995 company entered amended bank credit agreement provided aggregate credit facility 250 million primarily result events total debt outstanding december 31 1996 342 million compared 306 million december 31 1995 shareholders equity december 31 1996 negative 76 million compared negative 109 million december 31 1995 total interest expense 1996 262 million versus 310 million 1995 net sales 1996 4535 million increase 285 million compared 4250 million 1995 vapor futuris acquisitions contributed 407 million main reasons increased revenue operating income 1996 797 million compared 893 million 1995 lower margins companys locomotive pneumatics freight car divisions increased operating expenses accounted lower income net income 1996 327 million 115 per share compared 337 million 127 per share 1995 extraordinary charge 23 million 05 per share reduced interest expense lower overall effective tax rates 1996 partially offset lower operating income results operations following tables set forth period indicated companys net sales market net sales market following table sets forth certain data companys consolidated statements operations fiscal years ended december 31 1996 1995 1994 fiscal year 1996 compared fiscal year 1995 net sales net sales increased 7 4535 million 1996 4250 million 1995 1996 acquisitions vapor futuris accounted 407 million increase 1996 revenue also benefited full year pulse acquisition versus eleven months 1995 partially offsetting positive factors lower sales companys freight car division freight division sales decreased 293 million 12 2111 million 1996 compared 2405 million 1995 due part 5 decline oem market north american freight car deliveries fell 60853 units 1995 57877 units 1996 significant slowdown intermodal freight car coal car production also adversely affected mix sales freight car divisions products sales locomotive related products increased 203 million 21 1185 million 1996 compared 982 million 1995 increase achieved spite reduction north american locomotive deliveries due significant increase electronic related safety braking equipment supplied companys railway electronics group sales electronic related products including recently mandated endoftrain monitoring device increased 13 million 24 1996 compared 1995 levels sales companys historical locomotive products including pneumatic brakes compressors air dryers increased 5 million 14 passenger transit sales increased 349 million 1071 million 1996 compared 722 million 1995 acquisition vapor accounted 301 million increase capital spending transit authorities remained stable sales friction products included within freight locomotive transit markets increased 157 million 1996 acquisition futuris accounting 106 million increase effect price increases 1996 revenues less 2 gross profit gross profit increased 73 million 5 1533 million 1996 compared 1461 million 1995 gross profit increase due overall 7 increase net sales gross margin percentage sales declined slightly 1996 338 versus 344 1995 primarily result changes product mix selling marketing expenses selling expenses increased 56 million 1996 vapor futuris effect full year pulse accounted 44 million increased expenses companys international marketing activities accounted remainder increase general administrative expenses general administrative expenses increased 66 million vapor futuris full year pulse accounted 30 million remainder due increased corporate expenses including shareholder communications legal expenses insurance expenses costs expanded international activities engineering expenses engineering expenses excluding manufacturing support engineering included cost sales increased 37 million vapor futuris accounted 23 million balance increase due expanded staffing related new product development primarily within electronics group amortization expense amortization expense increased 17 million primarily result amortization intangibles including goodwill technology associated acquisitions vapor futuris pulse income operations operating income 1996 797 million versus 893 million 1995 decrease primarily due higher operating expenses amortization offset increased gross profit interest expense total interest expense 1996 262 million decrease 48 million 1995 primarily result lower overall weighted average interest rates 1996 reduced debt levels proceeds companys ipo june 1995 income taxes companys overall effective income tax rate declined 39 1996 compared 40 1995 due lower effective state tax rates benefit foreign sales corporation fsc established 1996 net income net income 1996 327 million compared 351 million 1995 extraordinary charge 23 million lower income resulted higher operating costs providing future additional engineering international sales staffing offset positive income changes fiscal year 1995 compared fiscal year 1994 net sales net sales increased 22 4250 million 1995 3475 1994 acquisition pulse electronics january 1995 accounted 309 million 40 increase remainder increase due increased demand companys products locomotive freight car divisions net sales freight car division increased 293 million 139 2404 million 1995 compared 2111 million 1994 due strong demand new car deliveries continued acceptance recently introduced products including elx empty load equipment truck mounted brake assembly repair service revenues freight car division increased nearly 8 million 14 continued retrofitting older rolling stock new valve stabilization leakage protection features strong oem revenues reflect fact north american freight car deliveries increased 142 53281 units 1994 60853 units 1995 sales locomotive division increased 422 million 75 1994 levels 309 million increase due acquisition pulse electronics excluding pulse locomotive revenue increased 113 million 20 due primarily north american locomotive deliveries increasing 18 1034 units 1994 1217 units 1995 net revenues passenger transit division increased 1995 38 million 6 spending new vehicles transit authorities remained fairly stable product sales consisting primarily industrial rubber increased 22 million 18 company expanded outside rubber sales total 22 increase net sales price increases accounted 2 approximately 7 million volume accounted 39 million 11 pulse acquisition comprised 309 million 9 gross profit gross profit increased 28 million 238 1995 gross margin increased 340 1994 344 1995 improvement gross profit due 22 increase sales volume higher overall margins resulting changes product mix partially offsetting factors increase warranty expense 34 million 47 million 1994 81 million 1995 primarily due upgrade costs 44 million companys epic brake product line selling marketing expenses selling expenses increased 23 million pulse accounted 12 million selling expenses new product support increased 11 million 10 percent sales total remained constant 31 1994 1995 general administrative expenses general administrative expenses increased 48 million increase pulse accounted 43 million excluding pulse general expenses increased less 3 5 million engineering expenses engineering expenses excluding manufacturing support engineering included cost sales increased 38 million approximately 26 million due pulse acquisition balance 12 million represents increased engineering support new product development amortization expenses amortization expenses increased 13 million primarily due amortization intangibles including goodwill associated pulse acquisition income operations operating income 1995 increased 157 million 213 prior year due primarily higher sales volume company able maintain profit margins 21 interest expense total interest expense 1995 31 million increase 201 million 1994 due primarily increased debt resulting companys recapitalization transaction establishment esop january 1995 partially offset proceeds ipo june 1995 income taxes companys overall effective income tax rate 1995 40 compared 41 1994 due lower effective state tax rates extraordinary item extraordinary item 1995 14 million represents net tax charge resulting companys june 1995 amended credit facility required writeoff previously deferred debt financing cost net income net income 1995 337 million compared 368 million 1994 increased 1995 operating income offset increased interest expenses liquidity capital resources company generated cash operating activities 589 million 458 million 437 million years 1996 1995 1994 respectively cash generated operating activities increasing primarily due stable net income improved asset management capital expenditures 129 million 162 million 129 million 1996 1995 1994 respectively majority capital expenditures reflect spending replacement equipment molds well increased capacity efficiency company expects capital expenditures 1997 approximate 25 million 8 million capital expenditures used invest new manufacturing facility technology center electronics group remainder machinery equipment improve efficiency quality freight transit divisions well replacements 1996 company acquired vapor futuris 64 million 15 million respectively transactions utilized borrowings entire purchase price also 1995 company acquired pulse electronics 549 million consisting 20 million bank borrowings 17 million related party note 179 million wabco common stock result recapitalization transaction january 31 1995 subsequent ipo senior note offering related amended bank credit facility transaction june 1995 companys debt structure debt service requirements changed significantly company debt structure december 31 1996 341690 shown actual column march 4 1997 one companys major shareholders scandinavian incentive holding bv sih agreed sell 10 million shares wabco common stock holds terms agreement company purchase 4 million shares 11 per share investment group consisting vestar equity partners lp harvard private capital group american industrial partners capital fund ii lp certain members company management acquire remaining 6 million shares price transaction conditioned upon among things obtaining approval companys senior note holders company intends finance purchase borrowings credit facility pro forma disclosures reflect subsequent event also described note 19 financial statements whereby company agreed repurchase 4 million shares common stock estimated cost 11 per share fund transaction including fees additional borrowings 46 million transaction approved companys board directors march 4 1997 expected completed march 31 1997 companys primary source liquidity operations 125 million revolving credit facility companys credit agreement amended 140 million pro forma basis december 31 1996 company utilized approximately 610 million borrowings 105 million letters credit therefore remaining borrowing capacity 535 million companys remaining borrowing capacity giving pro forma effect stock repurchase described approximately 23 million revolving credit borrowings due january 2001 term borrowings amended credit agreement due semiannual installments commenced june 30 1996 final payment due january 2002 remaining scheduled annual payments 182 million 226 million 402 million 201 million 414 million years ending 1997 1998 1999 2000 2001 respectively 212 million due january 31 2002 addition certain accelerated payments required either term loans revolving loans company may choose following interest rate options alternate base rate greater chase manhattan banks prime rate ii weighted average rates overnight federal funds transactions members federal reserve system arranged federal funds brokers plus one half one percent iii rate based secondary market rate threemonth certificates deposit plus 1 case plus applicable margin ranging 0 375 based wabcos interest expense coverage ratio leverage ratio b adjusted libo rate london interbank overseas rate dollar deposits adjusted statutory reserve requirements plus applicable margin ranging 75 15 based wabcos interest expense coverage ratio leverage ratio interest payable periodically addition company must pay certain fees administrative agents participating lending institutions including commitment fee 375 unborrowed amount term loans revolving loans order reduce impact interest rate changes variable rate debt company entered interest rate swaps three different lenders aggregate amount 75 million agreements effectively change companys interest rate exposure variable fixed rates ranging 722 837 agreements expire 1998 1999 amended credit agreement limits company respect declaring making cash dividend payments prohibits declaration making distributions whether cash property securities combination thereof respect shares companys capital stock however company permitted pay 01 quarterly dividends common stock subject certain conditions amended credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions mergers consolidations certain subsidiaries sales assets ordinary course business acquisitions requiring wabco pay 5 million less fiscal year 20 million less aggregate respectively limitation liens limitation certain debt payments limitation capital expenditures minimum fixed charge coverage ratio minimum interest expense coverage ratio maximum leverage ratio companys senior notes issued june 1995 bear interest rate 9375 mature june 2005 net proceeds note offering used prepay additional portion term loans outstanding existing credit agreement notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii amended credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes collectively senior indebtedness companys indenture pursuant notes issued contains certain restrictive covenants among things limit ability company certain subsidiaries incur indebtedness pay dividends redeem capital stock create restrictions investments unrestricted subsidiaries make distributions certain subsidiaries use proceeds sale assets subsidiary stock enter transactions affiliates create liens enter saleleaseback transactions companys indenture also restricts subject certain exceptions companys ability consolidate merge transfer substantially assets another person partial payment pulse acquisition company issued 170 million longterm pulse seller note due january 31 2004 interest payable semiannually accrues february 1 1998 per annum rate 95 february 1 1998 january 31 2001 interest accrue prime rate charged chase manhattan bank december 31 1997 plus 1 february 1 2001 january 31 2004 interest accrue prime rate charged chase manhattan bank december 31 2000 plus 1 esop loan original term 50 years annual payments principal interest approximately 12 million result inclusion us vapor salaried employees term esop loan reduced esop loan bears interest 85 per annum esop repay esop loan using contributions company obligated contribute amounts sufficient repay esop loan net effect esop companys stock allocated employees lieu retirement plan previously cash based defined benefit plan accordingly results reduced cash outlays estimated 3 4 million annually conjunction plan approved november 1 1995 repurchase one million shares common stock company purchased 405000 shares aggregate cost approximately 38 million december 31 1996 management believes based upon current levels operations forecasted earnings cash flow operations together borrowings amended credit agreement adequate make payments principal interest debt including notes make required contributions esop permit anticipated capital expenditures fund working capital requirements cash needs nevertheless company remain leveraged significant extent debt service obligations continue substantial companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place environmental matters product liability based available information environmental matters product liability claims presently represent material contingencies company see note 17 companys december 31 1996 consolidated financial statements effects inflation seasonality general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant companys business seasonal although third quarter results generally tend slightly lower quarters reflecting vacation time major customers period item 8item 7 managements discussion analysis financial condition results operations overview westinghouse air brake company north americas largest manufacturer valueadded equipment locomotives railway freight cars passenger transit vehicles companys primary manufacturing operations united states canada revenues historically predominantly north america recent years proportion international sales increased companys customer base consists freight transportation companies locomotive freight car original equipment manufacturers railroads transit car builders public transit systems 1997 versus 1996 summary results operations net income 1997 increased 46 million 141 compared 1996 earnings per share increased 235 142 per diluted share net sales 1997 5644 million reflecting 245 increase compared prior year higher revenue base reflects benefits associated acquisitions new products operating income earnings interest taxes depreciation amortization increased comparison primarily due revenue growth related gross margins number significant events occurred 1997 1996 impacted companys results operations financial condition company completed several strategic acquisitions complement enhance mix existing products markets revenues operations acquired 1997 1996 totaled 1282 million 1997 accounted 855 million overall 1997 sales increase following summary acquisitions completed past two years may 1997 company purchased stone located new jersey england one worlds leading suppliers air conditioning equipment transit industry established product base north america europe far east june 27 1997 company acquired heavy rail air conditioning business thermo king aggregate purchase price stone thermo king acquisitions approximately 77 million financed utilizing companys revolving line credit july 1997 company acquired 100 stock hp total purchase price 58 million included assumption 23 million debt hp leading supplier door controls transit rail cars buses italian market october 1997 wabco purchased rail products business related assets sloan valve company 25 million acquired products included slack adjusters angle cocks retainer valves september 1996 company acquired vapor passenger transit door manufacturer 639 million january 1996 company acquired futuris australian friction products manufacturer cash purchase price 15 million march 1997 agreement reached one companys major shareholders scandinavian incentive holding bv sih whereby company repurchased 4 million shares common stock held sih 44 million 11 per share plus 2 million fees company bank group agreed amend companys credit facility increase revolving credit availability 125 million 140 million waive 1996 mandatory termloan principal payment excess cash flow conjunction transaction sih also sold remaining 6 million shares companys common stock group investors consisting vestar equity partners lp harvard private capital group american industrial partners capital fund ii lp certain members senior management following table sets forth period indicated companys net sales market net sales net sales year ended december 31 1997 increased 1109 million 245 5644 million acquisitions vapor stone thermo king hp contributed 855 million increase addition increased volume electronics transit friction businesses favorably affected comparison gross profit gross profit increased 214 1861 million 1997 compared 1533 million 1996 gross margin percentage sales 330 1997 338 1996 effect initially lower margins recently acquired businesses primary factor change operating expenses total operating expenses increased 225 million yeartoyear comparison primarily reflecting effect acquisitions completed 1997 1996 incremental expenses acquired businesses totaled 153 million addition higher operating expenses reflect costs associated certain strategic initiatives including expanded international marketing activities additional engineering efforts associated new product development income operations operating income totaled 900 million 1997 compared 797 million year ago higher operating income reflects higher sales volume related gross profit interest expense interest expense increased 36 million 297 million 1997 primarily due funding costs associated repurchases common stock acquisitions partially offset debt repayments income taxes provision income taxes increased 24 million 233 million 1997 compared 209 million 1996 effective tax rate declined 385 1997 390 1996 due establishment foreign sales corporation latter part 1996 versus 1995 summary results operations net income net income 1996 declined 10 million 327 million compared 1995 lower income due change product sales mix including lower sales freight market due reduced oem production increased spending support additional engineering international sales staffing higher operating costs offset revenue growth net sales net sales increased 285 million 4535 million 1996 4250 million 1995 increase primarily due 1996 acquisitions vapor futuris sales also benefited full year pulse acquisition completed first quarter 1995 partially offsetting positive factors lower sales companys freight car division due part 5 decline oem production gross profit gross profit increased 73 million 5 1533 million 1996 primarily due higher sales volume gross margin percentage sales declined slightly 1996 338 versus 344 1995 primarily result changes product mix operating expenses nmnot meaningful operating expenses total operating expenses increased 169 million comparison totaled 736 million 1996 higher expense level primarily due futuris vapor acquisitions addition expenses increased part due wabcos expanded new product development initiatives international marketing activities well increased corporate expenses shareholder communication legal insurance costs income operations operating income 1996 797 million versus 893 million 1995 decrease primarily due higher operating expenses amortization offset increased gross profit interest expense total interest expense 1996 262 million decrease 48 million 1995 primarily result lower overall weighted average interest rates 1996 reduced debt levels proceeds companys ipo june 1995 income taxes companys overall effective income tax rate declined 390 1996 compared 400 1995 due lower effective state tax rates benefit foreign sales corporation fsc established 1996 liquidity capital resources liquidity provided primarily operating cash flow longterm borrowings wabcos operations generated cash flow totaling 670 million 589 million 458 million 1997 1996 1995 respectively operating cash flow increasing primarily due combination earnings growth improved asset management gross capital expenditures 296 million 132 million 162 million 1997 1996 1995 respectively majority capital expenditures reflect spending replacement equipment well increased capacity efficiency addition 1997 wabco made significant investments new electronics technology development center company expects capital expenditures 1998 approximate 28 million following table sets forth outstanding indebtedness wabco companys revolving credit term loan borrowings made pursuant credit agreement amended credit agreement consortium commercial banks credit agreement provides 140 million revolving credit loans including letters credit provided 1706 million term loans 1455 million outstanding december 31 1997 credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 736 yearend 1997 order reduce impact interest rate changes variable rate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts interest rate swaps aggregate notional value 100 million mature 1998 2000 interest rate swaps altered weightedaverage interest rate paid borrowings credit agreement 736 767 yearend 1997 principal repayments term loan borrowings due semiannual installments maturity january 2002 credit agreement limits company respect declaring making cash dividend payments prohibits declaration making distributions whether cash property securities combination thereof respect shares companys capital stock however company permitted pay 01 per share quarterly dividends common stock subject certain conditions credit agreement contains various covenants restrictions including limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions sales assets ordinary course business limitation liens limitation certain debt payments limitation capital expenditures minimum fixed charge coverage ratio minimum interest expense coverage ratio maximum leverage ratio companys senior notes issued june 1995 bear interest rate 9375 mature june 2005 net proceeds used prepay additional portion term loans outstanding existing credit agreement notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii amended credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes companys indenture pursuant notes issued contains certain restrictive covenants among things limit ability company certain subsidiaries incur indebtedness pay dividends redeem capital stock create restrictions investments unrestricted subsidiaries make distributions certain subsidiaries use proceeds sale assets subsidiary stock enter transactions affiliates create liens enter saleleaseback transactions companys indenture also restricts subject certain exceptions companys ability consolidate merge transfer substantially assets another person partial payment pulse acquisition company issued 170 million longterm pulse seller note due january 31 2004 interest payable semiannually accrues february 1 1998 per annum rate 95 february 1 1998 january 31 2001 interest accrue prime rate charged chase manhattan bank december 31 1997 plus 1 february 1 2001 january 31 2004 interest accrue prime rate charged chase manhattan bank december 31 2000 plus 1 1997 wabco completed stone thermo king hp acquisitions aggregate purchase price 135 million cash including 23 million assumed debt 1996 company acquired vapor futuris 639 million 15 million respectively transactions utilized borrowings purchase price also 1995 company acquired pulse electronics 549 million consisting 20 million bank borrowings 170 million note payable wabco common stock valued 179 million time acquisition march 1997 sih sold 10 million shares wabco common stock company purchased 4 million shares 11 per share investors consisting vestar equity partners lp harvard private capital group american industrial partners capital fund ii lp certain members wabcos management acquired remaining 6 million shares price company financed 4 million share repurchase borrowings credit facility connection establishment esop january 1995 company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan original term 50 years annual payments principal interest approximately 12 million esop loan bears interest 85 per annum esop repay esop loan using contributions company obligated contribute amounts sufficient repay esop loan net effect esop companys stock allocated employees lieu retirement plan previously cashbased defined benefit plan accordingly results reduced annual cash outlays estimated 3 4 million management believes based upon current levels operations forecasted earnings cash flow operations together borrowings credit agreement adequate make payments principal interest debt including notes make required contributions esop permit anticipated capital expenditures fund working capital requirements cash needs nevertheless company remain leveraged significant extent debt service obligations continue substantial companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effect year 2000 company information system improvement initiatives way include new computer hardware software applications new system expected operational late 1998 year 2000 compliant majority expenditures incurred hardware purchased software related project capitalized amortized estimated useful lives costs expensed incurred expenditures expected significant impact companys future results operations financial position forwardlooking statements time report written reports oral statements references made expectations regarding future performance company examples include limited statements expectations beliefs strategies future earnings revenue growth sales expansion opportunities forwardlooking statements based currently available competitive financial economic data companys operating plans inherently uncertain investors must recognize events could turn significantly different expected differences expectations factors listed among others could affect companys financial performance future could cause actual results differ materially expressed implied forwardlooking statements factors include changes domestic global assumptions expectations among others overall economic conditions interest rates demand services freight passenger rail industry consolidations rail industry demand companys products services product mix gains losses market share demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment continued outsourcing companys customers governmental funding companys customers future regulationderegulation companys customers andor rail industry successful research development success developing marketing delivering new products companys ability complete expected sales cancellation orders labor stability integration recent acquisitions completion additional acquisitions changes expected level capital expenditures continued bank financing warranty claims environmental laws lawsuits factors identified within form 10k filings securities exchange commission statements made pursuant safe harbor provisions private securities litigation reform act 1995 effects inflation seasonality general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant companys business seasonal although third quarter results generally tend slightly lower quarters reflecting vacation time major customers period item 8item 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually locomotives freight cars subway cars buses us well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 11 countries 2005 76 percent company’s revenues came north american operations wabtec also sold products services 89 countries around world management review 2005 future outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy addition management monitors company’s shortterm operational performance measures quality ontime delivery 2005 achieved following • increased revenues 258 company generated increases aftermarket oem sales well international sales • improved earnings per diluted share continuing operations 73 121 • increased cash 461 million achieved results despite higher raw material costs despite negative impact foreign currency exchange rates especially company’s canadian operations freight rail industry statistics carloadings orders new freight cars improved 2005 example carloadings increased record 172 million 09 higher 2004 freight railroads benefited strengthening economy us shown deliveries new freight cars increased 68657 2005 orders increased 80703 result yearend backlog freight cars ordered 69408 highest level since 1998 sales freight segment benefited trend following quarterly freight car statistics past three years source railway supply institute following summary freight car locomotive transit car deliveries industry source railway supply institute company estimates carloadings intermodal units originated increased past three years reflecting higher rail traffic ultimately better opportunities maintenance aftermarket sales company source association american railroadsweekly rail traffic 2006 expect demand locomotives freight cars transit vehicles remain levels 2005 expect demand aftermarket remain strong due continued growth rail traffic passenger transit ridership 2006 beyond continue face many challenges including increased costs raw materials especially steel higher costs medical insurance premiums foreign currency fluctuations addition face general economic risks well risk customers could curtail spending new existing equipment risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks company continues evaluate possible restructuring actions taken would expected result ongoing benefits would require significant onetime charges income results operations following table shows consolidated statements operations years indicated 2005 compared 2004 following table summarizes results operations period net sales increased 212 million 822 million 2004 1034 million 2005 primarily result volume increases freight car deliveries strong demand locomotive components acquisition friction product assets rutgers rail spa “cofren” rampup locomotive module contract 2005 aftermarket parts sales also increased strong carloadings intermodal units originated company realize significant net sales improvement price increases foreign exchange net income 2005 558 million 117 per diluted share net income 2004 324 million 071 per diluted share increase net income primarily due increased sales following table shows company’s net sales business segment net sales net sales 2005 increased 212 million 258 compared 2004 freight group’s increased sales reflected higher sales certain components international markets higher demand pneumatic air brake components related increased deliveries freight cars sales 25 million cofren acquisition first quarter 2005 sales locomotive module contract industry deliveries new freight cars 2005 increased 68657 units compared 46292 2004 transit group sales slightly higher mostly due increased oem demand gross profit gross profit increased 2596 million 2005 compared 2052 million 2004 gross profit dependent number factors including pricing sales volume product mix 2005 gross profit percentage sales 25 compared 25 2004 increase gross profit percentage primarily due increased sales company’s costimprovement programs company taking action improve margins future quarters including price increases ongoing initiatives increase productivity efficiency company recorded loss provision 16 million first quarter 2005 related contract assemble locomotive modules boise idaho facility provision based upon customer purchase orders units expected unprofitable specific contract costs third quarter 2005 result termination contract improvements cost entire reserve reversed earnings however result termination agreement company charged expense 12 million preproduction costs originally capitalized 2004 amortized along delivery modules contract 161000 costs contract termination potentially reduces number locomotive modules company may supply customer allowed price increases current future orders issues reducing gross profit percentage include severance relocation costs 19 million related consolidation several production facilities writedown fixed assets 1 million closure certain foundry operations provision warranty expense 71 million lower prioryear positively impacted gross profit provision warranty expense lower due improved warranty performance three business units lower charges certain specific products overall warranty reserve decreased 2005 13 million warranty claims paid warranty expense following table shows operating expenses operating expenses operating expenses increased 86 million 2005 compared 2004 operating expenses higher 2005 due addition cofren 1 million reserve note receivable considered uncollectible overall higher costs inflation sales activity 2004 included 32 million unfavorable litigation ruling getsgs company disagrees intends contest percentage sales total operating expense declined 153 2005 182 2004 income operations income operations totaled 1013 million 98 sales 2005 compared 554 million 67 sales 2004 higher operating income resulted primarily higher sales 2005 interest expense net interest expense decreased 247 2005 compared 2004 primarily due company’s lower debt level 2005 higher interest income expense net company recorded foreign exchange loss 33 million 12 million respectively 2005 2004 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes effective income tax rate 356 2005 2004 wabtec recorded 49 million tax benefit resolving certain tax issues prior years without benefit overall effective income tax rate 365 2004 2005 rate lower due increased income lower tax jurisdictions net income net income 2005 increased 233 million compared 2004 increase due higher sales 2004 compared 2003 following table summarizes results operations period net sales increased 145 7179 million 2003 822 million 2004 primarily result volume increases freight car locomotive transit car deliveries aftermarket part sales increased carloadings intermodal units originated company realize significant net sales improvement price increases foreign exchange net income 2004 324 million 071 per diluted share net income 2003 227 million 052 per diluted share increase net income primarily due increased sales favorable tax benefit following table shows company’s net sales business segment net sales net sales 2004 increased 1041 million 145 compared 2003 freight group’s increased sales reflected higher sales certain components international markets higher demand pneumatic air brake components related increased delivery freight cars locomotives greater demand friction products due overall increased rail traffic 2004 industry deliveries new freight cars 2004 increased 46292 units compared 31400 2003 transit group’s increased sales due increased deliveries existing contracts higher aftermarket sales gross profit gross profit increased 2052 million 2004 compared 1895 million 2003 gross profit dependent number factors including pricing sales volume product mix gross profit percentage sales 25 compared 264 2003 decrease gross profit percentage primarily due increased manufacturing costs higher raw material prices higher medical costs retiree health plans negative impact foreign exchange rates company’s canadian operations issues reducing gross profit percentage include inefficiencies relating closing relocation electronics plant canada us establishment 970000 reserve reflect future environmental monitoring boise facility fixed asset impairment charges 13 million start lowmargin rail door contracts transit group also provision warranty expense increased 44 million 2004 compared 2003 provision warranty expense higher due combination higher sales requiring additional reserves charges certain specific products although warranty provision increased 2004 warranty claims decreased resulting overall increase 41 million warranty reserves company taking action improve margins future quarters including price increases ongoing initiatives increase productivity efficiency following table shows operating expenses operating expenses operating expenses increased 101 million 2004 compared 2003 including 32 million unfavorable litigation ruling getsgs company disagrees intends contest costs comprising increase include restructuring costs company’s electronics unit higher medical insurance claims experience foreign exchange costs overall higher costs inflation sales activity increases partially offset reduced amortization expense amortization expense decreased due certain intangible assets fully amortized income operations income operations totaled 554 million 67 sales 2004 compared 498 million 69 sales 2003 higher operating income resulted increased sales 2004 partially offset higher operating expenses interest expense net interest expense increased 37 2004 compared 2003 primarily due company’s sale senior notes august 2003 notes resulting higher interest expense 2004 enabled company convert shortterm variablerate debt fixedrate debt attractive longterm interest rate expense net company incurred foreign exchange losses 12 million 28 million respectively 2004 2003 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes income tax expense 2004 includes tax benefit 49 million primarily related reversal certain items previously provided closed regulatory examination effective income tax rate including aforementioned tax benefit remains unchanged 365 2004 2003 net income net income 2004 increased 97 million compared 2003 increase due higher sales tax benefit mentioned partially offset items including unfavorable getsgs litigation ruling increased environmental reserve higher manufacturing costs liquidity capital resources liquidity provided primarily operating cash flow borrowings company’s unsecured credit facility consortium commercial banks “credit agreement” following summary selected cash flow information relevant data management uses ebitda measure liquidity following reconciliation ebitda net cash provided operating activities ebitda defined earnings deducting interest expense income taxes depreciation amortization although ebitda measure performance calculated accordance generally accepted accounting principles management believes useful investor evaluating wabtec widely used measure evaluate company’s operating performance ability service debt financial covenants credit facility include ratios based ebitda purport represent cash generated operating activities considered isolation substitute measures performance accordance generally accepted accounting principles addition ebitda calculated identically companies presentation may comparable similarly titled measures companies management’s discretionary use funds depicted ebitda may limited working capital debt service capital expenditure requirements restrictions related legal requirements commitments uncertainties operating activities operating cash flow 2005 841 million compared 529 million 2004 net income approximately 233 million higher 2005 2004 working capital increased used operating cash 187 million receivables increased 67 million inventory increased 139 million offset increase accounts payable accruals 588 million decrease current assets 34 million deferred accrued income taxes increased operating cash flows 14 million 15 million respectively 2005 remained relatively unchanged 2004 remaining source operating cash due depreciation amortization net decrease assets less liabilities 2005 operating cash flow 2004 529 million compared 559 million 2003 net income approximately 97 million higher 2004 2003 working capital decreased resulting increase operating cash flow 62 million accounts payable accruals increased 261 million offset increase receivables inventory current assets 108 million 52 million 39 million respectively deferred accrued income taxes remained relatively unchanged compared 88 million decrease 2003 remaining use operating cash due net increase assets less liabilities 2004 working capital remained relatively unchanged 2003 receivables inventory increased 132 million accounts payable increased 141 million investing activities 2005 2004 cash used investing activities 576 million 178 million respectively 2005 acquired assets rutgers rail spa 359 million net cash received remaining use cash consisted almost entirely capital expenditures net disposals 2003 cash used investing activities 125 million capital expenditures continuing operations 227 million 193 million 175 million 2005 2004 2003 respectively majority capital expenditures periods relates upgrades replacement existing equipment financing activities 2005 cash provided financing activities 28 million compared cash used financing activities 185 million 2004 company realized proceeds 301 million exercise stock options 2005 2004 long term debt reduced 401 million company also realized proceeds 23 million exercise stock options 2004 2003 company issued 150 million senior notes due august 2013 “the notes” notes issued par interest accrues 6875 payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing bank credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities november 2003 company issued common stock connection registration sale stock certain selling shareholders company issued 726900 shares common stock realizing total proceeds 10 million see “prospectus summaryrecent development” following table shows outstanding indebtedness december 31 2005 2004 revolving credit agreement term loan interest rates variable dependent market conditions cash balance december 31 2005 2004 1414 million 953 million respectively february 1 2005 company completed acquisition assets rutgers rail spa business operations italy germany france spain acquisition accounted purchase accordingly purchase price allocated respective assets liabilities based upon estimated fair values acquisition date operating results included consolidated statement operations acquisition date forward new company formed hold newly purchased assets named cofren srl “cofren” cofren one leading manufacturers brake shoes disc pads interior trim components rail applications europe purchase price 359 million net cash received resulting additional goodwill 57 million refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 december 31 2005 company available bank borrowing capacity net 264 million letters credit approximately 1486 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement year ended december 31 2005 refinancing credit agreement may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effects inflation general inflation material impact company’s results operations labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause labor cost automatically increase inflation become significant however higher costs metals reduced gross margin areas higher costs include medical benefits active retired employees contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2005 1 unconditional purchase obligations purposes disclosure defined contractual obligation purchase utilities electricity natural gas excess 100000 annually 200000 total longterm purchase obligations purposes disclosure defined contractual obligation purchase raw materials supplies noncancelable excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 89 million pension plan investments 2006 see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6 78 150 million senior notes due 2013 6 scheduled principal repayments outstanding loan balances disclosed year note 9 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate 19 million 8 annual capital expenditure budget subject approval board directors 2006 budget amount approved february 2006 board directors meeting 22 million 9 company 264 million outstanding letters credit performance bid bond purposes expire various dates 2009 10 guarantee debt former operating unit sold 2001 obligations operating activities company entered 58 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 75 million 61 million 2005 2004 respectively benefits paid post retirement plans 27 million 36 million 2005 2004 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate 19 million annually 2001 company sold subsidiary unit’s management team part sale company guaranteed approximately 3 million bank debt buyer used purchase financing debt refinanced june 2005 wabtec’s guarantee reduced 721000 management reason believe debt repaid refinanced company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2005 initial value performance bonds issued company’s behalf 747 million obligations investing activities company typically spends approximately 15 million 25 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia • demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectibility troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts description judgments uncertainties effect actual results differ assumptions inventories stated lower cost market inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed additional impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses description judgments uncertainties effect actual results differ assumptions accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period income taxes global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles description judgments uncertainties effect actual results differ assumptions company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined longterm contracts revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well approximately 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 17 countries 2010 46 company’s revenues came customers outside us management review outlook wabtec’s longterm financial goals generate cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s shortterm operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotives freight cars 2010 us freight rail traffic increased due improving overall economy favorable effect company’s freight group deliveries new locomotives freight cars lower 2009 levels order rates picked recent quarters 2010 revenue tonmiles increased 85 carloadings increased 73 intermodal loadings increased 142 rail traffic rebounded strongly 200809 economic recession us lingering effect recession 2010 deliveries new freight locomotives decreased 20 deliveries new freight cars decreased 25 although markets expected increase 2011 15 company’s revenues directly related deliveries new freight locomotives freight cars improvement markets would favorable effect company’s financial results whether demand continues improve depend largely continued strength overall economy rail traffic volumes 2008 us government enacted rail safety legislation requires certain freight passenger railroads equip certain locomotives positive train control technology end 2015 technology includes onboard locomotive computer related software developed wabtec industry leader wabtec expects benefit increased sales train controlrelated products technology deployed throughout industry north american transit rail industry driven government spending ridership spending safetealu federal government’s transportation funding bill increased 6 2009 remained consistent 2010 ridership decreased 4 1 2009 2010 respectively due recession impact employment levels although safetealu scheduled expire september 2009 bill extended march 4 2011 funding 2009 levels spending 2011 expected remain current levels least new bill passed early 2009 us federal government passed new spending legislation designed stimulate us economy 20 billion spent freight passenger transportation follows 84 billion public transportation 8 billion highspeed rail 15 billion discretionary intermodal projects 13 billion amtrak funding already allocated specific projects wabtec expects benefit slightly additional spending transit authorities invest new locomotives buses 2011 economy continues improve company expects conditions generally improve freight rail market slightly weaker passenger transit market demand new freight cars locomotives expected higher due increasing freight rail traffic passenger transit market company believes stable federal funding ridership would result stable demand new equipment aftermarket parts however government entities levels expected continue facing budget issues could negative effect demand company’s products services response current market conditions wabtec may continue take certain actions reduce costs including plant consolidations work force reductions general spending cuts management believes actions affect company’s ability continue invest strategic growth initiatives wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america europe majority rail system serves passenger transit market much larger transit market us asiapacific fastestgrowing market segment led china’s plans spend record levels 2011 beyond unfavorable general economic market conditions united states internationally could negative impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer order inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2010 compared 2009 following table summarizes results operations period net sales increased 1054 million 15070 million 2010 14016 million 2009 increase due higher freight group sales 1002 million original equipment aftermarket sales related acquisitions 861 million partially offsetting increase lower transit group sales 851 million company realized net sales increase 42 million due favorable effects foreign exchange net earnings generally impacted foreign exchange net income 2010 1231 million 256 per diluted share net income 2009 1151 million 239 per diluted share net income increased due higher sales volume operating margins partially offset higher income tax expense freight group sales increased 1961 million 333 due higher sales 818 million acquisitions 632 million specialty products 204 million brake products 136 million freight products freight group net sales improved 141 million due favorable effects foreign exchange transit group’s sales decreased 907 million 112 due lower brake product sales 389 million lower transit related product sales 263 million lower sales 190 million remanufacturing overhaul build locomotives partially offset sales acquisitions 43 million transit group sales lower due part completion major contracts well project delays budget constraints municipal transit authorities transit group net sales reduced 99 million due unfavorable effects foreign exchange gross profit gross profit increased 4491 million 2010 compared 3933 million 2009 gross profit dependent number factors including pricing sales volume product mix 2010 gross profit percentage sales 298 compared 281 2009 higher sales volume mix products provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 24 million higher 2010 compared 2009 due increased freight group sales warranty reserve recorded balance sheet 63 million higher december 31 2010 compared december 31 2009 result higher warranty expense driven higher sales lower claims actually satisfied particular certain transit group warranty reserves reflect provisions established original equipment deliveries 2010 operating expenses following table shows operating expenses selling general administrative expenses increased 349 million 2010 compared 2009 due expenses acquisitions incentive noncash compensation engineering expense decreased 22 million 2010 compared 2009 company focused engineering resources completing original equipment contracts costs related engineering specific customer contracts included cost sales total operating expenses 163 152 sales 2010 2009 respectively income operations income operations totaled 2028 million 135 sales 2010 compared 1800 million 128 sales 2009 income operations increased due higher sales volume operating margins interest expense net overall interest expense net decreased interest expense higher due increased borrowings offset interest income higher invested cash balances expense net company recorded foreign exchange expense 10 million due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings offset 09 million miscellaneous income taxes effective income tax rate 341 296 2010 2009 respectively increase effective tax rate primarily due benefit recorded 2009 related settlement examinations various taxing jurisdictions net income net income 2010 increased 80 million compared 2009 increase net income due higher sales volume operating margins partially offset higher income tax expense 2009 compared 2008 following table summarizes results operations period net sales decreased 1732 million 14016 million 2009 15748 million 2008 decrease due recession experienced previous 12 months contributed lower rail traffic lower freight group sales related acquisitions 1149 million partially offset decrease company realized net sales reduction 351 million due unfavorable effects foreign exchange net earnings generally impacted foreign exchange net income 2009 1151 million 239 per diluted share net income 2008 1306 million 266 per diluted share net income decreased due lower freight group sales severance costs related downsizing consolidation actions partially offset costsaving initiatives lower income taxes net income also decreased 39 million royalty charge included selling general administrative expenses related final award arbitration proceeding faiveley transport malmo ab wabtec freight group sales decreased 1852 million 239 due lower sales 1457 million specialty products 1073 million brake products 215 million remanufacturing overhaul manufacturing locomotives offsetting reductions increase sales 1031 million acquisitions transit group sales increased 120 million 15 due increased sales 171 million brake products 250 million transit related products 118 million acquisitions offsetting increases decrease sales 100 million remanufacturing overhaul build locomotives transit group net sales reduced 309 million due unfavorable effects foreign exchange sales mentioned gross profit gross profit decreased 3933 million 2009 compared 4272 million 2008 gross profit dependent number factors including pricing sales volume product mix 2009 gross profit percentage sales 281 compared 271 2008 gross profit percentage increased due realized cost savings downsizing consolidation actions increased gross profit transit segment due efficiencies realized certain longterm contracts provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty periods provision warranty expense 34 million 2009 compared 2008 due primarily specific reserves certain transit products warranty reserve recorded balance sheet 15 million lower december 31 2009 compared december 31 2008 result lower warranty expense compared claims actually satisfied balance sheet warranty reserve decreased december 31 2009 compared december 31 2008 due higher normal settlement claims operating expenses following table shows operating expenses selling general administrative expenses decreased 96 million 2009 compared 2008 due costsavings initiatives along lower costs related incentive compensation plans partially offset increased expenses acquisitions engineering expenses increased 34 million 2009 compared 2008 due mostly acquisitions costs related engineering specific customer contracts included cost sales amortization expense increased 48 million due acquisitions 2009 company sold facility net cash proceeds 36 million unrelated third party certain portions building leased back transaction resulted gain 21 million deferred gain 06 million deferred gain recognized five years total operating expenses 152 136 sales 2009 2008 respectively income operations income operations totaled 1800 million 128 sales 2009 compared 2125 million 135 sales 2008 income operations decreased due lower freight group sales severance costs related downsizing consolidation actions royalty payment faiveley transport malmo ab partially offset costsaving initiatives interest expense net interest expense net increased 81 million 2009 compared 2008 due acquisition financing expense net company recorded foreign exchange expense 13 million due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings offset 10 million miscellaneous income taxes effective income tax rate 296 361 2009 2008 respectively decrease effective tax rate primarily due settlement examinations various taxing jurisdictions 2009 net income net income 2009 decreased 155 million compared 2008 decrease net income due primarily lower sales liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2010 2009 2008 cash provided operations 1761 million 1623 million 1558 million respectively comparison 2009 cash provided operations 2010 resulted higher net income higher noncash items partially offset net increase working capital 2010 accounts receivable increased 343 million primarily due higher sales inventory increased 17 million prior year increases partially offset increase accounts payable 443 million operating assets liabilities net used cash 202 million due primarily payment timing certain accrued liabilities comparison 2008 cash provided operations 2009 resulted decrease working capital lower net income lower noncash items 2009 accounts receivable decreased 805 million primarily due lower sales inventory decreased 334 prior year decreases partially offset decrease accounts payable 482 million operating assets liabilities net used cash 601 million due primarily payment timing certain accrued liabilities comparison 2007 cash provided operations 2008 resulted higher net income partially offset net increase working capital 2008 accounts receivable increased 208 million primarily due higher sales inventory increased 427 million prior year increases partially offset increase accounts payable 143 million operating assets liabilities net provided cash 287 million due primarily payment timing certain accrued liabilities investing activities 2010 2009 2008 cash used investing activities 1563 million 1152 million 4174 million respectively net cash paid acquisitions 1382 million 963 million 3981 million years ended december 31 2010 2009 2008 respectively refer note 3 “notes consolidated financial statements” additional information acquisitions 2009 company sold facility net cash proceeds 36 million unrelated third party capital expenditures 208 million 183 million 197 million 2010 2009 2008 respectively financing activities 2010 cash provided financing activities 258 million included 2484 million proceeds debt 1854 million repayments debt revolving credit facility 327 million debt repayments term loan debt 19 million dividend payments 84 million wabtec stock repurchases 2009 cash used financing activities 130 million included 1975 million proceeds debt 1625 million repayments debt revolving credit facility 308 million debt repayments term loan debt 19 million dividend payments 197 million wabtec stock repurchases 2008 cash provided financing activities 1897 million included 2360 million borrowings new credit facility offset 458 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2010 2009 cash balance december 31 2010 2009 2369 million 1887 million respectively 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2010 weighted average interest rate company’s variable rate debt 158 december 31 2010 company available bank borrowing capacity net 289 million letters credit approximately 1371 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate 25 basis points alternate rate margin 125 basis points reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract december 31 2010 notional value interest rate swap outstanding 1370 million effectively changed company’s interest rate bank debt december 31 2010 variable rate fixed rate 227 interest rate swap agreement matures various times december 2012 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 8 “notes consolidated financial statements” included part iv item 15 report 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2010 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 72 million pension plan investments 2011 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6875 150 million senior notes due 2013 interest payments term loan facility revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 19 million 8 annual capital expenditure budget subject approval board directors 2011 budget amount approved december 2010 board directors meeting 9 company 289 million outstanding letters credit performance bid bond purposes expire various dates 2013 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 100 million timing uncertain except 13 million may become payable 2011 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 584 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 136 million 160 million 2010 2009 respectively benefits paid post retirement plans 19 million 19 million 2010 2009 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 19 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2010 initial value performance bonds issued company’s behalf 2267 million obligations investing activities company typically spends approximately 25 million 35 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost description judgments uncertainties effect actual results differ assumptions inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecast operating cash flows including markets market share sales volume pricing costs produce working capital changes fourth quarter 2010 company used discount rate reporting units ranging 11 13 terminal growth 1 3 difference discount rates based underlying markets risks associated reporting unit management considers historical experience available information time fair values business estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses description judgments uncertainties effect actual results differ assumptions accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period income taxes wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance asc605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles description judgments uncertainties effect actual results differ assumptions company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 18 countries 2011 47 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec performance system increase revenues focused growth strategy including global market expansion new products technologies aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity north america freight rail industry largely driven general economic conditions cause fluctuations rail traffic based fluctuations railroads increase decrease purchases new locomotives freight cars 2011 us freight rail traffic increased due improving overall economy according association american railroads 2011 revenue tonmiles increased 32 carloadings increased 22 intermodal loadings increased 54 compared period 2010 rail traffic rebounded 200809 economic recession favorable effect company’s freight group increased demand new locomotives freight cars aftermarket products services 15 company’s revenues directly related deliveries new freight cars improvement market favorable effect company’s financial results whether demand continues improve depend largely continued strength overall economy rail traffic volumes 2008 us government enacted rail safety legislation requires certain freight passenger railroads equip certain locomotives positive train control “ptc” technology end 2015 technology includes onboard locomotive computer related software developed wabtec industry leader wabtec expects benefit increased sales train controlrelated products engineering services technology deployed throughout industry ptc revenue 125 million 2011 north american transit rail industry driven government spending ridership according american public transportation association spending safetealu federal government’s transportation funding bill increased 6 2009 remained consistent 2010 2011 ridership decreased 4 1 2009 2010 respectively due recession impact employment levels ridership increased 2 2011 although safetealu expired september 2009 bill extended march 2012 funding 2009 levels spending 2012 expected remain current levels congress considering various multiyear funding bills 2011 market conditions improved north america freight rail market demand new freight cars locomotives higher due increasing freight rail traffic passenger transit market 2011 company believes existing levels federal funding ridership resulted consistent demand new equipment aftermarket parts compared previous years however government entities levels facing budget issues could negative effect demand company’s products services wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asiapacific south america europe majority rail system serves passenger transit market larger transit market us presence uk germany italy positioned company take advantage market asiapacific growth market various joint ventures direct exports china positioned company take advantage growth economic growth australia area expansion company commodity suppliers use products meet demands regional customers recently company announced contract acquisition brazil allowing us expand presence market 2012 beyond general economic market conditions united states internationally could impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2011 compared 2010 following table summarizes results operations period following table shows major components change sales 2011 2010 net sales increased 4606 million 19676 million 2011 15070 million 2010 increase due higher freight group sales 3558 million primarily increased demand freight original equipment electronics aftermarket products sales related acquisitions 1283 million partially offsetting increase lower sales 874 million primarily completion certain transit locomotive build contracts lower sales certain transit original equipment contracts company realized net sales increase 296 million income operations increase 41 million due favorable effects foreign exchange net income 2011 1701 million 351 per diluted share net income increased due higher sales volume operating margins freight group sales increased 4256 million 542 due higher sales 2815 million specialty products electronics primarily resulting increased demand original equipment rail products original equipment heat exchange products aftermarket rail products 477 million brake products resulting higher car build increased rail traffic 476 million acquisitions 266 million demand freight overhaul remanufacturing services freight group net sales improved 133 million due favorable effects foreign exchange transit group sales increased 351 million 49 due increased sales 807 million acquisitions 251 million resulting increased demand electronics partially offset decreased sales 870 million completion certain transit locomotive build contracts lower sales certain transit original equipment contracts transit group net sales improved 163 million due favorable effects foreign exchange cost sales gross profit cost sales increased 3393 million 13972 million 2011 10579 million 2010 2011 cost sales percentage sales 710 compared 702 period 2010 increase result increased costs transit segment related certain longterm contracts partially offset ii higher margin product sales freight aftermarket increased percentage total sales compared products 2011 raw material costs increased percentage sales approximately 44 2011 41 2010 labor costs percentage sales approximately 11 2011 2010 overhead costs decreased percentage sales approximately 16 2011 18 2010 freight group raw material costs increased percentage sales approximately 44 2011 40 2010 freight group labor costs decreased percentage sales approximately 10 2011 11 2010 overhead costs decreased percentage sales approximately 15 2011 18 2010 transit group raw material costs percentage sales approximately 43 2011 2010 transit group labor costs increased percentage sales approximately 12 2011 11 2010 overhead costs increased percentage sales 19 2011 18 2010 general raw material costs percentage sales increased reflecting higher mix revenue generated freight original equipment sales aftermarket services higher raw material component cost sales overhead costs vary percentage sales depending product mix changes sales volume addition included costs sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 30 million lower 2011 compared 2010 completion certain transit contracts required creating initial warranty reserves gross profit increased 5702 million 2011 compared 4491 million 2010 reasons discussed accordingly 2011 gross profit percentage sales 290 compared 298 2010 operating expenses following table shows operating expenses selling general administrative expenses increased 516 million 2011 compared 2010 190 million expenses acquisitions growth initiatives 181 million charge court ruling 119 million incentive noncash compensation 40 million certain onetime charges partially offset benefit 24 million settlement related prior acquisition engineering expense decreased 30 million 2011 compared 2010 company focused engineering resources completing original equipment contracts caused related engineering costs charged cost sales amortization expense increased 2011 compared 2010 due amortization intangibles associated acquisitions total operating expenses 152 163 sales 2011 2010 respectively income operations income operations totaled 2707 million 138 sales 2011 compared 2028 million 135 sales 2010 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased due higher interest income realized higher invested cash balances expense net company recorded foreign exchange losses 20 million 2011 foreign exchange losses 10 million 2010 due effect currency exchange rate changes intercompany transactions non us dollar denominated charged credited earnings income taxes effective income tax rate 334 341 2011 2010 respectively decrease effective tax rate primarily due tax benefit approximately 19 million due primarily settlement examinations various tax jurisdictions net income net income 2011 increased 470 million compared 2010 increase net income due higher sales volume partially offset increased operating expenses 2010 compared 2009 following table summarizes results operations period following table shows major components change sales 2010 2009 net sales increased 1054 million 15070 million 2010 14016 million 2009 increase due higher sales 1002 million increased customer demand freight original equipment aftermarket products freight overhaul remanufacturing services sales related acquisitions 861 million partially offsetting increase lower sales 851 million resulting completion certain transit original equipment contract lower demand transit car overhauls completion certain transit locomotive build contracts company realized net sales increase 42 million due favorable effects foreign exchange net earnings materially impacted foreign exchange net income 2010 1231 million 256 per diluted share net income 2009 1151 million 239 per diluted share net income increased due higher sales volume operating margins partially offset higher income tax expense freight group sales increased 1961 million 333 due higher sales 818 million acquisitions 631 million specialty products electronics primarily resulting increased customer demand original equipment heat exchange products aftermarket rail products 204 million brake products resulting increased rail traffic aftermarket demand brakes valves 136 million freight products primarily resulting increased international demand freight overhaul remanufacturing services increased 30 million freight group net sales improved 141 million due favorable effects foreign exchange transit group’s sales decreased 907 million 112 sales decreased 652 million completion major original equipment contract early 2010 sales also decreased 190 million due lower levels transit car overhauls completion certain contracts manufacture locomotives 2010 decreases partially offset sales acquisitions 43 million transit group net sales reduced 99 million due unfavorable effects foreign exchange cost sales gross profit cost sales increased 496 million 10579 million 2010 compared 10083 million 2009 2010 cost sales percentage sales 702 compared 719 2009 decrease result higher margin product sales freight aftermarket increased percentage total sales compared products ii decreased costs transit segment due efficiencies realized certain longterm contracts 2010 raw material costs decreased percentage sales approximately 41 2010 43 2009 labor costs percentage sales approximately 11 2010 2009 overhead costs percentage sales approximately 18 2010 2009 freight group raw material costs decreased percentage sales approximately 40 2010 41 2009 freight group labor costs percentage sales approximately 11 2010 2009 overhead costs decreased percentage sales approximately 18 2010 23 2009 transit group raw material costs percentage sales approximately 43 2010 2009 transit group labor costs increased percentage sales approximately 11 2010 10 2009 overhead costs increased percentage sales approximately18 2010 17 2009 general raw material costs percentage sales decreased reflecting higher mix revenue generated contracts delivering train control related services higher labor component cost sales overhead costs vary percentage sales depending product mix changes sales volume addition included costs sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 24 million higher 2010 compared 2009 due increased freight group sales gross profit increased 4491 million 2010 compared 3933 million 2009 reasons discussed accordingly 2010 gross profit percentage sales 298 compared 281 2009 operating expenses following table shows operating expenses selling general administrative expenses increased 349 million 2010 compared 2009 primarily due 173 million expenses acquisitions 167 million incentive noncash compensation engineering expense decreased 22 million 2010 compared 2009 company focused engineering resources completing original equipment contracts costs related engineering specific customer contracts included labor element cost sales total operating expenses 163 152 sales 2010 2009 respectively income operations income operations totaled 2028 million 135 sales 2010 compared 1800 million 128 sales 2009 income operations increased due higher sales volume operating margins interest expense net overall interest expense net decreased interest expense higher due increased borrowings offset interest income higher invested cash balances expense net company recorded foreign exchange expense 10 million due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings offset 09 million miscellaneous income taxes effective income tax rate 341 296 2010 2009 respectively increase effective tax rate primarily due benefit recorded 2009 related settlement examinations various taxing jurisdictions net income net income 2010 increased 80 million compared 2009 increase net income due higher sales volume operating margins partially offset higher income tax expense liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities 2011 2010 2009 cash provided operations 2486 million 1761 million 1623 million respectively comparison 2010 increased cash provided operations 2011 resulted higher net income higher noncash items partially offset net increase working capital 2011 accounts receivable increased 687 million primarily due higher sales inventory increased 795 million prior year increases partially offset increase accounts payable 600 million operating assets liabilities net provided cash 1231 million due primarily payment timing certain accrued liabilities comparison 2009 increased cash provided operations 2010 resulted higher net income higher noncash items partially offset net increase working capital 2010 accounts receivable increased 343 million primarily due higher sales inventory increased 17 million prior year increases partially offset increase accounts payable 443 million operating assets liabilities net used cash 202 million due primarily payment timing certain accrued liabilities investing activities 2011 2010 2009 cash used investing activities 1462 million 1563 million 1152 million respectively net cash paid acquisitions 1090 million 1382 million 963 million years ended december 31 2011 2010 2009 respectively refer note 3 “notes consolidated financial statements” additional information acquisitions 2009 company sold facility net cash proceeds 36 million unrelated third party capital expenditures 380 million 208 million 183 million 2011 2010 2009 respectively financing activities 2011 cash used financing activities 468 million included 2570 million proceeds debt 2435 million repayments debt revolving credit facility 397 million debt repayments term loan debt 38 million dividend payments 260 million wabtec stock repurchases 2010 cash provided financing activities 258 million included 2484 million proceeds debt 1854 million repayments debt revolving credit facility 327 million debt repayments term loan debt 19 million dividend payments 84 million wabtec stock repurchases 2009 cash used financing activities 130 million included 1975 million proceeds debt 1625 million repayments debt revolving credit facility 308 million debt repayments term loan debt 19 million dividend payments 197 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2011 2010 cash balance december 31 2011 2010 2856 million 2369 million respectively 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provides company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility expires november 7 2016 2011 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2011 company available bank borrowing capacity net 489 million letters credit approximately 3061 million subject certain financial covenant restrictions 2011 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted libor rates plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2011 weighted average interest rate company’s variable rate debt 153 reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively convert portion debt variable fixedrate borrowing term swap contracts december 31 2011 notional value interest rate swaps outstanding 1070 million effectively changed company’s interest rate bank debt december 31 2011 variable rate fixed rate 219 interest rate swap agreements mature december 31 2012 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement convert portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2011 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2011 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities see note 8 “notes consolidated financial statements” included part iv item 15 report 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provided company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities set expire january 2013 2008 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance measurements covenants expects measurements type limiting factor executing operating activities management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2011 1 purchase obligations purposes disclosure defined contractual obligation excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 71 million pension plan investments 2012 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable january july year 6875 150 million senior notes due 2013 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 58 million 8 annual capital expenditure budget subject approval board directors 2012 budget amount approved december 2011 board directors meeting 9 company 489 million outstanding letters credit performance bid bond purposes expire various dates 2013 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 82 million timing uncertain except 18 million may become payable 2012 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 883 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 125 million 136 million 2011 2010 respectively benefits paid post retirement plans 19 million 19 million 2011 2010 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 58 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2011 initial value performance bonds issued company’s behalf 489 million obligations investing activities company typically spends approximately 35 million 45 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition description judgments uncertainties effect actual results differ assumptions accounts receivable allowance doubtful accounts company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead market value products decrease due changing market conditions company could risk incurring cost additional reserves adjust inventory value market value lower stated cost inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory description judgments uncertainties effect actual results differ assumptions goodwill indefinitelived intangibles goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based last quantitative analysis performed october 1 2010 decline terminal growth rate greater 50 basis points would decrease fair market value 1333 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 3734 million even changes fair value reporting units would greater net book values valuation date october 1 2010 necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses description judgments uncertainties effect actual results differ assumptions accounting pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 20 million decrease expense 21 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 336 million decrease obligation281 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 17 million respectively 1 decrease increase health care cost trend rate used determining postretirement expense would decrease expense 04 million increase expense 03 million respectively 1 decrease increase health care cost trend rate used determining postretirement obligation would decrease obligation 38 million increase obligation 45 million respectively description judgments uncertainties effect actual results differ assumptions income taxes wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition revenue recognized accordance asc605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future description judgments uncertainties effect actual results differ assumptions sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined periods combined profit margin contracts recognized percentage completion method 2011 estimated higher lower 1 would increased decreased revenue gross profit year approximately 60 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred recognized life contracts preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 30 countries 2016 54 company’s revenues came customers outside us management review future outlook wabtec’s longterm financial goals generate cash flow operations excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls implementation wabtec excellence program increase revenues focused growth strategy including product innovation new technologies global market expansion aftermarket products services acquisitions addition management evaluates company’s current operational performance measures quality ontime delivery company monitors variety factors statistics gauge market activity freight rail markets around world driven primarily overall economic conditions activity transit markets driven primarily government funding passenger ridership changes market drivers cause fluctuations demand wabtec’s product services 2016 study unife estimates accessible global market railway products services 100 billion expected grow 32 annually 2021 highest expected growth rates asia pacific europe north america aar compiles statistics gauge level activity freight rail industry including carloadings generally referred “rail traffic” based changes rail traffic trends railroads increase decrease purchases new locomotives freight cars 2016 north american carloadings decreased 45 including 72 decrease commodity carloadings 15 decrease intermodal carloadings deliveries new locomotives decreased 20 deliveries new freight cars decreased 27 2017 expect locomotive freight car deliveries lower 2016 unife projects annual growth rate 23 north america actual figure depends growth economy north america american public transportation association apta compiles ridership statistics trends based preliminary figures 2016 ridership decreased 10 us flat canada ridership provides fare box revenues transit authorities use funds along state local money primarily equipment maintenance 2015 us congress passed new fiveyear transportation funding bill includes annual spending increases majority money transit agencies spend purchase new equipment infrastructure comes federal government wabtec continues expand presence freight rail passenger transit markets outside us particularly europe asia pacific gauge activity markets monitor trends rail traffic spending plans customers europe majority rail system serves passenger transit market significantly larger transit market us presence uk continental europe especially acquisition majority ownership faiveley transport positioned company take advantage market unife projects western european rail market grow annually 36 next five years france germany expected invest new rolling stock unife projects market asiapacific world’s second largest according study grow annually 54 primarily reflecting strong spending china growth markets around world according unife include latin america projected grow 21 africamiddle east projected grow 19 russiacis projected grow 15 actual growth rates affected general global economic conditions specific economic conditions market wholly owned subsidiaries joint ventures wabtec presence every key freight rail passenger transit market around world 2016 beyond general economic market conditions united states internationally impact sales operations extent factors cause instability capital markets shortages raw materials component parts longer sales cycles deferral delay customer orders inability market products effectively business results operations could materially adversely affected addition face risks associated fourpoint growth strategy including level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks acquisition faiveley transport sa july 27 2015 company announced plans acquire issued outstanding shares faiveley transport sa faiveley transport terms share purchase agreement share purchase agreement tender offer agreement tender offer agreement october 24 2016 company entered amendments share purchase agreement tender offer agreement faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valuedadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured three steps • wabtec made irrevocable offer owners approximately 51 faiveley transports shares purchase price €100 per share payable 25 45 cash election shareholders remainder common stock • upon completion required labor group consultations october 6 2015 51 shareholders entered definitive share purchase agreement amended october 24 2016 faiveley transport entered tender offer agreement wabtec also amended october 24 2016 • upon completing share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash wabtec common stock common stock portion consideration subject cap issuance faiveley common shares equivalent rates cash stock elected 51 owners wabtec intends delist faiveley transport euronext tender offer minority interests represent less 5 november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport variable interest entity model company concluded primary beneficiary faiveley transport possesses power direct activities faiveley transport significantly impact economic performance possesses obligation right absorb losses benefits faiveley transport therefore faiveley transport consolidated wabtec variable interest model acquisition based company’s 8477 stock price november 30 2016 aggregate value consideration paid faiveley transport family’s ownership interest 9781 million including 5347 million stock approximately 63 million shares 2118 million cash 4099 million debt assumed less 1783 million cash acquired company launched tender offer remaining publicly traded faiveley transport shares december 2016 tender offer public shareholders faiveley transport option elect receive €100 per share faiveley transport cash 11538 wabtec common shares per share faiveley transport february 3 2017 initial cash tender offer closed resulted company acquiring additional 275 outstanding share capital faiveley transport approximately 4118 million cash 252 million wabtec stock tender offer reopened dates duration determined french regulator total purchase price 100 shares faiveley transport approximately 17 billion including assumed debt net cash acquired approximate 10 billion cash portion transaction funded cash hand net proceeds recent 750 million senior notes offering company’s existing revolving credit facility term note results operations following table shows consolidated statements operations years indicated 2016 compared 2015 following table summarizes results operations period following table shows major components change sales 2016 2015 net sales decreased 3768 million 29312 million 2016 33080 million 2015 decrease primarily due lower sales specialty products electronics 4027 million lower brake products sales 551 million due decreased demand freight products attributable lower freight car locomotive builds train control signaling products services lower products sales 269 million decreased demand freight spare part kits acquisitions increased sales 1892 million unfavorable foreign exchange decreased sales 711 million freight segment sales decreased 5116 million 249 primarily due 4383 million decrease specialty products electronics sales lower demand freight original equipment rail products train control signaling products attributable lower freight car locomotive builds decrease 507 million brake products sales lower demand original equipment brakes aftermarket services decrease 337 million remanufacturing overhaul build sales due large locomotive rebuild contract completed 2016 decrease 269 million product sales decreased demand freight spare part kits acquisitions increased sales 551 million unfavorable foreign exchange decreased sales 172 million transit segment sales increased 1348 million 108 primarily due 356 million increase specialty products electronics higher demand original equipment conduction systems current collectors increase 227 million remanufacturing overhaul build sales higher demand aftermarket locomotive builds acquisitions increased sales 1341 million unfavorable foreign exchange decreased sales 539 million cost sales gross profit following table shows major components cost sales periods indicated cost sales decreased 2532 million 20069 million 2016 compared 22602 million period 2015 twelve months ended 2016 cost sales percentage sales 684 compared 683 period 2015 freight segment cost sales decreased 05 percentage sales 658 2016 compared 663 period 2015 decrease percentage sales primarily related sales lower material content lower overall material costs due ongoing sourcing efforts decreases various commodity prices partially offset increase overhead costs percentage sales primarily due certain fixed overhead costs transit segment cost sales decreased 03 percentage sales 714 2016 compared 717 period 2015 decrease primarily due better margin performance prior year acquisitions ongoing sourcing savings benefits partially offset 138 million costs related adjustments certain longterm contracts included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense 289 million 2016 compared 354 million 2015 operating expenses following table shows operating expenses total operating expenses 159 134 sales 2016 2015 respectively selling general administrative expenses increased 244 million 70 primarily due 389 million costs related faiveley acquisition 54 million costs related restructuring activity costs partially offset lower incentive noncash compensation expense effects foreign exchange engineering expense consistent prior year amortization expense increased 10 million due amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses decreased 261 million 125 2016 increased 160 basis points 118 sales decrease primarily attributable reduced sales volumes realized benefits associated cost saving initiatives undertaken 2016 partially offset 88 million incremental operating expenses acquisitions transit segment operating expenses increased 202 million 98 2016 decreased 10 basis points 163 sales increase primarily related 262 million incremental operating expenses related acquisitions 71 million related faiveley transport transaction increase partially offset lower operating expenses due foreign exchange corporate nonallocated operating expenses increased 315 million 2016 primarily due 318 million costs related faiveley acquisition partially offset realized benefits cost saving initiatives 2016 interest expense net overall interest expense net increased 257 million 2016 due higher overall debt balance 2016 compared 2015 primarily related faiveley transport acquisition 149 million debt refinancing costs refer note 8 notes condensed consolidated financial statements additional information debt expense net expense net decreased 23 million 30 million 2016 compared 2015 primarily due foreign exchange adjustments income taxes effective income tax rate 241 319 2016 2015 respectively decrease effective rate primarily result enacted tax rate change reduces corporate income tax rate france higher earnings mix lower tax rate jurisdictions partially offset 2016 transaction charges related acquisition faiveley transport deductible 2015 compared 2014 following table summarizes results operations period following table shows major components change sales 2015 2014 net sales increased 2635 million 33080 million 2015 30445 million 2014 increase primarily due 1565 million increase specialty products electronics sales higher demand freight original equipment products aftermarket electronic ptc electronic products acquisitions increased sales 2628 million unfavorable foreign exchange decreased sales 1518 million freight segment sales increased 3232 million 187 primarily due 1457 million increase specialty products electronics sales higher demand freight original equipment rail products ptc electronics aftermarket rail products 804 million remanufacturing overhaul build products due higher demand aftermarket locomotive builds acquisitions increased sales 1455 million unfavorable foreign exchange decreased sales 496 million transit segment sales decreased 597 million 45 due decrease 1023 million related unfavorable foreign exchange 539 million decrease remanufacturing overhaul build lower demand original transit locomotive multiyear project substantially completed 2014 231 million decrease brake products lower demand braking products europe braking systems north america decreases partially offset 1173 million sales acquisitions cost sales gross profit following table shows major components cost sales periods indicated cost sales increased 1517 million 22602 million 2015 compared 21085 million period 2014 twelve months ended 2015 cost sales percentage sales 683 compared 693 period 2014 decrease cost sales percentage sales due lower material costs primarily due lower original equipment transit locomotive sales higher specialty product electronics sales freight segment cost sales increased 05 percentage sales 663 2015 compared 658 period 2014 increase primarily related slightly lower margins related recent acquisitions cost overruns project nearing completion partially offset higher specialty products electronics sales transit segment cost sales decreased 22 percentage sales 717 2015 compared 739 period 2014 decrease 2015 primarily due lower material costs associated lower original equipment locomotive sales lower original equipment aftermarket brake product sales carry higher raw material content partially offset additional costs incurred closeout several projects included cost sales warranty expense provision warranty expense generally established specific losses along historical estimates customer claims percentage sales cause variability warranty expense quarters warranty expense twelve months ended december 31 2015 increased 13 million 354 million 341 million 2014 primarily due increased sales gross profit twelve months ended december 31 2015 increased 1118 million 10478 million 9360 million twelve months ended december 2014 gross profit margin increased 100 basis points 317 307 december 31 2014 increases due higher sales volume favorable sales mix reasons discussed operating expenses following table shows operating expenses total operating expenses 134 years ending december 31 2015 2014 selling general administrative expenses increased 228 million 70 primarily due 247 million expenses acquisitions partially offset lower incentive noncash compensation expense effects foreign exchange engineering expense increased 93 million 151 primarily due 35 million expenses acquisitions remainder increase attributed company concentrating resources new product development specifically electronics market costs related engineering specific customer contracts included cost sales amortization expense decreased 08 million due lower amortization intangibles associated acquisitions following table shows segment operating expenses freight segment operating expenses increased 198 million 105 2015 decreased 70 basis points 102 sales increase primarily relates 84 million incremental operating expenses acquisitions 79 million engineering attributable company concentrating resources new product development transit segment operating expenses increased 86 million 44 2015 increased 140 basis points 164 sales increase primarily related 198 million incremental operating expenses related acquisitions increase partially offset lower operating expenses due foreign exchange corporate nonallocated operating expenses increased 29 million 2015 primarily due higher administrative transaction costs associated growing business income operations income operations totaled 6076 million 184 sales 2015 compared 5271 million 173 sales 2014 income operations increased due higher sales volume partially offset increased operating expenses discussed interest expense net overall interest expense net decreased 07 million 2015 due lower average debt balances expense net expense net increased 36 million 53 million 2015 compared 2014 primarily due foreign exchange adjustments income taxes effective income tax rate 319 308 2015 2014 respectively increase effective rate primarily result higher earnings mix higher tax rate jurisdictions net income net income 2015 increased 133 469 million 3986 million compared 2014 increase net income due reasons discussed liquidity capital resources liquidity provided operating cash flow borrowings company’s unsecured credit facility consortium commercial banks following summary selected cash flow information relevant data operating activities cash provided operations 2016 4493 million compared 4483 million 2015 comparison 2015 cash provided operations 2016 increased slightly due positive changes assets liabilities net working capital mostly offset lower operating results net income plus netadd back noncash transactions earnings assets liabilities changed favorably 495 million primarily due increase accrued liabilities favorable changes working capital primarily related 577 million favorable change accounts payable principally due timing payments 252 million favorable change inventory driven successful efforts control amount inventory hand favorable changes working capital partially offset unfavorable change accrued income taxes 335 million driven lower income taxes owed end 2016 given decrease pretax income cash provided operations 2015 4483 million compared 4724 million 2014 comparison 2014 cash provided operations 2015 decreased due unfavorable working capital requirements partially offset higher operating results unfavorable working capital requirements primarily related unfavorable change accounts payable accrued liabilities 1320 million 869 million respectively cash outflows partially offset favorable change accounts receivable 389 million driven collections due achieving certain project related milestones favorable change inventory 842 million due successful efforts control amount inventory hand investing activities 2016 2015 2014 cash used investing activities 7751 million 3801 million 3477 million respectively major components cash outflow 2016 planned additions property plant equipment 502 million continued investments facilities manufacturing processes 1831 million net cash paid acquisitions compares 494 million property plant equipment 1296 million net cash paid acquisitions 2015 additionally 7447 million cash deposited escrow finance pending tender offer purchase noncontrolling interest faiveley transport partially offset 2029 million cash deposited escrow finance purchase controlling interest faiveley transport 2015 released escrow 2016 refer note 3 “notes condensed consolidated financial statements” additional information acquisitions financing activities 2016 cash provided financing activities 5242 million included 11250 million proceeds revolving credit facility debt 7700 million repayments debt revolving credit facility 3327 million repayments debt primarily driven repayments debt acquired purchase faiveley transport 7500 million new borrowings 2026 senior notes 324 million dividend payments 2122 million wabtec stock repurchases 2015 cash used financing activities 2489 million included 7874 million proceeds revolving credit facility debt 6127 million repayments debt revolving credit facility 270 million dividend payments 3878 million wabtec stock repurchases following table shows outstanding indebtedness december 31 2016 2015 cash balances december 31 2016 2015 3985 million 2262 million respectively 345 senior notes due november 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provides company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement facility expires june 22 2021 2016 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2016 company available bank borrowing capacity net 202 million letters credit approximately 7837 million subject certain financial covenant restrictions term loan drawn november 25 2016 company incurred 10 basis point commitment fee june 22 2016 initial draw november 25 2016 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points december 31 2016 weighted average interest rate company’s variable rate debt 251 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converted portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit ratings history performance company currently believes risk nonperformance negligible 2016 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2016 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt ebitda ratio 325 company compliance restrictions covenants 2016 refinancing credit agreement expect measurements limit company executing operating activities 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provided company 8000 million 5year revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement 2013 refinancing credit agreement replaced 2016 refinancing credit agreement 2013 refinancing credit agreement company could elected base rate interest us dollar denominated loans certain currencies interest rate based libor interest rates appropriate currencies case “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios schuldschein loan due 2016 conjunction acquisition faiveley transport wabtec acquired 1372 million schuldshein private placement loan originally issued faiveley transport march 5 2014 germany approximately 20 international investors participated loan denominated euros subsequent acquisition faiveley transport company repaid 385 million outstanding schuldshein loan remaining balance 987 million december 31 2016 divided three tranches original maturities 5 7 10 years bearing fixed variable rates summary tranches december 31 2016 follows schuldschein loan senior unsecured ranks pari passu future senior debt senior existing future subordinated indebtedness faiveley transport schuldschein loan agreement contains covenants undertakings limit among things following factoring receivables incurrence indebtedness sale assets change control mergers consolidations incurrence liens december 31 2016 faiveley transport compliance undertakings covenants contained loan agreement january 2017 company notified investors intention repay variable tranches private placement full totaling 391 million march 6 2017 desire repay fixed tranches private placement full february 28 2017 company repaid 187 million private placement fixed tranches outstanding december 31 2016 contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2016 1 purchase obligations represent noncancelable contractual obligations december 31 2016 addition company 2432 million open purchase orders related goods services received although open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust requirements based business needs prior delivery goods performance services 2 future minimum payments operating leases disclosed year note 14 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases company expects contribute 71 million pension plan investments 2016 see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 9 “notes consolidated financial statements” included part iv item 15 report 5 interest payments payable may november year 345 750 million senior notes due 2026 interest payments payable february august year 4375 250 million senior notes due 2023 interest payments revolving credit facility capital leases based contractual terms company’s current interest rates 6 scheduled principal repayments outstanding loan balances disclosed note 8 “notes consolidated financial statements” included part iv item 15 report 7 shareholder dividends subject approval company’s board directors currently annual rate approximately 382 million 8 annual capital expenditure budget subject approval board directors 2016 budget amount approved january 2017 board directors meeting 9 539 million standby letters credit comprised 531 million outstanding letters credit performance bid bond purposes 08 million interest expire various dates 2050 amounts include interest payments based contractual terms company’s current interest rate table reflect uncertain tax positions 84 million timing uncertain except 33 million may become payable 2017 refer note 10 “notes consolidated financial statements” additional information uncertain tax positions obligations operating activities company entered 700 million material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding postretirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 133 million 117 million 2016 2015 respectively benefits paid postretirement plans 09 million 16 million 2016 2015 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments interest payments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate approximately 382 million annually company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2016 initial value performance bonds issued company’s behalf 2103 million obligations investing activities including recent acquisition faiveley transport company expects spend approximately 100 million 120 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • prolonged unfavorable economic industry conditions markets served us including north america south america europe australia asia south africa • decline demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • orders either delayed canceled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers • industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates • availability credit operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental matters asbestosrelated matters pension liabilities warranties product liabilities intellectual property claims • completion integration acquisitions including acquisition faiveley transport • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations including related positive train control • federal state income tax legislation transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting estimates preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting allowance doubtful accounts inventories testing goodwill intangibles impairment warranty reserves pensions postretirement benefits stock based compensation tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 17 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report incorporated reference herein management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition accounts receivable allowance doubtful accounts description company provides allowance doubtful accounts cover anticipated losses uncollectible accounts receivable judgments uncertainties allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence effect actual results differ assumptions estimates regarding collectability troubled accounts andor actual losses within receivable portfolio exceed historical experience may exposed expense increasing allowance doubtful accounts inventories description inventories stated lower cost market reviewed ensure adequate provision recognized excess slow moving obsolete inventories judgments uncertainties cost determined firstin firstout fifo method inventory costs include material labor overhead company compares inventory components prior year sales history current backlog anticipated future requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence effect actual results differ assumptions market value products decrease due changing market conditions company could risk incurring writedowns adjust inventory value market value lower stated cost estimates regarding sales backlog requirements inaccurate may exposed expense increasing reserves slow moving obsolete inventory goodwill indefinitelived intangibles description goodwill indefinitelived intangibles required tested impairment least annually company performs annual impairment test fourth quarter frequently indicators impairment present company reviews goodwill impairment reporting unit level evaluation impairment involves comparing current fair value business recorded value including goodwill judgments uncertainties number significant assumptions estimates involved application impairment test including identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude amount effect actual results differ assumptions management considers historical experience available information time fair values reporting units estimated however actual amounts realized may differ used evaluate impairment goodwill actual results consistent assumptions judgments used estimating future cash flows asset fair values may exposed impairment losses could material results operations example based quantitative analysis performed october 1 2016 decline terminal growth rate greater 50 basis points would decrease fair market value 477 million increase weightedaverage cost capital 100 basis points would result decrease fair market value 1191 million even changes fair value reporting units would greater net book values necessitating step 2 calculations see note 2 “notes consolidated financial statements” included part iv item 15 report additional discussion regarding impairment testing warranty reserves description company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods judgments uncertainties general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses effect actual results differ assumptions actual results consistent assumptions judgments used calculate warranty liability company may risk realizing material gains losses accounting pensions postretirement benefits description company provides pension postretirement benefits employees amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality judgments uncertainties significant judgments estimates used determining liabilities expenses pensions postretirement benefits rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets differences actual expected asset returns recognized expense using normal amortization gains losses per asc 715 effect actual results differ assumptions used determining pension postretirement benefits change significantly costs fluctuate materially period key assumptions determining pension postretirement expense obligation include discount rate expected return assets health care cost trend rate example 1 decrease increase discount rate used determining pension postretirement expense would increase expense 18 million decrease expense 14 million respectively 1 decrease increase discount rate used determining pension postretirement obligation would increase obligation 634 million decrease obligation 498 million respectively 1 decrease increase expected return assets used determining pension expense would increase decrease expense 27 million actual asset values december 31 2016 1 lower amortization losses following year would decrease 02 million 1 decrease increase health care cost trend rate used determining postretirement expense would increase decrease expense less 01 million 1 decrease increase health care cost trend rate used determining postretirement obligation would increase decrease obligation 03 million stockbased compensation description company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals program structured rolling threeyear plan year starts new threeyear performance cycle recently completed cycle 20142016 incentive stock units vest performance threeyear cumulative threshold company utilizes economic profit measure performance goal economic profit measure extent company produces financial results excess cost capital based company’s achievement threshold threeyear cumulative performance stock units vested range 0 200 shares granted judgments uncertainties significant judgments estimates used determining estimated threeyear performance used estimate total shares expected vest three year vesting cycle corresponding expense based grant date fair value award determining estimated threeyear performance company utilizes combination historical actual results budgeted results forecasts initial grant year performance cycle company estimates threeyear performance 100 actual performance results cycle begin accumulate company completes budgeting forecasting cycles performance estimates updated judgments estimates reviewed updated quarterly basis effect actual results differ assumptions used determining estimated threeyear performance change significantly stockbased compensation expense related unvested incentive stock awards fluctuate materially period example 10 decrease increase estimated vesting percentage incentive stock awards would decrease increase stockbased compensation expense approximately 08 million 08 million respectively income taxes description wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates accordance asc 74010 accounting income taxes accounting uncertainty income taxes judgments uncertainties estimate tax obligations uncertain management must use judgment estimate exposures associated various filing positions well realization deferred tax assets asc 74010 establishes recognition measurement threshold determine amount tax benefit recognized related uncertain tax positions effect actual results differ assumptions management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount deferred tax valuation allowance provided likely portion deferred tax assets realized revenue recognition description revenue recognized accordance asc605 “revenue recognition” company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined certain preproduction costs relating long term production supply contracts deferred recognized life contracts judgments uncertainties revenue recognized products shipped respective customers title passed price product determined contract accounting involves judgmental process estimating total sales costs contract results development estimated profit margin percentages contract revenue recognized using percentage completion method amount reported revenues determined calculating cost incurred date percentage total expected contract costs determine percentage total contract revenue recognized current period due size duration nature many contracts estimation total sales costs completion complicated subject many variables total contract sales estimates based negotiated contract prices quantities modified assumptions regarding contract options change orders price adjustment clauses inflation indexbased clauses total contract cost estimates largely based negotiated estimated purchase contract terms historical performance trends business base economic projections factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements longterm contracts revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined preproduction costs recognized expected life contract usually based company’s progress toward estimated number units expected delivered production supply contract effect actual results differ assumptions market conditions customer demands dictate changes standard shipping terms company may impacted longer typical revenue recognition cycles development expected contract costs contract profit margin percentages involves procedures personnel areas provide financial production information status contracts due significance judgment estimation process likely materially different revenue amounts could recorded used different assumptions underlying circumstances change changes underlying assumptionsestimates supplier performance circumstances may adversely positively affect financial performance future periods combined profit margin contracts recognized percentage completion method 2016 estimated higher lower 1 would increased decreased revenue gross profit year approximately 121 million contracts expected completed loss position provisions made currently estimated losses uncompleted contracts charge expense unrecognized portions preproduction costs could realized company’s estimate number units delivered changes underlying contract cancelled item 7aitem 7 managements discussion analysis financial condition results operations overview net income 1999 366 million 083 per diluted share compared 739 million 167 per diluted share 1998 excluding merger restructuring charge discussed wabtec set financial records 1999 net income 77 million earnings per diluted share 174 net sales 11 billion net sales increased 82 1999 including sales companies acquired late 1998 1999 gross margin 1999 296 compared 29 1998 excluding cost sales component merger restructuring charge gross margins would increased 301 operating margins 1999 decreased 103 compared 14 1998 excluding merger restructuring charges effect operating income operating margins increased 147 compared prior year merger restructuring plan company announced merger restructuring plan anticipated yield synergies 15 million pretax 2000 produce ongoing annualized benefit 25 million pretax yearend 2000 company expects benefits realized reduced cost sales reduced selling general administrative expenses merger restructuring plan involves elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company estimates charges complete merger restructuring plan total 70 million pretax approximately 50 million charge expensed fourth quarter 1999 50 million charge recorded follows 52 million cost sales 436 million separate line item operating expenses 13 million 850000 net tax extraordinary item cash noncash portion 50 million charge estimated 38 million 29 million spent end 1999 12 million respectively 20 million charge left incurred company expects majority charge occur second third quarter 2000 cash portion approximately 12 million 13 million charge 50 million charge included following announced actions costs associated transaction items investment bankers legal fees accountant fees sec fees etc consolidation corporate headquarters wilmerding pa elimination duplicate corporate functions closing moving young radiators centerville ia plant consolidating young administrative offices companys jackson tn facility closing gg locotronics plant itasca il moving production nearby elk grove village il facility san luis potosi mexico implementing national sales force eliminating duplicate sales functions december 31 1999 87 million 50 million merger restructuringrelated charge still remaining accrued balance sheet accrual balance sheet discussed greater detail note 19 notes consolidated financial statements included part ii item 8 report results operations following table sets forth wabtecs consolidated statements income years indicated 1999 adjusted column represents 1999 income statement excluding effects merger restructuring charge 1999 compared 1998 net sales increased 82 11 billion 1999 1 billion 1998 increase driven acquisitions primarily within freight group contributed 113 million sales 1999 incremental revenue acquisitions along increase transit group sales partially offset slowdown locomotive overhaul market us freight car deliveries decreased slightly 1999 74223 75685 1998 2000 company expects oem freight car locomotive industries deliver approximately 50000 1100 new freight cars locomotives respectively cost sales increased 73 7891 million 1999 7356 million 1998 gross margin increased 296 compared 29 1998 excluding cost sales component merger restructuring charge gross margin would increased 301 increase attributed volume favorable product mix freight group component companies increased volume transit group selling general administrative expenses increased 74 122 million 1136 million 1998 cost reductions lower incentiverelated expenses offset operating expenses acquired companies 18 million engineering expenses increased 134 345 million 304 million primarily result rockwell acquisition october 1998 new product development efforts amortization expense increased 38 158 million 1999 115 million 1998 increase primarily attributable acquisitions made late 1998 rockwell railroad electronics division rockwell october 1998 young radiator young november 1998 acquisitions made early 1999 gg locotronics qtron january 1999 agc technologies february 1999 income operations totaled 116 million 1999 compared 145 million 1998 operating margins 103 14 respectively excluding operating expense component merger restructuring charge operating income would 1649 million operating mar gins percentage sales 1999 increased 147 slightly higher 14 prior year higher adjusted operating income resulted higher sales volume related gross profit favorable aftermarket sales volume relatively strong operating margins transit group component companies freight group primary reasons increase operating income see note 16 notes consolidated financial statements included part ii item 8 report interest expense increased 197 444 million 1999 371 million 1998 debt net cash equivalents 562 million december 31 1999 versus 565 million december 31 1998 increase interest expense even though net debt balance decreased due wabtec carrying higher average debt balance 1999 result late 1998 acquisitions rockwell 80 million young 68 million 1999 acquisitions gg locotronics qtron agc technologies 32 million wabtec also funded cash transaction costs associated merger totaled 29 million investment income argentina represents income recognized related investment argentina sold 1998 cash secured note receivable expense 90000 recorded 1999 versus income 3 million 1998 fluctuation due foreign exchange gainslosses foreign exchange loss virtually offsetting 1999 compared foreign exchange gain 2 million 1998 company recorded income tax expense 336 million compared 421 million 1998 effective tax rate 1999 469 compared 347 1998 excluding assumed tax benefit component merger restructuring charge wabtec incurred income tax expense 43 million 1999 effective tax rate 356 compared 347 1998 rate lower due nonrecurring deferred tax liability reversal wabtec expects ongoing rate approximately 36 company consolidated mexican united states federal net operating loss carryforwards 5 million 19 million expiring various times year 2005 2010 respectively 1999 469000 extraordinary loss net tax incurred extinguishment certain term debt well 850000 extraordinary loss net tax writeoff deferred financing fees refinancing companys principal credit facility november 1999 connection merger 1998 wabtec incurred 53 million extraordinary loss net tax related amending certain credit facilities 1998 compared 1997 net sales increased 19 1 billion 1998 870 million 1997 incremental revenues acquisitions contributed 85 million increase increased sales freight group also positively impacted oem freight car deliveries increasing 75685 deliveries 1998 50396 deliveries 1997 increase locomotive overhauls freight car work united states mexico 1998 cost sales increased 203 7356 million 1998 6119 million 1997 gross margin decreased 29 1998 297 1997 primary reason decrease incremental gross margin 1998 acquisitions lower margin subsidiaries selling general administrative expenses increased 16 1136 million 1998 979 million 1997 operating expenses acquisitions accounted 14 million increase costs associated preparing year 2000 compliance 3 million engineering expenses increased 248 304 million 1998 244 million 1997 increase attributed new product development 1998 income operations totaled 145 million 1998 compared 1246 million 1997 higher operating income resulted higher sales volume related higher gross profit percentage sales 1998 operating income 14 slightly lower 143 prior year favorable oem sales volume generally weaker operating margins freight transit groups primary reason see note 16 notes consolidated financial statements included part ii item 8 report interest expense increased 64 371 million 1998 349 million 1997 debt net cash equivalents 565 million december 31 1998 versus 398 million december 31 1997 increase attributed late 1998 acquisitions rockwell young investment incomeargentina represents income recognized related investment argentina 10 million 1998 versus 2 million 1997 increase due wabtec selling investment argentina cash secured note receivable 1998 income 3 million recorded 1998 compared income 875000 1997 fluctuation primarily due foreign exchange gain 2 million recorded 1998 company recorded income tax expense 421 million 1998 versus 35 million 1997 effective income tax rate 347 1998 compared 378 1997 decrease effective tax rate primarily result utilization foreign sales corporation nonrecurring reversal deferred tax liability 1998 wabtec incurred 53 million extraordinary loss net tax related amending certain credit facilities first second quarter 1998 repayment higherrate mexican facility fourth quarter 1998 liquidity capital resources liquidity provided primarily operating cash flow borrowings companys credit facilities consortium commercial banks credit agreement following summary selected cash flow information relevant data operating cash flow 1999 774 million compared 734 million period year ago 1999 cash outlays merger restructuring activities approximately 29 million reported reduction cash provided operating activities excluding cash outlays cash provided operating activities would approximately 1067 million compared 734 million 1998 increase primarily result improved working capital management however within freight group inventory levels increased due strategic purchases locomotive parts cores used exchange overhaul programs additionally within transit group production continues anticipated future product deliveries related metropolitan transit authoritynew york city transit project adjusted ebitda excluding merger restructuring charge would 207 million 1999 compared 182 million 1998 cash used investing activities declined 1999 664 million 2438 million year ago 1999 1998 1997 company used 322 million 1802 million 248 million respectively certain business acquisitions capital expenditures 308 million 578 million 442 million 1999 1998 1997 respectively majority capital expenditures periods relates upgrades existing equipment replacement existing equipment purchases new equipment due expansion wabtecs operations company believes overall cost savings achieved increasing efficiencies company expects 2000 capital expenditures equipment purchased similar purposes approximate 4045 million cash used financing activities 117 million 1999 versus cash provided financing activities 1619 million 1998 described company refinanced preexisting credit facilities wabco motivepower immediately following merger november 1999 additionally company issued 75 million senior notes first quarter 1999 used proceeds repay amounts outstanding certain unsecured bank term debt repaid portion companys previous revolving credit facility historically company financed purchase significant businesses utilizing amounts available credit facilities company estimates charges complete merger restructuring plan total 70 million pretax approximately 50 million charge expensed fourth quarter 1999 cash noncash portion 1999 50 million charge 38 million 12 million respectively 20 million charge yet incurred company expects majority charge occur second third quarter 2000 cash portion approximately 1213 million charge based anticipated cash flow provided operations forecasted results credit available credit agreement company believes able make planned capital expenditures required debt payments next twelve months following table sets forth companys outstanding indebtedness average interest rates december 31 1999 revolving credit note term loan interest rates variable dependent market conditions interest pulse note vary prime credit agreement november 1999 connection merger wabco terminated existing credit agreement refinanced existing motivepower credit agreement consortium commercial banks credit agreement provides 275 million fiveyear revolving credit facility 364day 275 million convertible revolving credit facility december 31 1999 company available borrowing capacity net letters credit approximately 158 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions whether cash property securities combination thereof one exception restriction company may make repurchases redemptions pay dividends net dividends unallocated shares common stock company returned company aggregate amount exceed 50 companys accumulated consolidated net income fiscal year credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor weightedaverage contractual interest rate credit agreement borrowings 736 december 31 1999 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 1999 notional value interest rate swaps outstanding totaled 50 million effectively changed companys interest rate variable rate fixed rate 733 interest rate swap agreements mature 2000 2001 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9 38 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9 38 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay 30 million debt associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million comet acquisition notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes unsecured credit facility october 1998 company obtained 30 million unsecured credit facility group commercial banks purpose financing rockwell acquisition january 1999 facility repaid proceeds 1999 notes offering pulse note partial payment pulse acquisition company issued 17 million note due january 31 2004 interest 95 january 2000 note repaid revolving credit facility comet notes connection comet acquisition company issued notes totaling 122 million unsecured notes totaling 62 million delivered company note amount 6 million delivered subsidiary company secured acquired assets notes repaid january 1999 proceeds 1999 notes offering industrial revenue bond july 1998 subsidiary company entered 10year 75 million debt obligation bears interest rate 55 provide financing purchase building used companys operations principal repayments outstanding loan balances due various intervals maturity see note 6 notes consolidated financial statements included part ii item 8 report esop connection establishment esop january 1995 company made 140 million loan esop loan used purchase 9336000 shares companys outstanding common stock esop loan original term 50 years annual payments principal interest approximately 12 million esop loan bears interest 85 per annum esop repay esop loan using contributions company obligated contribute amounts sufficient repay esop loan net effect esop companys common stock allocated employees lieu retirement plan previously cashbased defined benefit plan accordingly results reduced annual cash outlays estimated 3 million 4 million management believes based upon current levels operations forecasted earnings cash flow operations together borrowings credit agreement adequate make payments principal interest debt including notes make required contributions esop permit anticipated capital expenditures fund working capital requirements cash needs foreseeable future including 2001 overall increases financial liquidity primarily result changing base available borrowing november 1999 refinanced credit agreement issuance 1999 notes also increased companys liquidity reducing outstanding revolving credit borrowings thereby increasing available borrowing capacity nevertheless company remain leveraged significant extent debt service obligations continue substantial debt company requires dedication substantial portion future cash flows payment principal interest indebtedness thereby reducing funds available capital expenditures future business opportunities company believes available cash flow liquidity sufficient meet debt service requirements companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effects year 2000 company information system improvement initiatives process include new computer hardware software applications new system substantially operational year 2000 compliant cost project approximately 17 million majority costs previously incurred based information available date wabtec experienced significant events attributable year 2000 issues company continue monitor potential issues wabtec customers suppliers order permit rapid response issues arise impact year 2000 issues continue depend way issues addressed third parties provide products services us company believes year 2000 issues arise would significant impact operations wabtec expect incur significant direct costs related year 2000 issue current year effects inflation seasonality general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant companys business seasonal although third quarter results may impacted vacation plant shutdowns several major customers period conversion euro currency january 1 1999 certain members european union established fixed conversion rates existing currencies european unions common currency euro company conducts business member countries transition period introduction euro january 1 1999 june 30 2002 company assessing issues involved introduction euro however expect conversion euro material impact operations financial results forward looking statements believe statements historical facts included report including certain statements business managements discussion analysis financial condition results operations may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia demand services freight passenger rail industry consolidations rail industry demand products services continued outsourcing customers demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment fluctuations interest rates operating factors supply disruptions technical difficulties changes operating conditions costs successful introduction new products labor relations completion integration additional acquisitions development use new technology year 2000 disruptions competitive factors actions competitors politicalgovernmental factors political stability relevant areas world future regulationderegulation customers andor rail industry governmental funding customers political developments laws regulations forced divestiture assets restrictions production imports exports price controls tax increases retroactive tax claims expropriation property cancellation contract rights environmental regulations transaction commercial factors outcome negotiations partners governments suppliers customers others ability complete integration westinghouse air brake motivepower businesses achieve stated synergies company undertakes obligation publicly update revise forwardlooking statements whether result new information future events otherwise recent accounting pronouncements derivative instruments hedging activities june 1998 statement financial accounting standards sfas 133 accounting derivative instruments hedging activity issued sfas 133 amended sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 amendment fasb statement 133 effective financial statements fiscal quarters fiscal years beginning june 15 2000 company yet determined effect standard financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview november 2001 wabtec sold certain assets ge transportation systems 240 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer results businesses along several small noncore businesses company decided exit classified discontinued operations throughout report prior period results restated discontinued operations format net sales ongoing operations decreased 34 8112 million 2000 7837 million 2001 major causes change effect companys 2001 results operations financial condition include decreases component sales due continuation weak freight market downturn locomotive overhaul market offsetting improved sales transit business due increased governmental spending transit equipment net income 2001 618 million 143 per diluted share compared 254 million 059 per diluted share 2000 results 2001 include 478 million income discontinued operations including 415 million gain net tax sale writedown certain businesses classified discontinued operations 93 million charge asset writedowns 37 million restructuringrelated charge 685000 gain disposition excess facilities 2 million research development tax credit 17 million charge severance costs related 10 percent salary workforce reduction 2000 results include 62 million income discontinued operations 202 million merger restructuringrelated charge 44 million gain disposition product line 51 million writeoff deferred tax asset relating termination esop 2 million legal settlement excluding nonrecurring nonoperating items earnings continuing operations per diluted share would 049 082 2001 2000 respectively merger restructuring plan 2001 company completed merger restructuring plan charges totaling 71 million pretax approximately 49 million charge expensed 1999 20 million 2000 2 million 2001 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company december 31 2001 32 million merger restructuring charge still remained accrued balance sheet accrual balance sheet discussed greater detail note 22 notes consolidated financial statements included part ii item 8 report company began completed new restructuring plan transit rail business 2001 company estimates synergies plan yield approximately 3 million pretax cost savings 2002 beyond benefits realized reduced cost sales reduced selling general administrative expenses restructuring plan involved operational realignment related workforce reductions charges complete restructuring plan totaled 2 million pretax 2 million charge included costs associated relocating several production operations chicago montreal including severance costs approximately 103 employees results operations following table sets forth wabtecs consolidated statements operations years indicated enhance comparability results prior periods 2001 adjusted column represents reported income statement excluding restructuringrelated charges asset writedowns severance costs related 10 percent salary workforce reduction research development tax credits gain sale excess facilities 2000 adjusted column represents reported income statement excluding restructuringrelated charges legal settlement charge writeoff deferred tax asset gain sale product line 1999 adjusted column represent reported income statement excluding effects merger restructuring related charges 2001 compared 2000 following table sets forth companys net sales business segment net sales decreased 275 million 34 7837 million 2001 8112 million 2000 overall decrease primarily attributable decreased north american oem freight car locomotive component sales volumes lower locomotive overhauls within freight group sales volumes within freight group reflected softening oem market freight cars 34247 freight cars delivered 2001 compared 55821 2000 partially offsetting decreases increases transit group sales due increased shipments mta contract company estimates oem freight car locomotive industries deliver 20000 freight cars 700 locomotives respectively 2002 gross profit decreased 2099 million 2001 compared 2357 million period 2000 gross margin percentage sales 268 compared 291 2000 gross margin dependent number factors including pricing sales volume product mix decrease gross profit margin largely attributed effect decrease sales volumes approximately 11 million gross profit balance principally result changes sales mix primarily drop freight group 8 offset increase transit group 5 overall pricing pressures many product lines total operating expenses percentage net sales 199 2001 195 period year ago excluding 93 million asset writedowns 37 million merger restructuring charges 17 million severance costs 2001 182 million 2000 merger restructuring charges operating expenses would 18 172 net sales respectively without merger restructuring charges periods asset writedowns severance costs 2001 operating expenses would increased 15 million 2001 compared 2000 income operations totaled 541 million 2001 compared 778 million 2000 operating margins 69 96 respectively excluding merger restructuringrelated charges periods asset writedowns severance costs 2001 2 million legal settlement 2000 operating income would 687 million 100 million 2001 2000 respectively 2001 operating margins percentage sales would decreased 88 123 2000 lower adjusted operating income resulted decreased sales volumes freight group changes product mix see note 19 notes consolidated financial statements included part ii item 8 report interest expense decreased 232 335 million 2001 436 million 2000 debt net cash equivalents 1879 million december 31 2001 versus 5341 million end 2000 decrease interest expense primarily due lower debt amount result working capital management sale proceeds gets received november 2001 company expects interest expense 2002 22 million 2001 company recorded foreign exchange losses 17 million february 2000 company disposed transit electrification product line 55 million cash recognized gain 44 million items reported income expense net effective income tax rate 2001 242 compared 494 2000 company expects ongoing rate approximately 3536 2001 rate includes effect research development tax credits 2 million excluding tax credit rate would 35 2000 rate includes effect onetime noncash writeoff deferred tax asset 51 million relating termination esop excluding effect rate would 36 2000 compared 1999 following table sets forth companys net sales business segment net sales decreased 329 million 39 8112 million 2000 8441 million 1999 overall decrease primarily attributable decreased north american oem freight car locomotive component sales volumes lower locomotive overhauls within freight group sales volumes within freight group reflected softening oem market freight cars 55821 freight cars delivered 2000 compared 74223 1999 partially offsetting decreases increases transit group sales due increased shipments mta contract gross profit decreased 2357 million 2000 compared 2749 million period 1999 gross margin percentage sales 291 compared 326 1999 gross margin dependent number factors including pricing sales volume product mix decrease gross profit margin largely attributed effect decrease sales volumes approximately 13 million gross profit balance principally result changes sales mix primarily increased oem component sales transit group products lower margins companys overall historical results pricing pressures manufacturing inefficiencies primarily related merger integration efforts total operating expenses percentage net sales 195 2000 222 period year ago excluding merger restructuring charges 182 million 2000 429 million 1999 operating expenses would 172 171 net sales respectively without merger restructuring charges periods operating expenses would decreased 46 million 2000 compared 1999 reduction primarily result continuing cost reduction programs income operations totaled 778 million 2000 compared 878 million 1999 operating margins 96 104 respectively excluding merger restructuring related charges periods 2 million legal settlement 2000 operating income would 100 million 1358 million 2000 1999 respectively 2000 operating margins percentage sales would decreased 123 161 1999 lower adjusted operating income resulted decreased sales volumes freight group changes product mix see note 19 notes consolidated financial statements included part ii item 8 report interest expense increased 4 436 million 2000 42 million 1999 debt net cash equivalents 5341 million december 31 2000 versus 5615 million end 1999 increase interest expense even though net debt balance decreased fourth quarter 2000 primarily due higher interest rates february 2000 company disposed transit electrification product line 55 million cash recognized gain 44 million reported income effective income tax rate 2000 494 compared 469 1999 excluding effect one time noncash writeoff deferred tax asset 51 million relating termination esop rate would 36 1999 excluding assumed tax benefit component merger restructuring charge effective tax rate would 356 1999 469000 extraordinary loss net tax incurred extinguishment certain term debt well 850000 extraordinary loss net tax writeoff deferred financing fees refinancing companys principal credit facility november 1999 connection merger liquidity capital resources liquidity provided primarily operating cash flow borrowings companys credit facilities consortium commercial banks credit agreement following summary selected cash flow information relevant data operating cash flow 2001 1191 million compared 602 million period year ago working capital decreased significantly 2001 primarily due decrease accounts receivable inventory 2001 2000 cash outlays merger restructuring activities approximately 68 million 29 million respectively reported reduction cash provided operating activities excluding cash outlays cash provided operating activities would approximately 1259 892 million respectively increase operating cash flow 2001 primarily result improved working capital management cash provided investing activities increased 2001 2274 million versus cash used investing activities 215 million year ago 2001 amount primarily sale businesses ge 240 million 2001 2000 1999 com pany used 37 million 650000 145 million respectively certain business acquisitions capital expenditures continuing operations 207 million 232 million 241 million 2001 2000 1999 respectively majority capital expenditures periods relates upgrades existing equipment replacement existing equipment purchases new equipment due expansion wabtecs operations company believes overall cost savings achieved increasing efficiencies company expects 2002 capital expenditures equipment purchased similar purposes approximate 215 million cash used financing activities 2972 million 2001 versus 38 million 2000 2001 company reduced longterm debt 2983 million 2000 company reduced longterm debt 284 million company issued 75 million senior notes first quarter 1999 repay amounts outstanding certain unsecured bank term debt repaid portion companys previous revolving credit facility historically company financed purchase significant businesses utilizing cash flow generated operations amounts available credit facilities addition issuance 1999 notes increased companys liquidity reducing outstanding revolving credit borrowings thereby increasing available borrowing capacity following table sets forth companys outstanding indebtedness december 31 2001 2000 revolving credit note term loan interest rates variable dependent market conditions credit agreement november 1999 connection merger wabco terminated existing secured credit agreement refinanced existing unsecured motivepower credit agreement consortium commercial banks unsecured credit agreement currently provides 275 million fiveyear revolving credit facility expiring 2004 364day 100 million convertible revolving credit facility maturing november 2004 annual renewals november 2000 company banks negotiated reduction 364day facility 275 million 213 million primarily due credit availability excess current forecasted needs effort reduce commitment costs related fees november 2001 company negotiated reduction 364day facility 213 million 100 million result 200 million net tax cash proceeds sale locomotive businesses ge december 31 2001 company available bank borrowing capacity net letters credit approximately 288 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater abn amro bank nvs prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios cost funds rate fluctuating interest rate based abn amro bank nvs cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including without limitation following limitation incurrence additional indebtedness limitation mergers consolidations sales assets acquisitions limitation liens limitation sale leasebacks limitation investments loans advances limitation certain debt payments limitation capital expenditures minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed common indexes libor maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 358 million 2727 million 638 respectively 2001 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2001 notional value interest rate swaps outstanding totaled 60 million effectively changed companys interest rate variable rate fixed rate 870 interest rate swap agreements mature 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes due june 2005 june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially issuance 1999 notes improved companys financial liquidity using portion proceeds repay shortterm 30 million loan associated rockwell acquisition bore interest 956 ii using portion proceeds repay variablerate revolving credit borrowings thereby increasing amounts available revolving credit facility iii repaying remaining unpaid principal 102 million loan prior acquisition notes senior unsecured obligations company rank pari passu right payment existing future indebtedness capitalized lease obligations ii credit agreement iii indebtedness company money borrowed iv indebtedness evidenced notes debentures bonds similar instruments payment company responsible liable unless case clause iii iv instrument creating evidencing pursuant outstanding provided obligations subordinate right payment notes callable par june 2002 company evaluate whether notes portions thereof called time replaced borrowings credit agreement industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 payable monthly principal interest installments proceeds bond provided financing purchase building used companys operations principal repayments outstanding loan balances due various intervals maturity see note 9 notes consolidated financial statements included part ii item 8 report company believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements companys sources funds fail satisfy companys cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place effects inflation general price inflation material impact companys results operations companys labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause companys cost automatically increase inflation become significant conversion euro currency january 1 1999 certain members european union established fixed conversion rates existing currencies european unions common currency euro company conducts business member countries transition period introduction euro january 1 1999 june 30 2002 transition euro material impact operations financial results forward looking statements believe statements historical facts included report including certain statements business managements discussion analysis financial condition results operations may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia demand services freight passenger rail industry consolidations rail industry demand products services continued outsourcing customers demand freight cars locomotives passenger transit cars buses industry demand faster efficient braking equipment fluctuations interest rates operating factors supply disruptions technical difficulties changes operating conditions costs successful introduction new products labor relations completion integration additional acquisitions development use new technology competitive factors actions competitors politicalgovernmental factors political stability relevant areas world future regulationderegulation customers andor rail industry governmental funding customers political developments laws regulations forced divestiture assets restrictions production imports exports price controls tax increases retroactive tax claims expropriation property cancellation contract rights environmental regulations transaction commercial factors outcome negotiations partners governments suppliers customers others company undertakes obligation publicly update revise forwardlooking statements whether result new information future events otherwise item 7aitem 7 management’s discussion analysis financial condition results operations overview wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually locomotives freight cars passenger transit vehicles us well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations nine countries 2004 78 percent company’s revenues came north american operations wabtec also sold products services 82 countries around world management review 2004 future outlook wabtec’s longterm financial goals generate free cash flow excess net income maintain strong credit profile minimizing overall cost capital increase margins strict attention cost controls increase revenues focused growth strategy addition management monitors company’s shortterm operational performance measures quality ontime delivery 2004 achieved following • generated cash 65 million twice net income 324 million • reduced debt net cash 65 million • revenues increased 145 company generated increases aftermarket oem sales well international sales • product quality measured firsttime pass rate improved 3 • productivity increased 6 achieved results despite higher raw material costs especially steel copper despite negative impact foreign currency exchange rates especially company’s canadian operations freight rail industry statistics carloadings orders new freight cars improved 2004 example carloadings grew 29 compared 2003 freight railroads benefited strengthening economy us shown orders new freight cars increased 70291 2004 result backlog freight cars ordered 58677 highest yearend level since 1998 sales freight segment demonstrated trend following quarterly freight car statistics past three years source railway supply institute following summary freight car locomotive transit car deliveries industry based company estimates management forecasting slight increase deliveries freight transit cars carloadings intermodal units originated grown proportionally past three years reflecting higher rail traffic ultimately better opportunities maintenance aftermarket sales company carloadings originated thousands intermodal units originated thousands source association american railroadsweekly rail traffic 2005 expect demand improve due continued strength freight rail passenger transit aftermarket well growth market new freight cars looking beyond 2005 expect generate increases sales earnings executing fourpoint growth strategy see page 5 details • expand aftermarket sales • accelerate new product development • expand globally • continuous improvement lean principles 2005 beyond continue face many challenges including increased costs raw materials especially steel higher costs medical insurance premiums foreign currency fluctuations addition face general economic risks well risk customers could curtail spending new existing equipment risks associated fourpoint growth strategy include level investment customers willing make new technologies developed industry company risks inherent global expansion necessary modify financial operating strategies reflect changes market conditions risks results operations following table shows consolidated statements operations years indicated 2004 compared following table summarizes results operations period net sales increased 145 7179 million 2003 822 million 2004 primarily result volume increases freight car locomotive transit car deliveries aftermarket part sales increased carloadings intermodal units originated company realize significant net sales improvement price increases foreign exchange net income 2004 324 million 071 per diluted share net income 2003 227 million 052 per diluted share increase net income primarily due increased sales favorable tax benefit following table shows company’s net sales business segment net sales net sales 2004 increased 1041 million 145 compared 2003 sales increased freight group transit group freight group’s increased sales reflected higher sales certain components international markets higher demand pneumatic air brake components related increased delivery freight cars locomotives greater demand friction products due overall increased rail traffic 2004 industry deliveries new freight cars 2004 increased 46292 units compared 31400 2003 transit group’s increased sales due increased deliveries existing contracts higher aftermarket sales gross profit gross profit increased 2052 million 2004 compared 1895 million 2003 gross profit dependent number factors including pricing sales volume product mix gross profit percentage sales 25 compared 264 2003 decrease gross profit percentage primarily due increased manufacturing costs higher raw material prices higher medical costs retiree health plans negative impact foreign exchange rates company’s canadian operations issues reducing gross profit percentage include inefficiencies relating closing relocation electronics plant canada us establishment 970000 reserve reflect future environmental monitoring boise facility fixed asset impairment charges 13 million start lowmargin rail door contracts transit group also provision warranty expense negatively impacted gross profit increased 44 million 2004 compared 2003 provision warranty expense higher due combination higher sales requiring additional reserves charges certain specific products although warranty provision increased 2004 warranty claims decreased resulting overall increase 41 million warranty reserves company taking action improve margins future quarters including price increases ongoing initiatives increase productivity efficiency following table shows operating expenses operating expenses operating expenses increased 101 million 2004 compared 2003 including 32 million unfavorable litigation ruling getsgs company disagrees intends continue contest costs comprising increase include restructuring costs company’s electronics unit higher medical insurance claims experience foreign exchange costs overall higher costs inflation sales activity increases partially offset reduced amortization expense amortization expense decreased due certain intangible assets fully amortized income operations income operations totaled 554 million 67 sales 2004 compared 498 million 69 sales 2003 higher operating income resulted increased sales 2004 offset higher operating expenses interest expense interest expense increased 37 2004 compared 2003 primarily due company’s sale senior notes august 2003 notes resulting higher interest expense current year enabled company convert shortterm variablerate debt fixedrate debt attractive longterm interest rate expense company incurred foreign exchange losses 12 million 28 million respectively 2004 2003 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes 2004 includes tax benefit 49 million primarily related reversal certain items previously provided closed regulatory examination effective income tax rate including aforementioned tax benefit remains unchanged 365 2004 2003 2004 american jobs creation act 2004 passed company process evaluating impact company subsidiaries net income net income 2004 increased 97 million compared 2003 increase due higher sales tax benefit mentioned partially offset items including unfavorable getsgs litigation ruling increased environmental reserve higher manufacturing costs 2003 compared 2002 following table summarizes results operations period 2002 completed fair value assessments goodwill wrote carrying value goodwill 90 million 832 million freight group 68 million transit group accordance adoption sfas 142 “goodwill intangible assets” total impact writedown net taxes 617 million following table shows company’s net sales business segment net sales net sales 2003 increased 217 million 31 compared 2002 increased sales freight group offset lower sales transit group freight group’s increased sales reflected higher sales components new freight cars locomotives commuter locomotives well higher international sales industry deliveries new freight cars 2003 increased 31400 units compared 17700 2002 transit group’s decreased sales due completion contract supply components new york city subway cars 2002 lower aftermarket sales gross profit gross profit increased 1895 million 2003 compared 1795 million 2002 gross profit dependent number factors including pricing sales volume product mix gross profit percentage sales 264 compared 258 2002 increase gross profit percentage primarily due higher sales favorable product mix offset negative impact weakening us dollar versus canadian dollar following table shows operating expenses operating expenses operating expenses increased 69 million 2003 compared 2002 due writeoff nonoperating assets 16 million higher medical insurance premiums partially offset reduced amortization expense amortization expense decreased due certain intangible assets fully amortized income operations income operations totaled 498 million 69 sales 2003 compared 467 million 67 sales 2002 higher operating income resulted increased sales gross margins partially offset increased operating expenses 2003 interest expense interest expense decreased 419 2003 compared 2002 primarily due substantial decrease debt expense company incurred foreign exchange losses 28 million 12 million respectively 2003 2002 due effect currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings income taxes 2003 includes tax benefit 27 million primarily related reversal certain items previously provided closed regulatory examination effective income tax rate 365 2003 32 2002 change effective tax rate due higher effective state tax rate increased statutory rates foreign jurisdictions also increased income reduced significance favorable impact company’s utilization foreign tax credits effective tax rate net income net income 2003 increased 682 million compared 2002 included 617 million net tax write goodwill income cumulative effect accounting change increased 65 million compared 2002 increase due increased sales improved margins lower interest expense income taxes management believes next three years cash outlays income taxes less income tax expense due utilization nols amortization goodwill intangible assets continue amortized tax purposes company’s current level pretax income sufficient utilize deferred tax assets 2004 company produced 11 million federal net operating loss carried forward portion reported federal credits amount 42 million realized carry back claim management believes tax planning opportunities exist various foreign countries allow company utilize foreign net operating loss carryforwards accelerated rate tax assets uncertain regarding realization valuation allowance full amount asset management believes remaining assets realized normal course business overall effective income tax rate includes tax benefit 49 million 27 million 2004 2003 respectively primarily related reversal certain items previously provided closed regulatory examination liquidity capital resources liquidity provided primarily operating cash flow borrowings company’s unsecured credit facility consortium commercial banks “credit agreement” following summary selected cash flow information relevant data management utilizes ebitda measure liquidity following reconciliation ebitda net cash provided operating activities ebitda defined earnings deducting interest expense income taxes depreciation amortization although ebitda measure performance calculated accordance generally accepted accounting principles management believes useful investor evaluating wabtec widely used measure evaluate company’s operating performance ability service debt financial covenants credit facility include ratios based ebitda purport represent cash generated operating activities considered isolation substitute measures performance accordance generally accepted accounting principles addition ebitda calculated identically companies presentation may comparable similarly titled measures companies management’s discretionary use funds depicted ebitda may limited working capital debt service capital expenditure requirements restrictions related legal requirements commitments uncertainties operating activities operating cash flow 2004 529 million compared 559 million 2003 net income approximately 97 million higher 2004 2003 working capital decreased generated operating cash 62 million accounts payable accruals increased 261 million offset increase receivables inventory current assets 108 million 52 million 39 million respectively deferred accrued income taxes remained relatively unchanged compared 88 million decrease 2003 remaining use operating cash due net increase assets less liabilities 2004 operating cash flow 2003 559 million compared 157 million 2002 working capital remained relatively unchanged 2003 receivables inventory increased 132 million accounts payable increased 141 million also deferred income taxes decreased 88 million 2003 2002 cash outlays merger restructuring activities approximately 25 million reported reduction cash provided operating activities also 2002 30 million paid taxes related gain sale locomotive aftermarket assets 2001 operating cash flow 2002 excluding 30 million tax payment 2001 approximately 46 million investing activities 2004 2003 cash used investing activities 178 million 125 million respectively consisting almost entirely capital expenditures net disposals 2002 cash used investing activities 108 million 2002 company used 17 million certain business acquisitions see note 5 “notes consolidated financial statements” included part iv item 15 report information capital expenditures continuing operations 193 million 175 million 141 million 2004 2003 2002 respectively majority capital expenditures periods relates upgrades replacement existing equipment financing activities 2004 cash used financing activities 185 million compared cash provided financing activities 92 million 2003 2004 long term debt reduced 401 million company also realized proceeds 23 million exercise stock options 2004 2003 company issued 150 million senior notes due august 2013 “the notes” notes issued par interest accrues 6875 payable semiannually january 31 july 31 year commencing january 31 2004 proceeds used repay debt outstanding company’s existing bank credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens november 2003 company issued common stock connection registration sale stock certain selling shareholders company issued 726900 shares common stock realizing total proceeds 10 million see “prospectus summaryrecent development” cash used financing activities 441 million 2002 company reduced longterm debt 459 million repaid 175 million senior notes third quarter 2002 take advantage lower interest rates revolving credit agreement historically company financed purchase significant businesses utilizing cash flow generated operations amounts available credit facilities following table shows outstanding indebtedness december 31 2004 2003 revolving credit agreement term loan interest rates variable dependent market conditions cash balance december 31 2004 2003 953 million 703 million respectively february 1 2005 company completed acquisition assets rütgers rail spa acquisition accounted purchase accordingly purchase price allocated respective assets liabilities based upon estimated fair values acquisition date operating results included consolidated statement operations acquisition date forward new company formed hold newly purchased assets rütgers rail spa named cofren srl “cofren” cofren become leading manufacturer brake shoes disc pads interior trim components rail applications europe purchase price 366 million cash subject adjustment based calculation net worth defined sale purchase agreement adjustment completed within 90 business days acquisition date refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provides 175 million fiveyear revolving credit facility expiring january 2009 december 31 2004 company available bank borrowing capacity net 219 million letters credit approximately 1531 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 40 million 367 million 29 respectively 2004 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2003 notional value interest rate swaps outstanding totaled 40 million effectively changed interest rate variable rate fixed rate 398 interest rate swap agreements terminated net gain 200000 2004 conjunction 40 million repayment revolving credit agreement refinancing credit agreement may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 100 200 basis points depending consolidated total indebtedness cash flow ratios current margin 100 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 30 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants expects measurements type limiting factor executing operating activities see note 9 “notes consolidated financial statements” included part iv item 15 report management believes based current levels operations forecasted earnings cash flow liquidity sufficient fund working capital equipment needs well meeting debt service requirements sources funds fail satisfy company’s cash requirements company may need refinance existing debt obtain additional financing assurance new financing alternatives would available case new financing available would expected costly burdensome debt agreements currently place extinguishment debt june 1995 company issued 100 million 9375 senior notes due 2005 “1995 notes” january 1999 company issued additional 75 million 9375 senior notes due 2005 “1999 notes” 1995 notes 1999 notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted noncash loss 19 million relating writeoff deferred debt issuance costs effects inflation general inflation material impact company’s results operations labor contracts contain negotiated salary benefit increases others contain cost living adjustment clauses would cause labor cost automatically increase inflation become significant however higher costs metals reduced gross margin areas higher costs include medical benefits active retired employees contractual obligations offbalance sheet arrangements company obligated make future payments various contracts debt agreements lease agreements certain contingent commitments debt guarantees company grouped contractual obligations offbalance sheet arrangements operating activities financing activities investing activities manner classified statement consolidated cash flows provide better understanding nature obligations arrangements provide basis comparison historical information table provides summary contractual obligations offbalance sheet arrangements december 31 2004 1 unconditional purchase obligations purposes disclosure defined contractual obligation purchase utilities electricity natural gas excess 100000 annually 200000 total longterm purchase obligations purposes disclosure defined contractual obligation purchase raw materials supplies noncancelable excess 100000 annually 200000 total 2 future minimum payments operating leases disclosed year note 15 “notes consolidated financial statements” included part iv item 15 report 3 annual payments participants expected continue foreseeable future amounts ranges noted pension funding payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 4 annual payments participants expected continue foreseeable future amounts ranges noted postretirement payments based actuarial estimates using current assumptions discount rates health care costs see disclosure note 10 “notes consolidated financial statements” included part iv item 15 report 5 scheduled principal repayments outstanding loan balances disclosed year note 9 “notes consolidated financial statements” included part iv item 15 report 6 shareholder dividends subject approval company’s board directors currently annual rate 18 million 7 annual capital expenditure budget subject approval board directors 2005 budget amount approved february 2005 board directors meeting 25 million 8 company 219 million outstanding letters credit performance bid bond purposes expire various dates 2009 9 guarantee debt former operating unit sold 2001 obligations operating activities company entered 347000 material longterm noncancelable materials supply purchase obligations operating leases represent multiyear obligations rental facilities equipment estimated pension funding post retirement benefit payments based actuarial estimates using current assumptions discount rates expected return longterm assets rate compensation increases health care cost trend rates benefits paid pension obligations 61 million 57 million 2004 2003 respectively benefits paid post retirement plans 35 million 21 million 2004 2003 respectively obligations financing activities cash requirements financing activities consist primarily longterm debt repayments dividend payments shareholders company historically paid quarterly dividends shareholders subject quarterly approval board directors currently rate 18 million annually 2001 company sold subsidiary unit’s management team part sale company guaranteed approximately 3 million bank debt buyer used purchase financing debt refinanced june 2004 wabtec’s guarantee reduced 13 million management reason believe debt repaid refinanced company arranges performance bonds issued third party insurance companies support certain long term customer contracts december 31 2004 initial value performance bonds issued company’s behalf 150 million obligations investing activities company typically spends approximately 1525 million year capital expenditures primarily related facility expansion efficiency modernization health safety environmental control company expects annual capital expenditures future within range forward looking statements believe statements historical facts included report including certain statements “business” “management’s discussion analysis financial condition results operations” may constitute forwardlooking statements based forwardlooking statements current expectations projections future events although believe assumptions made connection forwardlooking statements reasonable cannot assure assumptions expectations correct forwardlooking statements subject various risks uncertainties assumptions us including among things economic industry conditions • materially adverse changes economic industry conditions generally markets served us including north america south america europe australia asia • demand freight cars locomotives passenger transit cars buses related products services • reliance major original equipment manufacturer customers • original equipment manufacturers’ program delays • demand services freight passenger rail industry • demand products services • continued recovery industry particular orders either delayed cancelled returning historical levels reduced combination foregoing • consolidations rail industry • continued outsourcing customers industry demand faster efficient braking equipment • fluctuations interest rates foreign currency exchange rates operating factors • supply disruptions • technical difficulties • changes operating conditions costs • increases raw material costs • successful introduction new products • performance material longterm contracts • labor relations • completion integration acquisitions • development use new technology competitive factors • actions competitors politicalgovernmental factors • political stability relevant areas world • future regulationderegulation customers andor rail industry • levels governmental funding transit projects including customers • political developments laws regulations • outcome existing future legal proceedings including litigation involving principal customers litigation respect environmental asbestosrelated matters pension liabilities transaction commercial factors • outcome negotiations partners governments suppliers customers others statements 10k apply date statements made undertake obligation update statement reflect events circumstances date statement made reflect occurrence unanticipated events critical accounting policies preparation financial statements accordance generally accepted accounting principles requires management make judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses areas uncertainty require judgments estimates assumptions include accounting derivatives environmental matters warranty reserves testing goodwill intangibles impairment proceeds assets sold pensions postretirement benefits tax matters management uses historical experience available information make judgments estimates actual results inevitably differ estimates assumptions used prepare company’s financial statements given time despite inherent limitations management believes management’s discussion analysis financial condition results operations mda financial statements related footnotes provide meaningful fair perspective company discussion judgments uncertainties associated accounting derivatives environmental matters found notes 2 18 respectively “notes consolidated financial statements” included part iv item 15 report summary company’s significant accounting policies included note 2 “notes consolidated financial statements” included part iv item 15 report management believes application policies consistent basis enables company provide users financial statements useful reliable information company’s operating results financial condition company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method outputbased measures appropriate used measure progress individual contracts towards completion contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period known provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred amortized life contract 2002 adopted new standard accounting goodwill intangible assets indefinite lives cumulative effect adjustment recognized january 1 2002 upon adoption new standard charge 617 million tax also 2002 amortization ceased goodwill intangible assets indefinite lives total amortization expense intangible assets recognized 24 million 2004 34 million 2003 4 million 2002 additionally goodwill indefinitelived intangibles required tested impairment least annually evaluation impairment involves comparing current fair value business recorded value including goodwill use combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair values could realized actual transaction may differ used evaluate impairment goodwill allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence company provides warranty reserves cover expected costs repairing replacing products durability quality workmanship issues occurring established warranty periods general reserves provided percentage sales based historical experience addition specific reserves established known warranty issues estimable losses inventory reviewed ensure adequate provision recognized excess slow moving obsolete inventories company compares inventory components prior year sales history current backlog requirements extent inventory parts exceed estimated usage demand reserve recognized reduce carrying value inventory also specific reserves established known inventory obsolescence areas significant judgments estimates include liabilities expenses pensions postretirement benefits amounts determined using actuarial methodologies incorporate significant assumptions including rate used discount future estimated liability longterm rate return plan assets several assumptions relating employee workforce salary increases medical costs retirement age mortality rate used discount future estimated liabilities determined considering rates available yearend debt instruments could used settle obligations plan longterm rate return estimated considering historical returns expected returns current projected asset allocations generally applied fiveyear average market value assets global company wabtec records estimated liability benefit income taxes based determines likely paid various tax jurisdictions operates management uses best judgment determination amounts however liabilities ultimately realized paid dependent various matters including resolution tax audits various affected tax jurisdictions may differ amounts recorded adjustment estimated liability would recorded income period becomes probable amount actual liability differs recorded amount management believe charge would material item 7a item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabco exposed risks increases interest rates may adversely affect funding costs associated 308 million variablerate debt including effects interest rate swaps represents 66 total longterm debt december 31 1998 management entered payfixed receivevariable interest rate swap contracts partially mitigate impact variablerate debt interest rate increases see note 5 notes consolidated financial statements included elsewhere report december 31 1998 instantaneous 100 basis point increase interest rates would reduce companys earnings 22 million assuming additional intervention strategies management january 1999 company converted portion variablerate debt fixed rate debt issuance 75 million senior notes february 28 1999 variablerate debt represents 52 including effects interest rate swaps total longterm debt foreign currency exchange risk company routinely enters several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries company significant operations december 31 1998 company significant instruments outstanding wabco also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar december 31 1998 approximately 72 wabcos net sales united states 11 canada 17 international locations primarily europe item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated 274 million variablerate debt considering effects interest rate swaps described represent 51 total longterm debt december 31 2000 56 1999 management entered payfixed receivevariable interest rate swap contracts partially mitigate impact variablerate debt interest rate increases see note 6 notes consolidated financial statements included part ii item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt considering effects interest rate swaps described companys variable rate debt represents 66 total longterm debt december 31 2002 1 2001 management entered payfixed receivevariable interest rate swap contracts partially mitigate impact variablerate debt interest rate increases december 31 2002 instantaneous 100 basis point increase interest rates would reduce companys annual earnings 882000 assuming additional intervention strategies management company adopted statement financial accounting standards sfas 133 amended sfas 138 accounting derivative instruments hedging activities effective january 1 2001 application company concluded swap contracts qualify special cash flow hedge accounting permit recording fair value swap corresponding adjustment comprehensive income balance sheet see note 22 notes consolidated financial statements included part iv item 15 report fluctuation expected material effect companys financial condition results operations liquidity foreign currency exchange risk company occasionally enters several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries company significant operations december 31 2002 company instruments outstanding wabtec also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2002 approximately 76 wabtecs net sales united states 7 canada 2 mexico 15 international locations primarily europe see note 21 notes consolidated financial statements included part iv item 15 report december 31 2002 company believe changes foreign currency exchange rates represent material risk results operations financial position liquidity wabtecs market risk exposure substantially different exposure december 31 2001 recent accounting pronouncements see notes 2 8 notes consolidated financial statements included part iv item 15 report item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business exposed risks increases interest rates may adversely affect funding costs associated variablerate debt considering effects interest rate swaps described variable rate debt represents 0 total longterm debt december 31 2003 66 2002 management entered payfixed receivevariable interest rate swap contracts mitigates impact variablerate debt interest rate increases december 31 2003 instantaneous 100 basis point increase interest rates would reduce annual earnings adopted statement financial accounting standards “sfas” 133 amended sfas 138 “accounting derivative instruments hedging activities” effective january 1 2001 application concluded swap contracts qualify “special cash flow hedge accounting” permit recording fair value swap corresponding adjustment comprehensive income balance sheet see note 21 “notes consolidated financial statements” included part iv item 15 report fluctuation expected material effect financial condition results operations liquidity foreign currency exchange risk occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2003 several instruments outstanding hedge currency rate fluctuation 2004 entered foreign currency options forward contracts reduce impact changes currency exchange rates currency option gives us right obligation exchange currency predetermined exchange rate either specific date within specific period time forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date either take delivery currency settle net basis outstanding forward contracts option agreements sale us dollars usd purchase canadian dollars cad december 31 2003 outstanding option agreements notional value 105 million cad resulting recording current asset 270000 increase comprehensive income 171000 net tax forward contracts notional value 135 million cad resulting recording current asset 100000 increase comprehensive income 64000 net tax subsequent december 31 2003 company entered additional forward contracts hedge exposure canadian currency risk including forwards outstanding end 2003 forward contracts currently total notional value 83 million cad 62 million usd average exchange rate 0747 usd per 1 cad also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2003 approximately 69 wabtec’s net sales united states 9 canada 1 mexico 21 international locations primarily europe see note 20 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2002 recent accounting pronouncements see note 2 “notes consolidated financial statements” included part iv item 15 report item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business exposed risks increases interest rates may adversely affect funding costs associated variablerate debt outstanding variable rate debt december 31 2006 2005 management entered payfixed receivevariable interest rate swap contracts mitigated impact variablerate debt interest rate increases interest rate swap contracts terminated 2004 2003 concluded swap contracts qualified “special cash flow hedge accounting” permitted recording fair value swap corresponding adjustment comprehensive income balance sheet foreign currency exchange risk occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2006 several instruments outstanding hedge currency rate fluctuation 2007 entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad december 31 2006 forward contracts notional value 48 million cad 427 million us average exchange rate 089 usd per 1 cad resulting recording current liability 13 million corresponding offset accumulated comprehensive loss 825000 net tax also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2006 approximately 66 wabtec’s net sales united states 10 canada 2 mexico 4 australia 1 germany 9 united kingdom 8 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2005 recent accounting pronouncements july 2006 financial accounting standards board fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxesan interpretation fasb statement 109” fin 48 prescribes comprehensive model company recognize measure present disclose financial statements uncertain tax positions taken expects take tax return fin 48 effective first quarter 2007 cumulative effects applying interpretation recorded adjustment retained earnings beginning period adoption company currently evaluating impact statement financial statements september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” sfas 158 sfas 158 requires employer recognize funded status defined benefit pension postretirement benefit plans net asset liability statement financial position offsetting amount accumulated comprehensive income recognize changes funded status year changes occur comprehensive income company adopted provisions sfas 158 december 31 2006 provisions sfas 158 applied prospective basis therefore prior periods presented restated adoption 2006 effect computation net periodic benefit expense pensions postretirement benefits see note 10 “notes consolidated financial statements” included part iv item 15 report impact adoption company’s consolidated balance sheet december 31 2006 september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements sfas 157 becomes effective wabtec january 1 2008 upon adoption provisions sfas 157 applied prospectively limited exceptions adoption sfas 157 expected material impact company’s consolidated financial statements effective january 1 2006 wabtec adopted sfas 123 r requires company recognize compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant wabtec elected modified prospective transition method adoption prior periods financial statements restated prior january 1 2006 wabtec accounted stockbased compensation accordance provisions accounting principles board opinion 25 apb 25 “accounting stock issued employees” related interpretations result adoption stockbased compensation expense 2006 includes 13 million expense related stock options previously recognized apb 25 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business exposed risks increases interest rates may adversely affect funding costs associated variablerate debt outstanding variable rate debt december 31 2007 2006 foreign currency exchange risk occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2007 several instruments outstanding hedge currency rate fluctuation 2008 company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2006 company forward contracts sale us dollars usd purchase canadian dollars cad company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2006 company forward contracts notional value 48 million cad 427 million us average exchange rate 089 usd per 1 cad resulting recording current liability 13 million corresponding offset accumulated comprehensive loss 825000 net tax 2007 foreign currency forward contracts settled december 31 2007 company forward contracts sale usd purchase euro notional value 23 million euro 31 million usd average exchange rate 132 usd per 1 euro forward contracts used mitigate variability cash flows payment liabilities denominated currencies usd since company treat derivatives hedges change fair value forward contracts related liabilities recorded income statement 2007 company recorded fair value gain amount 315000 also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2007 approximately 60 wabtec’s net sales united states 12 canada 3 mexico 3 australia 2 germany 11 united kingdom 9 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2006 recent accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements sfas 157 became effective wabtec january 1 2008 upon adoption provisions sfas 157 applied prospectively limited exceptions company currently evaluating impact adopting statement company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes “fin 48”an interpretation fasb statement 109 january 1 2007 implementation fin 48 resulted 27 million reduction beginning balance retained earnings reported change accounting principle adoption date january 1 2007 liability income taxes associated uncertain tax positions 135 million 80 million recognized would favorably affect company’s effective tax rate december 31 2007 liability income taxes associated uncertain tax positions 172 million 106 million recognized would favorably affect company’s effective income tax rate 37 million increase unrecognized tax benefits year ended december 31 2007 primarily relates filing amended returns company includes interest penalties related uncertain tax positions income tax expense january 1 2007 company accrued interest penalties approximately 17 million 11 million respectively related uncertain tax positions due increase unrecognized tax benefits identified company accrued additional interest penalties related uncertain tax positions year ended december 31 2007 total interest penalties accrued december 31 2007 approximately 33 million 18 million respectively december 31 2006 company adopted recognition disclosure provisions sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” sfas 158 company must adopt measurement date provisions sfas 158 december 31 2008 february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure eligible items fair value specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date sfas 159 effective fiscal years beginning november 15 2007 company currently evaluating impact adopting statement december 2007 fasb issued sfas 141 revised “business combinations” “sfas 141 r” replacing sfas 141 “business combinations” “sfas 141” sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 141r retains fundamental requirements sfas 141 broadens scope applying acquisition method transactions events one entity obtains control one businesses requires among things assets acquired liabilities assumed measured fair value acquisition date liabilities related contingent consideration recognized acquisition date remeasured fair value subsequent reporting period acquisitionrelated costs expensed incurred income recognized fair value net assets acquired exceeds fair value consideration transferred sfas 160 establishes accounting reporting standards noncontrolling interests ie minority interests subsidiary including changes parent’s ownership interest subsidiary requires among things noncontrolling interests subsidiaries classified separate component equity except presentation disclosure requirements sfas 160 applied retrospectively periods presented sfas 141 r sfas 160 applied prospectively financial statements issued fiscal years beginning december 15 2008 company currently evaluating impact adopting statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 61 0 total longterm debt december 31 2008 2007 respectively annual basis 1 change interest rate variable rate debt december 31 2008 would increase decrease interest expense 23 million foreign currency exchange risk company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2008 several instruments outstanding hedge currency rate fluctuation 2009 december 31 2008 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2008 company forward contracts notional value 50 million zar 557000 us average exchange rate 897 zar per 1 usd resulting recording current asset 41000 corresponding offset accumulated comprehensive income 26000 net tax december 31 2007 company forward contracts sale usd purchase euro notional value 23 million euro 31 million usd average exchange rate 132 usd per 1 euro forward contracts used mitigate variability cash flows payment liabilities denominated currencies usd since company treat derivatives hedges change fair value forward contracts related liabilities recorded income statement 2007 company recorded fair value gain amount 315000 also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2008 approximately 59 wabtec’s net sales united states 9 canada 3 mexico 5 australia 2 germany 11 united kingdom 11 international locations see note 20 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2007 recent accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements statement indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability sfas 157 defines fair value based upon exit price model relative sfas 157 fasb issued fasb staff positions fsp 1571 1572 1573 fsp 1571 amends sfas 157 exclude sfas 13 related interpretive accounting pronouncements address leasing transactions fsp 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis fsp 1573 clarifies application sfas 157 relates valuation financial assets market active financial assets fsp effective immediately includes periods financial statements issued company financial assets valued using inactive markets impacted issuance fsp company adopted sfas 157 january 1 2008 exception application statement nonrecurring nonfinancial assets nonfinancial liabilities refer note 18 notes consolidated financial statements additional discussion fair value measurements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 sfas 159 permits entities choose measure eligible items fair value specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date sfas 159 effective fiscal years beginning november 15 2007 company adopted sfas 159 elected measure additional financial instruments items fair value december 2007 fasb issued sfas 141 revised “business combinations” sfas 141r replacing sfas 141 “business combinations” sfas 141 sfas 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” sfas 160 sfas 141r retains fundamental requirements sfas 141 broadens scope applying acquisition method transactions events one entity obtains control one businesses requires among things assets acquired liabilities assumed measured fair value acquisition date liabilities related contingent consideration recognized acquisition date remeasured fair value subsequent reporting period acquisitionrelated costs expensed incurred income recognized fair value net assets acquired exceeds fair value consideration transferred sfas 160 establishes accounting reporting standards noncontrolling interests ie minority interests subsidiary including changes parent’s ownership interest subsidiary requires among things noncontrolling interests subsidiaries classified separate component equity except presentation disclosure requirements sfas 160 applied retrospectively periods presented sfas 141r sfas 160 applied prospectively financial statements issued fiscal years beginning december 15 2008 company currently evaluating impact adopting statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” sfas 161 sfas 161 requires enhanced disclosures entity’s derivative hedging activities thereby improves transparency financial reporting sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” sfas 133 well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments entities instruments subject sfas 161 must provide robust qualitative disclosures expanded quantitative disclosures sfas 161 effective prospectively financial statements issued fiscal years interim periods beginning november 15 2008 early application permitted company currently evaluating disclosure implications adopting statement june 2008 fasb issued fsp emerging issues task force “eitf” 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp eitf 0361 fsp eitf 0361 states unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method fsp eitf 0361 effective fiscal years beginning december 15 2008 interim periods within years upon adoption company required retrospectively adjust earnings per share data including amounts related interim periods summaries earnings selected financial data conform provisions fsp eitf 0361 company currently evaluating impact adopting fsp eitf 0361 december 2008 fasb issued fsp sfas 132r1 “employers’ disclosures postretirement benefit plan assets” fsp sfas 132r1 fsp sfas 132r1 amends sfas 132 revised 2003 “employers’ disclosures pensions postretirement benefits” sfas 132r provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan additional disclosure requirements fsp include expanded disclosures entity’s investment policies strategies categories plan assets concentrations credit risk fair value measurements plan assets company currently evaluating disclosure implications adopting statement item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 38 61 total longterm debt december 31 2009 2008 respectively annual basis 1 change interest rate variable rate debt december 31 2009 would increase decrease interest expense 15 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution company anticipate nonperformance company concluded interest rate swap agreement qualifies special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company interest rate swap agreement notional value 925 million effectively changed company’s interest rate bank debt december 31 2009 variable rate fixed rate 184 interest rate swap agreement matures january 2010 december 31 2009 company recorded current liability 63000 corresponding offset accumulated comprehensive loss 38000 net tax foreign currency exchange risk company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2009 several instruments outstanding hedge currency rate fluctuation 2010 december 31 2009 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company forward contracts notional value 101 million zar 12 million us average exchange rate 821 zar per 1 usd resulting recording current liability 110000 corresponding offset accumulated comprehensive income 70000 net tax december 31 2008 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2008 company forward contracts notional value 50 million zar 557000 us average exchange rate 897 zar per 1 usd resulting recording current asset 41000 corresponding offset accumulated comprehensive income 26000 net tax also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2009 approximately 60 wabtec’s net sales united states 10 canada 2 mexico 4 australia 2 germany 10 united kingdom 12 international locations see note 20 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2008 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 53 35 total longterm debt december 31 2012 2011 respectively annual basis 1 change interest rate variable rate debt december 31 2012 would increase decrease interest expense 17 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2012 approximately 50 wabtec’s net sales united states 11 united kingdom 8 canada 8 australia 6 mexico 2 germany 15 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2011 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 11 53 total longterm debt december 31 2013 2012 respectively annual basis 1 change interest rate variable rate debt december 31 2013 would increase decrease interest expense 05 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2013 approximately 52 wabtec’s net sales united states 12 united kingdom 7 canada 5 australia 5 mexico 3 brazil 2 germany 14 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2012 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 23 11 total longterm debt december 31 2014 2013 respectively annual basis 1 change interest rate variable rate debt december 31 2014 would increase decrease interest expense 12 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2014 approximately 50 wabtec’s net sales united states 12 united kingdom 6 canada 6 mexico 4 australia 3 brazil 3 germany 3 china 13 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2013 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 42 23 total longterm debt december 31 2015 2014 respectively annual basis 1 change interest rate variable rate debt december 31 2015 would increase decrease interest expense 30 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 3 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2015 approximately 53 wabtec’s net sales united states 11 united kingdom 6 canada 6 mexico 3 australia 3 brazil 3 germany 3 china 12 international locations see note 20 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 3 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2014 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 38 36 total longterm debt december 31 2017 2016 respectively annual basis 1 change interest rate variable rate debt december 31 2017 would increase decrease interest expense 71 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2017 approximately 34 wabtec’s net sales united states 9 united kingdom 7 canada 6 france 5 china 5 germany 4 australia 4 mexico 4 india 4 italy 2 brazil 16 international locations see note 20 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2016 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 22 38 total longterm debt december 31 2018 2017 respectively reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange rate risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2018 approximately 33 wabtec’s net sales united states 9 united kingdom 7 germany 6 canada 6 france 5 mexico 4 china 4 australia 4 india 4 italy 2 brazil 16 international locations see note 22 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2018 item 8item 7aquantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 32 22 total debt december 31 2019 2018 respectively annual basis 1 change interest rate variable rate debt december 31 2019 would increase decrease interest expense 14 million foreign currency exchange rate risk company exposed certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2019 approximately 41 wabtec’s net sales united states 9 canada 6 india 5 united kingdom 4 mexico 4 germany 4 australia 4 france 4 china 19 international locations see note 21 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2019 item 8item 7aquantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 15 32 total debt december 31 2020 2019 respectively annual basis 1 change interest rate variable rate debt december 31 2020 would increase decrease interest expense 65 million foreign currency exchange rate risk company exposed certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” notes 2 20 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk sales geographic area item 8nannanitem 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business exposed risks increases interest rates may adversely affect funding costs associated variablerate debt outstanding variable rate debt december 31 2005 2004 management entered payfixed receivevariable interest rate swap contracts mitigated impact variablerate debt interest rate increases interest rate swap contracts terminated 2004 2003 concluded swap contracts qualified “special cash flow hedge accounting” permitted recording fair value swap corresponding adjustment comprehensive income balance sheet foreign currency exchange risk occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2005 several instruments outstanding hedge currency rate fluctuation 2006 entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad december 31 2005 forward contracts notional value 24 million cad 193 million us average exchange rate 080 usd per 1 cad resulting recording current asset increase comprehensive income 877000 net tax also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2005 approximately 64 wabtec’s net sales united states 11 canada 1 mexico 24 international locations primarily europe see note 19 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2004 recent accounting pronouncements november 2004 financial accounting standards board “fasb” issued statement financial accounting standard “sfas” 151 “inventory costsan amendment arb 43 chapter 4” standard provides clarification abnormal amounts idle facility expense freight handling costs spoilage recognized current period charges additionally standard requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions standard effective inventory costs incurred fiscal years beginning june 15 2005 company expect adoption sfas 151 material impact company’s financial position results operations december 2004 fasb issued statement financial accounting standard 123 revised 2004 “sharebased payment” statement replaces fasb statement 123 supersedes apb opinion 25 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used company fasb 123r requires transactions accounted using fairvaluebased method would result expense recognized company’s financial statements company required adopt 123r first quarter 2006 result extension granted securities exchange commission april 14 2005 adoption 123r expected reduce quarterly earnings approximately 001 per share 2006 december 2004 fasb issued staff position “fsp” 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” fsp 1092 provides guidance sfas 109 “accounting income taxes” respect recording potential impact repatriation provisions american jobs creation act 2004 “jobs act” enterprises’ income tax expense deferred tax liability jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate impact jobs act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company evaluated impact repatriation provisions adjusted tax expense deferred tax liability reflect repatriation provisions jobs act march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” statement requires companies recognize liability fair value legal obligation perform asset retirement activities conditional future event amount reasonably estimated provisions statement effective years ending december 15 2005 company expect adoption fasb 47 material impact company’s financial position results operations june 2005 fasb issued sfas 154 “accounting changes error corrections replacement apb opinion 20 fasb statement 3” sfas 154 requires retrospective application financial statements prior periods changes accounting principle adopted prospectively statement effective fiscal years beginning december 15 2005 company expect adoption sfas 154 material impact company’s financial position results operations item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 32 38 total longterm debt december 31 2010 2009 respectively annual basis 1 change interest rate variable rate debt december 31 2010 would increase decrease interest expense 13 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible company concluded interest rate swap agreement qualifies special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet december 31 2010 company interest rate swap agreements notional value 1370 million effectively changed company’s interest rate bank debt december 31 2010 variable rate fixed rate 227 interest rate swap agreements mature various times december 2012 december 31 2010 company recorded current liability 25 million corresponding offset accumulated comprehensive loss 15 million net tax foreign currency exchange risk company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2010 several instruments outstanding hedge currency rate fluctuation 2010 december 31 2010 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2010 company forward contracts notional value 247 million zar 34 million us average exchange rate 719 zar per 1 usd resulting recording current liability 192000 corresponding offset accumulated comprehensive income 122000 net tax december 31 2009 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company forward contracts notional value 101 million zar 12 million us average exchange rate 821 zar per 1 usd resulting recording current liability 110000 corresponding offset accumulated comprehensive income 70000 net tax also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2010 approximately 54 wabtec’s net sales united states 11 canada 3 mexico 5 australia 2 germany 9 united kingdom 16 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2009 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 35 32 total longterm debt december 31 2011 2010 respectively annual basis 1 change interest rate variable rate debt december 31 2011 would increase decrease interest expense 14 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixed rate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2011 approximately 53 wabtec’s net sales united states 9 united kingdom 8 canada 6 australia 5 mexico 2 germany 17 international locations see note 19 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2010 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt company’s variable rate debt represents 36 42 total longterm debt december 31 2016 2015 respectively annual basis 1 change interest rate variable rate debt december 31 2016 would increase decrease interest expense 68 million reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report additional information regarding interest rate risk foreign currency exchange risk company subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2016 approximately 46 wabtec’s net sales united states 11 united kingdom 7 canada 6 mexico 4 china 3 australia 3 germany 2 brazil 18 international locations see note 20 “notes consolidated financial statements” included part iv item 15 report reduce impact changes currency exchange rates company periodically entered foreign currency forward contracts refer “financial derivatives hedging activities” note 2 “notes consolidated financial statements” included part iv item 15 report information regarding foreign currency exchange risk market risk exposure substantially different exposure december 31 2015 item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated 320 million variablerate debt including effects interest rate swaps represents 56 total longterm debt december 31 1999 management entered payfixed receivevariable interest rate swap contracts partially mitigate impact variablerate debt interest rate increases see note 6 notes consolidated financial statements included part ii item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business wabtec exposed risks increases interest rates may adversely affect funding costs associated variablerate debt considering effects interest rate swaps described companys variable rate debt represents 1 total longterm debt december 31 2001 51 2000 variable portion low management entered payfixed receivevariable interest rate swap contracts partially mitigate impact variablerate debt interest rate increases see note 9 notes consolidated financial statements included part ii item 8item 7a quantitative qualitative disclosures market risk interest rate risk ordinary course business exposed risks increases interest rates may adversely affect funding costs associated variablerate debt outstanding variable rate debt december 31 2004 considering effects interest rate swaps described variable rate debt represented 0 total longterm debt december 31 2003 management entered payfixed receivevariable interest rate swap contracts mitigated impact variablerate debt interest rate increases interest rate swap contracts terminated 2004 2003 concluded swap contracts qualified “special cash flow hedge accounting” permitted recording fair value swap corresponding adjustment comprehensive income balance sheet see note 20 “notes consolidated financial statements” included part iv item 15 report foreign currency exchange risk occasionally enter several types financial instruments purpose managing exposure foreign currency exchange rate fluctuations countries significant operations december 31 2004 several instruments outstanding hedge currency rate fluctuation 2005 entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad december 31 2004 forward contracts notional value 59 million cad 435 million us average exchange rate 074 usd per 1 cad resulting recording current asset increase comprehensive income 36 million net tax also subject certain risks associated changes foreign currency exchange rates extent operations conducted currencies us dollar year ended december 31 2004 approximately 66 wabtec’s net sales united states 10 canada 2 mexico 22 international locations primarily europe see note 19 “notes consolidated financial statements” included part iv item 15 report market risk exposure substantially different exposure december 31 2003 recent accounting pronouncements effective december 31 2003 wabtec adopted sfas 132 revised 2003 “employers’ disclosures pensions postretirement benefitsan amendment fasb statements 87 88 106” us pension plans standard requires additional disclosures employer’s pension plans postretirement benefits type plan assets investment strategy measurement date plan obligations cash flows components net periodic benefit costs recognized interim periods see note 10 consolidated financial statements required additional disclosures november 2004 financial accounting standards board “fasb” issued sfas 151 inventory costsan amendment arb 43 chapter 4” standard provides clarification abnormal amounts idle facility expense freight handling costs spoilage recognized current period charges additionally standard requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions standard effective inventory costs incurred fiscal years beginning june 15 2005 company currently evaluating effect standard company’s financial statements results operations sfas 123 revised 2004 “sharebased payment” issued december 2004 standard requires companies measure recognize cost employee services received exchange award equity instruments based grantdate fair value effective date first interim reporting period beginning june 15 2005 wabtec currently evaluating pricing models transition provisions standard begin expensing stock options third quarter 2005 december 2004 fasb issued fsp 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” fsp 1092 provides guidance sfas 109 “accounting income taxes” respect recording potential impact repatriation provisions american jobs creation act 2004 “jobs act” enterprises’ income tax expense deferred tax liability jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate impact jobs act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company yet completed evaluating impact repatriation provisions accordingly provided fsp 1092 company adjusted tax expense deferred tax liability reflect repatriation provisions job act item 8 item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 report december 31 2000 company believe changes foreign currency exchange rates represent material risk results operations financial position liquidity item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 14 part iv hereof item 9item 8 financial statements supplementary data financial statements supplementary data set forth item 15 part iv hereof item 9 nannanitem 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report independent auditors board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheet westinghouse air brake technologies corporation subsidiaries december 31 2002 related consolidated statements operations shareholders equity cash flows year ended audit also included financial statement schedule year ended december 31 2002 listed index item 15a2 registration statement financial statements responsibility companys management responsibility express opinion financial statements based audit financial statements westinghouse air brake technologies corporation subsidiaries december 31 2001 two fiscal years ended audited auditors ceased operations auditors expressed unqualified opinion financial statements report dated february 18 2002 conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states also opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein fully discussed note 8 consolidated financial statements effective january 1 2002 westinghouse air brake technologies corporation adopted provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 discussed consolidated financial statements westinghouse air brake technologies corporation december 31 2001 two fiscal years ended audited auditors ceased operations described note 8 financial statements revised include transitional disclosures required sfas 142 adopted company january 1 2002 audit procedures respect disclosures note 8 respect 2001 2000 included agreeing previously reported net income previously issued financial statements adjustments reported net income representing amortization expense including related tax effects recognized periods related goodwill result initially applying statement 142 companys underlying records obtained management b testing mathematical accuracy reconciliation adjusted net income reported net income related earnings per share amounts opinion disclosures 2001 2000 note 8 appropriate however engaged audit review apply procedures 2001 2000 financial statements company respect disclosures accordingly express opinion form assurance 2001 2000 financial statements taken whole ernst young llp february 14 2003 report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation delaware corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders equity cash flows three years period ended december 31 2001 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states arthur andersen llp pittsburgh pennsylvania february 18 2002 copy audit report previously issued arthur andersen llp connection companys annual report form 10k year ended december 31 2001 audit report reissued arthur andersen llp connection annual report form 10k see exhibit 232 discussion westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business westinghouse air brake technologies corporation company one north americas largest manufacturers valueadded equipment locomotives railway freight cars passenger transit vehicles company formed november 1999 merger westinghouse air brake company motivepower industries inc products intended enhance safety improve productivity reduce maintenance costs customers product offerings include brakes locomotives freight cars passenger transit vehicles electronic controls monitors heat exchangers cooling systems switcher commuter locomotives couplers door systems draft gears company aggressively pursues technological advances respect new product development product enhancements company headquarters wilmerding pennsylvania 4409 full time employees facilities throughout world 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead see note 6 property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes see note 7 intangible assets company adopted sfas 142 effective january 1 2002 result goodwill intangible assets indefinite lives longer amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill effective january 1 2002 reviewed annually impairment amortizable intangibles reviewed impairment indicators impairment present see note 8 revenue recognition revenue recognized accordance staff accounting bulletin sab 101 revenue recognition financial statements wabtec recognizes revenue upon passage title ownership risk loss customer company recognizes revenues longterm contracts based percentage completion method accounting contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period known provisions made estimated losses uncompleted contracts known necessary shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales stockbased compensation company accounts stockbased compensation including stock options employee stock purchases apb opinion 25 accounting stock issued employees see note 14 related pro forma disclosures research development research development costs charged expense incurred years ended december 31 2002 2001 2000 company incurred costs approximately 336 million 332 million 323 million respectively warranty costs warranty costs accrued based managements estimates repair upgrade costs per unit historical experience recent years company introduced number new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon managements estimates actual future results may vary estimates warranty expense 176 million 141 million 112 million 2002 2001 2000 respectively warranty reserves 174 154 million december 31 2002 2001 respectively see note 17 financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received recognized interest expense see note 9 company adopted statement financial accounting standards sfas 133 amended sfas 138 accounting derivative instruments hedging activities effective january 1 2001 resulting recording current assets 266000 long term assets 399000 current liabilities 760000 long term liabilities 11 million decrease comprehensive loss 12 million application company concluded interest rate swap contracts qualify special cash flow hedge accounting permit recording fair value swap corresponding adjustment comprehensive income loss balance sheet income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes see note 12 foreign currency translation assets liabilities foreign subsidiaries except companys mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded companys consolidated financial statements based upon provisions statement financial accounting standards sfas 52 foreign currency translation effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange loss 12 million 17 million 1 million 2002 2001 2000 respectively earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options see note 13 comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders equity companys accumulated comprehensive income loss consists foreign currency translation adjustments unrealized gains losses derivatives designated qualified cash flow hedges pension related adjustments see note 15 significant customers concentrations credit risk companys trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer transit group accounted 11 companys consolidated net sales 2002 2001 one customer accounted 10 companys consolidated net sales 2000 allowance doubtful accounts 46 million 23 million december 31 2002 2001 respectively employees december 31 2002 approximately 36 companys workforce covered collective bargaining agreements generally effective 2003 2004 2005 deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 issued adoption eitf 9714 required company record treasury stock historical value companys stock maintained deferred compensation plans recent accounting pronouncements august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets provisions tangible longlived assets whether held used disposed sale means tested recoverability whenever events changes circumstances indicate carrying amount may recoverable sfas 144 effective fiscal years beginning december 15 2001 company adopted sfas 144 third quarter 2001 prior time required april 2002 sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections issued statement updates clarifies simplifies existing accounting pronouncements technical corrections existing pronouncements substantive nature instances may change accounting practice provisions standard related sfas 13 effective transactions occurring may 15 2002 provisions standard must applied financial statements issued may 15 2002 company completed process evaluating impact result adopting june 2002 financial accounting standards board issued sfas 146 accounting costs associated exit disposal activities sfas 146 nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity liability exit cost recognized date entitys commitment exit plan sfas 146 requires liability cost associated exit disposal activity recognized fair value liability incurred provisions statement effective exit disposal activities initiated december 31 2002 company completed process evaluating impact result adopting december 2002 financial accounting standards board issued sfas 148 accounting stockbased compensation transition disclosure sfas 148 amends sfas 123 accounting stockbased compensation provide alternate methods transition sfas 123s fair value method accounting stockbased compensation statement amend sfas 123 require companies account employee stock options using fair value method disclosure provisions statement applicable companies stockbased compensation provisions standard effective fiscal years ending december 15 2002 adoption pronouncement material impact company change made method accounting stock based compensation 3 discontinued operations november 1 2001 company completed sale certain assets ge transportation systems gets 238 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer terms sales agreement company agreed indemnify gets among things certain potential third party site environmental cleanup remediation costs company purchased insurance policy mitigate exposure environmental indemnities company reported 487 million tax gain sale 2001 fourth quarter 2001 company decided exit businesses put businesses sale net amount businesses written estimated realizable value based multiple earnings classified assets held sale balance sheet company reported 72 million tax loss writedown entities december 31 2002 one businesses continues classified held sale market conditions deteriorated past year result asset sold company actively solicited receive reasonable offers purchase asset response reduced price asset continues actively marketed price reasonable given change market conditions asset recorded held sale 24 million accordance sfas 144 operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures 5 mergers acquisitions 2002 2001 2000 company completed following acquisitions february 2002 company purchased minority interest business india company already 17 million ii october 2001 company purchased certain assets milufab supplier door panels subway trains 37 million iii june 2001 company purchased certain assets core systems company provides repair billings rail industry 743000 iv july 2000 company purchased certain assets iron fireman manufacturer transportation boiler equipment 650000 acquisitions accounted purchase method accordingly results operations applicable acquisition included companys financial statements prospectively acquisition date excess purchase price fair value identifiable net assets approximately 29 million allocated goodwill effective january 1 2002 goodwill longer amortized upon adoption sfas 142 see note 2 6 inventory components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows 8 intangibles company adopted sfas 142 goodwill intangible assets effective january 1 2002 provisions goodwill intangible assets indefinite lives longer amortized straightline basis assets estimated useful life instead subject periodic assessments impairment applying fairvaluebased test company completed phase ii assessments wrote carrying value goodwill 90 million 832 million freight group 68 million transit group resulting noncash aftertax charge 617 million fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill still remaining balance sheet 1095 million december 31 2002 december 31 2002 2001 companys trademarks gross carrying amount 23121 accumulated amortization 3558 company believes intangible indefinite life intangible assets company goodwill trademarks consist following connection adoption sfas 142 company reassessed useful lives classification identifiable assets determined continue appropriate weighted average useful lives patents 13 years covenants compete 5 years amortization expense intangible assets 53 million year ended december 31 2002 estimated amortization expense five succeeding years follows changes carrying amount goodwill segment year ended december 31 2002 follows actual results continuing operations year ended december 31 2002 pro forma results continuing operations 2001 2000 applied nonamortization provisions sfas 142 periods follows 9 longterm debt longterm debt consisted following credit agreement november 1999 wabtec refinanced existing unsecured motivepower credit agreement consortium commercial banks unsecured credit agreement currently provides 275 million fiveyear revolving credit facility expiring november 2004 364day 95 million convertible revolving credit facility maturing november 2004 annual renewal november 2003 november 2001 company banks negotiated reduction 364day facility 213 million 100 million result 208 million net tax cash proceeds sale locomotive businesses ge november 2002 company negotiated reduction 364day facility 100 million 95 million december 31 2002 company available bank borrowing capacity net letters credit approximately 159 million credit agreement company may elect base rate interest rate based london interbank offered rates interest libor cost funds rate bid rate base rate greater lasalle bank national associations prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 875 200 basis points depending companys consolidated total indebtedness cash flow ratios current margin 150 basis points cost funds rate fluctuating interest rate based lasalle bank national associations cost funds bid rate option participating bank may propose interest rate lend funds rate may either fixed rate floating rate based libor credit agreement limits companys ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults change control company credit agreement borrowings bear variable interest rates indexed indexes described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 2177 million 1337 million 331 respectively 2002 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2002 notional value interest rate swaps outstanding totaled 60 million effectively changed companys interest rate variable rate fixed rate 87 interest rate swap agreements mature june 2003 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance 9 38 senior notes june 1995 company issued 100 million 9375 senior notes due 2005 1995 notes january 1999 company issued additional 75 million 9375 senior notes due 2005 1999 notes 1995 notes 1999 notes collectively notes 1999 notes issued premium resulting effective rate 85 terms 1995 notes 1999 notes substantially 1995 notes 1999 notes issued pursuant indentures substantially notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted extraordinary noncash loss 12 million net tax relating writeoff deferred debt issuance costs see note 25 industrial revenue bond july 1998 subsidiary company entered 10 year 75 million debt obligation bears interest rate 55 payable monthly principal interest installments proceeds bond provided financing purchase building used companys operations scheduled principal repayments outstanding loan balances required december 31 2002 follows 10 employee benefit plans assumed health care cost trend rate grades initial rate 9 ultimate rate 475 five years 1 increase assumed health care cost trend rate increase amount expense recognized postretirement plans approximately 303000 2003 increase accumulated postretirement benefit obligation approximately 35 million 1 decrease assumed health care cost trend rate decrease amount expense recognized postretirement plans approximately 239000 2003 decrease accumulated postretirement benefit obligation approximately 28 million composition plan assets consists primarily equities corporate bonds governmental notes temporary investments 2002 2001 result early retirement package offered certain union employees company incurred charges approximately 12 million 16 million respectively reflected special termination benefit included table aggregate benefit obligation fair value plan assets pension plans plan assets excess benefit obligations 2 million 21 million respectively december 31 2002 83 million 97 million respectively december 31 2001 total pension plan benefit obligation excess plan assets defined contribution plans costs recognized multiemployer defined contribution plans summarized follows company sponsors defined benefit pension plans cover certain us canadian employees provide benefits stated amounts year service employee connection establishment employee stock ownership plan trust see note 11 january 1995 pension plan us salaried employees modified eliminate credit accrual current service costs future periods effective march 31 1995 companys funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method applied accompanying financial statements addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substan tially us employees conjunction establishment esop january 1995 see note 11 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 company also participates variety defined contribution 401k multiemployer pension health welfare plans additionally company stock optionbased benefit plans described note 14 11 employee stock ownership plan trust esop effective january 31 1995 company established westinghouse air brake company employee stock ownership plan trust esop enable participating employees obtain ownership interests company employees eligible participate esop primarily include salaried us employees described note 10 esop contributions intended supplement replace salaried employee benefit plans connection establishment esop company made 140 million loan esop used purchase 9336000 shares companys outstanding common stock esop loan initially term 50 years interest 85 collateralized shares purchased esop company contributions esop used repay esop loans annual debt service requirements approximately 12 million company obligated contribute amounts sufficient repay esop loan esop used company contributions repay esop loan approximately 187000 shares allocated annually participants 50year period transactions occurred simultaneously accounting purposes offset allocated esop shares august 1 2000 approximately 11 million shares company terminated contributions esop effective august 1 2000 2002 allocated shares distributed participants 401k accounts unallocated shares returned company exchange forgiveness esop loan also 2000 company incurred 51 million noncash charge writeoff related deferred tax asset due esop tax benefits would realized esop continued utilized future periods charge reported within caption income tax expense consolidated statement operations 12 income taxes components income continuing operations provision income taxes companys domestic foreign operations years ended december 31 provided consolidated provision credit income taxes included statement income years ended december 31 consisted following consolidated income tax provision credit included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided research development credit year 2002 relates current credits claimed research development credit year 2001 related credits claimed current period refund claims filed amended returns prior periods components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized company established valuation allowance certain net operating loss carryforwards losses anticipated produce tax benefit although realization net deferred tax asset assured management believes likely net deferred tax asset realized companys net operating loss carryforward year ended december 31 2002 778000 expire 2010 13 earnings per share computation earnings per share continuing operations follows options purchase approximately 21 million 28 million 42 million shares common stock outstanding 2002 2001 2000 respectively included computation diluted earnings per share options exercise price exceeded average market price common shares 14 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year added shares available grant 2000 plan based adjustment company approximately 15 million shares available 2002 grants available approximately 13 shares end fiscal 2003 shares available grants given date may exceed 15 wabtecs total common shares outstanding generally options become exercisable threeyear vesting period expire ten years date grant part longterm incentive program 1998 company granted options purchase 500020 certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors stock option plan 500000 shares common stock reserved issuance yearend 2002 company granted nonqualified stock options nonemployee directors purchase total 80000 shares employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants purchase companys common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2002 172646 shares company applies apb 25 related interpretations accounting stockbased compensation plans accordingly compensation expense recognized plans compensation expense plans determined based fair value grant dates awards companys net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options vesting period since compensation expense associated option grants would recognized vesting period initial impact applying sfas 123 pro forma net income representative potential impact pro forma net income future years subsequent year pro forma compensation expense would include effect recognizing portion compensation expense multiple awards purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options summary companys stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2002 restricted stock award february 2001 company awarded two officers 4920 shares restricted common stock lieu cash bonus 2000 15 comprehensive income loss components accumulated comprehensive loss 16 operating leases company leases office manufacturing facilities operating leases terms ranging one fifteen years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2002 2001 2000 62 million 57 million 63 million respectively certain companys equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 28 million 28 million 4 million years 2002 2001 2000 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 17 warranties following table reconciles changes companys product warranty reserve year ended december 31 2002 18 stockholders agreements december 31 2002 approximate ownership interests companys common stock management 10 investors consisting vestar equity partners lp charlesbank equity fund ii limited partnership american industrial partners capital fund ii lp 13 others including public shareholders 77 stockholders agreement exists company vestar charlesbank american industrial partners referred provides among things composition board directors long certain minimum stock ownership percentages maintained rights request registration shares 19 preferred stock companys authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action companys shareholders rights preferences preferred stock would superior common stock december 31 2002 2001 preferred stock issued outstanding 20 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc asi indemnified company certain items including among others environmental claims indemnification provisions agreement expired various dates 2000 except claims timely asserted continue resolved asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations company named along parties potentially responsible party prp north carolina inactive sites response act alleged release threat release hazardous substances old james landfill site north carolina company believes unreimbursed costs associated cleanup activities site material result indemnification provisions referred insurance policy rocky mountain international insurance ltd acknowledged coverage currently paying claim company established reserve costs companys affiliates operations use products contain asbestos actions filed company certain affiliates consistent experience others number claims increased recent years however important note asbestos claims involve products sold prior 1990 formation company affiliates incurred significant costs related asbestos claims covered insurance subject indemnity companies manufactured sold products question management believes claims material accordingly financial statements reflect costs reserves claims boise idaho company subject rcra part b closure permit issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower industries boise idaho facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents company accrued 793000 december 31 2002 estimated remaining costs remediation company compliance permit december 31 2002 mountaintop pennsylvania foster wheeler energy corporation fwec seller mountaintop property predecessor one companys subsidiaries 1989 agreed indemnify companys predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior companys acquisition young radiator young agreed clean alleged contamination prior production site mattoon ill company process remediating site state illinois estimates costs reme diate site approximately 543000 accrued december 31 2002 racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 476000 december 31 2002 estimate remaining restoration costs getsgs november 3 2000 company settled suit brought 1999 geharris railway electronics llc geharris railway electronics services llc collectively geharris september 20 2002 motion lawsuit filed successor ge harris ge transportation services global signaling llc getsgs motion getsgs contends company acting beyond authority granted parties november 2000 settlement license agreement contempt consent order concluded suit time support motion getsgs points principally sales offers sell certain railway brake equipment including distributed power equipment australian customers getsgs seeking substantial money damages claimed significant business loss matter discovery hearing getsgs motion scheduled may 13 2003 company contingent obligations relating certain sales leaseback transactions reserves established time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 21 segment information wabtec two reportable segments freight group transit group key factors used identify reportable segments organization alignment companys internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment engines onboard electronic components train coupler equipment revenues derived oem sales locomotive overhauls aftermarket sales freight car repairs services assets sold gets part freight group transit group consists products passenger transit vehicles typically subways rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments operating results based income operations merger restructuring charges corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2002 follows segment financial information 2001 follows segment financial information 2000 follows 2001 2000 530000 152 million merger restructuring costs related freight group 2001 2000 2 million 235000 merger restructuring costs related transit group following geographic area data include net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales companys united states operations 619 million 903 million 989 million years ending december 31 2002 2001 2000 respectively following data reflects income loss operations including merger restructuring related charges major geographic area attributed companys operations within following countries regions 22 fair value financial instruments estimated fair values companys financial instruments approximate related carrying values except following fair values fixed rate obligations estimated using discounted cash flow analyses fair value companys interest rate swaps see note 9 based dealer quotes represent estimated amount company would pay counterparty terminate swap agreements 23 selected quarterly financial data unaudited earnings per share year different sum quarterly earnings per share due rounding company recorded cumulative effect accounting change goodwill net tax 617 million 141 first quarter 2002 company also recorded 12 million 003 per diluted share extraordinary loss early extinguishment debt third quarter 2002 fourth quarter 2002 company recorded 772000 002 per diluted share tax benefit due research development credits utilization foreign tax credits also fourth quarter 2002 companys vacation policy changed employees leave company entitled pro rata portion vacation year instead entire vacation year change resulted income 789000 net tax 002 per diluted share company recorded restructuringrelated costs approximately 854000 001 first quarter 2001 11 million 002 16 million 002 192000 000 net tax per diluted share second third fourth quarters 2001 respectively company also recorded 2 million 005 per diluted share research development tax credit third quarter 2001 fourth quarter 2001 company recorded 93 million 014 net tax per diluted share charge asset writedowns consisting primarily asset impairment related locomotive lease fleet 52 million writeoff 18 million investment argentina 15 million writedown facility estimated realizable value 17 million 003 net tax per diluted share charge severance related ten percent salary headcount reduction 685000 001 net tax per diluted share gain sale unused facilities 24 merger restructuring charge 2001 company completed merger restructuring plan charges totaling 71 million pretax approximately 2 million charge expensed 2001 20 million 2000 49 million 1999 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company december 31 2002 647000 merger restructuring charge still remaining accrued balance sheet part accrued liabilities table identifies significant components charge reflects accrual balance date lease impairment charges asset writedowns associated companys closing several plants consolidation corporate headquarters companys evaluation certain assets projected cash flows assets remaining lives estimated less carrying values company began completed new restructuring plan transit rail business 2001 restructuring plan involved operational realignment related workforce reductions charges 2001 restructuring plan move totaled 2 million pretax 2002 operations still included much cost integration normal operations 2 million charge 2001 included costs associated relocating several production operations chicago montreal including severance costs approximately 103 employees 25 extraordinary item july 2002 company redeemed 175 million senior notes par face use cash hand additional borrowings credit agreement redemption resulted extraordinary noncash loss 12 million net tax relating writeoff deferred debt issuance costs signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation gregory h davies gregory h davies chief executive officer date march 28 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated certification gregory h davies certify 1 reviewed annual report form 10k westinghouse air brake technologies corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 28 2003 gregory h davies name gregory h davies title president chief executive officer certification robert j brooks certify 1 reviewed annual report form 10k westinghouse air brake technologies corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 28 2003 robert j brooks name robert j brooks title chief financial officer certification pursuant 18 usc sec 1350 undersigned officers westinghouse air brake technologies corporation company hereby certify best knowledge companys annual report form 10k year ended december 31 2002 report fully complies requirements section 13a 15d applicable securities exchange act 1934 information contained report fairly presents material respects financial condition results operations company gregory h davies gregory h davies president chief executive officer date march 28 2003 robert j brooks robert j brooks chief financial officer date march 28 2003 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies 2 actual disbursements andor charges exhibits item 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report 1035 amendment 3 dated july 18 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association abn amro bank nv bookrunner cosyndication agent bank new york cosyndication agent chase manhattan bank administrative agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1036 amendment 4 dated september 17 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions lasalle bank national association chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1037 amendment 5 dated november 14 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent jp morgan chase bank formerly known chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1038 amendment 6 dated november 13 2002 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent jp morgan chase bank administrative agent bank new york cosyndication agent mellon bank na documentation agent lasalle bank national association issuing bank abn amro bank nv issuing bank chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 1039 asset purchase agreement general electric company ge transportation systems business westinghouse air brake technologies corporation dated july 24 1040 refinancing credit agreement among company guarantors various lenders lasalle bank national association jp morgan chase bank new york citizens bank pennsylvania national city bank pennsylvania bank nova scotia bank tokyomitsubishi trust company pnc bank national association dated january 12 2004 filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s current report form 8k dated october 3 1996 filed exhibit company’s registration statement form s8 33339159 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s current report form 8k dated october 5 1998 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s annual report form 10k period ended december 31 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s annual report form 10k period ended december 31 2001 filed exhibit company’s annual report form 10k period ended december 31 2002 filed exhibit company’s registration statement form s4 333110600 report independent auditors board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheet westinghouse air brake technologies corporation subsidiaries december 31 2003 2002 related consolidated statements operations shareholders’ equity cash flows years ended audit also included financial statement schedule year ended december 31 2003 listed index item 15a registration statement financial statements responsibility company’s management responsibility express opinion financial statements based audit financial statements westinghouse air brake technologies corporation subsidiaries december 31 2001 year ended audited auditors ceased operations auditors expressed unqualified opinion financial statements report dated february 18 2002 conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2003 2002 results operations cash flows years ended conformity accounting principles generally accepted united states also opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein fully discussed note 8 consolidated financial statements effective january 1 2002 westinghouse air brake technologies corporation adopted provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 discussed consolidated financial statements westinghouse air brake technologies corporation december 31 2001 year ended audited auditors ceased operations described note 8 financial statements revised include transitional disclosures required sfas 142 adopted company january 1 2002 audit procedures respect disclosures note 8 respect 2001 included agreeing previously reported net income previously issued financial statements adjustments reported net income representing amortization expense including related tax effects recognized periods related goodwill result initially applying statement 142 company’s underlying records obtained management b testing mathematical accuracy reconciliation adjusted net income reported net income related earnings per share amounts opinion disclosures 2001 note 8 appropriate however engaged audit review apply procedures 2001 financial statements company respect disclosures accordingly express opinion form assurance 2001 financial statements taken whole ernst young llp february 17 2004 report independent public accountants board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation delaware corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2001 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position westinghouse air brake technologies corporation subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states arthur andersen llp pittsburgh pennsylvania february 18 2002 copy audit report previously issued arthur andersen llp connection company’s annual report form 10k year ended december 31 2001 audit report reissued arthur andersen llp connection annual report form 10k see exhibit 232 discussion westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations nine countries 2003 79 percent company’s revenues came north american operations wabtec also sold products services 62 countries around world 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 45 million 46 million december 31 2003 2002 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets company adopted sfas 142 effective january 1 2002 result goodwill intangible assets indefinite lives longer amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill effective january 1 2002 reviewed annually impairment amortizable intangibles reviewed impairment indicators impairment present warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience recent years company introduced number new products company level historical warranty experience new products continuing products therefore warranty reserves established new products based upon management’s estimates actual future results may vary estimates warranty expense 105 million 176 million 141 million 2003 2002 2001 respectively warranty reserves 133 million 174 million december 31 2003 2002 respectively deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 “accounting deferred compensation arrangements amounts earned held rabbi trust invested” “eitf 9714” issued adoption eitf 9714 required company record treasury stock historical value company’s stock maintained deferred compensation plans income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws effect differences expected reverse provision income taxes includes federal state foreign income taxes stockbased compensation effective january 1 2003 company adopted sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 amends sfas 123 “accounting stockbased compensation” provide alternate methods transition sfas 123’s fair value method accounting stockbased compensation statement amends disclosure requirements sfas 123 require prominent disclosures method accounting compensation cost associated employee stock option plans well effect method used reported results company adopted disclosure requirements sfas 148 changed method measuring compensation cost stock options company continues use intrinsic value based method recognize compensation expense issuance options exercise price equal greater market price stock time grant result adoption sfas 148 impact results operations financial position compensation expense plans determined based fair value grant dates awards company’s net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options’ vesting period purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options significantly different employee stock options although valuation model acceptable method use presenting pro forma information differences traded options employee stock options blackscholes model necessarily provide single measure fair value employee stock options financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received recognized interest expense company adopted statement financial accounting standards “sfas” 133 amended sfas 138 “accounting derivative instruments hedging activities” effective january 1 2001 resulting recording current assets 266000 long term assets 399000 current liabilities 760000 long term liabilities 11 million decrease comprehensive loss 12 million application company concluded interest rate swap contracts qualify “special cash flow hedge accounting” permit recording fair value swap corresponding adjustment comprehensive income loss balance sheet december 31 2003 result entering interest rate swaps company expected incur 600000 additional interest expense 2004 company also entered foreign currency options forward contracts reduce impact changes currency exchange rates currency option gives company right obligation exchange currency predetermined exchange rate either specific date within specific period time forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis outstanding forward contracts option agreements sale us dollars purchase canadian dollars cad december 31 2003 company outstanding option agreements notional value 105 million cad resulting recording current asset 270000 increase comprehensive income 171000 net tax forward contracts notional value 135 million cad resulting recording current asset 100000 increase comprehensive income 64000 net tax december 31 2003 result entering foreign currency forward option contracts company expected incur additional currency exchange loss gain 2004 subsequent december 31 2003 company entered additional forward contracts hedge exposure canadian currency risk including forwards outstanding end 2003 forward contracts currently total notional value 83 million cad 62 million us average exchange rate 0747 usd per 1 cad foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions statement financial accounting standards “sfas” 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange loss 28 million 12 million 17 million 2003 2002 2001 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments unrealized gains losses derivatives designated qualified cash flow hedges foreign currency hedges pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletin sab 101 “revenue recognition financial statements” wabtec recognizes revenue upon passage title ownership risk loss customer company recognizes revenues longterm contracts based percentage completion method accounting contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period known provisions made estimated losses uncompleted contracts known necessary certain preproduction costs relating long term production supply contracts deferred amortized life contract deferred preproduction costs 34 million 700000 december 31 2003 2002 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2003 one customer transit group accounted 11 company’s consolidated net sales 2002 2001 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2003 2002 2001 company incurred costs approximately 329 million 336 million 332 million respectively employees december 31 2003 approximately 36 company’s workforce covered collective bargaining agreements generally effective 2004 2005 2006 earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements april 2003 financial accounting standards board issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 provisions statement effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 applied prospectively sfas 149 impact company’s financial statements results operations may 2003 financial accounting standards board issued sfas 150 “accounting certain instruments characteristics liabilities equity” sfas 150 requires certain financial instruments embodying obligation transfer assets issue equity securities classified liabilities effective financial instruments entered modified may 31 2003 otherwise effective july 1 2003 sfas 150 impact company’s financial statements results operations effective december 31 2003 wabtec adopted sfas 132 revised 2003 “employers’ disclosures pensions postretirement benefits amendment fasb statements 87 88 106” us pension plans standard requires additional disclosures employer’s pension plans postretirement benefits type plan assets investment strategy measurement date plan obligations cash flows components net periodic benefit costs recognized interim periods see note 10 consolidated financial statements required additional disclosures 2003 company adopted fasb interpretation “fin” 45 “guarantor’s accounting disclosure requirements guarantees” fin 45 requires increased disclosure guarantees including likelihood payment remote product warranty information see note 16 fin 45 also requires guarantors recognize liability certain types guarantees equal fair value guarantee upon issuance adoption fin 45 impact company’s financial statements results operations january 2003 financial accounting standards board issued interpretation 46 “consolidation variable interest entities” variable interest entity “vie” one contractual ownership interests entity change changes entity’s net asset value interpretation requires consolidation vie primary beneficiary also requires disclosure vies enterprise significant variable interest primary beneficiary company believe statement material impact company’s financial statements results operations december 8 2003 president bush signed law medicare prescription drug improvement modernization act 2003 act expanded medicare include first time coverage prescription drugs january 2004 fasb issued staff position 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1061 position permits sponsor postretirement health care plan provides prescription drug benefit make onetime election defer accounting effects act permitted fsp fas 1061 company elected defer financial recognition legislation fasb issues final accounting guidance accordance fsp fas 1061 appropriate disclosures related deferral election made note 10 consolidated financial statements 3 discontinued operations november 1 2001 company completed sale certain assets ge transportation systems gets 238 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer terms sales agreement company agreed indemnify gets among things certain potential third party site environmental cleanup remediation costs company purchased insurance policy mitigate exposure environmental indemnities company reported 487 million tax gain sale 2001 fourth quarter 2001 company decided exit businesses put businesses sale net assets businesses written estimated realizable value based multiple earnings classified assets held sale balance sheet company reported 72 million tax loss writedown entities december 31 2003 one businesses sold company actively solicited receive reasonable offers purchase asset response reduced price asset longer actively marketed result company reclassed business continuing operations fourth quarter 2003 reclassification material impact financial statements accordance sfas 144 operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures 5 mergers acquisitions company make acquisitions 2003 2002 2001 company completed following acquisitions february 2002 company purchased minority interest business india company already 17 million ii october 2001 company purchased certain assets milufab supplier door panels subway trains 37 million acquisitions accounted purchase method accordingly results operations applicable acquisition included company’s financial statements prospectively acquisition date excess purchase price fair value identifiable net assets approximately 29 million allocated goodwill effective january 1 2002 goodwill longer amortized upon adoption sfas 142 6 inventory components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 21 million 202 million 20 million 2003 2002 2001 respectively 8 intangibles company adopted sfas 142 “goodwill intangible assets” effective january 1 2002 provisions goodwill intangible assets indefinite lives longer amortized straightline basis assets estimated useful life instead subject periodic assessments impairment applying fairvaluebased test 2002 company completed phase ii assessments wrote carrying value goodwill 90 million 832 million freight group 68 million transit group resulting noncash aftertax charge 617 million fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information company also performed required impairment test 2003 resulted additional impairment charge goodwill still remaining balance sheet 1095 million december 31 2003 december 31 2003 2002 company’s trademarks net carrying amount 195 million company believes intangibles indefinite life intangible assets company goodwill trademarks consist following connection adoption sfas 142 company reassessed useful lives classification identifiable assets determined continue appropriate weighted average useful life patents 13 years covenants compete five years amortization expense intangible assets 34 million 4 million 113 million years ended december 31 2003 2002 2001 respectively amortization expense five succeeding years follows thousands changes carrying amount goodwill segment years ended december 31 2003 2002 respectively follows actual results continuing operations year ended december 31 2003 2002 pro forma results continuing operations 2001 applied nonamortization provisions sfas 142 periods follows 9 longterm debt longterm debt consisted following credit agreement november 1999 wabtec refinanced existing unsecured motivepower credit agreement “credit agreement” consortium commercial banks unsecured credit agreement provided 275 million fiveyear revolving credit facility expiring november 2004 364day 275 million convertible revolving credit facility maturing november 2004 november 2001 company banks negotiated reduction 364day facility 100 million result 208 million net tax cash proceeds sale certain businesses november 2002 company negotiated reduction 364day facility 100 million 95 million july 2003 company banks negotiated reduction facilities 225 million result issuance senior notes 225 million facility provided reduced fiveyear facility 1672 million reduced 364day facility 578 million november 2003 company allowed 578 million 364day facility expire december 31 2003 company’s available bank borrowing capacity net 196 million letters credit approximately 1077 million credit agreement borrowings bear variable interest rates indexed indices described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 209 million 1293 million 268 respectively 2003 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2003 notional value interest rate swaps outstanding totaled 40 million effectively changed company’s interest rate bank debt december 31 2003 variable rate fixed rate 398 interest rate swap agreements mature february 2006 company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions company anticipate nonperformance required sfas 145 company reclassified 12 million net tax charge related early extinguishment debt third quarter 2002 previously recorded extraordinary item interest expense income tax expense refinancing credit agreement january 2004 company entered new credit agreement refinancing existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provides 175 million fiveyear revolving credit facility expiring january 2009 financial statements prepared based terms refinanced credit agreement refinancing credit agreement company may elect base rate interest rate based london interbank offered rates interest “libor” base rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 100 200 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 175 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrue rate 6875 per annum payable semiannually january 31 july 31 year commencing january 31 2004 proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens scheduled principal repayments outstanding loan balances required december 31 2003 follows extinguishment borrowings june 1995 company issued 100 million 9375 senior notes due 2005 “1995 notes” january 1999 company issued additional 75 million 9375 senior notes due 2005 “1999 notes” 1995 notes 1999 notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted noncash loss 19 million relating writeoff deferred financing costs july 1998 subsidiary company entered 10 year 75 million debt obligation purchase building used company’s operations debt repaid september 2003 10 employee benefit plans company sponsors defined benefit pension plans cover certain us canadian united kingdom employees provide benefits stated amounts year service employee included table aggregate benefit obligation fair value plan assets pension plans plan assets excess benefit obligations 3 million 34 million respectively december 31 2003 2 million 21 million respectively december 31 2002 total pension plan benefit obligation excess plan assets components prepaid accrued benefit costs country follows pension plan assets composition us plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s asset allocations december 31 2003 asset category follows investment policies determined plan’s pension committee set forth plan’s investment policy pursuant plan’s investment policy investment strategy use passive index funds managed bank new york target asset allocation composite benchmarks include following company’s funding methods primarily based erisa requirements differ used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expects contribute 64 million pension plan 2004 level funding continue future periods rebalancing asset allocation occurs quarterly basis 2002 result early retirement package offered certain union employees company incurred charges approximately 12 million reflected special termination benefit addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits substantially us employees january 1995 postretirement health care life insurance benefits salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 assumed health care cost trend rate grades initial rate 8 ultimate rate 475 four years 1 increase assumed health care cost trend rate increase amount expense recognized postretirement plans approximately 358000 2004 increase service interest cost components accumulated postretirement benefit obligation approximately 41 million 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized postretirement plans approximately 286000 2004 decrease accumulated postretirement benefit obligation approximately 34 million december 8 2003 president bush signed law medicare prescription drug improvement modernization act 2003 act expanded medicare include first time coverage prescription drugs company sponsors retiree medical programs certain locations expects legislation reduce company’s costs programs future january 2004 fasb staff position 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1061 issued permits sponsor postretirement health care plan provides prescription drug benefit make onetime election defer accounting effects act company awaiting guidance various governmental regulatory agencies concerning requirements must met obtain cost reductions well manner savings measured based preliminary analysis appears company’s retiree medical plans may need revised order qualify beneficial treatment act plans continue unchanged defined contribution plans company also participates variety defined contribution 401k multiemployer pension health welfare plans additionally company stock option based benefit plans described note 14 costs recognized multiemployer defined contribution plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock december 31 2003 2002 plan held behalf participants 776000 shares market value 132 million 861000 shares market value 12 million respectively 11 income taxes general company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income loss continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings foreign subsidiaries intended permanently reinvested practical estimate income tax expense benefit might incurred earnings remitted us consolidated provision credit income taxes included statement income consisted following consolidated income tax provision credit included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized company recorded valuation allowance 185 million certain net operating loss carryforwards deferred tax assets anticipated produce tax benefit valuation allowance increased current year 39 million applied certain state foreign deferred tax assets state foreign net operating loss carryforwards exist amount 139 million 205 million respectively set expire various periods 2006 2023 valuation allowance established certain net operating loss carryforwards federal tax credits exist approximately 56 million comprised research experimentation credits available 2023 alternative minimum tax credits available indefinitely 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 646000 21 million 28 million shares common stock outstanding 2003 2002 2001 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year added shares available grant 2000 plan based adjustment company approximately 14 million shares available 2003 grants available approximately 14 million shares end fiscal 2004 shares available grants given date may exceed 15 wabtec’s total common shares outstanding generally options become exercisable threeyear vesting period expire ten years date grant part longterm incentive program 1998 company granted options purchase 500020 shares certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors’ stock option plan 500000 shares common stock reserved issuance yearend 2003 company granted nonqualified stock options nonemployee directors purchase total 93000 shares employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants purchase company’s common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2003 202632 shares summary company’s stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2003 restricted stock award february 2001 company awarded two officers 4920 shares restricted common stock lieu cash bonus 2000 14 comprehensive loss components accumulated comprehensive loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2003 2002 2001 69 million 62 million 57 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 28 million 28 million 28 million years 2003 2002 2001 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 guarantees 2001 company sold small noncore operating unit management team part sale wabtec guaranteed approximately 3 million bank debt buyer used purchase financing event purchaser cannot repay refinance debt without guarantee wabtec business would returned wabtec debt due 2004 company reason believe debt repaid refinanced following table reconciles changes company’s product warranty reserve follows 17 stockholders’ agreements december 31 2003 approximate ownership interests company’s common stock management 12 american industrial partners capital fund ii lp 2 others including public shareholders 86 stockholders agreement exists company american industrial partners provides among things composition board directors long certain minimum stock ownership percentages maintained rights request registration shares 18 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2003 2002 preferred stock issued outstanding 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc “asi” indemnified company certain items including among things certain environmental claims company asserted prior 2000 asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations actions filed us certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products since 2000 number claims increased claims made whollyowned subsidiary railroad friction products corporation rfpc based product sold rfpc acquired american standard inc’s asi 50 interest rfpc 1990 acquired remaining interest rfpc 1992 claims include suit rfpc asi seeking contribution indemnity asbestos claims brought asi alleges claim exposure rfpc’s product claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue neither affiliates date incurred material costs relating asbestos claims cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated certainty boise idaho company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower industries boise idaho facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents company accrued 585000 december 31 2003 estimated remaining costs remediation company compliance permit december 31 2003 mountaintop pennsylvania foster wheeler energy corporation “fwec” seller mountaintop property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa october 14 2003 company executed consent order agreement padep pursuant pa land recycling environmental remediation standards act 2 entitling company liability protections afforded act 2 environmental contamination identified agreement management believes act 2 protection fwec indemnification arrangement enforceable benefit company management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon ill company process remediating site state illinois estimates costs remediate site approximately 251000 accrued december 31 2003 racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 259000 december 31 2003 estimate remaining remediation costs getsgs november 3 2000 company settled suit brought 1999 geharris railway electronics llc geharris railway electronics services llc collectively “geharris” september 20 2002 motion lawsuit filed successor ge harris ge transportation services global signaling llc “getsgs” motion getsgs contends company acting beyond authority granted parties’ november 2000 settlement license agreement contempt consent order concluded suit time support motion getsgs points principally sales offers sell certain railway brake equipment including distributed power equipment australian customers getsgs seeking substantial money damages claimed significant business loss two day hearing held getsgs’ motion may 2003 parties completed filed posthearing papers august 28 2003 barring settlement agreement interim parties awaiting court’s decision opinion motion company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 58 million established time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segments freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment engines onboard electronic components train coupler equipment revenues derived oem sales locomotive overhauls aftermarket sales freight car repairs services assets sold gets part freight group transit group consists products passenger transit vehicles typically subways rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2003 follows 2001 530000 merger restructuring costs related freight group 2 million related transit group following geographic area data years ended december 31 2003 2002 2001 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 592 million 619 million 903 million years ending december 31 2003 2002 2001 respectively following data reflects income loss operations including merger restructuring related charges major geographic area attributed company’s operations within following countries regions years ended december 31 2003 2002 2001 respectively 21 fair value financial instruments estimated fair values company’s financial instruments approximate related carrying values except following fair value company’s interest rate swaps see note 9 foreign exchange hedges option contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 22 selected quarterly financial data unaudited earnings per share 2002 different sum quarterly earnings per share due rounding company recorded cumulative effect accounting change goodwill net tax 617 million 141 first quarter 2002 fourth quarter 2002 company recorded 772000 002 per diluted share tax benefit due research development credits utilization foreign tax credits also fourth quarter 2002 company’s vacation policy changed employees leave company entitled pro rata portion vacation year instead entire vacation year change resulted income 789000 net tax 002 per diluted share 23 restructuring charge 2001 company completed merger restructuring plan charges totaling 71 million pretax approximately 2 million costs expensed 2001 20 million 2000 49 million 1999 plan involved elimination duplicate facilities excess capacity operational realignment related workforce reductions evaluation certain assets perceived ongoing benefit company december 31 2003 86000 merger restructuring charge still remaining accrued balance sheet part accrued liabilities table identifies significant components charge reflects accrual balance date lease impairment charges associated company’s closing plant consolidation corporate headquarters signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation gregory h davies gregory h davies chief executive officer date march 15 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets 2 actual disbursements andor charges exhibits 1027 amendment 1 amended restated stockholders agreement dated march 5 1997 among voting trust vestar harvard aip company 1028 common stock registration rights agreement dated march 5 1997 among company harvard aip voting trust 1029 1998 employee stock purchase plan 1032 westinghouse air brake technologies corporation 2000 stock incentive plan 1033 amendment 1 dated november 16 2000 among company guarantors time party thereto banks time party thereto abn amro bank nv bookrunner cosyndication agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1034 amendment 2 dated march 30 2001 among company guarantors time party thereto banks time party thereto abn amro bank nv bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1035 amendment 3 dated july 18 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association abn amro bank nv bookrunner cosyndication agent bank new york cosyndication agent chase manhattan bank administrative agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1036 amendment 4 dated september 17 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions lasalle bank national association chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1037 amendment 5 dated november 14 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent jp morgan chase bank formerly known chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s current report form 8k dated october 3 1996 filed exhibit company’s registration statement form s8 33339159 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s current report form 8k dated october 5 1998 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s annual report form 10k period ended december 31 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s annual report form 10k period ended december 31 2001 filed exhibit company’s annual report form 10k period ended december 31 2002 filed exhibit company’s registration statement form s4 333110600item 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated january 5 2006 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded schaefer equipment inc schaefer becorit gmbh becorit assessment internal controls financial reporting december 31 2006 schaefer becorit acquired company purchase business combinations effective october 6 december 1 2006 respectively schaefer becorit wholly owned subsidiaries whose total assets net sales represent 118 09 respectively related consolidated financial statement amounts year ended december 31 2006 based assessment management concluded company maintained effective internal control financial reporting december 31 2006 based criteria internal controlintegrated framework issued coso management’s assessment effectiveness company’s internal control financial reporting december 31 2006 audited ernst young llp independent registered public accounting firm stated report included herein management’s certifications company’s chief executive officer chief financial officer required sarbanesoxley act included exhibits 31 32 company’s 10k addition 2006 company’s chief executive officer provided new york stock exchange annual ceo certification regarding company’s compliance new york stock exchange’s corporate governance listing standards albert j neupaver albert j neupaver president chief executive officer director alvaro garciatunon alvaro garciatunon senior vice president chief financial officer secretary report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2006 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein explained note 10 consolidated financial statements december 31 2006 company adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88106 132r” explained note 13 consolidated financial statements year ended december 31 2006 company adopted statement financial accounting standards 123 r “sharebased payment” also audited accordance standards public company accounting oversight board united states effectiveness westinghouse air brake technologies corporation’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 23 2007 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 23 2007 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited management’s assessment included accompanying management’s report internal control financial reporting westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls schaefer equipment inc becorit gmbh included 2006 consolidated financial statements westinghouse air brake technologies corporation constituted 118 total assets december 31 2006 09 net sales year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting schaefer equipment inc becorit gmbh opinion management’s assessment westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2006 fairly stated material respects based coso criteria also opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2006 report dated february 23 2007 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 23 2007 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 11 countries 2006 78 company’s revenues came north american operations wabtec also sold products services 108 countries around world 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 36 million 41 million december 31 2006 2005 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually impairment frequently indicators impairment present amortizable intangible assets reviewed impairment indicators impairment present evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number westinghouse air brake technologies corporation notes consolidated financial statementscontinued significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair value could realized could differ used evaluate impairment goodwill warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 109 million 78 million 149 million 2006 2005 2004 respectively warranty reserves 174 million 162 million december 31 2006 2005 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation effective january 1 2006 company adopted statement financial accounting standard sfas 123 r “sharebased payment” sfas 123 r requires company recognize compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant wabtec elected modified prospective transition method adoption prior periods financial statements restated prior january 1 2006 accounted stockbased compensation accordance provisions accounting principles board opinion 25 apb 25 “accounting stock issued employees” related interpretations see note 13 detailed discussion company’s stockbased compensation plans pro forma effect prior adoption sfas 123 r company’s net income earnings per share 2005 2004 would reduced pro forma amounts shown compensation expense determined based fair value grant dates accordance sfas 123 “accounting stockbased compensation” financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received recognized westinghouse air brake technologies corporation notes consolidated financial statementscontinued interest expense company concluded interest rate swap contracts qualify “special cash flow hedge accounting” permit recording fair value swap corresponding adjustment comprehensive income loss balance sheet company’s last interest rate swaps matured 2004 company also entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad company also concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2006 company forward contracts notional value 48 million cad 427 million us average exchange rate 089 usd per 1 cad resulting recording current liability 13 million corresponding offset accumulated comprehensive loss 825000 net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions sfas 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange intercompany transaction losses recognized income 11 million 33 million 12 million 2006 2005 2004 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 65 million 49 million 53 million december 31 2006 2005 2004 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers westinghouse air brake technologies corporation notes consolidated financial statementscontinued commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2006 2005 2004 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2006 2005 2004 company incurred costs approximately 327 million 328 million 338 million respectively employees december 31 2006 approximately 41 company’s workforce covered collective bargaining agreements generally effective 2007 2008 2009 agreements expiring 2007 cover approximately 19 company’s workforce earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements july 2006 financial accounting standards board fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxesan interpretation fasb statement 109” fin 48 prescribes comprehensive model company recognize measure present disclose financial statements uncertain tax positions taken expects take tax return fin 48 effective first quarter 2007 cumulative effects applying interpretation recorded adjustment retained earnings beginning period adoption company currently evaluating impact statement financial statements september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” sfas 158 sfas 158 requires employer recognize funded status defined benefit pension postretirement benefit plans net asset liability statement financial position offsetting amount accumulated comprehensive income recognize changes funded status year changes occur comprehensive income company adopted provisions sfas 158 december 31 2006 provisions sfas 158 applied prospective basis therefore prior periods presented restated adoption 2006 effect computation net periodic benefit expense pensions postretirement benefits see note 10 impact adoption company’s consolidated balance sheet december 31 2006 westinghouse air brake technologies corporation notes consolidated financial statementscontinued september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements sfas 157 becomes effective wabtec january 1 2008 upon adoption provisions sfas 157 applied prospectively limited exceptions adoption sfas 157 expected material impact company’s consolidated financial statements 3 acquisitions discontinued operations october 6 2006 company acquired 100 stock schaefer equipment inc schaefer based warren ohio manufacturer forged brake rigging components freight cars purchase price 363 million net cash received resulting additional goodwill 239 million schaefer manufactures variety forged components bodymounted truckmounted braking systems addition december 1 2006 company acquired 100 stock becorit gmbh becorit manufacturer friction products european transit railway industry purchase price 509 million net cash received resulting additional goodwill 300 million becorit manufactures variety brake shoes pads friction linings passenger transit cars freight cars locomotives also makes friction products industrial markets mining wind power generation february 1 2005 company completed acquisition assets rütgers rail spa business operations italy germany france spain company formed hold purchased assets rütgers rail spa named cofren srl “cofren” cofren manufacturer brake shoes disc pads interior trim components rail applications europe purchase price 359 million net cash received resulting additional goodwill 57 million acquisitions accounted purchase accordingly purchase price allocated respective assets liabilities based upon estimated fair values acquisition date due timing acquisitions still process finalizing valuations acquired assets liabilities therefore purchase price allocations preliminary subject change finalized operating results included consolidated statement operations acquisition date forward westinghouse air brake technologies corporation notes consolidated financial statementscontinued acquisitions occurred 2006 following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition schaefer preliminary allocation 42 million acquired intangible assets exclusive goodwill 19 million assigned customer relationships 12 million assigned trademarks 11 million assigned energy supply contracts trademarks identified infinite lived assets weighted average useful lives customer relationships energy supply contracts 20 years becorit preliminary allocation 104 million acquired intangible assets exclusive goodwill 62 million assigned customer relationships 32 million assigned trade name 700000 assigned patents 300000 assigned backlog trade name considered infinite useful life patents customer relationships average useful life 19 years following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2005 acquisition rütgers rail spa company decided offer sale noncore product division part purchase accounting carrying value division adjusted estimated net realizable value classified assets held sale included noncurrent assets balance sheet march 31 2006 sale division completed approximately 14 million cash including working capital adjustment approximately 600000 established buyer fourth quarter 2006 assets sold primarily included transit car interior products services customers located westinghouse air brake technologies corporation notes consolidated financial statementscontinued europe sale resulted loss approximately 17 million including working capital adjustment subject review independent arbitration ruling expected sometime late 2007 also fourth quarter 2005 company decided liquidate bus door joint venture china resulted impairment charge approximating 1 million accordance sfas 144 “accounting impairment disposal longlived assets” operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures july 31 2006 board directors authorized repurchase 50 million company’s outstanding shares company intends purchase shares open market negotiated block trades time limit set completion program qualifies refinancing credit agreement well 6 78 senior notes currently outstanding 2006 673900 shares repurchased total cost 189 million 5 restructuring impairment charges july 19 2006 board directors approved restructuring plan improve profitability efficiency certain business units part plan wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing wabtec recorded expenses 68 million pretax 2006 restructuring expenses result approval plan expenses comprised following components 12 million employee severance costs associated approximately 240 salaried hourly employees located wallaceburg stoney creek locations 22 million pension postretirement benefit curtailment employees 29 million related asset impairments structures machinery equipment 541000 goodwill impairment westinghouse air brake technologies corporation notes consolidated financial statementscontinued specific wallaceburg facility december 31 2006 employees associated restructuring program terminated none severance paid severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees restructuring plan result additional expenses 2007 primarily pensionrelated settlement charges pension funding subject regulatory review approval funding anticipated made 2007 first six months 2005 company recorded restructuring asset impairment charges totaling 23 million related consolidating two uk facilities one relocating product line canada us completion data center migration charges consisted severance costs 593000 43 employees relocation costs 469000 asset impairment 12 million 235000 costs paid december 31 2005 remaining costs paid 2006 fourth quarter 2005 company recorded restructuring charges 800000 relating consolidating two australian facilities one 2006 additional 74000 restructuring charges recorded total charges consisted severance costs 647000 14 employees relocation costs 71000 asset impairment 56000 december 31 2006 527000 costs paid includes 305000 unpaid employee severance costs 6 inventory components inventory net reserves 7 property plant equipment major classes depreciable assets follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued estimated useful lives property plant equipment follows depreciation expense 217 million 217 million 228 million 2006 2005 2004 respectively 8 intangibles goodwill intangible assets indefinite lives longer amortized instead subject periodic assessments impairment applying fairvaluebased test fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill still remaining balance sheet 1733 million 1182 million december 31 2006 2005 respectively december 31 2006 2005 company’s trademarks net carrying amount 240 million 199 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful life patents 13 years customer relationships 20 years covenants compete five years amortization expense intangible assets 35 million 31 million 24 million years ended december 31 2006 2005 2004 respectively amortization expense five succeeding years follows thousands westinghouse air brake technologies corporation notes consolidated financial statementscontinued change carrying amount goodwill segment year ended december 31 2006 follows 9 longterm debt longterm debt consisted following refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 december 31 2006 company available bank borrowing capacity net 239 million letters credit approximately 1511 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement year ended december 31 2006 refinancing credit agreement may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio westinghouse air brake technologies corporation notes consolidated financial statementscontinued refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants company entered amendment refinancing credit agreement february 2007 prior amendment refinancing credit agreement prohibited company making acquisitions past certain dollar limit without prior approval bank consortium refinancing credit agreement permits company complete acquisitions long certain financial parameters ratios met 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens 10 employee benefit plans company sponsors various defined benefit plans including pension post retirement benefits disclosed addition previously stated company adopted provisions sfas 158 december 31 2006 excluding elimination early measurement date required december 31 2008 provisions sfas 158 applied prospective basis therefore prior periods presented restated adoption 2006 effect computation net periodic benefit expense pensions postretirement benefits following table illustrates incremental effect applying sfas 158 individual items company’s consolidated balance sheet december 31 2006 westinghouse air brake technologies corporation notes consolidated financial statementscontinued defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date us canadian german plans uk plan uses october 31 measurement date following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status westinghouse air brake technologies corporation notes consolidated financial statementscontinued aggregate accumulated benefit obligation us pension plan 478 million 493 million december 31 2006 2005 respectively aggregate accumulated benefit obligation international pension plans 1162 million 928 million december 31 2006 2005 respectively benefit obligations exceeded plan assets pension plans end years components net periodic benefit cost 2006 company recorded decreases minimum liability net tax us plan international plans 31 million 37 million respectively reducing accumulated comprehensive loss 2005 company recorded increases minimum liability net tax us plan international plans 30 million 31 million respectively increasing accumulated comprehensive loss weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2006 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2007 westinghouse air brake technologies corporation notes consolidated financial statementscontinued pension plan assets composition plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s target actual asset allocations respective measurement dates 2006 2005 asset category follows investment policies determined respective plan’s pension committee set forth investment policy pursuant investment policy us investment strategy use passive index funds managed bank new york company evaluating allocation policies international plans rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expects contribute 59 million us plan 78 million international plans 2007 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees january 1995 postretirement health care life insurance benefits us salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components westinghouse air brake technologies corporation notes consolidated financial statementscontinued obligations funded status components net periodic benefit cost westinghouse air brake technologies corporation notes consolidated financial statementscontinued weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2006 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2007 assumed health care cost trend rate us plans grades initial rate 10 ultimate rate 5 2011 international plans 792 485 2013 1 increase assumed health care cost trend rate increase amount expense recognized us international postretirement plans approximately 04 million 01 million respectively 2007 increase service interest cost components accumulated postretirement benefit obligation approximately 47 million 12 million respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 03 million 01 million respectively 2007 decrease accumulated postretirement benefit obligation approximately 39 million 10 million respectively cash flows benefit payments expected paid plan participants follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued defined contribution plans company also participates certain 401k multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2006 2005 plan held behalf participants 562000 shares market value 171 million 646000 shares market value 174 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 72 million foreign subsidiaries intended permanently reinvested westinghouse air brake technologies corporation notes consolidated financial statementscontinued consolidated provision income taxes included statement income consisted following consolidated income tax provision included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided effective income tax rate 2006 includes tax benefit release valuation allowance related certain deferred state tax assets amount 53 million based management’s determination likely future taxable income sufficient realize assets westinghouse air brake technologies corporation notes consolidated financial statementscontinued overall effective income tax rate 2004 includes tax benefit 49 million primarily related reversal certain items previously provided closed regulatory examination deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized state foreign net operating loss carryforwards exist amount 131 million 9 million respectively set expire various periods 2007 2026 valuation allowance still exists andor established certain net operating loss carryforwards federal tax credits approximately 5 million related research experimentation credits alternative minimum tax credits fully utilized 2006 state tax credits approximately 501000 available consist various machinery equipment research experimentation jobs related credits westinghouse air brake technologies corporation notes consolidated financial statementscontinued 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 4400 13000 589000 shares common stock outstanding 2006 2005 2004 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans december 31 2006 company maintains employee stockbased compensation plans stock options nonvested restricted stock incentive stock awards governed 2000 stock incentive plan amended 2000 plan 2000 plan amended effective february 16 2006 increase maximum shares available future grants existing plan 719512 2000000 shares december 31 2006 shares available future grants 2000 plan 2424012 shares awards may made 2000 plan subsequent january 31 2016 company also maintains employee stock purchase plan nonemployee directors’ fee stock option plan directors plan stockbased compensation expense 92 million 33 million 14 million years ended december 31 2006 2005 2004 respectively company recognized associated tax benefits related stockbased compensation plans 34 million 12 million 05 million respective periods included stockbased compensation expense 2006 13 million expense related stock options result adoption fas 123 r january 1 2006 25 million related nonvested restricted stock 49 million related incentive stock awards approximately 500000 related awards issued directors’ fees accounting nonvested stock awards incentive plan impacted significantly adoption fas 123 r december 31 2006 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 109 million recognized weighted average period 13 years westinghouse air brake technologies corporation notes consolidated financial statementscontinued stock options 2000 stock incentive plan 2000 plan stock options granted eligible employees price less market prices dates grant generally options become exercisable threeyear vesting period expire ten years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant addition compensation directors fees total 10500 shares awarded nonemployee directors years ended december 31 2006 2005 2004 awards may made plan subsequent october 31 2016 total number shares issued plan december 31 2006 222000 shares part longterm incentive program 1998 company granted options purchase 500020 shares 20 per share certain executives plan preceded 2000 plan grants may made plan summary company’s stock option activity related information year ended december 31 2006 follows total intrinsic value options exercised years ended december 31 2006 2005 2004 145 million 162 million 82 million respectively fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based us treasury bond rates expected life option westinghouse air brake technologies corporation notes consolidated financial statementscontinued nonvested restricted stock incentive stock awards 2006 2000 plan company issued 200500 nonvested restricted stock executives february 2006 nonvested stock generally vests four years date grant addition company issued incentive stock awards 2004 2005 2006 eligible employees vest upon attainment certain three year performance goals three year period ending december 31 2006 2007 2008 respectively december 31 2006 stock awards issued incentive plan awarded vested incentive stock awards included table represent maximum number shares may ultimately vest december 31 2006 based company’s performance estimate majority stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes nonvested restricted stock incentive stock awards activity related information year ended december 31 2006 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants could purchase company’s common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2006 151794 shares plan terminated effective january 1 2007 14 comprehensive loss components accumulated comprehensive loss westinghouse air brake technologies corporation notes consolidated financial statementscontinued 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2006 2005 2004 68 million 72 million 78 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 19 million 29 million 22 million years 2006 2005 2004 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 guarantees following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2006 2005 preferred stock issued outstanding westinghouse air brake technologies corporation notes consolidated financial statementscontinued 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc “asi” indemnified company certain items including among things certain environmental claims company asserted prior 2000 asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products since 2000 number claims increased resolution claims may take significant period time claims made wholly owned subsidiary railroad friction products corporation rfpc based product sold rfpc prior time company acquired interest rfpc april 17 2005 claim company former stockholder rfpc contending company assumed entity’s liability asbestos claims arising exposure rfpc’s product resolved company’s favor claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present variety factors including 1 limited asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s limited history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion westinghouse air brake technologies corporation notes consolidated financial statementscontinued confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents additional 970000 accrued 2004 based refined estimates ongoing monitoring costs company reevaluated reserve reversed 280000 earnings 2005 total company accrued approximately 727000 december 31 2006 estimated remaining costs remediation monitoring company compliance permit december 31 2006 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company completed remediation site state’s voluntary cleanup program process obtaining closure certification site state illinois company accrued 3500 december 31 2006 estimate obtaining closure certification young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate company accrued approximately 142000 december 31 2006 estimate remaining remediation costs company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 15 million remain december 31 2006 april 2005 amtrak decided suspend acela express train service due cracks spokes cars’ brake discs amtrak’s acela service resumed limited basis july 2005 complete service resumed september 2005 wabtec design supply braking system acela cars braking system supplied knorr brake corporation brake discs designed faiveley transport wabtec provide machined approximately onethird brake discs cars assisted amtrak others including bombardier corporation alstom transportation inc knorr faiveley evaluation investigation brake disc cracks westinghouse air brake technologies corporation notes consolidated financial statementscontinued july 11 2005 wabtec received written notice potential claim damages knorr march 2 2006 received notice knorr stated amtrak view may warranty claims wabtec knorr faiveley neither knorr notice specified amount range claims company although knorr indicated expects company participate financial settlement arising alleged defects failures acela brake discs wabtec turn forwarded knorr’s notices faiveley notified faiveley potential claims wabtec faiveley presentation provided wabtec faiveley august 22 2006 bombardier claimed reached settlement amtrak knorr related suspension amtrak’s acela service bombardier alleged incurred damages approximately 38 million assigned rights pursue additional claims amtrak knorr approximately 17 million 10 million respectively wabtec contacted faiveley asserting faiveley fully responsible claims made bombardier including assigned claims amtrak knorr wabtec believe material legal liability regard matter march 2006 management began internal investigation related business transactions conducted subsidiary pioneer friction limited “pioneer” west bengal india internal compliance review management discovered disbursements made may violation applicable laws regulations pioneer fourthtier subsidiary wabtec two intermediate subsidiaries australian companies turn owned us holding company transactions inconsequential material overall operations wabtec may result potential penalties management concluded investigation informed wabtec’s audit committee board directors appropriate authorities time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment onboard electronic components train coupler equipment revenues derived oem sales aftermarket sales freight car repairs services transit group consists products passenger transit vehicles locomotives typically subways commuter rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications well commuter rail locomotives revenues derived oem aftermarket sales well repairs services company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses westinghouse air brake technologies corporation notes consolidated financial statementscontinued items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies beginning 2006 company transferred certain operations freight transit group reflect shift markets customers served operations reflect information used chief decision maker evaluation operations company addition beginning 2006 company allocated certain corporate costs freight transit groups reflect beneficial use costs specific groups prior period results adjusted comparability purposes segment financial information 2006 follows segment financial information 2005 follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued segment financial information 2004 follows following geographic area data years ended december 31 2006 2005 2004 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 1340 million 1056 million 816 million years ending december 31 2006 2005 2004 respectively sales product follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2006 westinghouse air brake technologies corporation notes consolidated financial statementscontinued balance sheet december 31 2005 income statement year ended december 31 2006 westinghouse air brake technologies corporation notes consolidated financial statementscontinued income statement year ended december 31 2005 income statement year ended december 31 2004 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries westinghouse air brake technologies corporation notes consolidated financial statementscontinued condensed statement cash flows year ended december 31 2006 condensed statement cash flows year ended december 31 2005 condensed statement cash flows year ended december 31 2004 westinghouse air brake technologies corporation notes consolidated financial statementscontinued 22 expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 fourth quarter 2006 includes tax benefit release valuation allowance 53 million signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation albert j neupaver albert j neupaver president chief executive officer date march 1 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets 2 actual disbursements andor charges exhibits filing method 21 amended restated agreement plan merger amended originally included annex joint proxy statementprospectus 31 restated certificate incorporation company dated january 30 1995 amended march 30 1995 32 amended restated bylaws company effective january 5 2006 41a indenture bank new york trustee dated august 6 2003 41b resolutions adopted july 23 2003 board directors establishing terms offering 150000000 aggregate principal amount 6875 notes due 2013 42 purchase agreement dated july 23 2003 company initial purchasers 43 exchange registration rights agreement dated august 6 2003 101 motivepower stock option agreement originally included annex b joint proxy statementprospectus 102 westinghouse air brake stock option agreement originally included annex c joint proxy statementprospectus 103 voting agreement dated september 26 1999 among william e kassling robert j brooks harvard private capital holdings inc vestar equity partners lp motivepower industries inc originally included annex joint proxy statementprospectus 104 indemnification agreement dated january 31 1995 company voting trust trustees 105 agreement sale purchase north american operations railway products group operating division american standard inc dated 1990 rail acquisition corp american standard inc provisions indemnification reproduced 106 letter agreement undated company american standard inc environmental costs sharing 107 purchase agreement dated june 17 1992 among company schuller international inc manville corporation european overseas corporation provisions indemnification reproduced 108 asset purchase agreement dated january 23 1995 among company pulse acquisition corporation pulse electronics inc pulse embedded computer systems inc pulse shareholders schedules exhibits omitted 109 license agreement dated december 31 1993 sab wabco holdings bv company 1010 letter agreement dated january 19 1995 company vestar capital partners inc 1011 westinghouse air brake company 1995 stock incentive plan amended 1012 westinghouse air brake company 1995 nonemployee directors’ fee stock option plan amended 1013 letter agreement dated january 1 1995 company vestar capital partners inc 1014 form indemnification agreement company authorized representatives exhibits filing method 1015 common stock registration rights agreement dated march 5 1997 among company harvard aip voting trust 1016 1998 employee stock purchase plan 1017 westinghouse air brake technologies corporation 2000 stock incentive plan amended 1018 asset purchase agreement general electric company ge transportation systems business westinghouse air brake technologies corporation dated july 24 1019 refinancing credit agreement among company guarantors various lenders lasalle bank national association jp morgan chase bank new york citizens bank pennsylvania national city bank pennsylvania bank nova scotia bank tokyomitsubishi trust company pnc bank national association dated january 12 2004 1020 sale purchase agreement rütgers rail spa company dated august 12 2004 1021 amendment agreement dated january 28 2005 among rütgers rail spa company cofren srl rfpc holding company sale purchase agreement dated august 12 2004 1022 employment agreement albert j neupaver dated february 1 2006 1023 restricted stock agreement albert j neupaver dated february 1 2006 1024 stock purchase agreement among wabtec holding company certain shareholders schaefer manufacturing inc ccp limited partnership dated october 6 2006 1025 share purchase agreement bba holding deutschland gmbh westinghouse air brake technologies corporation dated november 27 2006 exhibits schedules omitted provided commission upon request list subsidiaries company 231 consent ernst young llp 311 rule 13a14a15d14a certifications 321 section 1350 certifications 991 annual report form 11k year ended december 31 2005 westinghouse air brake technologies corporation savings plan filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated january 5 2006 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006item 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s quarterly report form 10q period ended march 31 2007 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007 management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded ricon corporation ricon assessment internal controls financial reporting december 31 2007 ricon acquired company purchase business combination effective june 8 2007 ricon wholly owned subsidiary whose total assets net sales represents 81 27 respectively related consolidated financial statement amounts year ended december 31 2007 based assessment management concluded company maintained effective internal control financial reporting december 31 2007 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2007 audited ernst young llp independent registered public accounting firm stated report included herein management’s certifications company’s chief executive officer chief financial officer required sarbanesoxley act included exhibits 31 32 company’s 10k addition 2007 company’s chief executive officer provided new york stock exchange annual ceo certification regarding company’s compliance new york stock exchange’s corporate governance listing standards albert j neupaver albert j neupaver president chief executive officer director alvaro garciatunon alvaro garciatunon senior vice president chief financial officer secretary report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2007 2006 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein explained note 11 consolidated financial statements year ended december 31 2007 company adopted financial accounting standards board interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” explained note 10 consolidated financial statements december 31 2006 company adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88106 132r” explained note 13 consolidated financial statements year ended december 31 2006 company adopted statement financial accounting standards 123r “sharebased payment” also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 22 2008 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 22 2008 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls ricon corporation included 2007 consolidated financial statements westinghouse air brake technologies corporation constituted 81 total assets december 31 2007 27 net sales year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting ricon corporation opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2007 2006 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2007 westinghouse air brake technologies corporation report dated february 22 2008 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 22 2008 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 12 countries 2007 40 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 46 million 36 million december 31 2007 2006 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually impairment frequently indicators impairment present amortizable intangible assets reviewed impairment indicators impairment present evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair value could realized could differ used evaluate impairment goodwill warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 104 million 106 million 78 million 2007 2006 2005 respectively warranty reserves 223 million 174 million december 31 2007 2006 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation effective january 1 2006 company adopted statement financial accounting standard sfas 123 r “sharebased payment” sfas 123 r requires company recognize compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant wabtec elected modified prospective transition method adoption prior periods financial statements restated prior january 1 2006 accounted stockbased compensation accordance provisions accounting principles board opinion 25 apb 25 “accounting stock issued employees” related interpretations see note 13 detailed discussion company’s stockbased compensation plans pro forma effect prior adoption sfas 123 r company’s net income earnings per share 2005 would reduced pro forma amounts shown compensation expense determined based fair value grant dates accordance sfas 123 “accounting stockbased compensation” financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2006 company forward contracts sale us dollars usd purchase canadian dollars cad company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2006 company forward contracts notional value 48 million cad 427 million us average exchange rate 089 usd per 1 cad resulting recording current liability 13 million corresponding offset accumulated comprehensive loss 825000 net tax 2007 foreign currency forward contracts settled december 31 2007 company forward contracts sale usd purchase euro notional value 23 million euro 31 million usd average exchange rate 132 usd per 1 euro forward contracts used mitigate variability cash flows payment liabilities denominated currencies usd since company treat derivatives hedges change fair value forward contracts related liabilities recorded income statement 2007 company recorded fair value gain amount 315000 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions sfas 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange intercompany transaction losses recognized income 32 million 11 million 33 million 2007 2006 2005 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 95 million 65 million 49 million december 31 2007 2006 2005 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2007 2006 2005 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2007 2006 2005 company incurred costs approximately 374 million 327 million 328 million respectively employees december 31 2007 approximately 37 company’s workforce covered collective bargaining agreements generally effective 2008 2009 2010 agreements expiring 2008 cover approximately 14 company’s workforce earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements sfas 157 became effective wabtec january 1 2008 upon adoption provisions sfas 157 applied prospectively limited exceptions company currently evaluating impact adopting statement company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes “fin 48”an interpretation fasb statement 109 january 1 2007 implementation fin 48 resulted 27 million reduction beginning balance retained earnings reported change accounting principle adoption date january 1 2007 liability income taxes associated uncertain tax positions 135 million 80 million recognized would favorably affect company’s effective tax rate december 31 2007 liability income taxes associated uncertain tax positions 172 million 106 million recognized would favorably affect company’s effective income tax rate 37 million increase unrecognized tax benefits year ended december 31 2007 primarily relates filing amended returns company includes interest penalties related uncertain tax positions income tax expense january 1 2007 company accrued interest penalties approximately 17 million 11 million respectively related uncertain tax positions due increase unrecognized tax benefits identified company accrued additional interest penalties related uncertain tax positions year ended december 31 2007 total interest penalties accrued december 31 2007 approximately 33 million 18 million respectively december 31 2006 company adopted recognition disclosure provisions sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” sfas 158 company must adopt measurement date provisions sfas 158 december 31 2008 february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure eligible items fair value specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date sfas 159 effective fiscal years beginning november 15 2007 company currently evaluating impact adopting statement december 2007 fasb issued sfas 141 revised “business combinations” “sfas 141 r” replacing sfas 141 “business combinations” “sfas 141” sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 141r retains fundamental requirements sfas 141 broadens scope applying acquisition method transactions events one entity obtains control one businesses requires among things assets acquired liabilities assumed measured fair value acquisition date liabilities related contingent consideration recognized acquisition date remeasured fair value subsequent reporting period acquisitionrelated costs expensed incurred income recognized fair value net assets acquired exceeds fair value consideration transferred sfas 160 establishes accounting reporting standards noncontrolling interests ie minority interests subsidiary including changes parent’s ownership interest subsidiary requires among things noncontrolling interests subsidiaries classified separate component equity except presentation disclosure requirements sfas 160 applied retrospectively periods presented sfas 141 r sfas 160 applied prospectively financial statements issued fiscal years beginning december 15 2008 company currently evaluating impact adopting statements 3 acquisitions discontinued operations june 8 2007 company acquired 100 stock ricon corporation ricon manufacturer variety electromechanical wheelchair lifts ramps antigraffiti windows purchase price 736 million resulting preliminary additional goodwill 497 million none deductible tax purposes included purchase price 736 million 65 million related escrow deposit may released company working capital adjustments indemnity claims accordance purchase escrow agreements october 6 2006 company acquired 100 stock schaefer equipment inc schaefer manufacturer variety forged components bodymounted truckmounted braking systems purchase price 367 million net cash received resulting additional goodwill 248 million none deductible tax purposes december 1 2006 company acquired 100 stock becorit gmbh becorit manufacturer variety brake shoes pads friction linings passenger transit cars freight cars locomotives friction products industrial markets mining wind power generation purchase price 513 million net cash received resulting additional goodwill 322 million none deductible tax purposes february 1 2005 company completed acquisition assets rütgers rail spa business operations italy germany france spain company formed hold purchased assets rütgers rail spa named cofren srl “cofren” cofren manufacturer brake shoes disc pads interior trim components rail applications europe purchase price 359 million net cash received resulting additional goodwill 57 million none deductible tax purposes operating results included consolidated statement operations acquisition date forward ricon acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition preliminary allocation 216 million acquired intangible assets exclusive goodwill 97 million assigned trade name 93 million assigned customer relationships 18 million assigned patents 760000 assigned customer backlog trade name considered infinite useful life customer relationships patents average useful life 10 years following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2006 march 31 2006 sale noncore product division completed approximately 14 million cash including working capital adjustment approximately 600000 established buyer fourth quarter 2006 assets sold primarily included transit car interior products services customers located europe sale resulted loss approximately 17 million including working capital adjustment subject litigation resolution expected sometime late 2008 august 6 2007 sale joint venture china completed approximately 398000 cash accordance sfas 144 “accounting impairment disposal longlived assets” operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures july 31 2006 board directors authorized repurchase 50 million company’s outstanding shares company intends purchase shares open market negotiated block trades time limit set completion program qualifies refinancing credit agreement well 6 78 senior notes currently outstanding 2006 673900 shares repurchased average price 2798 per share 2007 509800 shares repurchased average price 3506 per share purchases open market 5 restructuring impairment charges wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing years ended december 31 2007 2006 wabtec recorded charges 36 million 68 million respectively total charges restructuring expenses recorded date 104 million comprised 29 million employee severance costs associated approximately 330 salaried hourly employees 41 million pension postretirement benefit curtailment employees 29 million related asset impairments structures machinery equipment 541000 goodwill impairment specific wallaceburg facility severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2007 12 million amount paid year ended december 31 2007 additional severance pension asset impairment charges 15 million recorded related canadian operations 276000 costs paid december 31 2007 2005 company recorded restructuring charges 800000 relating consolidating two australian facilities one years ended december 31 2007 2006 additional 505000 recorded majority recorded second quarter 2007 total restructuring charges date 13 million consisting severance costs 797000 14 employees relocation costs 452000 asset impairment 56000 expenses paid december 31 2007 6 inventories components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 251 million 217 million 217 million 2007 2006 2005 respectively 8 intangibles goodwill intangible assets indefinite lives longer amortized instead subject periodic assessments impairment applying fairvaluebased test fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill 2326 million 1733 million december 31 2007 2006 respectively change carrying amount goodwill segment year ended december 31 2007 follows december 31 2007 2006 company’s trademarks net carrying amount 345 million 240 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships 7 years 13 years respectively amortization expense intangible assets 39 million 35 million 31 million years ended december 31 2007 2006 2005 respectively amortization expense five succeeding years follows thousands 9 longterm debt longterm debt consisted following refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 company entered amendment refinancing credit agreement february 2007 permits company complete acquisitions without prior approval bank consortium long certain financial parameters ratios met december 31 2007 company available bank borrowing capacity net 591 million letters credit approximately 1159 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement 2007 2006 refinancing credit agreement company may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants expects measurements type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens capital leases capital leases acquired ricon acquisition 10 employee benefit plans company sponsors various defined benefit plans including pension post retirement benefits disclosed addition previously stated company adopted provisions sfas 158 december 31 2006 excluding elimination early measurement date required december 31 2008 provisions sfas 158 applied prospective basis therefore prior periods presented restated adoption 2006 effect computation net periodic benefit expense pensions postretirement benefits following table illustrates incremental effect applying sfas 158 individual items company’s consolidated balance sheet december 31 2006 defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date us canadian german plans uk plan uses october 31 measurement date following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plan 451 million 478 million december 31 2007 2006 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2007 follows 2006 company recorded decreases minimum liability net tax us plan international plans 31 million 37 million respectively reducing accumulated comprehensive loss 2005 company recorded increases minimum liability net tax us plan international plans 30 million 31 million respectively increasing accumulated comprehensive loss weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2007 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2008 pension plan assets composition plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s target actual asset allocations respective measurement dates 2007 2006 asset category follows investment policies determined respective plan’s pension committee set forth investment policy pursuant investment policy us investment strategy use passive index funds managed bank new york company evaluating allocation policies international plans rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expect contribute us plan expects contribute 67 million international plans 2008 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2007 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2007 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2008 assumed health care cost trend rate us plans grades initial rate 90 ultimate rate 50 2011 international plans 778 485 2013 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 233000 79000 respectively 2008 increase service interest cost components accumulated postretirement benefit obligation approximately 40 million 339000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 326000 62000 respectively 2008 decrease accumulated postretirement benefit obligation approximately 32 million 295000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2007 2006 plan held behalf participants 509000 shares market value 175 million 562000 shares market value 171 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 1408 million foreign subsidiaries intended permanently reinvested consolidated provision income taxes included statement income consisted following consolidated income tax provision included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided effective income tax rate 2007 includes tax benefit release valuation allowance related certain deferred state foreign tax assets amount 31 million based management’s determination likely future taxable income sufficient realize assets overall effective income tax rate 2006 includes tax benefit 53 million primarily release valuation allowance related certain deferred state tax assets deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized state foreign net operating loss carryforwards exist amount 911 million 57 million respectively set expire various periods 2008 2027 valuation allowance still exists andor established certain net operating loss carryforwards federal tax credits approximately 33 million related research experimentation credits foreign tax credits fully utilized 2007 state tax credits approximately 319000 available consist various machinery equipment research experimentation jobs related credits company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes “fin 48” interpretation fasb statement 109 january 1 2007 adoption date january 1 2007 liability income taxes associated uncertain tax positions 135 million 80 million recognized would favorably affect company’s effective tax rate december 31 2007 liability income taxes associated uncertain tax positions 172 million 106 million recognized would favorably affect company’s effective income tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense january 1 2007 company accrued interest penalties approximately 17 million 11 million respectively related uncertain tax positions due increase unrecognized tax benefits identified company accrued additional interest penalties related uncertain tax positions year ended december 31 2007 total interest penalties accrued december 31 2007 approximately 33 million 18 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2003 internal revenue service currently auditing tax year ended december 31 2004 time company believes reasonably possible unrecognized tax benefits may significantly change within next twelve months approximate range 32 million 42 million based expiration statutory review periods current examinations 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 4400 13000 shares common stock outstanding 2007 2006 2005 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans december 31 2007 company maintains employee stockbased compensation plans stock options nonvested restricted stock incentive stock awards governed 2000 stock incentive plan amended 2000 plan 2000 plan amended effective february 16 2006 increase maximum shares available future grants existing plan 719512 2000000 shares december 31 2007 shares available future grants 2000 plan 2096898 shares awards may made 2000 plan subsequent january 31 2016 company also maintains nonemployee directors’ fee stock option plan directors plan stockbased compensation expense 112 million 92 million 33 million years ended december 31 2007 2006 2005 respectively company recognized associated tax benefits related stockbased compensation plans 36 million 34 million 12 million respective periods included stockbased compensation expense 2007 878000 expense related stock options 38 million related nonvested restricted stock 61 million related incentive stock awards 458000 million related awards issued directors’ fees december 31 2007 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 108 million recognized weighted average period 11 years stock options 2000 plan stock options granted eligible employees fair market value average high low wabtec stock price date grant generally options become exercisable three four year vesting period expire ten years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant addition compensation directors’ fees total 12000 shares awarded nonemployee directors year ended december 31 2007 10500 shares year ended december 31 2006 10500 shares year ended december 31 2005 awards may made plan subsequent october 31 2016 total number shares issued plan december 31 2007 268000 shares following table summarizes company’s stock option activity related information 2000 plan directors plan years ended december 31 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based us treasury bond rates expected life option nonvested restricted stock incentive stock awards 2000 plan eligible employees granted nonvested restricted stock generally vest three four years date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative three year performance goals incentive stock awards included table represent maximum number shares may ultimately vest december 31 2007 based company’s performance estimate majority stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes nonvested restricted stock incentive stock awards activity related information years ended december 31 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants could purchase company’s common stock 85 lesser fair market value first last day offering period plan terminated effective january 1 2007 14 comprehensive loss components accumulated comprehensive income loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2007 2006 2005 75 million 68 million 72 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 15 million 19 million 29 million years 2007 2006 2005 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 guarantees following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2007 2006 preferred stock issued outstanding 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products since 2000 number claims increased resolution claims may take significant period time claims made wholly owned subsidiary railroad friction products corporation rfpc based product sold rfpc prior time company acquired interest rfpc april 17 2005 claim company former stockholder rfpc contending company assumed entity’s liability asbestos claims arising exposure rfpc’s product resolved company’s favor claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present variety factors including 1 limited asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s limited history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents additional 970000 accrued 2004 based refined estimates ongoing monitoring costs company reevaluated reserve reversed 280000 earnings 2005 total company accrued approximately 466000 december 31 2007 estimated remaining costs remediation monitoring company compliance permit december 31 2007 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company completed remediation site state’s voluntary cleanup program process obtaining closure certification site state illinois company accrued 13000 december 31 2007 estimate obtaining closure certification young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate company accrued approximately 132000 december 31 2007 estimate remaining remediation costs company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 13 million remain december 31 2007 april 2005 amtrak decided suspend acela express train service due cracks spokes cars’ brake discs amtrak’s acela service resumed limited basis july 2005 complete service resumed september 2005 wabtec design supply braking system acela cars braking system supplied knorr brake corporation brake discs designed faiveley transport wabtec provide machined approximately onethird brake discs cars assisted amtrak others including bombardier corporation alstom transportation inc knorr faiveley evaluation investigation brake disc cracks july 11 2005 wabtec received written notice potential claim damages knorr march 2 2006 received notice knorr stated amtrak view may warranty claims wabtec knorr faiveley neither knorr notice specified amount range claims company although knorr indicated expects company participate financial settlement arising alleged defects failures acela brake discs wabtec turn forwarded knorr’s notices faiveley notified faiveley potential claims wabtec faiveley presentation provided wabtec faiveley august 22 2006 bombardier claimed reached settlement amtrak knorr related suspension amtrak’s acela service bombardier alleged incurred damages approximately 38 million assigned rights pursue additional claims amtrak knorr approximately 17 million 10 million respectively wabtec contacted faiveley asserting faiveley fully responsible claims made bombardier including assigned claims amtrak knorr wabtec believe material legal liability regard matter management pursued commercial resolution bombardier would mutually beneficial parties result discussions company reached framework settlement provides bombardier receive payments based certain sales company taking account historical sales volume company fully released bombardier’s claims assigned claims knorr amtrak arrangement would effect 2007 2009 would subject maximum amount 44 million total assuming corresponding level sales reached settlement release arrangement described finalized signed december 21 2007 company recorded provision 25 million pending settlement first quarter 2007 company recorded additional 19 million pending settlement third quarter 2007 provide payments would payable based current sales levels total amount provided item december 31 2007 44 million march 2006 management began internal investigation related business transactions conducted subsidiary pioneer friction limited “pioneer” west bengal india internal compliance review management discovered disbursements made may violation applicable laws regulations pioneer fourthtier subsidiary wabtec two intermediate subsidiaries australian companies turn owned us holding company entered nonprosecution agreement united states department justice pay estimated penalty 300000 company reached civil settlement securities exchange commission pay penalty 377000 october 18 2007 faiveley transport malmo ab filed request arbitration international chamber commerce alleging breach contract trade secret violations relating company’s manufacture sale certain components issue limited number used transit industry day faiveley also filed related proceeding company united states district court southern district new york requesting preliminary injunction aid arbitration forums faiveley seeks prevent company manufacturing selling subject components arbitration panel decides faiveley’s claim arbitration faiveley also seeks unspecified amount damages motion company dismiss federal court action jurisdictional grounds denied company appealed decision appeal pending company denies faiveley’s allegations believe material legal liability matter vigorously contest proceedings time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared primarily production operation freight cars locomotives including braking control equipment onboard electronic components train coupler equipment transit group consists products passenger transit vehicles locomotives typically subways commuter rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications well commuter rail locomotives company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2007 follows segment financial information 2006 follows segment financial information 2005 follows following geographic area data years ended december 31 2007 2006 2005 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 2397 million 1340 million 1056 million years ended december 31 2007 2006 2005 respectively sales product follows 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2007 balance sheet december 31 2006 income statement year ended december 31 2007 income statement year ended december 31 2006 income statement year ended december 31 2005 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2007 condensed statement cash flows year ended december 31 2006 condensed statement cash flows year ended december 31 2005 22 expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 second fourth quarter 2007 includes tax benefit release valuation allowance 31 million second fourth quarter 2006 includes tax benefit release valuation allowance 53 million signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation albert j neupaver albert j neupaver president chief executive officer date february 29 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s quarterly report form 10q period ended march 31 2007 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007item 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 3390866 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007 filed exhibit company’s quarterly report form 10q period ended june 30 2008 filed exhibit company’s quarterly report form 10q period ended september 30 2008 management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded poli spa poli standard car truck sct assessment internal controls financial reporting december 31 2008 poli sct acquired company purchase business combination effective june 30 2008 december 5 2008 respectively poli sct wholly owned subsidiaries whose total assets represents 64 213 respectively net sales represents 10 07 respectively related consolidated financial statement amounts year ended december 31 2008 based assessment management concluded company maintained effective internal control financial reporting december 31 2008 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2008 audited ernst young llp independent registered public accounting firm stated report included herein management’s certifications company’s chief executive officer chief financial officer required sarbanesoxley act included exhibits 31 32 company’s 10k addition 2008 company’s chief executive officer provided new york stock exchange annual ceo certification regarding company’s compliance new york stock exchange’s corporate governance listing standards albert j neupaver albert j neupaver president chief executive officer director alvaro garciatunon alvaro garciatunon senior vice president chief financial officer secretary report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2008 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein explained note 11 “notes consolidated financial statements” year ended december 31 2007 company adopted financial accounting standards board interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” explained note 10 “notes consolidated financial statements” december 31 2006 company adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 23 2009 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 23 2009 report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls poli spa standard car truck included 2008 consolidated financial statements westinghouse air brake technologies corporation constituted 64 213 total assets december 31 2008 respectively 10 07 net sales year ended respectively audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting poli spa standard car truck opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2008 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2008 westinghouse air brake technologies corporation report dated february 23 2009 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 23 2009 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 104 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 16 countries 2008 41 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 50 million 46 million december 31 2008 2007 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually impairment frequently indicators impairment present amortizable intangible assets reviewed impairment indicators impairment present evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair value could realized could differ used evaluate impairment goodwill warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 171 million 104 million 106 million 2008 2007 2006 respectively warranty reserves 307 million 223 million december 31 2008 2007 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation effective january 1 2006 company recognizes compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2008 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2008 company forward contracts notional value 50 million zar 557000 us average exchange rate 897 zar per 1 usd resulting recording current asset 41000 corresponding offset accumulated comprehensive income 26000 net tax december 31 2007 company forward contracts sale usd purchase euro notional value 23 million euro 31 million usd average exchange rate 132 usd per 1 euro forward contracts used mitigate variability cash flows payment liabilities denominated currencies usd since company treat derivatives hedges change fair value forward contracts related liabilities recorded income statement 2007 company recorded fair value gain amount 315000 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions sfas 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange intercompany transaction losses recognized income 399000 32 million 11 million 2008 2007 2006 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 110 million 95 million december 31 2008 2007 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2008 2007 2006 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2008 2007 2006 company incurred costs approximately 390 million 374 million 327 million respectively employees december 31 2008 approximately 32 company’s workforce covered collective bargaining agreements generally effective 2009 2010 2011 agreements expiring 2009 cover approximately 19 company’s workforce earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply accounting pronouncements require permit fair value measurements statement indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability sfas 157 defines fair value based upon exit price model relative sfas 157 fasb issued fasb staff positions fsp 1571 1572 1573 fsp 1571 amends sfas 157 exclude sfas 13 related interpretive accounting pronouncements address leasing transactions fsp 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis fsp 1573 clarifies application sfas 157 relates valuation financial assets market active financial assets fsp effective immediately includes periods financial statements issued company financial assets valued using inactive markets impacted issuance fsp company adopted sfas 157 january 1 2008 exception application statement nonrecurring nonfinancial assets nonfinancial liabilities refer note 18 additional discussion fair value measurements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 sfas 159 permits entities choose measure eligible items fair value specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date sfas 159 effective fiscal years beginning november 15 2007 company adopted sfas 159 elected measure additional financial instruments items fair value december 2007 fasb issued sfas 141 revised “business combinations” sfas 141r replacing sfas 141 “business combinations” sfas 141 sfas 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” sfas 160 sfas 141r retains fundamental requirements sfas 141 broadens scope applying acquisition method transactions events one entity obtains control one businesses requires among things assets acquired liabilities assumed measured fair value acquisition date liabilities related contingent consideration recognized acquisition date remeasured fair value subsequent reporting period acquisitionrelated costs expensed incurred income recognized fair value net assets acquired exceeds fair value consideration transferred sfas 160 establishes accounting reporting standards noncontrolling interests ie minority interests subsidiary including changes parent’s ownership interest subsidiary requires among things noncontrolling interests subsidiaries classified separate component equity except presentation disclosure requirements sfas 160 applied retrospectively periods presented sfas 141r sfas 160 applied prospectively financial statements issued fiscal years beginning december 15 2008 company currently evaluating impact adopting statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” sfas 161 sfas 161 requires enhanced disclosures entity’s derivative hedging activities thereby improves transparency financial reporting sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” sfas 133 well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments entities instruments subject sfas 161 must provide robust qualitative disclosures expanded quantitative disclosures sfas 161 effective prospectively financial statements issued fiscal years interim periods beginning november 15 2008 early application permitted company currently evaluating disclosure implications adopting statement june 2008 fasb issued fsp emerging issues task force “eitf” 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp eitf 0361 fsp eitf 0361 states unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method fsp eitf 0361 effective fiscal years beginning december 15 2008 interim periods within years upon adoption company required retrospectively adjust earnings per share data including amounts related interim periods summaries earnings selected financial data conform provisions fsp eitf 0361 company currently evaluating impact adopting fsp eitf 0361 december 2008 fasb issued fsp sfas 132r1 “employers’ disclosures postretirement benefit plan assets” fsp sfas 132r1 fsp sfas 132r1 amends sfas 132 revised 2003 “employers’ disclosures pensions postretirement benefits” sfas 132r provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan additional disclosure requirements fsp include expanded disclosures entity’s investment policies strategies categories plan assets concentrations credit risk fair value measurements plan assets company currently evaluating disclosure implications adopting statement 3 acquisitions discontinued operations december 5 2008 company acquired standard car truck company “sct” manufacturer designer stabilization systems freight cars including engineered truck undercarriage components springs friction wedges wear plates barber® brand truck design used throughout world holds leading share north american market company also manufactures services locomotives components including compressors pumps purchase price 3029 million net cash received resulting preliminary additional goodwill 676 million deductible tax purposes included purchase price 3029 million 250 million related escrow deposit may released company working capital adjustments indemnity claims accordance purchase escrow agreements december 5 2008 company acquired majority beijing wabtec huaxia technology company ltd “huaxia” 56 million invested 28 million minority interest joint venture china huaxia china joint venture manufactures variety brake shoes pads friction linings freight car market china october 27 2008 company acquired certain assets related development sale service maintenance software programs used train management systems 45 million june 30 2008 company acquired 100 stock poli spa poli european based manufacturer rail braking equipment including brake discs high speed applications well tread brake units pneumatic brake valves meet international union railways uic standards poli primarily operate business wabtec’s transit group purchase price 522 million 823 million usd net cash received resulting preliminary additional goodwill 268 million none deductible tax purposes included purchase price 118 million related escrow deposit may released company indemnity claims environmental claims allocation tax liabilities accordance purchase escrow agreements june 8 2007 company acquired 100 stock ricon corporation ricon manufacturer variety electromechanical wheelchair lifts ramps antigraffiti windows purchase price 736 million resulting additional goodwill 497 million none deductible tax purposes included purchase price 736 million 65 million related escrow deposit may released company working capital adjustments indemnity claims accordance purchase escrow agreements october 6 2006 company acquired 100 stock schaefer equipment inc schaefer manufacturer variety forged components bodymounted truckmounted braking systems purchase price 367 million net cash received resulting additional goodwill 248 million none deductible tax purposes december 1 2006 company acquired 100 stock becorit gmbh becorit manufacturer variety brake shoes pads friction linings passenger transit cars freight cars locomotives friction products industrial markets mining wind power generation purchase price 513 million net cash received resulting additional goodwill 322 million none deductible tax purposes operating results included consolidated statement operations acquisition date forward sct poli ricon acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition allocation 216 million acquired intangible assets ricon exclusive goodwill 97 million assigned trade name 93 million assigned customer relationships 18 million assigned patents 760000 assigned customer backlog trade name considered indefinite useful life customer relationships patents average useful life 10 years preliminary allocation 1467 million acquired intangible assets sct exclusive goodwill 251 million assigned trade name 1138 million assigned customer relationships 12 million assigned patents 11 million assigned customer backlog 55 million assigned long term contracts trade name considered indefinite useful life customer relationships average useful life 25 years patents average useful life 9 years preliminary allocation 364 million acquired intangible assets poli exclusive goodwill 188 million assigned trade name 168 million assigned customer relationships 449000 assigned patents 312000 assigned customer backlog trade name considered indefinite useful life customer relationships average useful life 15 years patents average useful life 8 years following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2007 1 year ended december 31 2008 gross profit net income include 485 million expense management incentive bonus recorded sct conjunction signing purchase agreement accordance sfas 144 “accounting impairment disposal longlived assets” operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures july 31 2006 board directors authorized repurchase 50 million company’s outstanding shares february 20 2008 board directors authorized repurchase additional 100 million company’s outstanding shares company intends purchase shares open market negotiated block trades time limit set completion program qualifies refinancing credit agreement 2008 refinancing credit agreement applicable well 6 78 senior notes currently outstanding shares purchased first quarter 2007 second quarter 2007 company repurchased 92700 shares wabtec stock average price 3687 per share third quarter 2007 company repurchased 38500 shares wabtec stock average price 3622 per share fourth quarter 2007 company repurchased 378600 shares wabtec stock average price 3450 per share purchases open market first quarter 2008 company repurchased 712900 shares average price 3429 per share exhausting 500 million authorization made 2006 second quarter 2008 company repurchased 5200 shares average price 3597 per share additional shares repurchased third quarter 2008 fourth quarter 2008 company repurchased 599800 shares average price 3522 per share purchases open market 5 restructuring impairment charges wabtec downsized two canadian plants stoney creek wallaceburg moving certain products lowercost facilities outsourcing years ended december 31 2008 2007 2006 wabtec recorded charges 46 million 36 million 68 million respectively year ended december 31 2007 additional severance pension asset impairment charges 15 million recorded related canadian operations costs paid december 31 2008 total charges restructuring expenses recorded date 165 million comprised 56 million employee severance costs associated approximately 400 salaried hourly employees 55 million pension postretirement benefit curtailment employees 48 million related asset impairments structures machinery equipment 541000 goodwill impairment severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2008 39 million amount paid 6 inventories components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 247 million 251 million 217 million 2008 2007 2006 respectively 8 intangibles goodwill intangible assets indefinite lives amortized instead subject periodic assessments impairment applying fairvaluebased test fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill 3194 million 2326 million december 31 2008 2007 respectively change carrying amount goodwill segment year ended december 31 2008 follows december 31 2008 2007 company’s trademarks net carrying amount 756 million 345 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships intellectual property 8 years 14 years 25 years respectively amortization expense intangible assets 50 million 39 million 35 million years ended december 31 2008 2007 2006 respectively amortization expense five succeeding years follows thousands 9 longterm debt longterm debt consisted following 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2008 company available bank borrowing capacity net 573 million letters credit approximately 2427 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points initial alternate rate margin 175 basis points december 31 2008 weighted average interest rate company’s variable rate debt 332 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement extended expiration agreement company entered another amendment refinancing credit agreement february 2007 permitted company complete acquisitions without prior approval bank consortium long certain financial parameters ratios met refinancing credit agreement variable interest rates indexed certain indices company may elected base interest rate interest rate based libor base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios margin 625 basis points company borrow refinancing credit agreement 2007 2006 6875 senior notes due august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens capital leases capital leases acquired poli standard car truck ricon acquisitions scheduled principal repayments debt capital lease balances december 31 2008 follows 10 employee benefit plans company sponsors various defined benefit plans including pension post retirement benefits disclosed effective january 1 2008 company earlyadopted measurement date plan assets benefit obligation measured provisions statement financial accounting standards sfas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” sfas 158 sfas 158 measurement date required company’s fiscal yearend company’s uk defined benefit pension plan previously used october 31 measurement date plans measured december 31 consistent company’s fiscal yearend noncash effect adoption measurement date provisions sfas 158 january 1 2008 decreased retained earnings 66000 net tax effect results operations defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date us canadian german uk plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 459 million 451 million december 31 2008 2007 respectively aggregate accumulated benefit obligation international pension plans 909 million 1294 million december 31 2008 2007 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2008 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2008 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2009 pension plan assets composition plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s target actual asset allocations respective measurement dates 2008 2007 asset category follows investment policies determined respective plan’s pension committee set forth investment policy pursuant investment policy us investment strategy use passive index funds managed bank new york company evaluating allocation policies international plans rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expect contribute us plans expects contribute 91 million international plans 2009 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2008 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2008 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2009 assumed health care cost trend rate us plans grades initial rate 80 ultimate rate 45 2027 international plans 95 45 2028 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 306000 22000 respectively 2009 increase service interest cost components accumulated postretirement benefit obligation approximately 40 million 255000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 250000 25000 respectively 2009 decrease accumulated postretirement benefit obligation approximately 33 million 223000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2008 2007 plan held behalf participants 484000 shares market value 192 million 509000 shares market value 175 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 899 million foreign subsidiaries intended permanently reinvested consolidated provision income taxes included statement income consisted following consolidated income tax provision included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided effective income tax rate 2008 includes net tax benefit approximately 10 million due primarily expiration statutory review periods current examinations various tax jurisdictions deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized state foreign net operating loss carryforwards exist amount 887 million 60 million respectively set expire various periods 2010 2029 federal tax credits approximately 19 million related research experimentation credits foreign tax credits fully utilized 2008 state tax credits approximately 798000 available consist various machinery equipment research experimentation jobs related credits company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes “fin 48”an interpretation fasb statement 109 january 1 2007 fin 48 clarifies accounting uncertainty income taxes january 1 2008 liability income taxes associated uncertain tax positions 172 million 106 million recognized would favorably affect company’s effective tax rate december 31 2008 liability income taxes associated uncertain tax positions 171 million 101 million recognized would favorably affect company’s effective income tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense january 1 2008 company accrued interest penalties approximately 33 million 18 million respectively related uncertain tax positions total interest penalties accrued december 31 2008 approximately 44 million 24 million respectively internal revenue service currently auditing 2005 2006 tax years limited exception company longer subject examination various us foreign taxing authorities years 2004 time company believes reasonably possible unrecognized tax benefits approximately 31 million may change within next twelve months due expiration statutory review periods current examinations 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 12200 4400 shares common stock outstanding 2008 2007 2006 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans december 31 2008 company maintains employee stockbased compensation plans stock options nonvested restricted stock incentive stock awards governed 2000 stock incentive plan amended 2000 plan 2000 plan amended effective february 16 2006 increase maximum shares available future grants existing plan 719512 2000000 shares december 31 2008 shares available future grants 2000 plan 1572469 shares awards may made 2000 plan subsequent january 31 2016 company also maintains nonemployee directors’ fee stock option plan directors plan stockbased compensation expense 105 million 112 million 92 million years ended december 31 2008 2007 2006 respectively company recognized associated tax benefits related stockbased compensation plans 33 million 36 million 34 million respective periods included stockbased compensation expense 2008 10 million expense related stock options 32 million related nonvested restricted stock 57 million related incentive stock awards 603000 million related awards issued directors’ fees december 31 2008 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 114 million recognized weighted average period 15 years stock options 2000 plan stock options granted eligible employees fair market value average high low wabtec stock price date grant generally options become exercisable three four year vesting period expire ten years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant addition compensation directors’ fees total 13500 shares awarded nonemployee directors year ended december 31 2008 12000 shares year ended december 31 2007 10500 shares year ended december 31 2006 awards may made plan subsequent october 31 2016 total number shares issued plan december 31 2008 312500 shares following table summarizes company’s stock option activity related information 2000 plan directors plan years ended december 31 options outstanding december 31 2008 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based us treasury bond rates expected life option nonvested restricted stock incentive stock awards 2000 plan eligible employees granted nonvested restricted stock generally vest three four years date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative three year performance goals incentive stock awards included table represent maximum number shares may ultimately vest december 31 2008 based company’s performance estimate majority stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes nonvested restricted stock incentive stock awards activity related information years ended december 31 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants could purchase company’s common stock 85 lesser fair market value first last day offering period plan terminated effective january 1 2007 14 comprehensive loss components accumulated comprehensive income loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2008 2007 2006 81 million 75 million 68 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 16 million 15 million 19 million years 2008 2007 2006 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 warranties following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2008 2007 preferred stock issued outstanding 18 fair value measurement september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 effective fiscal years beginning november 15 2007 interim periods within years statement defines fair value establishes framework measuring fair value expands related disclosure requirements statement also applicable accounting pronouncements require permit fair value measurements statement indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability sfas 157 defines fair value based upon exit price model relative sfas 157 fasb issued fasb staff positions fsp 1571 1572 1573 fsp 1571 amends sfas 157 exclude sfas 13 “accounting leases” sfas 13 related interpretive accounting pronouncements address leasing transactions fsp 1572 delays effective date application sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities recognized disclosed fair value financial statements nonrecurring basis fsp 1573 clarifies application sfas 157 relates valuation financial assets market active financial assets fsp effective immediately includes periods financial statements issued company currently financial assets valued using inactive markets impacted issuance fsp company adopted sfas 157 january 1 2008 exception application statement nonrecurring nonfinancial assets nonfinancial liabilities nonrecurring nonfinancial assets nonfinancial liabilities company applied provisions sfas 157 include measured fair value goodwill impairment testing indefinite lived intangible assets measured fair value impairment testing asset retirement obligations initially measured fair value initially measured fair value business combination implementation sfas 157 financial assets financial liabilities material impact company’s consolidated financial position results operations company currently evaluating impact adopting sfas 157 nonfinancial assets nonfinancial liabilities valuation hierarchy sfas 157 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides assets liabilities carried fair value measured recurring basis december 31 2008 result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products last four years overall number new claims filed significantly decreased compared previous four year period however resolution new claims previously filed claims may take significant period time claims made wholly owned subsidiary railroad friction products corporation rfpc based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 limited asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s limited history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents additional 970000 accrued 2004 based refined estimates ongoing monitoring costs company reevaluated reserve reversed 280000 earnings 2005 total company accrued approximately 755000 december 31 2008 estimated remaining costs remediation monitoring company compliance permit december 31 2008 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company completed remediation site state’s voluntary cleanup program obtained closure certification site state illinois young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 677000 remain december 31 2008 october 18 2007 faiveley transport malmo ab filed request arbitration international chamber commerce alleging breach contract trade secret violations relating company’s manufacture sale certain components issue limited number primarily used transit industry day faiveley also filed related proceeding company united states district court southern district new york “federal court” requesting preliminary injunction aid arbitration forums faiveley seeks prevent company manufacturing selling subject components arbitration panel decides faiveley’s claim arbitration faiveley also seeks monetary damages company’s motion subsequent appeal initially dismiss federal court action jurisdictional grounds denied may 2 2008 week july 28 2008 federal court conducted hearing faiveley’s injunction request august 22 2008 federal court issued order denying part granting part faiveley’s injunction request order wabtec permitted perform contracts entered prior august 22 2008 including new york city transit contract parties main focus hearing however wabtec permitted enter future contracts supply one products issue components international arbitrators decide merits dispute wabtec requested granted expedited appeal merits federal court action appeal argued february 9 2009 october 1 2008 filing international arbitration panel faiveley alleged 128 million damages company believes claim grossly overstated supported facts circumstances surrounding case frivolous respects february 11 2009 international arbitration panel completed first part hearing underlying breach contract trade secret issues panel conduct second part hearing april 2009 company denies faiveley’s allegations believe material legal liability matter vigorously contest proceedings time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared primarily production operation freight cars locomotives including braking control equipment onboard electronic components train coupler equipment transit group consists products passenger transit vehicles locomotives typically subways commuter rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications well commuter rail locomotives company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2008 follows segment financial information 2007 follows segment financial information 2006 follows following geographic area data years ended december 31 2008 2007 2006 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 2618 million 2397 million 1340 million years ended december 31 2008 2007 2006 respectively sales product follows 21 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 22 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2008 balance sheet december 31 2007 income statement year ended december 31 2008 income statement year ended december 31 2007 income statement year ended december 31 2006 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2008 condensed statement cash flows year ended december 31 2007 condensed statement cash flows year ended december 31 2006 23 income expense components expense follows 24 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 second fourth quarter 2007 includes tax benefit release valuation allowance 14 million 17 million respectively signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 3390866 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007 filed exhibit company’s quarterly report form 10q period ended june 30 2008 filed exhibit company’s quarterly report form 10q period ended september 30 2008item 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 3390866 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007 filed exhibit company’s quarterly report form 10q period ended june 30 2008 filed exhibit company’s quarterly report form 10q period ended september 30 2008 filed exhibit company’s quarterly report form 10q period ended june 30 2009 management contract compensatory plan management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded unifin international lp affiliate cardinal pumps exchangers inc unifin assessment internal controls financial reporting december 31 2009 unifin acquired company purchase business combination effective october 1 2009 unifin wholly owned subsidiaries whose total assets represents 124 net income represents 08 related consolidated financial statement amounts year ended december 31 2009 based assessment management concluded company maintained effective internal control financial reporting december 31 2009 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2009 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2009 2008 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein explained note 11 “notes consolidated financial statements” year ended december 31 2007 company adopted financial accounting standards board interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” subsequently codified topic 740 “income taxes” accounting standards codification explained note 2 “notes consolidated financial statements” year ended december 31 2009 company adopted december 2007 amendment accounting standard codification topic 810 “consolidation” also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 24 2010 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 24 2010 report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls unifin international lp affiliate cardinal pumps exchangers inc unifin included 2009 consolidated financial statements westinghouse air brake technologies corporation constituted 124 total assets december 31 2009 08 net income year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting unifin opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2009 2008 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2009 westinghouse air brake technologies corporation report dated february 24 2010 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 24 2010 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well approximately 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 17 countries 2009 40 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation subsequent events preparing accompanying audited consolidated financial statements company reviewed determined necessary company’s management events occurred december 31 2009 february 24 2010 issuance date financial statements accounting standards codification financial accounting standards board’s fasb accounting standards codification asc became effective july 1 2009 date asc became fasb’s officially recognized source authoritative us generally accepted accounting principles gaap applicable public nonpublic nongovernmental entities superseding existing fasb american institute certified public accountants aicpa emerging issues task force eitf related literature rules interpretive releases sec authority federal securities laws also sources authoritative gaap sec registrants accounting literature considered nonauthoritative switch asc affects way companies refer us gaap financial statements accounting policies citing particular content asc involves specifying unique numeric path content topic subtopic section paragraph structure cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 73 million 50 million december 31 2009 2008 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed reviewed impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate goodwill impairment analysis performed goodwill impairment analysis performed comparing carrying amount reporting unit estimated fair value extent carrying value reporting unit exceeds estimated fair value reporting unit’s carrying value goodwill compared implied fair value goodwill extent carrying value goodwill exceeds implied fair value goodwill impairment exists must recognized company reviews goodwill impairment reporting unit level company’s reporting units reportable segments company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins fourth quarter 2009 company used discount rate reporting units ranging 14 20 terminal revenue growth rate 3 difference discount rates based underlying markets risks associated company’s reporting units market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units fourth quarter 2009 company used ebitda multiples reporting units ranging 65 75 difference ebitda multiples due underlying markets associated company’s reporting units fair value freight transit segments exceeded carrying value reporting unit 10 warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 204 million 171 million 104 million 2009 2008 2007 respectively warranty reserves 292 million 307 million december 31 2009 2008 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2009 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company forward contracts notional value 101 million zar 12 million us average exchange rate 821 zar per 1 usd resulting recording current liability 110000 corresponding offset accumulated comprehensive income 70000 net tax december 31 2008 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2008 company forward contracts notional value 50 million zar 557000 us average exchange rate 897 zar per 1 usd resulting recording current asset 41000 corresponding offset accumulated comprehensive income 26000 net tax reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution company anticipate nonperformance company concluded interest rate swap agreement qualifies special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company interest rate swap agreement notional value 925 million effectively changed company’s interest rate bank debt december 31 2009 variable rate fixed rate 184 interest rate swap agreement matures january 2010 december 31 2009 company recorded current liability 63000 corresponding offset accumulated comprehensive loss 38000 net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions asc 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 13 million 04 million 32 million 2009 2008 2007 respectively noncontrolling interests january 1 2009 company adopted amendment asc 810 “consolidation” related noncontrolling interests consolidated financial statements amendment establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary amendment clarifies noncontrolling interest reported equity consolidated financial statements requires net income attributable parent noncontrolling interest disclosed separately face consolidated statement income presentation disclosure requirements amendment require retrospective application prior periods presented accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2009 2008 net income attributable noncontrolling interests years ended december 31 2009 2008 2007 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 121 million 110 million december 31 2009 2008 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2009 2008 2007 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2009 2008 2007 company incurred costs approximately 424 million 390 million 374 million respectively employees december 31 2009 approximately 37 company’s workforce covered collective bargaining agreements generally effective 2010 2011 2012 2013 agreements expiring 2010 cover approximately 21 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 12 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements december 2007 updates made asc 805 “business combinations” asc 8101065 “noncontrolling interests consolidated financial statements” update asc 805 retains fundamental requirements also broadens scope applying acquisition method transactions events one entity obtains control one businesses requires among things assets acquired liabilities assumed measured fair value acquisition date liabilities related contingent consideration recognized acquisition date remeasured fair value subsequent reporting period acquisitionrelated costs expensed incurred income recognized fair value net assets acquired exceeds fair value consideration transferred update asc 8101065 establishes accounting reporting standards noncontrolling interests ie minority interests subsidiary including changes parent’s ownership interest subsidiary requires among things noncontrolling interests subsidiaries classified separate component equity except presentation disclosure requirements update asc 8101065 applied retrospectively periods presented updates asc 805 asc 8101065 applied prospectively financial statements issued fiscal years beginning december 15 2008 updated standard effective company business combination transactions acquisition date january 1 2009 adoption updated standard material impact company’s financial condition results operations june 2008 update made asc 2601055 “determining whether instruments granted sharebased payment transactions participating securities” update asc 2601055 states unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method asc 2601055 effective fiscal years beginning december 15 2008 interim periods within years upon adoption company required retrospectively adjust earnings per share data including amounts related interim periods summaries earnings selected financial data conform updates asc 2601055 company adopted updated asc 2601055 january 1 2009 computed earnings per share based twoclass method see note 12 “earnings per share” included herein december 2008 update made asc 7202065 “employers’ disclosures postretirement benefit plan assets” update asc 7202065 amends asc 2301055 “employers’ disclosures pensions postretirement benefits” provide guidance employer’s disclosures plan assets defined benefit pension postretirement plan additional disclosure requirements updated asc 7202065 include expanded disclosures entity’s investment policies strategies categories plan assets concentrations credit risk fair value measurements plan assets adoption updated standard material impact company’s financial condition results operations may 2009 update made asc 855 “subsequent events” update asc 855 requires entity recognize financial statements effects subsequent events provide additional evidence conditions existed date balance sheet nonrecognized subsequent events must disclosed keep financial statements misleading entity required disclose nature event well estimate financial effect statement estimate cannot made addition update asc 855 requires entity disclose date subsequent events evaluated company adopted updated asc 855 second quarter 2009 see “subsequent events” june 2009 fasb issued update 200901 “topic 105generally accepted accounting principles amendments based statement financial accounting standards 168the fasb accounting standards codification hierarchy generally accepted accounting principles” asu 200901 asu 200901 establishes two levels gaap authoritative nonauthoritative switch asc affects way companies refer us gaap financial statements accounting policies citing particular content asc involves specifying unique numeric path content topic subtopic section paragraph structure company began using new guidelines number system prescribed asc referring gaap third quarter 2009 asc intended change alter existing gaap adoption standard impact company’s financial condition results operations june 2009 update made asc 860 “transfers servicing” among items update removes concept qualifying specialpurpose entity clarifies objective asc 860 determine whether transferor entities included transferor’s financial statements presented surrendered control transferred financial assets update effective january 1 2010 upon adoption company expect update material impact financial condition results operations june 2009 update made asc 810 “consolidation” update amends consolidation guidance applicable variable interest entities effective beginning first annual reporting period begins november 15 2009 upon adoption company expect update material impact financial condition results operations august 2009 fasb issued update 200905 “fair value measurement disclosures topic 820measuring liabilities fair value” asu 200905 asu 200905 amends asc 820 “fair value measurements disclosures” provide guidance measure fair value liability primarily three things 1 sets forth types valuation techniques used value liability quoted price active market identical liability available 2 clarifies estimating fair value liability reporting entity required include separate input adjustment inputs relating existence restriction prevents transfer liability 3 clarifies quoted price active market identical liability measurement date quoted price identical liability traded asset active market adjustments quoted price asset required level 1 fair value measurements asu 200905 effective beginning fourth quarter 2009 company adoption standard material impact company’s financial condition results operations october 2009 fasb issued update 200913 “revenue recognition topic 605multipledeliverable revenue arrangements consensus fasb emerging issues task force” asu 200913 asu 200913 provides amendments criteria asc 60525 separating consideration multipledeliverable arrangements result amendments multipledeliverable arrangements separated circumstances existing us gaap asu 200913 1 establishes selling price hierarchy determining selling price deliverable 2 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method 3 requires vendor determine best estimate selling price manner consistent used determine price sell deliverable standalone basis 4 significantly expands disclosures related vendor’s multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company currently evaluating impact adopting asu 200913 october 2009 fasb issued update 200914 “software topic 985certain revenue arrangements include software elements consensus fasb emerging issues task force” asu 200914 asu 200914 changes accounting model revenue arrangements include tangible products software elements provides additional guidance determine software relating tangible product would excluded scope software revenue guidance addition asu 200914 provides guidance vendor allocate arrangement consideration deliverables arrangement includes tangible products software asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company currently evaluating impact adopting asu 200914 3 acquisitions discontinued operations october 1 2009 company used cash hand acquire unifin international lp affiliate cardinal pumps exchangers inc “unifin” manufacturer cooling systems related equipment power generation transmission industry purchase price 929 million net cash received resulting preliminary additional goodwill 548 million deductible tax purposes unifin operate business wabtec’s freight group july 22 2009 company acquired certain assets 34 million december 5 2008 company acquired standard car truck company “sct” manufacturer designer stabilization systems freight cars including engineered truck undercarriage components springs friction wedges wear plates barber® brand truck design used throughout world holds leading share north american market company also manufactures services locomotives components including compressors pumps purchase price 3026 million net cash received resulting goodwill 1547 million deductible tax purposes included purchase price 3026 million 250 million related escrow deposit may released company indemnity claims accordance purchase escrow agreements december 5 2008 company acquired majority beijing wabtec huaxia technology company ltd “huaxia” 56 million december 31 2008 company invested 28 million shenyang cnr wabtec railway brake technology company ltd “shenyang” minority interest joint venture company huaxia shenyang manufactures braking equipment including brake shoes pads friction linings freight car market china october 27 2008 company acquired certain assets related development sale service maintenance software programs used train management systems 45 million june 30 2008 company acquired 100 stock poli spa poli european based manufacturer rail braking equipment including brake discs high speed applications well tread brake units pneumatic brake valves meet international union railways uic standards poli primarily operate business wabtec’s transit group purchase price 552 million 870 million usd net cash received resulting goodwill 389 million none deductible tax purposes included purchase price 118 million related escrow deposit may released company indemnity claims environmental claims allocation tax liabilities accordance purchase escrow agreements june 8 2007 company acquired 100 stock ricon corporation ricon manufacturer variety electromechanical wheelchair lifts ramps antigraffiti windows purchase price 736 million resulting additional goodwill 497 million none deductible tax purposes included purchase price 736 million 65 million related escrow deposit may released company working capital adjustments indemnity claims accordance purchase escrow agreements operating results included consolidated statement operations acquisition date forward unifin sct poli acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition preliminary allocation 335 million acquired intangible assets unifin exclusive goodwill 148 million assigned trade name 163 million assigned customer relationships 278000 assigned patents 21 million assigned customer backlog trade name considered indefinite useful life customer relationships’ average useful life 10 years patents’ average useful life three years allocation 710 million acquired intangible assets sct exclusive goodwill 293 million assigned trade name 385 million assigned customer relationships 743000 assigned patents 10 million assigned customer backlog 14 million assigned long term contracts trade name considered indefinite useful life customer relationships’ average useful life 24 years patents’ average useful life nine years allocation 374 million acquired intangible assets poli exclusive goodwill 188 million assigned trade name 178 million assigned customer relationships 449000 assigned patents 312000 assigned customer backlog trade name considered indefinite useful life customer relationships average useful life 15 years patents average useful life eight years following unaudited pro forma financial information presents income statement results poli sct huaxia unifin occurred january 1 2008 1 year ended december 31 2008 net income attributable wabtec shareholders included 485 million expense management incentive bonus recorded sct conjunction signing purchase agreement 4 supplemental cash flow disclosures july 31 2006 board directors authorized repurchase 50 million company’s outstanding shares common stock february 20 2008 board directors authorized repurchase additional 100 million company’s outstanding shares company intends purchase shares open market negotiated block trades time limit set completion program qualifies 2008 refinancing credit agreement well 6875 senior notes currently outstanding first quarter 2008 company repurchased 712900 shares average price 3429 per share exhausting 500 million authorization made 2006 second quarter 2008 company repurchased 5200 shares average price 3597 per share additional shares repurchased third quarter 2008 fourth quarter 2008 company repurchased 599800 shares average price 3522 per share purchases open market first quarter 2009 company repurchased 290000 shares average price 2508 per share second quarter 2009 company repurchased 379700 shares average price 3261 per share additional shares repurchased third fourth quarters 2009 purchases open market 5 restructuring impairment charges wabtec downsized canadian operations moving certain products lowercost facilities outsourcing freight segment wabtec recorded charges 46 million 36 million years ended december 31 2008 2007 respectively charges operations restructuring plan recorded year ended december 31 2009 operations cumulative expenses restructuring expenses recorded since 2006 165 million comprised 57 million employee severance costs approximately 400 employees 55 million pension postretirement benefit curtailment employees 53 million related fixed asset goodwill impairment goodwill impairment recorded amortization expense charges recorded cost sales severance costs contractual liabilities payment dependent waiver expiration certain seniority rights employees december 31 2009 42 million amount paid 6 inventories components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 257 million 247 million 251 million 2009 2008 2007 respectively 8 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment applying fairvaluebased test frequently indicators impairment present fair value determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill indefinite live intangible assets impaired december 31 2009 2008 goodwill 4830 million 3194 million december 31 2009 2008 respectively adjustment 1035 million goodwill due standard car truck poli change carrying amount goodwill segment year ended december 31 2009 follows december 31 2009 2008 company’s trademarks net carrying amount 960 million 756 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships intellectual property seven years 17 years 19 years respectively amortization expense intangible assets 98 million 50 million 39 million years ended december 31 2009 2008 2007 respectively amortization expense five succeeding years follows thousands 9 longterm debt longterm debt consisted following 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2009 company available bank borrowing capacity net 286 million letters credit approximately 2004 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2009 weighted average interest rate company’s variable rate debt 149 reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract december 31 2009 notional value interest rate swap outstanding 925 million effectively changed company’s interest rate bank debt december 31 2009 variable rate fixed rate 184 interest rate swap agreement matures january 2010 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution company anticipate nonperformance 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens debt capital leases capital leases acquired poli sct acquisitions scheduled principal repayments debt capital lease balances december 31 2009 follows 10 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date us canadian german uk plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 465 million 459 million december 31 2009 2008 respectively aggregate accumulated benefit obligation international pension plans 1190 million 909 million december 31 2009 2008 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2009 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2009 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2010 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters composition plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date balanced fund provides longterm growth income investing diversified portfolio approximately 60 equities 40 bonds plan assets considered level 1 based fair value valuation hierarchy see note 18 “fair value measurement” included herein plan assets asset category december 31 2009 2008 follows us international pension plans target asset allocations 60 equity securities 40 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 701000 us plans 87 million international plans 2010 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2009 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2009 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2010 assumed health care cost trend rate us plans grades initial rate 78 ultimate rate 45 2027 international plans 93 45 2028 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 231000 28000 respectively 2010 increase accumulated postretirement benefit obligation approximately 37 million 507000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 193000 24000 respectively 2010 decrease accumulated postretirement benefit obligation approximately 31 million 435000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2009 2008 plan held behalf participants 428000 shares market value 175 million 484000 shares market value 192 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 1466 million foreign subsidiaries intended permanently reinvested consolidated provision income taxes included statement income consisted following consolidated income tax provision included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided effective income tax rate 2009 includes net tax benefit approximately 97 million due primarily settlement examinations various tax jurisdictions deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized state foreign net operating loss carryforwards exist amount 652 million 14 million respectively set expire various periods 2011 2030 federal foreign tax credits approximately 14 million related research experimentation credits fully utilized 2009 state tax credits approximately 866000 available consist various machinery equipment research experimentation jobs related credits december 31 2009 liability income taxes associated uncertain tax positions 100 million 26 million recognized would favorably affect company’s effective income tax rate december 31 2008 liability income taxes associated uncertain tax positions 171 million 101 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense total interest penalties accrued december 31 2009 approximately 31 million 17 million respectively december 31 2008 company accrued interest penalties approximately 44 million 24 million respectively internal revenue service currently auditing 2007 2008 tax years limited exception company longer subject examination various us foreign taxing authorities years 2006 time company believes reasonably possible unrecognized tax benefits approximately 32 million may change within next twelve months due expiration statutory review periods current examinations 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 79200 32400 4400 shares common stock outstanding 2009 2008 2007 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans december 31 2009 company maintains employee stockbased compensation plans stock options nonvested restricted stock incentive stock awards governed 2000 stock incentive plan amended 2000 plan 2000 plan amended effective february 16 2006 increase maximum shares available future grants existing plan 719512 2000000 shares december 31 2009 shares available future grants 2000 plan 1056189 shares awards may made 2000 plan subsequent january 31 2016 company also maintains nonemployee directors’ fee stock option plan directors plan stockbased compensation expense 36 million 105 million 112 million years ended december 31 2009 2008 2007 respectively company recognized associated tax benefits related stockbased compensation plans 16 million 33 million 36 million respective periods included stockbased compensation expense 2009 19 million expense related stock options 28 million related nonvested restricted stock 472000 related awards issued directors’ fees offset reduction expense 16 million related incentive stock awards december 31 2009 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 98 million recognized weighted average period 13 years stock options 2000 plan stock options granted eligible employees fair market value average high low wabtec stock price date grant generally options become exercisable three four year vesting period expire ten years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant addition compensation directors’ fees total 13500 shares awarded nonemployee directors year ended december 31 2009 13500 shares year ended december 31 2008 12000 shares year ended december 31 2007 awards may made plan subsequent october 31 2016 total number shares issued plan december 31 2009 362000 shares following table summarizes company’s stock option activity related information 2000 plan directors plan years ended december 31 options outstanding december 31 2009 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based us treasury bond rates expected life option nonvested restricted stock incentive stock awards 2000 plan eligible employees granted nonvested restricted stock generally vest three four years date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative three year performance goals incentive stock awards included table represent maximum number shares may ultimately vest december 31 2009 based company’s performance estimate majority stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes nonvested restricted stock incentive stock awards activity related information years ended december 31 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period 14 comprehensive loss components accumulated comprehensive income loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2009 2008 2007 85 million 81 million 75 million respectively amounts shown net sublease rentals zero 16 million 15 million years 2009 2008 2007 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 warranties following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2009 2008 preferred stock issued outstanding 18 fair value measurement asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2009 included current liabilities condensed consolidated balance sheet following table provides asset carried fair value measured recurring basis december 31 2008 included current assets condensed consolidated balance sheet company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments plan assets considered level 1 based fair value valuation hierarchy see note 10 “employee benefit plans” included herein 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation rfpc based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents company accruals approximately 468000 december 31 2009 estimated remaining costs remediation monitoring company compliance permit december 31 2009 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company completed remediation site state’s voluntary cleanup program obtained closure certification site state illinois young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 677000 remain december 31 2009 october 18 2007 faiveley transport malmo ab filed request arbitration international chamber commerce alleging breach contract trade secret violations relating company’s manufacture sale certain components issue limited number used transit industry day faiveley malmo also filed related proceeding company united states district court southern district new york “federal court” requesting preliminary injunction aid arbitration forums faiveley malmo sought prevent company manufacturing selling subject components arbitration panel decided faiveley malmo’s claim arbitration faiveley malmo also sought monetary damages federal court action faiveley malmo’s request preliminary injunction initially granted part august 22 2008 injunction vacated appellate court march 9 2009 case remanded district court proceedings remand faiveley malmo renewed request injunctive relief district court denied request august 31 2009 faiveley malmo appealed denial appellate court faiveley malmo’s appeal remains pending company moved dismiss appeal based decision rendered international arbitration proceeding international arbitration proceeding faiveley malmo originally alleged 128 million damages later reduced claim 91 million damages company stated faiveley malmo’s claims grossly overstated supported facts circumstances surrounding case frivolous respects icc international court arbitration arbitral tribunal heard case first half 2009 issued award dated december 21 2009 pursuant award company required make 39 million royalty payment faiveley malmo respect faiveley’s malmo’s claims company alleging breach contract trade secret violations faiveley malmo’s parent company faiveley transport stated faiveley entities considering filing claims company arising allegations company vigorously contest claims believe would result material legal liability time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared primarily production operation freight cars locomotives including braking control equipment onboard electronic components train coupler equipment transit group consists products passenger transit vehicles locomotives typically subways commuter rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications well commuter rail locomotives company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2009 follows segment financial information 2008 follows segment financial information 2007 follows following geographic area data years ended december 31 2009 2008 2007 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 2413 million 2618 million 2397 million years ended december 31 2009 2008 2007 respectively sales product follows 21 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 22 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2009 balance sheet december 31 2008 income statement year ended december 31 2009 income statement year ended december 31 2008 income statement year ended december 31 2007 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2009 condensed statement cash flows year ended december 31 2008 condensed statement cash flows year ended december 31 2007 23 income expense components expense follows 24 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 3390866 filed part company’s registration statement form s4 33388903 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated december 13 2007 filed exhibit company’s quarterly report form 10q period ended march 31 2006 filed annex company’s schedule 14a proxy statement filed april 13 2006 filed exhibit company’s quarterly report form 10q period ended september 30 2006 filed exhibit company’s annual report form 10k period ended december 31 2006 filed exhibit company’s quarterly report form 10q period ended june 30 2007 filed exhibit company’s quarterly report form 10q period ended june 30 2008 filed exhibit company’s quarterly report form 10q period ended september 30 2008 filed exhibit company’s quarterly report form 10q period ended june 30 2009 management contract compensatory planitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s current report form 8k file 03390866 dated november 7 2011 filed exhibit company’s current report form 8k file 03390866 dated july 2 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 filed exhibit company’s annual report form 10k file 03390866 dated february 25 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded mors smitt holding “mors smitt” winco equipamentos ferroviarios ltda “winco” lh group “lh” assessment internal controls financial reporting december 31 2012 company acquired mors smitt effective june 14 2012 winco effective july 31 2012 lh effective october 1 2012 mors smitt winco lh wholly owned subsidiaries whose total assets represents 52 05 26 respectively whose total net assets represents 75 04 37 respectively net income represents 05 02 00 respectively whose customer revenues represents 13 02 07 respectively related consolidated financial statement amounts year ended december 31 2012 based assessment management concluded company maintained effective internal control financial reporting december 31 2012 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2012 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2012 2011 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2012 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 22 2013 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 22 2013 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls mors smitt holding “mors smitt” winco equipamentos ferroviarios ltda “winco” lh group “lh” included 2012 consolidated financial statements westinghouse air brake technologies corporation constituted 52 05 26 respectively total assets 75 04 37 respectively total net assets december 31 2012 05 02 00 respectively net income 13 02 07 respectively customer revenue year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting mors smitt winco lh opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2012 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2012 2011 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2012 report dated february 22 2013 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 22 2013 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statement comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 19 countries 2012 50 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 67 million 84 million december 31 2012 2011 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed july 2012 fasb issued asu 201202 “intangiblesgoodwill topic 350 testing indefinitelived intangible assets impairment” asu 201202 provisions asu 201202 provide entity option assess qualitative factors determine whether morelikelythannot fair value indefinitelived intangible asset less carrying value based review qualitative factors entity determines morelikelythannot fair value indefinitelived intangible asset less carrying value action required entity determines otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test required prior accounting guidance similar asu 201108 entity option bypass qualitative assessment proceed directly fair value calculation entity may resume performing qualitative analysis subsequent period asu 201202 effective fiscal years beginning september 15 2012 early adoption permitted financial statements recent annual interim period yet issued chose early adopt new accounting provisions effective intangible impairment review fourth quarter fiscal 2012 determined based upon qualitative assessment fair value calculation required indications fair value indefinitelived intangible assets less carrying value september 2011 fasb issued accounting standards updated “asu” 201108 amends rules testing goodwill impairment new rules entity option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances entity determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary adopted asu 201108 2011 annual goodwill impairment test assessing qualitative factors determine whether likely fair value reporting unit less carrying amount assess relevant events circumstances may impact fair value carrying amount reporting unit identification relevant events circumstances may impact reporting unit’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact qualitative assessment concludes likely fair value reporting unit less carrying value company performs twostep impairment test first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 230 million 199 million 228 million 2012 2011 2010 respectively accrued warranty 582 million 506 million december 31 2012 2011 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2012 company forward contracts reduce impact interest rate changes portion variablerate debt company entered forward starting interest rate swap agreement notional value 1500 million effective july 31 2013 termination date november 7 2016 interest rate swap agreement convert portion company’s outstanding debt variable rate fixedrate borrowing company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible company concluded interest rate swap agreements qualify special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin december 31 2012 company recorded current liability 41 million corresponding offset accumulated comprehensive loss 25 million net tax related agreement foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 01 million 20 million 10 million 2012 2011 2010 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2012 2011 net income attributable noncontrolling interests years ended december 31 2012 2011 2010 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 971 million 589 customer deposits 828 million 728 provisions loss contracts 142 million 93 million december 31 2012 2011 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 205 million 154 million december 31 2012 2011 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2012 2011 2010 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2012 2011 2010 company incurred costs approximately 413 million 372 million 402 million respectively employees december 31 2012 approximately 27 company’s workforce covered collective bargaining agreements generally effective 2013 2015 agreements expiring 2013 cover approximately 16 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates 3 acquisitions company made following acquisitions operating business unit component business unit freight segment • july 31 2012 company acquired winco equipamentos ferroviarios ltda “winco” established marketing sales company provider freight car components capabilities including valueadded engineering assembly service technical support logistics based brazil initial net payment approximately 37 million net cash resulting preliminary additional goodwill 48 million none deductible tax purposes addition 37 million purchase agreement includes contingent consideration paid future periods based achievement certain financial results • november 3 2011 company acquired bearward engineering “bearward” ukbased manufacturer cooling systems related equipment power generation industrial markets net purchase price approximately 436 million net cash resulting additional goodwill 170 million none deductible tax purposes winco acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition bearward acquisition following table summarizes final fair values assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • january 31 2013 company acquired napier turbochargers ltd “napier” ukbased provider turbochargers related parts worldwide power generation marine markets net purchase price approximately 1125 million net cash • october 1 2012 company acquired lh group “lh” ukbased provider maintenance overhaul services passenger transit market net purchase price approximately 478 million net cash resulting preliminary goodwill 189 million none deductible tax purposes • july 13 2012 company acquired tec tran corp affiliates “tec tran” usowned manufacturer hydraulic braking systems transit cars based north carolina net purchase price approximately 83 million net cash resulting preliminary additional goodwill 17 million deductible tax purposes • june 14 2012 company acquired mors smitt holding “mors smitt” leading manufacturer electronic components rail industrial markets operations netherlands united kingdom us france china hongkong net purchase price approximately 900 million net cash resulting preliminary additional goodwill 425 million none deductible tax purposes • november 18 2011 company acquired fulmer company “fulmer” leading manufacturer motor components rail power generation industrial markets net purchase price 136 million resulting additional goodwill 24 million deductible tax purposes • june 29 2011 company acquired aftermarket transit parts business “atp” ge transportation parts supply business propulsion control systems passenger transit car aftermarket north america net purchase price 211 million resulting additional goodwill • february 25 2011 company acquired brush traction group “brush” ukbased provider locomotive overhauls services aftermarket components net purchase price approximately 307 million resulting additional goodwill 205 million deductible tax purposes lh tec tran mors smitt acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition fulmer atp brush traction acquisition following table summarizes final fair values assets acquired liabilities assumed date acquisition 2012 acquisitions listed excluding napier include escrow deposits 118 million may released company indemnity claims accordance purchase escrow agreements allocation 1217 million acquired intangible assets companies listed tables exclusive goodwill 832 million assigned customer relationships 277 million assigned trade names 21 million assigned license agreement 21 million assigned noncompete agreements 66 million assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 20 years license agreement’s useful life 20 years noncompete agreements average useful life two years following unaudited pro forma financial information presents income statement results acquisition brush traction atp bearward fulmer mors smitt tec tran winco lh occurred january 1 2011 4 supplemental cash flow disclosures may 11 2011 board directors increased stock repurchase authorization 150 million company’s outstanding shares december 31 2012 purchases totaled 726 million leaving 774 million authorization new share repurchase authorization superseded previous authorization 150 million 394 million remaining company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2011 refinancing credit agreement 2008 refinancing credit agreement well notes currently outstanding first quarter 2012 shares repurchased second quarter 2011 company repurchased 298800 shares average price 7338 per share third quarter 2012 company repurchased 77500 shares average price 7832 per share fourth quarter 2012 company repurchased 231100 shares average price 8031 per share purchases open market first quarter 2011 shares repurchased second quarter 2012 company repurchased 95000 shares average price 6514 per share third quarter 2011 company repurchased 308600 shares average price 5708 per share fourth quarter 2011 company repurchased 35000 shares average price 6341 per share purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 289 million 299 million 284 million 2012 2011 2010 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2012 2011 goodwill 6660 million 5875 million december 31 2012 2011 respectively change carrying amount goodwill segment year ended december 31 2012 follows december 31 2012 2011 company’s trademarks net carrying amount 1313 million 1146 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships intellectual property five years 16 years 17 years respectively amortization expense intangible assets 153 million 150 million 102 million years ended december 31 2012 2011 2010 respectively amortization expense five succeeding years follows thousands 8 longterm debt longterm debt consisted following 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provides company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility expires november 7 2016 2011 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2012 company available bank borrowing capacity net 325 million letters credit approximately 4005 million subject certain financial covenant restrictions 2011 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted libor rates plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2012 weighted average interest rate company’s variable rate debt 121 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement convert portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2011 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2011 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provided company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities set expire january 2013 2008 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company intent ability refinance notes maturing august 2013 long term basis utilizing capacity 2011 refinancing credit agreement 2011 refinancing credit agreement provide available bank borrowing capacity sufficient refinance notes longterm basis notes included longterm portion debt december 31 2012 company compliance restrictions covenants indenture notes issued expects restrictions covenants type limiting factor executing operating activities notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens debt capital leases scheduled principal repayments debt capital lease balances december 31 2012 follows 9 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 514 million 517 million december 31 2012 2011 respectively aggregate accumulated benefit obligation international pension plans 1542 million 1339 million december 31 2012 2011 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2012 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2012 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2013 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 17 “fair value measurement” included herein plan assets asset category december 31 2012 2011 follows us pension plan target asset allocation 50 equity securities 50 debt securities international pension plans target asset allocations 50 equity securities 50 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 49 million international plans expect make contribution us plans 2013 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2012 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2012 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2013 assumed health care cost trend rate us plans grades initial rate 72 ultimate rate 45 2027 international plans 80 45 2030 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 180000 22000 respectively 2013 increase accumulated postretirement benefit obligation approximately 44 million 324000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 153000 18000 respectively 2013 decrease accumulated postretirement benefit obligation approximately 37 million 279000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2012 2011 plan held behalf participants 371100 shares market value 325 million 403400 shares market value 282 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2012 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted rehabilitation plan september 30 2012 increasing weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates 3 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 remains effect company’s union adopts rehabilitation plan “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2011 2010 plan years ended 2011 2010 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2012 “surcharge imposed” column indicates whether company’s contribution rate 2012 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 4041 million december 31 2012 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation withholding taxes approximately 52 million would payable upon remittance previously unremitted earnings december 31 2012 consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided “american taxpayer relief act” retroactively extended research development tax credit certain foreign tax provisions expired 2012 benefit extenders approximately 20 million recorded first quarter 2013 bill enacted deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized 2012 21 million valuation allowance foreign carryforwards recorded state foreign tax credit carryforwards approximately 28 million expire various periods december 31 2014 december 31 2029 state net operating loss carryforwards amount 500 million expire various periods december 31 2014 december 31 2033 december 31 2012 liability income taxes associated uncertain tax positions 113 million 37 million recognized would favorably affect company’s effective income tax rate december 31 2011 liability income taxes associated uncertain tax positions 82 million 21 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense december 31 2011 total interest penalties accrued approximately 25 million 14 million respectively december 31 2011 total interest penalties accrued approximately 28 million 15 million respectively internal revenue service currently auditing 2009 2010 tax years limited exception company longer subject examination various us foreign taxing authorities years 2009 time company believes reasonably possible unrecognized tax benefits approximately 31 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows options purchase approximately 19000 25000 15000 shares common stock outstanding 2012 2011 2010 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2012 company maintains employee stockbased compensation plans stock options restricted stock incentive stock awards governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan 10 year term march 27 2021 provides maximum 1900000 shares grants awards shares granted awarded 2011 plan december 31 2012 2011 plan approved stockholders wabtec may 11 2011 december 31 2012 number shares available future grants 2000 plan 89640 shares company also maintains 1995 nonemployee directors’ fee stock option plan “the directors plan” directors plan amended authorizes total 500000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2012 2011 2010 company issued total 11005 11636 18302 shares restricted stock nonemployee directors total number shares issued plan december 31 2012 402943 shares awards may made 2000 plan directors plan subsequent october 31 2016 stockbased compensation expense 198 million 186 million 118 million years ended december 31 2012 2011 2010 respectively company recognized associated tax benefits related stockbased compensation plans 59 million 51 million 30 million respective periods included stockbased compensation expense 2012 24 million expense related stock options 48 million related nonvested restricted stock 606000 related restricted stock units 112 million related incentive stock awards 800000 related awards issued directors’ fees december 31 2012 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 202 million recognized weighted average period 10 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2012 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 year us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock awards vest one year date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock awards vest awarded ranging 0 200 initial incentive stock awards granted incentive stock awards included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2012 company estimates achieve 200 126 incentive stock awards expected vest based performance three year periods ending december 31 2012 2013 2014 respectively recorded incentive compensation expense accordingly estimate number stock awards expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity 2011plan 2000 plan directors plan incentive stock awards activity 2011 plan 2000 plan related information years ended december 31 13 comprehensive loss components accumulated comprehensive loss 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2012 2011 2010 147 million 134 million 98 million respectively amounts shown net sublease rentals 02 million 03 million 02 million years 2012 2011 2010 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2012 2011 preferred stock issued outstanding 17 fair value measurement asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2012 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2011 included current liabilities consolidated balance sheet result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy see note 9 “employee benefit plans” included herein 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future competitor company faiveley transport usa inc certain affiliated entities sued company us district court southern district new york may 2010 alleging misappropriation trade secrets related claims stemming expired license agreement april 2011 court granted plaintiffs’ motion partial summary judgment several claims following jury trial damages plaintiffs awarded 181 million plus interest final verdict amount entered july 2011 company recorded charge second quarter 2011 amount 181 million company appealed verdict us court appeals second circuit february 6 2013 appellate court issued summary order decreeing judgment awarding damages vacated remanded district court new trial limited issue damages unless faiveley plaintiffs agreed reduce amount damages previously awarded 15 million plus interest proceedings occurred since date appellate court’s order time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2012 follows segment financial information 2011 follows segment financial information 2010 follows following geographic area data years ended december 31 2012 2011 2010 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 5796 million 4106 million 3272 million years ended december 31 2012 2011 2010 respectively sales product follows 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreement senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” november 7 2011 company refinanced existing revolving credit term loan facility due 2016 “the bank debt” obligations note bank debt fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2012 balance sheet december 31 2011 income statement year ended december 31 2012 income statement year ended december 31 2011 income statement year ended december 31 2010 condensed statement cash flows year ended december 31 2012 condensed statement cash flows year ended december 31 2011 condensed statement cash flows year ended december 31 2010 22 income expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 1 second quarter 2011 includes 181 million charge court ruling 2 second quarter 2011 includes tax benefits 17 million primarily related resolving certain tax issues prior periods closed regulatory examination third quarter 2012 includes tax benefits 17 million due claims refund signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s current report form 8k file 03390866 dated november 7 2011 filed exhibit company’s current report form 8k file 03390866 dated july 2 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 filed exhibit company’s annual report form 10k file 03390866 dated february 25 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sectionsitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 113782 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 113782 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 113782 period ended september 30 2008 filed exhibit company’s current report form 8k file 113782 dated july 2 2009 filed exhibit company’s current report form 8k file 113782 dated february 22 2011 filed exhibit company’s annual report form 10k file 113782 dated february 25 2011 filed exhibit company’s annual report form 10k file 113782 dated february 22 2013 filed exhibit company’s current report form 8k file 113782 dated may 15 2013 filed exhibit company’s current report form 8k file 113782 dated august 8 2013 management contract compensatory plan management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded napier turbochargers ltd “napier” turbonetics holdings inc “turbonetics” longwood industries inc “longwood” assessment internal controls financial reporting december 31 2013 company acquired napier effective february 1 2013 turbonetics effective july 30 2013 longwood effective september 24 2013 napier turbonetics longwood wholly owned subsidiaries whose total assets represents 49 08 38 respectively whose total net assets represents 75 14 53 respectively net income represents 18 01 respectively whose customer revenues represents 17 02 07 respectively related consolidated financial statement amounts year ended december 31 2013 based assessment management concluded company maintained effective internal control financial reporting december 31 2013 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2013 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2013 2012 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2013 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2013 2012 consolidated results operations cash flows three years period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated february 21 2014 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 21 2014 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls napier turbochargers ltd “napier” turbonetics holdings inc “turbonetics” longwood industries inc “longwood” included 2013 consolidated financial statements westinghouse air brake technologies corporation constituted 49 08 38 respectively total assets 75 14 53 respectively total net assets december 31 2013 18 01 respectively net income 17 02 07 respectively customer revenue year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting napier turbonetics longwood opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2013 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2013 2012 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2013 report dated february 21 2014 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 21 2014 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statement comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 19 countries 2013 48 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation capital structure may 14 2013 stockholders approved amendment amended restated certificate incorporation increase number authorized shares common stock 2000 million shares addition may 14 2013 board directors approved twoforone split company’s issued outstanding common stock form 100 stock dividend increase authorized shares stock split became effective may 14 2013 june 11 2013 respectively company issued approximately 662 million shares common stock result twoforone stock split par value company’s common stock remained unchanged 001 per share information regarding shares common stock except par value per share retained earnings net income per common share attributable wabtec shareholders periods presented reflects twoforone split company’s common stock number shares company’s common stock issuable upon exercise outstanding stock options vesting stockbased awards proportionally increased exercise price per share thereof proportionally decreased accordance terms stock incentive plans cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 57 million 67 million december 31 2013 2012 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed july 2012 fasb issued asu 201202 “intangiblesgoodwill topic 350 testing indefinitelived intangible assets impairment” asu 201202 provisions asu 201202 provide entity option assess qualitative factors determine whether morelikelythannot fair value indefinitelived intangible asset less carrying value based review qualitative factors entity determines morelikelythannot fair value indefinitelived intangible asset less carrying value action required entity determines otherwise required determine fair value indefinitelived intangible asset perform quantitative impairment test required prior accounting guidance entity option bypass qualitative assessment proceed directly fair value calculation entity may resume performing qualitative analysis subsequent period asu 201202 effective fiscal years beginning september 15 2012 early adoption permitted financial statements recent annual interim period yet issued chose early adopt new accounting provisions effective intangible impairment review fourth quarter fiscal 2012 determined based upon qualitative assessments fair value calculation required either 2012 2013 indications fair value indefinitelived intangible assets less carrying value september 2011 fasb issued accounting standards updated “asu” 201108 amends rules testing goodwill impairment new rules entity option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances entity determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary adopted asu 201108 2011 2012 annual goodwill impairment test 2013 company opted perform quantitative assessment determined step two necessary assessing qualitative factors determine whether likely fair value reporting unit less carrying amount assess relevant events circumstances may impact fair value carrying amount reporting unit identification relevant events circumstances may impact reporting unit’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact qualitative assessment concludes likely fair value reporting unit less carrying value company performs twostep impairment test first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 231 million 229 million 199 million 2013 2012 2011 respectively accrued warranty 606 million 582 million december 31 2013 2012 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2013 company forward contracts reduce impact interest rate changes portion variablerate debt company entered forward starting interest rate swap agreement notional value 1500 million effective july 31 2013 termination date november 7 2016 interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible company concluded interest rate swap agreement qualifies special cash flow hedge accounting requires recording fair value interest rate swap agreement permits corresponding adjustment comprehensive income loss net tax balance sheet term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin december 31 2013 company recorded current liability 30 million corresponding offset accumulated comprehensive loss 18 million net tax related agreement foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 35 million 01 million 20 million 2013 2012 2011 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2013 2012 net income attributable noncontrolling interests years ended december 31 2013 2012 2011 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” company recognized revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 established sales price set customer 4 collection sale revenue customer reasonably assured 5 contingencies exist delivery considered occurred customer assumes risk rewards ownership company estimates records provisions quantity rebates sales returns allowances offset revenue period related revenue recognized based upon experience items included reduction deriving net sales general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 2050 million 971 customer deposits 666 million 828 provisions loss contracts 140 million 142 million december 31 2013 2012 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 192 million 205 million december 31 2013 2012 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2013 2012 2011 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2013 2012 2011 company incurred costs approximately 463 million 413 million 372 million respectively employees december 31 2013 approximately 27 company’s workforce covered collective bargaining agreements generally effective 2014 2017 agreements expiring 2014 cover approximately 15 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates 3 acquisitions company made following acquisitions operating business unit component business unit freight segment • september 24 2013 company acquired longwood industries inc “longwood” manufacturer specialty rubber products transportation oil gas industrial markets net purchase price approximately 839 million net cash resulting preliminary goodwill 360 million none deductible tax purposes • july 30 2013 company acquired turbonetics holdings inc “turbonetics” manufacturer turbochargers related components various industrial markets net purchase price approximately 232 million net cash resulting preliminary goodwill 70 million none deductible tax purposes • february 26 2013 company acquired transdyne “transdyne” distributor wearprotection components hardware used primarily railroad freight cars net purchase price approximately 24 million net cash resulting preliminary goodwill 05 million deductible tax purposes • january 31 2013 company acquired napier turbochargers ltd “napier” ukbased provider turbochargers related parts worldwide power generation marine markets net purchase price approximately 1123 million net cash resulting preliminary goodwill 654 million none deductible tax purposes • july 31 2012 company acquired winco equipamentos ferroviarios ltda “winco” established marketing sales company provider freight car components capabilities including valueadded engineering assembly service technical support logistics based brazil initial net payment approximately 37 million net cash resulting additional goodwill 38 million none deductible tax purposes addition 37 million purchase agreement includes contingent consideration paid future periods based achievement certain financial results napier transdyne turbonetics longwood acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition winco acquisition following table summarizes final fair values assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • february 12 2014 company signed definitive agreement acquire fandstan electric group ltd “fandstan” leading rail industrial equipment manufacturer variety markets including rail tram transportation industrial energy purchase price approximately 2150 million company expects transaction completed first quarter 2014 subject customary closing conditions competition authority clearance • october 1 2012 company acquired lh group “lh” ukbased provider maintenance overhaul services passenger transit market net purchase price approximately 481 million net cash resulting additional goodwill 201 million none deductible tax purposes • july 13 2012 company acquired tec tran corp affiliates “tec tran” usowned manufacturer hydraulic braking systems transit cars based north carolina net purchase price approximately 83 million net cash resulting additional goodwill 17 million deductible tax purposes • june 14 2012 company acquired mors smitt holding “mors smitt” leading manufacturer electronic components rail industrial markets operations netherlands united kingdom us france china hongkong net purchase price approximately 900 million net cash resulting additional goodwill 429 million none deductible tax purposes lh tec tran mors smitt acquisitions following table summarizes final fair values assets acquired liabilities assumed date acquisition 2013 acquisitions listed include escrow deposits 208 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 3326 million 1774 million 1552 million related goodwill intangible assets respectively allocation 1552 million acquired intangible assets companies listed tables 1050 million assigned customer relationships 394 million assigned trade names 52 million assigned patents 08 million assigned favorable leasehold interest 06 million assigned noncompete agreements 42 million assigned customer backlog trade names considered indefinite useful life customer relationships’ useful life 20 years patents’ useful life 12 years favorable leasehold useful life five years noncompete agreements useful life two years following unaudited pro forma financial information presents income statement results acquisition winco mors smitt tec tran lh napier transdyne turbonetics longwood occurred january 1 2012 4 supplemental cash flow disclosures december 11 2013 board directors amended stock repurchase authorization 200 million company’s outstanding shares share repurchase authorization supersedes previous authorization 150 million 444 million remained december 31 2013 shares repurchased new authorization company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2013 refinancing credit agreement well notes currently outstanding first second quarters 2013 shares repurchased third quarter 2013 company repurchased 93205 shares average price 5886 per share fourth quarter 2013 company repurchased 413900 shares average price 6647 per share purchases open market first quarter 2012 shares repurchased second quarter 2012 company repurchased 597600 shares average price 3669 per share third quarter 2012 company repurchased 155000 shares average price 3916 per share fourth quarter 2012 company repurchased 462200 shares average price 4015 per share purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 335 million 289 million 299 million 2013 2012 2011 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2013 2012 change carrying amount goodwill segment year ended december 31 2013 follows december 31 2013 2012 company’s trademarks net carrying amount 1568 million 1313 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following remaining weighted average useful lives patents customer relationships intellectual property ten years 17 years 16 years respectively amortization expense intangible assets 177 million 153 million 150 million years ended december 31 2013 2012 2011 respectively amortization expense five succeeding years follows thousands 17574 16131 15980 15084 14448 8 longterm debt longterm debt consisted following 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 800 million fiveyear revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2013 company available bank borrowing capacity net 598 million letters credit approximately 5402 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 0 basis points alternate rate margin 100 basis points december 31 2013 weighted average interest rate company’s variable rate debt 117 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities see note 8 “notes consolidated financial statements” included part iv item 15 report 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provided company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted libor rates plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement debt capital leases scheduled principal repayments debt capital lease balances december 31 2013 follows 200030 future years 250018 total 450709 9employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 463 million 514 million december 31 2013 2012 respectively aggregate accumulated benefit obligation international pension plans 1598 million 1542 million december 31 2013 2012 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2013 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2013 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2014 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 17 “fair value measurement” included herein plan assets asset category december 31 2013 2012 follows us pension plan target asset allocation 50 equity securities 50 debt securities canadian german pension plans target asset allocations 50 equity securities 50 debt securities united kingdom plan target asset allocation 625 equity securities 375 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 52 million international plans expect make contribution us plans 2014 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2013 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2013 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2014 assumed health care cost trend rate us plans grades initial rate 70 ultimate rate 45 2027 international plans 70 45 2027 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 159000 17000 respectively 2013 increase accumulated postretirement benefit obligation approximately 33 million 237000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 134000 15000 respectively 2013 decrease accumulated postretirement benefit obligation approximately 28 million 219000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2013 2012 plan held behalf participants 713200 shares market value 530 million 742400 shares market value 325 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2013 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted rehabilitation plan september 30 2012 increasing weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates 3 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 remains effect company’s union adopts rehabilitation plan “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2012 2011 plan years ended 2012 2011 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2013 “surcharge imposed” column indicates whether company’s contribution rate 2013 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 5158 million december 31 2013 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation withholding taxes approximately 54 million would payable upon remittance previously unremitted earnings december 31 2013 consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided september 13 2013 treasury internal revenue service issued final regulations regarding deduction capitalization expenditures related tangible property final regulations internal revenue code sections 162 167 263a apply amounts paid acquire produce improve tangible property well dispositions property generally effective tax years beginning january 1 2014 evaluated regulations determined material impact consolidated results operations cash flows financial position deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2013 valuation allowance certain foreign carryforwards 33 million state foreign tax credit carryforwards approximately 41 million expire various periods december 31 2015 december 31 2030 state net operating loss carryforwards amount 692 million expire various periods december 31 2015 december 31 2034 december 31 2013 liability income taxes associated uncertain tax positions 105 million 47 million recognized would favorably affect company’s effective income tax rate december 31 2012 liability income taxes associated uncertain tax positions 113 million 37 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense december 31 2013 total interest penalties accrued approximately 15 million 09 million respectively december 31 2012 total interest penalties accrued approximately 25 million 14 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2011 time company believes reasonably possible unrecognized tax benefits approximately 03 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows 1 basic weightedaverage common shares outstanding 95463 95469 95639 basic weightedaverage common shares outstanding nonvested restricted stock expected vest 95932 95976 96149 percentage allocated common shareholders 995 options purchase approximately 12000 38000 50000 shares common stock outstanding 2013 2012 2011 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2013 company maintains employee stockbased compensation plans stock options restricted stock incentive stock awards governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan 10 year term march 27 2021 december 31 2013 number shares available future grants 2011 plan 3731087 shares includes remaining shares grant 2000 plan 2011 plan approved stockholders wabtec may 11 2011 company also maintains 1995 nonemployee directors’ fee stock option plan “ directors plan” directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2013 2012 2011 company issued total 17875 22010 23272 shares restricted stock nonemployee directors total number shares issued plan december 31 2013 823760 shares awards may made directors plan subsequent october 31 2016 stockbased compensation expense plans 241 million 198 million 186 million years ended december 31 2013 2012 2011 respectively company recognized associated tax benefits related stockbased compensation plans 79 million 59 million 51 million respective periods included stockbased compensation expense 2013 23 million expense related stock options 56 million related nonvested restricted stock 21 million related restricted stock units 131 million related incentive stock awards 10 million related awards issued directors’ fees december 31 2013 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 210 million recognized weighted average period 12 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2013 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 year us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock awards vest one year date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock awards vest awarded ranging 0 200 initial incentive stock awards granted incentive stock awards included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2013 company estimates achieve 200 164 100 incentive stock awards expected vest based performance three year periods ending december 31 2013 2014 2015 respectively recorded incentive compensation expense accordingly estimate number stock awards expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock awards activity related information 2011 plan 2000 plan related information years ended december 31 13other comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2013 follows reclassifications accumulated comprehensive loss yearended december 31 2013 follows 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2013 2012 2011 182 million 147 million 134 million respectively amounts shown net sublease rentals 03 million 02 million 03 million years 2013 2012 2011 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2013 2012 preferred stock issued outstanding 17 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2013 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2012 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2013 december 31 2012 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represent accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 notes 2003 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreement 2013 notes 2003 notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2013 follows segment financial information 2012 follows segment financial information 2011 follows following geographic area data years ended december 31 2013 2012 2011 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 5423 million 5796 million 4106 million years ended december 31 2013 2012 2011 respectively sales product follows 20 income expense components expense follows 21 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 1 information basic earnings operations per common share diluted earnings operations per common share periods presented reflects twoforone split company’s common stock occurred may 14 2013 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index 1015 form agreement nonstatutory stock options 2011 stock incentive plan amended list subsidiaries company 231 consent ernst young llp 311 rule 13a14a15d14a certifications 312 rule 13a14a15d14a certifications 321 section 1350 certifications 101ins xbrl instance document 101sch xbrl taxonomy extension calculation linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 4filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 113782 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 113782 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 113782 period ended september 30 2008 filed exhibit company’s current report form 8k file 113782 dated july 2 2009 filed exhibit company’s current report form 8k file 113782 dated february 22 2011 filed exhibit company’s annual report form 10k file 113782 dated february 25 2011 filed exhibit company’s annual report form 10k file 113782 dated february 22 2013 filed exhibit company’s current report form 8k file 113782 dated may 15 2013 filed exhibit company’s current report form 8k file 113782 dated august 8 2013 management contract compensatory planitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report page 1 financial statements reports internal control management’s reports westinghouse air brake technologies corporation shareholders report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets december 31 2014 2013 consolidated statements operations three years ended december 31 2014 2013 2012 consolidated statements comprehensive income three years ended december 31 2014 2013 2012 consolidated statements cash flows three years ended december 31 2014 2013 2012 consolidated statements shareholders’ equity three years ended december 31 2014 2013 2012 notes consolidated financial statements 2 financial statement schedules schedule iivaluation qualifying accounts b filing method exhibits 31 restated certificate incorporation company dated january 30 1995 amended december 31 2003 32 certificate amendment restated certificate incorporation dated may 14 2013 33 amended restated bylaws company effective february 15 2011 41 indenture dated august 8 2013 company wells fargo national association trustee 42 first supplemental indenture dated august 8 2013 company wells fargo bank national association trustee 43 form 4375 senior note due 2023 included exhibit 42 101 agreement sale purchase north american operations railway products group operating division american standard inc known trane dated 1990 rail acquisition corp american standard inc provisions indemnification reproduced 102 letter agreement undated company american standard inc known trane environmental costs sharing 103 purchase agreement dated june 17 1992 among company schuller international inc manville corporation european overseas corporation provisions indemnification reproduced 104 westinghouse air brake company 1995 nonemployee directors’ fee stock option plan amended 105 westinghouse air brake technologies corporation 2000 stock incentive plan amended 106 employment agreement albert j neupaver dated february 1 2006 107 form restricted stock agreement 108 westinghouse air brake technologies corporation 2011 stock incentive plan 109 stock purchase agreement among company standard car truck company robclif inc dated september 12 2008 1010 first amended restated refinancing credit agreement dated december 19 2013 among company wabtec cooperatief ua certain subsidiaries guarantors lenders party thereto pnc bank national association administrative agent pnc capital markets llc jp morgan securities inc joint lead arranges joint book runners jp morgan chase bank na syndication agent bank america na citizens bank pennsylvania branch banking trust company bank toykomitsubish ufj ltd codocumentation agents 1011 form employment continuation agreement entered company albert j neupaver alvaro garciatunon raymond betler charles f kovac r mark cox david l deninno patrick dugan scott e wahlstrom timothy r wesley 1012 wabtec corporation deferred compensation plan executive officers directors adopted december 10 2009 1013 form agreement nonstatutory stock option 1995 nonemployee directors’ fee stock option plan amended 1014 form agreement nonstatutory stock options 2000 stock incentive plan amended 1015 form agreement nonstatutory stock options 2011 stock incentive plan amended list subsidiaries company 231 consent ernst young llp 311 rule 13a14a15d14a certifications 312 rule 13a14a15d14a certifications 321 section 1350 certifications 101ins xbrl instance document 101sch xbrl taxonomy extension calculation linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 113782 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 113782 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 113782 period ended september 30 2008 filed exhibit company’s current report form 8k file 113782 dated july 2 2009 filed exhibit company’s current report form 8k file 113782 dated february 22 2011 filed exhibit company’s annual report form 10k file 113782 dated february 25 2011 filed exhibit company’s annual report form 10k file 113782 dated february 22 2013 filed exhibit company’s current report form 8k file 113782 dated may 15 2013 filed exhibit company’s current report form 8k file 113782 dated august 8 2013 filed exhibit company’s annual report form 10k file 113782 dated february 21 2014 management contract compensatory plan management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded c2ce pty ltd “c2ce” diafrag fandstan electric group ltd “fandstan” assessment internal controls financial reporting december 31 2014 company acquired c2ce effective september 3 2014 diafrag effective august 19 2014 fandstan effective june 6 2014 c2ce diafrag fandstan wholly owned subsidiaries whose total assets represents 09 23 121 respectively whose total net assets represents 14 34 98 respectively net income represents 03 04 18 respectively whose customer revenues represents 05 04 47 respectively related consolidated financial statement amounts year ended december 31 2014 based assessment management concluded company maintained effective internal control financial reporting december 31 2014 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2014 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2014 2013 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2014 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2014 2013 consolidated results operations cash flows three years period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 20 2015 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 20 2015 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls c2ce pty ltd “c2ce” diafrag fandstan electric group ltd “fandstan” included 2014 consolidated financial statements westinghouse air brake technologies corporation constituted 09 23 121 respectively total assets 14 34 98 respectively total net assets december 31 2014 05 04 47 respectively customer revenue 03 04 18 respectively net income year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting napier turbonetics longwood opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2014 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2014 2013 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2014 report dated february 20 2015 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 20 2015 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 20 countries 2014 50 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation capital structure may 14 2013 stockholders approved amendment amended restated certificate incorporation increase number authorized shares common stock 2000 million shares addition may 14 2013 board directors approved twoforone split company’s issued outstanding common stock form 100 stock dividend increase authorized shares stock split became effective may 14 2013 june 11 2013 respectively company issued approximately 662 million shares common stock result twoforone stock split par value company’s common stock remained unchanged 001 per share information regarding shares common stock except par value per share retained earnings net income per common share attributable wabtec shareholders periods presented reflects twoforone split company’s common stock number shares company’s common stock issuable upon exercise outstanding stock options vesting stockbased awards proportionally increased exercise price per share thereof proportionally decreased accordance terms stock incentive plans cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 63 million 57 million december 31 2014 2013 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2014 company opted perform qualitative assessment determined step two necessary assessing qualitative factors determine whether likely fair value reporting unit less carrying amount assess relevant events circumstances may impact fair value carrying amount reporting unit identification relevant events circumstances may impact reporting unit’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact qualitative assessment concludes likely fair value reporting unit less carrying value company performs twostep impairment test first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 341 million 231 million 229 million 2014 2013 2012 respectively accrued warranty 878 million 606 million december 31 2014 2013 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2014 company material foreign currency forward contracts reduce impact interest rate changes portion variablerate debt company entered two forward starting interest rate swap agreement notional value 1500 million december 31 2014 company recorded current liability 34 million corresponding offset accumulated comprehensive loss 20 million net tax related agreement information regarding forward starting interest rate swap agreements see footnote 8 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 24 million 35 million 01 million 2014 2013 2012 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2014 2013 net income attributable noncontrolling interests years ended december 31 2014 2013 2012 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” company recognized revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 established sales price set customer 4 collection sale revenue customer reasonably assured 5 contingencies exist delivery considered occurred customer assumes risk rewards ownership company estimates records provisions quantity rebates sales returns allowances offset revenue period related revenue recognized based upon experience items included reduction deriving net sales general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 1878 million 2050 million customer deposits 1118 million 666 million provisions loss contracts 71 million 140 million december 31 2014 2013 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 249 million 192 million december 31 2014 2013 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2014 2013 2012 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2014 2013 2012 company incurred costs approximately 619 million 463 million 413 million respectively employees december 31 2014 approximately 28 company’s workforce covered collective bargaining agreements generally effective 2015 2017 agreements expiring 2015 cover approximately 21 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements may 2014 fasb issued asu 201409 “revenue contract customers” asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entity’s nature amount timing uncertainty revenue cash flows arising contracts customers pronouncement effective annual reporting periods beginning december 15 2016 including interim periods within reporting period applied retrospectively early application permitted company currently evaluating impact pronouncement consolidated financial statements related disclosures 3 acquisitions company made following acquisitions operating business unit component business unit freight segment • february 4 2015 company acquired railroad controls lp “rcl” us based provider railway signal construction services purchase price approximately 637 million net cash acquired • september 3 2014 company acquired c2ce pty ltd “c2ce” leading provider railway signal design services australia purchase price approximately 251 million net cash acquired resulting preliminary goodwill 151 million none deductible tax purposes • september 24 2013 company acquired longwood industries inc “longwood” manufacturer specialty rubber products transportation oil gas industrial markets purchase price approximately 839 million net cash acquired resulting additional goodwill 283 million none deductible tax purposes • july 30 2013 company acquired turbonetics holdings inc “turbonetics” manufacturer turbochargers related components various industrial markets purchase price approximately 232 million net cash acquired resulting additional goodwill 113 million none deductible tax purposes • january 31 2013 company acquired napier turbochargers ltd “napier” ukbased provider turbochargers related parts worldwide power generation marine markets purchase price approximately 1123 million net cash acquired resulting additional goodwill 670 million none deductible tax purposes c2ce acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition longwood turbonetics napier acquisitions following table summarizes final fair values assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • august 19 2014 company acquired diafrag leading manufacturer friction products brazil purchase price approximately 706 million net cash acquired resulting preliminary goodwill 430 million none deductible tax purposes • june 6 2014 company acquired fandstan electric group ltd “fandstan” leading rail industrial equipment manufacturer variety markets including rail tram transportation industrial energy purchase price approximately 1994 million net cash acquired resulting preliminary goodwill 601 million none deductible tax purposes fandstan diafrag acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition 2014 acquisitions listed include escrow deposits 416 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 3963 million 2247 million 1714 million related goodwill intangible assets respectively allocation 1714 million acquired intangible assets companies listed tables 1110 million assigned customer relationships 459 million assigned trade names 52 million assigned patents 08 million assigned favorable leasehold interest 21 million assigned noncompete agreements 65 million assigned customer backlog trade names considered indefinite useful life customer relationships’ useful life 20 years patents’ useful life 12 years favorable leasehold useful life five years noncompete agreements useful life four years following unaudited pro forma financial information presents income statement results acquisition napier turbonetics longwood c2ce fandstan diafrag occurred january 1 2013 4 supplemental cash flow disclosures december 11 2013 board directors amended stock repurchase authorization 200 million company’s outstanding shares december 31 2014 purchases totaled 268 million leaving 1732 million authorization company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2013 refinancing credit agreement well notes currently outstanding first quarter 2014 company repurchased 27500 shares average price 7822 per share second quarters 2014 company repurchased 194700 shares average price 7433 per share third quarter 2014 company repurchased 124600 shares average price 8133 per share fourth quarter 2014 shares repurchased purchases open market first second quarters 2013 shares repurchased third quarter 2013 company repurchased 93205 shares average price 5886 per share fourth quarter 2013 company repurchased 413900 shares average price 6647 per share purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows years land improvements 10 20 building improvements 20 40 machinery equipment 3 15 depreciation expense 388 million 335 million 289 million 2014 2013 2012 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2014 2013 change carrying amount goodwill segment year ended december 31 2014 follows december 31 2014 2013 company’s trademarks net carrying amount 1701 million 1568 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following remaining weighted average useful lives patents customer relationships intellectual property 9 years 16 years 15 years respectively amortization expense intangible assets 225 million 177 million 153 million years ended december 31 2014 2013 2012 respectively amortization expense five succeeding years follows thousands amortization expense five succeedng years follows thousands 22183 19054 17649 16670 16228 8 longterm debt longterm debt consisted following 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 800 million fiveyear revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2014 company available bank borrowing capacity net 291 million letters credit approximately 5009 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 0 basis points alternate rate margin 100 basis points december 31 2014 weighted average interest rate company’s variable rate debt 175 january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit rating history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities see note 8 “notes consolidated financial statements” included part iv item 15 report 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provided company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted libor rates plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement debt capital leases scheduled principal repayments debt capital lease balances december 31 2014 follows 270068 future years 250016 total 521195 9employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 493 million 463 million december 31 2014 2013 respectively aggregate accumulated benefit obligation international pension plans 1384 million 1082 million december 31 2014 2013 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2014 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2014 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2015 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 17 “fair value measurement” included herein plan assets asset category december 31 2014 2013 follows us canadian german pension plans target asset allocation 50 equity securities 50 debt securities united kingdom plan target asset allocation 625 equity securities 375 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 61 million international plans expect make contribution us plans 2015 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2014 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2014 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2015 assumed health care cost trend rate us plans grades initial rate 680 ultimate rate 45 2027 international plans 691 454 2027 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 145000 16000 respectively 2014 increase accumulated postretirement benefit obligation approximately 47 million 276000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 124000 14000 respectively 2014 decrease accumulated postretirement benefit obligation approximately 39 million 247000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2014 2013 plan held behalf participants 670322 shares market value 582 million 713200 shares market value 530 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2014 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted rehabilitation plan september 30 2012 increasing weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates 3 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 remains effect company’s union adopts rehabilitation plan “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2012 2011 plan years ended 2012 2011 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2014 “surcharge imposed” column indicates whether company’s contribution rate 2014 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 6408 million december 31 2014 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation withholding taxes approximately 194 million would payable upon remittance previously unremitted earnings december 31 2014 consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided september 13 2013 treasury internal revenue service issued final regulations regarding deduction capitalization expenditures related tangible property final regulations internal revenue code sections 162 167 263a apply amounts paid acquire produce improve tangible property well dispositions property generally effective tax years beginning january 1 2014 evaluated regulations determined material impact consolidated results operations cash flows financial position deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2014 valuation allowance certain foreign carryforwards 18 million state foreign tax credit carryforwards approximately 11 million expire various periods december 31 2015 december 31 2030 state net operating loss carryforwards amount 50 million expire various periods december 31 2015 december 31 2035 december 31 2014 liability income taxes associated uncertain tax positions 126 million 55 million recognized would favorably affect company’s effective income tax rate december 31 2013 liability income taxes associated uncertain tax positions 105 million 47 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense december 31 2014 total interest penalties accrued approximately 19 million 13 million respectively december 31 2013 total interest penalties accrued approximately 15 million 09 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2011 time company believes reasonably possible unrecognized tax benefits approximately 07 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows 1 basic weightedaverage common shares outstanding 95781 95463 95469 basic weightedaverage common shares outstanding nonvested restricted stock expected vest 96175 95932 95976 percentage allocated common shareholders 996 995 options purchase approximately 17000 12000 38000 shares common stock outstanding 2014 2013 2012 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2014 company maintains employee stockbased compensation plans stock options restricted stock incentive stock awards governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan 10 year term march 27 2021 december 31 2014 number shares available future grants 2011 plan 3393779 shares includes remaining shares grant 2000 plan 2011 plan approved stockholders wabtec may 11 2011 company also maintains 1995 nonemployee directors’ fee stock option plan “ directors plan” directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2014 2013 2012 company issued total 12704 17875 22010 shares restricted stock nonemployee directors total number shares issued plan december 31 2014 836464 shares awards may made directors plan subsequent october 31 2016 stockbased compensation expense plans 261 million 241 million 198 million years ended december 31 2014 2013 2012 respectively company recognized associated tax benefits related stockbased compensation plans 76 million 79 million 59 million respective periods included stockbased compensation expense 2014 23 million expense related stock options 62 million related nonvested restricted stock 27 million related restricted stock units 139 million related incentive stock awards 10 million related awards issued directors’ fees december 31 2014 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 228 million recognized weighted average period 10 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2014 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 year us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock awards vest one year date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock awards vest awarded ranging 0 200 initial incentive stock awards granted incentive stock awards included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2014 company estimates achieve 181 105 113 incentive stock awards expected vest based performance three year periods ending december 31 2014 2015 2016 respectively recorded incentive compensation expense accordingly estimate number stock awards expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock awards activity related information 2011 plan 2000 plan related information years ended december 31 13other comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2014 follows reclassifications accumulated comprehensive loss yearended december 31 2014 follows 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2014 2013 2012 200 million 182 million 147 million respectively amounts shown net sublease rentals 01 million 03 million 02 million years 2014 2013 2012 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2014 2013 preferred stock issued outstanding 17 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2014 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2013 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2014 december 31 2013 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represent accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreements 2013 notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies following geographic area data years ended december 31 2014 2013 2012 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 5217 million 5423 million 5796 million years ended december 31 2014 2013 2012 respectively sales product follows 20 income expense components expense follows 21 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 1 information basic earnings operations per common share diluted earnings operations per common share periods presented reflects twoforone split company’s common stock occurred may 14 2013 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index exhibits filing method 31 restated certificate incorporation company dated january 30 1995 amended december 31 2003 32 certificate amendment restated certificate incorporation dated may 14 2013 33 amended restated bylaws company effective february 15 2011 41 indenture dated august 8 2013 company wells fargo national association trustee 42 first supplemental indenture dated august 8 2013 company wells fargo bank national association trustee 43 form 4375 senior note due 2023 included exhibit 42 101 agreement sale purchase north american operations railway products group operating division american standard inc known trane dated 1990 rail acquisition corp american standard inc provisions indemnification reproduced 102 letter agreement undated company american standard inc known trane environmental costs sharing 103 purchase agreement dated june 17 1992 among company schuller international inc manville corporation european overseas corporation provisions indemnification reproduced 104 westinghouse air brake company 1995 nonemployee directors’ fee stock option plan amended 105 westinghouse air brake technologies corporation 2000 stock incentive plan amended 106 employment agreement albert j neupaver dated february 1 2006 107 form restricted stock agreement 108 westinghouse air brake technologies corporation 2011 stock incentive plan 109 stock purchase agreement among company standard car truck company robclif inc dated september 12 2008 1010 first amended restated refinancing credit agreement dated december 19 2013 among company wabtec cooperatief ua certain subsidiaries guarantors lenders party thereto pnc bank national association administrative agent pnc capital markets llc jp morgan securities inc joint lead arrangers joint book runners jp morgan chase bank na syndication agent bank america na citizens bank pennsylvania branch banking trust company bank toykomitsubish ufj ltd codocumentation agents 1011 form employment continuation agreement entered company albert j neupaver alvaro garciatunon raymond betler charles f kovac r mark cox david l deninno patrick dugan scott e wahlstrom timothy r wesley 1012 wabtec corporation deferred compensation plan executive officers directors adopted december 10 2009 1013 form agreement nonstatutory stock option 1995 nonemployee directors’ fee stock option plan amended 1014 form agreement nonstatutory stock options 2000 stock incentive plan amended 1015 form agreement nonstatutory stock options 2011 stock incentive plan amended list subsidiaries company 231 consent ernst young llp exhibits filing method 311 rule 13a14a15d14a certifications 312 rule 13a14a15d14a certifications 321 section 1350 certifications 101ins xbrl instance document 101sch xbrl taxonomy extension calculation linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 4filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 113782 filed april 13 2006 filed annex company’s schedule 14a proxy statement file 113782 filed march 31 2011 filed exhibit company’s quarterly report form 10q file 113782 period ended september 30 2008 filed exhibit company’s current report form 8k file 113782 dated july 2 2009 filed exhibit company’s current report form 8k file 113782 dated february 22 2011 filed exhibit company’s annual report form 10k file 113782 dated february 25 2011 filed exhibit company’s annual report form 10k file 113782 dated february 22 2013 filed exhibit company’s current report form 8k file 113782 dated may 15 2013 filed exhibit company’s current report form 8k file 113782 dated august 8 2013 filed exhibit company’s annual report form 10k file 113782 dated february 21 2014 management contract compensatory planitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded relay monitoring systems pty ltd rms track iq metalocaucho mtc railroad controls lp rcl assessment internal controls financial reporting december 31 2015 company acquired rms effective october 30 2015 track iq effective october 8 2015 mtc effective june 17 2015 rcl effective february 4 2015 rms track iq mtc rcl wholly owned subsidiaries whose total assets represents 08 04 10 28 respectively whose total net assets represents 06 13 16 52 respectively whose customer revenues represents 00 01 04 32 respectively net income represents 00 02 00 39 respectively related consolidated financial statement amounts year ended december 31 2015 based assessment management concluded company maintained effective internal control financial reporting december 31 2015 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2015 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2015 2014 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2015 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2015 2014 consolidated results operations cash flows three years period ended december 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 19 2016 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 19 2016 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls relay monitoring systems pty ltd rms track iq metalocaucho mtc railroad controls lp rcl included 2015 consolidated financial statements westinghouse air brake technologies corporation constituted 08 04 10 28 respectively total assets 06 13 16 52 respectively total net assets december 31 2015 00 01 04 32 respectively net sales 00 02 00 39 respectively net income year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting rms track iq metalocaucho rcl opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2015 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2015 2014 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2015 report dated february 19 2016 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 19 2016 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 20 countries 2015 47 company’s revenues came customers outside us 2 proposed transaction faiveley transport sa july 27 2015 company announced plans acquire faiveley transport sa faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valuedadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured three steps • wabtec made irrevocable offer owners approximately 51 faiveley transport’s shares purchase price €100 per share payable 25 cash 75 wabtec preferred stock preferred stock 1 annual dividend greater annual dividend assuming full conversion common shares must converted three years wabtec common shares implied ratio one faiveley transport common share 1125 wabtec common shares shareholders owning 51 faiveley transport entered exclusive discussions wabtec • upon completion required labor group consultations october 6 2015 51 shareholders entered definitive share purchase agreement faiveley transport entered acquisition agreement wabtec • upon completing share purchase wabtec commence tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash wabtec preferred stock preferred stock portion consideration subject cap 75 faiveley transport’s common shares wabtec intends delist faiveley transport euronext tender offer minority interests represent less 5 total purchase price offered 18 billion including assumed debt wabtec plans fund cash portion transaction cash hand existing credit facilities potentially credit debt financing prior december 31 2015 wabtec set aside €1869 million escrow deposit faiveley transport purchase combination wabtec faiveley transport would create one world’s largest public rail equipment companies revenues 45 billion presence key freight rail passenger transit geographies worldwide closing transaction subject various conditions including completion regulatory requirements steps currently ongoing timing completion unknown 3 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation capital structure may 14 2013 stockholders approved amendment amended restated certificate incorporation increase number authorized shares common stock 2000 million shares addition may 14 2013 board directors approved twoforone split company’s issued outstanding common stock form 100 stock dividend increase authorized shares stock split became effective may 14 2013 june 11 2013 respectively company issued approximately 662 million shares common stock result twoforone stock split par value company’s common stock remained unchanged 001 per share information regarding shares common stock except par value per share retained earnings net income per common share attributable wabtec shareholders periods presented reflects twoforone split company’s common stock number shares company’s common stock issuable upon exercise outstanding stock options vesting stockbased awards proportionally increased exercise price per share thereof proportionally decreased accordance terms stock incentive plans cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 56 million 63 million december 31 2015 2014 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2015 company opted perform qualitative goodwill assessment determined step two necessary assessing qualitative factors determine whether likely fair value reporting unit less carrying amount assess relevant events circumstances may impact fair value carrying amount reporting unit identification relevant events circumstances may impact reporting unit’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact qualitative assessment concludes likely fair value reporting unit less carrying value company performs twostep impairment test first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 354 million 341 million 229 million 2015 2014 2013 respectively accrued warranty 921 million 878 million december 31 2015 2014 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2015 company material foreign currency forward contracts reduce impact interest rate changes portion variablerate debt company entered two forward starting interest rate swap agreement notional value 150 million december 31 2015 company recorded current liability 45 million corresponding offset accumulated comprehensive loss 27 million net tax related agreements information regarding forward starting interest rate swap agreements see footnote 9 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 47 million 24 million 35 million 2015 2014 2013 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2015 2014 net income attributable noncontrolling interests years ended december 31 2015 2014 2013 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” company recognized revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 established sales price set customer 4 collection sale revenue customer reasonably assured 5 contingencies exist delivery considered occurred customer assumes risk rewards ownership company estimates records provisions quantity rebates sales returns allowances offset revenue period related revenue recognized based upon experience items included reduction deriving net sales general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 1038 million 1878 million customer deposits 1061 million 1118 million provisions loss contracts 118 million 71 million december 31 2015 2014 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 303 million 249 million december 31 2015 2014 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2015 2014 2013 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2015 2014 2013 company incurred costs approximately 712 million 619 million 463 million respectively employees december 31 2015 approximately 30 company’s workforce covered collective bargaining agreements generally effective 2015 2017 agreements expiring 2015 cover approximately 26 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 12 “earnings per share” included herein use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements april 2015 fasb issued accounting standards update 20153 “simplifying presentation debt issuance costs” “asu 20153” changes presentation debt issuance costs financial statements present costs direct deduction related debt liability rather asset asu 20153 become effective public companies interim annual reporting periods beginning december 15 2015 early adoption permitted adoption standard expected material impact financial statements company make required changes first quarter 2016 may 2014 fasb issued asu 20149 “revenue contract customers” asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entity’s nature amount timing uncertainty revenue cash flows arising contracts customers board voted propose standard would take effect reporting periods beginning december 15 2017 early adoption would allowed original effective date company currently evaluating impact pronouncement consolidated financial statements related disclosures november 2015 fasb issued asu 201517 “balance sheet classification deferred taxes” part simplification initiatives update requires deferred tax liabilities assets classified noncurrent classified statement financial position update effective financial periods beginning december 15 2017 however early application permitted adoption standard expected material impact financial statements 4 acquisitions company made following acquisitions operating business unit component business unit freight segment • october 30 2015 company acquired relay monitoring systems pty ltd “rms” australian based manufacturer electrical protection control products purchase price approximately 187 million net cash acquired resulting preliminary goodwill 76 million none deductible tax purposes • october 8 2015 company acquired track iq australian based manufacturer wayside censor systems global rail industry purchase price approximately 91 million net cash acquired resulting preliminary goodwill 64 million deductible tax purposes • february 4 2015 company acquired railroad controls lp “rcl” us based provider railway signal construction services purchase price approximately 780 million net cash acquired resulting preliminary goodwill 149 million deductible tax purposes • september 3 2014 company acquired c2ce pty ltd “c2ce” leading provider railway signal design services australia purchase price approximately 255 million net cash acquired resulting additional goodwill 159 million none deductible tax purposes rms track iq rcl acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisitions c2ce acquisition following table summarizes final fair value assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • june 17 2015 company acquired metalocaucho mtc manufacturer transit products primarily rubber components suspension vibration control systems purchase price approximately 234 million net cash acquired resulting preliminary goodwill 121 million none deductible tax purposes • august 21 2014 company acquired diafrag leading manufacturer friction products brazil purchase price approximately 706 million net cash acquired resulting additional goodwill 359 million none deductible tax purposes • june 6 2014 company acquired fandstan electric group ltd “fandstan” leading rail industrial equipment manufacturer variety markets including rail tram transportation industrial energy purchase price approximately 1994 million net cash acquired resulting additional goodwill 625 million none deductible tax purposes mtc acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition diafrag fandstan acquisitions following table summarizes final fair values assets acquired liabilities assumed date acquisitions 2015 acquisitions listed include escrow deposits 367 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 2974 million 1553 million 1421 million related goodwill intangible assets respectively allocation 1421 million acquired intangible assets 1060 million assigned customer relationships 274 million assigned trade names 24 million assigned noncompete agreements 63 million assigned customer backlog trade names considered indefinite useful life customer relationships’ useful life 20 years noncompete agreements useful life five years following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2014 5 supplemental cash flow disclosures november 9 2015 board directors amended stock repurchase authorization 350 million company’s outstanding shares december 31 2015 purchases totaled 3167 million leaving 333 million authorization february 9 2016 board directors amended stock repurchase authorization 350 million companys outstanding shares new stock repurchase authorization supersedes previous authorization 350 million 333 million remained company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2013 refinancing credit agreement well notes currently outstanding first second quarters 2015 shares repurchased third quarter 2015 company repurchased 237027 shares average price 9423 per share fourth quarter 2015 4652000 shares repurchased average price 7856 per share purchases open market first quarter 2014 company repurchased 27500 shares average price 7822 per share second quarters 2014 company repurchased 194700 shares average price 7433 per share third quarter 2014 company repurchased 124600 shares average price 8133 per share fourth quarter 2014 shares repurchased purchases open market 6 inventories components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 431 million 388 million 335 million 2015 2014 2013 respectively 8 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 3 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2015 2014 change carrying amount goodwill segment year ended december 31 2015 follows december 31 2015 2014 company’s trademarks net carrying amount 1674 million 1701 million respectively company believes intangibles indefinite lives intangible assets company goodwill trademarks consist following remaining weighted average useful lives patents customer relationships intellectual property 10 years 16 years 14 years respectively amortization expense intangible assets 217 million 224 million 177 million years ended december 31 2015 2014 2013 respectively estimated amortization expense five succeeding years follows thousands 9 longterm debt longterm debt consisted following 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provides company 8000 million five year revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement facility expires december 19 2018 2013 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2015 company available bank borrowing capacity net 219 million letters credit approximately 3331 million subject certain financial covenant restrictions 2013 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 basis points 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 basis points 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 0 basis points alternate rate margin 75 basis points december 31 2015 weighted average interest rate company’s variable rate debt 110 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit rating history performance company currently believes risk nonperformance negligible 2013 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2013 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provided company 6000 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility set expire november 7 2016 2011 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 basis points 75 basis points alternate rate based quoted libor rates plus margin ranged 75 basis points 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios current base rate margin 0 basis points alternate rate margin 100 basis points 4375 senior notes due august 2023 august 31 2013 company issued 2500 million senior notes due 2023 “the 2013 notes” interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 6875 senior notes due august 2013 august 31 2003 company issued 1500 million senior notes due 2013 “the 2003 notes” 2003 notes issued par interest 2003 notes accrued rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes company paid 2003 notes matured july 31 2013 utilizing available capacity 2011 refinancing credit agreement debt capital leases 10 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 452 million 493 million december 31 2015 2014 respectively aggregate accumulated benefit obligation international pension plans 1902 million 2134 million december 31 2015 2014 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2015 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2015 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2016 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 18 “fair value measurement” included herein plan assets asset category december 31 2015 2014 follows us canadian german pension plans target asset allocation 50 equity securities 50 debt securities united kingdom plan target asset allocation 625 equity securities 375 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 62 million international plans expect make contribution us plans 2016 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status 2015 company amended medical plan amongst things provided participants hra funding contributions change resulted 161 million decrease accumulated project benefit obligation components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2015 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2015 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2016 assumed health care cost trend rate us plans grades initial rate 660 ultimate rate 450 2027 international plans 662 450 2027 10 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 189000 14000 respectively 2015 increase accumulated postretirement benefit obligation approximately 46000 228000 respectively 10 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 158000 13000 respectively 2015 decrease accumulated postretirement benefit obligation approximately 42000 206000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2015 2014 plan held behalf participants 632523 shares market value 450 million 670322 shares market value 582 million respectively additionally company stock option based benefit plans described note 13 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2015 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted funding improvement plan october 21 2015 continuing existing plan increased weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates december 31 2017 3 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 surcharge ended october 21 2015 rehabilitation plan commenced “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2013 2012 plan years ended 2013 2012 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2015 “surcharge imposed” column indicates whether company’s contribution rate 2015 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 10040 million december 31 2015 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2015 valuation allowance certain foreign carryforwards 126 million primarily brazil south africa state tax credit carryforwards approximately 10 million expire various periods december 31 2016 december 31 2030 net operating loss carryforwards amount 256 million expire various periods december 31 2016 december 31 2035 december 31 2015 liability income taxes associated unrecognized tax benefits 106 million 43 million recognized would favorably affect company’s effective income tax rate december 31 2014 liability income taxes associated unrecognized tax benefits 126 million 55 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2015 total interest penalties accrued approximately 20 million 02 million respectively december 31 2014 total interest penalties accrued approximately 19 million 13 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2012 time company believes reasonably possible unrecognized tax benefits approximately 21 million may change within next 12 months due expiration statutory review periods current examinations 12 earnings per share computation earnings per share operations follows options purchase approximately 13000 17000 12000 shares common stock outstanding 2015 2014 2013 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans december 31 2015 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan 10 year term march 27 2021 december 31 2015 number shares available future grants 2011 plan 2703673 shares includes remaining shares grant 2000 plan 2011 plan approved stockholders wabtec may 11 2011 company also maintains 1995 nonemployee directors’ fee stock option plan “ directors plan” directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2015 2014 2013 company issued total 11256 12704 17875 shares restricted stock nonemployee directors total number shares issued plan december 31 2015 847720 shares units may made directors plan subsequent october 31 2016 stockbased compensation expense plans 260 million 261 million 241 million years ended december 31 2015 2014 2013 respectively company recognized associated tax benefits related stockbased compensation plans 153 million 76 million 79 million respective periods included stockbased compensation expense 2015 22 million expense related stock options 62 million related nonvested restricted stock 25 million related restricted stock units 135 million related incentive stock units 11 million related units issued directors’ fees december 31 2015 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 238 million recognized weighted average period 11 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four years vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2015 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2015 company estimates achieve 123 134 101 incentive stock units expected vest based performance three year periods ending december 31 2015 2016 2017 respectively recorded incentive compensation expense accordingly estimate number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 14 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2015 follows reclassifications accumulated comprehensive loss yearended december 31 2015 follows 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2015 2014 2013 202 million 200 million 182 million respectively amounts shown net sublease rentals 07 million 01 million 03 million years 2015 2014 2013 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 warranties following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2015 2014 preferred stock issued outstanding 18 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2015 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2014 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2015 december 31 2014 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represent accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreements 2013 notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies following geographic area data years ended december 31 2015 2014 2013 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 5084 million 5217 million 5423 million years ended december 31 2015 2014 2013 respectively sales product follows 21 income expense components expense follows 22 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 1 information basic earnings operations per common share diluted earnings operations per common share periods presented reflects twoforone split company’s common stock occurred may 14 2013 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 19 2016 raymond betler raymond betler president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated exhibit index management contract compensatory planitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded aero transportation products atp thermal transfer corporation ttc semvac group semvac general contractor general melett limited melett assessment internal controls financial reporting december 31 2017 company acquired atp effective march 13 2017 ttc effective april 5 2017 semvac effective april 28 2017 general effective october 2 2017 melett effective december 4 2017 atp ttc semvac general melett subsidiaries whose total assets represents 11 06 03 09 15 respectively whose customer revenues represents 09 04 03 02 01 respectively related consolidated financial statement amounts year ended december 31 2017 based assessment management concluded company maintained effective internal control financial reporting december 31 2017 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2017 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion financial statements audited accompanying consolidated balance sheets westinghouse air brake technologies corporation company december 31 2017 2016 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 2017 related notes schedule listed index item 152 collectively referred “consolidated financial statements” opinion based audits report auditors consolidated financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity us generally accepted accounting principles audit preacquisition historical basis consolidated financial statements faiveley transport sa consolidated subsidiary statements reflect total assets constituting 259 2016 total revenues constituting 38 2016 related consolidated totals statements audited auditors whose report furnished us opinion insofar relates amounts included faiveley transport sa based solely report auditors audited adjustments necessary convert preacquisition historical amounts included faiveley transport sa basis reflected company’s 2016 consolidated financial statements also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 26 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits report auditors provide reasonable basis opinion ernst young llp served companys auditor since 2002 pittsburgh pennsylvania february 26 2018 report independent registered public accounting firm management board faiveley transport opinion consolidated balance sheets related consolidated statement income comprehensive income shareholders’ equity cash flows present fairly material respects financial position faiveley transport subsidiaries december 31 2016 november 30 2016 results operations cash flows period november 30 2016 december 31 2016 presented separately herein conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits financial statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 company applied push accounting acquisition wabtec pricewaterhousecoopers audit philippe vincent partner neuillysurseine france february 23 2017 report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion internal control financial reporting audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion westinghouse air brake technologies corporation company maintained material respects effective internal control financial reporting december 31 2017 based coso criteria indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls aero transportation products “atp” thermal transfer corporation “ttc” semvac group semvac general contractor “am general” melett limited melett included 2017 consolidated financial statements company constituted 11 06 03 09 15 total assets respectively december 31 2017 09 04 03 02 01 revenues respectively year ended audit internal control financial reporting company also include evaluation internal control financial reporting atp ttc semvac general melett also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2017 2016 related consolidated statements comprehensive income shareholders’ equity cash flows three years period ended december 31 2017 related notes schedule listed index item 152 report dated february 26 2018 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp pittsburgh pennsylvania february 26 2018 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased equipment systems services global passenger transit freight rail industries highly engineered products intended enhance safety improve productivity reduce maintenance costs customers found locomotives freight cars passenger transit cars buses around world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 31 countries products found 100 countries throughout world 2017 66 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controls consolidated subsidiaries companys ownership less 100 outside shareholders interests shown noncontrolling interests statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 123 million 73 million december 31 2017 2016 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company computes book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases goodwill intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment reporting unit level least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2017 company opted proceed directly twostep quantitative impairment test reporting units goodwill first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units income approach market approach weighted 50 respectively arriving fair value discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units estimated fair value reporting units substantially excess respective carrying value resulted conclusion impairment existed additionally company proceeded directly quantitative impairment test trade names indefinite lives fair value trade names subject quantitative impairment test exceeded respective carrying value resulting conclusion impairment existed trade names subject quantitative testing company opted perform qualitative trade name impairment assessment determined qualitative assessment likely estimated fair values trade names less carrying values therefore analysis required assessing qualitative factors determine whether likely fair value trade name less carrying amount assess relevant events circumstances may impact fair value carrying amount trade name identification relevant events circumstances may impact trade name’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 504 million 289 million 354 million 2017 2016 2015 respectively accrued warranty 1531 million 1390 million december 31 2017 2016 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis information regarding foreign currency forward contracts see footnote 17 reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreement notional value 150 million december 31 2017 company recorded current liability 12 million corresponding offset accumulated comprehensive loss 07 million net tax related agreements information regarding interest rate swap agreement see footnote 17 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 66 million 40 million 47 million 2017 2016 2015 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2017 2016 net income attributable noncontrolling interests 85 million year ended december 31 2016 net income attributable noncontrolling interest material years ended december 31 2017 2015 comprehensive income attributable noncontrolling interests years ended december 31 2017 2016 2015 material revenue recognition revenue recognized accordance asc 605 “revenue recognition” company recognizes revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 established sales price set customer 4 collection sale revenue customer reasonably assured 5 contingencies exist delivery considered occurred customer assumes risk rewards ownership company estimates records provisions quantity rebates sales returns allowances offset revenue period related revenue recognized based upon experience items included reduction deriving net sales general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 3662 million 2749 million customer deposits 3697 million 2566 million provisions loss contracts 940 million 605 million december 31 2017 2016 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 202 million 294 million december 31 2017 2016 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2017 2016 2015 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2017 2016 2015 company incurred costs approximately 952 million 714 million 712 million respectively earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation refer recently adopted accounting pronouncements use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recently issued accounting pronouncements february 2018 financial accounting standards board fasb issued accounting standards update asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income amendments update address certain stranded income tax effects accumulated comprehensive income aoci resulting tax cuts jobs act tcja current guidance requires effect change tax laws rates deferred tax balances reported income continuing operations accounting period includes period enactment even related income tax effects originally charged credited directly aoci amount reclassification would include effect change us federal corporate income tax rate gross deferred tax amounts related valuation allowances date enactment tcja related items aoci updated guidance effective reporting periods beginning december 15 2018 applied retrospectively period effect tcja related items remaining aoci recognized beginning period adoption early adoption permitted company currently evaluating potential impact adopting guidance consolidated financial statements march 2017 fasb issued asu 201707 compensation retirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost amendments update require service cost component net benefit costs reported line item items compensation costs arising services rendered pertinent employees period components net benefit costs required presented income statement separately service cost component outside income operations update also allows service cost component eligible capitalization applicable asu effective public companies fiscal years beginning december 15 2017 interim periods within fiscal years early adoption permitted beginning annual period amendments applied retrospectively presentation service cost component components net periodic pension cost net periodic postretirement benefit cost income statement prospectively capitalization service cost component net periodic pension cost net periodic postretirement benefit assets company expect adoption guidance 2018 material impact companys financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments update eliminate requirement perform step 2 goodwill impairment test instead entity perform goodwill impairment test comparing fair value reporting unit carrying amount recognize impairment charge amount carrying amount exceeds reporting units fair value carrying amount goodwill asu effective public companies fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted impact adopting guidance could result change overall conclusion whether reporting units goodwill impaired amount impairment charge recognized event reporting units carrying value exceeds fair value companys reporting units fair values greater carrying value companys last quantitative goodwill impairment test performed october 1 2017 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash amendments update require statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows asu effective public companies fiscal years beginning december 15 2017 interim periods within fiscal years early adoption permitted company expect adoption guidance 2018 material impact companys financial statements february 2016 fasb issued asu 201602 leases topic 814 requires lessees recognize right use asset lease liability balance sheet leases terms longer 12 months leases terms less 12 months lessee permitted make accounting policy election class underlying asset recognize right use asset lease liability asu effective public companies fiscal years beginning december 15 2018 interim periods within fiscal years company currently evaluating potential impact adopting guidance consolidated financial statements may 2014 fasb issued asu 20149 “revenue contract customers” asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entity’s nature amount timing uncertainty revenue cash flows arising contracts customers board voted propose standard would take effect reporting periods beginning december 15 2017 early adoption would allowed original effective date impact results anticipated material analysis companys current longterm contracts new revenue recognition standard supports recognition revenue time costtocost method substantially longterm contracts consistent current revenue recognition model company plans adopt accounting standard update using modified retrospective method cumulative effect initially applying update recognized first reporting period 2018 company evaluated new disclosure requirements implementing appropriate changes business processes controls support disclosure new guidance recently adopted accounting pronouncements march 2016 fasb issued asu 201609 “compensation stock compensation topic 718 improvements employee sharebased payment accounting” asu simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu became effective public companies interim annual reporting periods beginning december 15 2016 accordance update company began recognizing excess tax deficiencies tax benefits sharebased payment awards benefit expense income tax income statement update adopted prospectively accordance asu impact adoption income statement material additionally accordance update company began classifying excess income tax benefits exercise stock options operating activity consolidated statement cash flows company elected adopt amendment retrospectively impact adoption operating financing cash flows material 3 acquisitions faiveley transport november 30 2016 company acquired majority ownership faiveley transport sa “faiveley transport” terms share purchase agreement “share purchase agreement” faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valueadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured step acquisition follows • november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest terms share purchase agreement directed company pay €100 per share faiveley transport payable 25 45 cash election shareholders remainder payable wabtec stock faiveley family’s ownership interest acquired company represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport upon completion share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash 11538 shares wabtec common stock per share faiveley transport common stock portion consideration subject cap issuance wabtec common shares equivalent rates cash stock elected 51 owners • february 3 2017 initial cash tender offer closed resulted company acquiring approximately 27 additional outstanding share capital voting rights faiveley transport approximately 4118 million cash 252 million wabtec stock initial cash tender offer company owned approximately 78 outstanding share capital 76 voting rights • march 6 2017 final cash tender offer closed resulted company acquiring approximately 21 additional outstanding share capital 22 additional outstanding voting rights faiveley transport approximately 3032 million cash 03 million wabtec stock final cash tender offer company owned approximately 99 share capital 98 voting rights faiveley transport • march 21 2017 mandatory squeezeout procedure finalized resulted company acquiring faiveley transport shares tendered offers approximately 175 million cash resulted company owning 100 share capital voting rights faiveley transport november 30 2016 date company acquired 51 share capital 49 voting interest faiveley transport faiveley transport consolidated variable interest entity model company concluded primary beneficiary faiveley transport possessed power direct activities faiveley transport significantly impact economic performance possessed obligation right absorb losses benefits faiveley transport purchase price paid 100 ownership faiveley transport 1507 million 7447 million included deposits escrow consolidated balance sheet december 31 2016 cash designated use consideration tender offers fair values assets acquired liabilities assumed determined using income cost market approaches fair value measurements primarily based significant inputs observable market considered level 3 december 31 2016 consolidated balance sheet includes assets liabilities faiveley transport measured fair value fair value noncontrolling interest preliminarily determined using market price faiveley transport’s publicly traded common stock multiplied number publicly traded common shares outstanding acquisition date considered level 1 acquisition noncontrolling interest three months ended march 31 2017 resulted 89 million increase additional paidin capital consolidated balance sheet represents difference consideration paid acquire noncontrolling interest carrying value noncontrolling interest acquisition following table summarizes final fair values faiveley transport assets acquired liabilities assumed twelve months ended december 31 2017 estimated fair values customer relationships current liabilities adjusted 218 million 653 million respectively changes initial estimates based information existed date acquisition additionally estimated fair values accounts receivable current liabilities adjusted 28 million 362 million respectively correct errors preliminary estimated fair values faiveley transport assets acquired liabilities assumed noncurrent assets adjusted 300 million record deferred tax impact adjustments result adjustments immaterial adjustments related changes initial estimates based information existed date acquisition goodwill increased 741 million accounts receivable current liabilities adjusted 643 million correct error preliminary estimated fair values faiveley transport assets liabilities assumed related factoring arrangement recourse substantially accounts receivable acquired expected collectible included current liabilities 259 million accrued compensation acquired sharebased stock plans obligated settled cash contingent liabilities assumed part transaction material contingent liabilities related environmental legal tax matters contingent liabilities recorded fair value purchase accounting aside pertaining uncertainty income taxes exception fair value basis accounting goodwill calculated difference acquisition date fair value consideration transferred fair value net assets acquired represents future economic benefits including synergies assembled workforce expect achieve result acquisition purchased goodwill deductible tax purposes goodwill allocated freight segment 720 million goodwill allocated transit segment 11904 million acquisitions company made following acquisitions operating business unit component business unit freight segment • december 4 2017 company acquired melett limited melett leader design manufacture supply highquality turbochargers replacement parts turbocharger aftermarket purchase price approximately 740 million net cash acquired resulting preliminary goodwill 225 million none deductible tax purposes • april 5 2017 company acquired thermal transfer corporation ttc leading provider heat transfer solutions industrial applications purchase price approximately 325 million net cash acquired resulting preliminary goodwill 163 million deductible tax purposes • march 13 2017 company acquired aero transportation products atp manufacturer engineered covering systems hopper freight cars purchase price approximately 653 million net cash acquired resulting preliminary goodwill 290 million deductible tax purposes • december 14 2016 company acquired workhorse rail llc workhorse supplier engineered freight car components mainly aftermarket purchase price approximately 438 million net cash acquired resulting goodwill 223 million 38 deductible tax purposes • november 17 2016 company acquired assets precision turbo engine precision turbo designer manufacturer highperformance aftermarket turbochargers wastegates heat exchangers automotive performance market purchase price approximately 139 million net cash acquired resulting goodwill 42 million deductible tax purposes • may 5 2016 company acquired assets unitrac railroad materials unitrac leading designer manufacturer railroad products track work services purchase price approximately 148 million net cash acquired resulting goodwill 24 million deductible tax purposes melett ttc atp acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisitions workhorse precision turbo unitrac acquisitions following table summarizes final fair value assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • october 2 2017 company acquired general contractor general manufacturer safety systems mainly transit rail cars purchase price approximately 104 million net cash acquired resulting preliminary goodwill 129 million none deductible tax purposes • august 1 2016 company acquired gerken group sa gerken manufacturer specialty carbon graphite products rail industrial applications purchase price approximately 628 million net cash acquired resulting goodwill 175 million none deductible tax purposes general acquisition following table summarizes preliminary estimated fair value assets acquired liabilities assumed date acquisition gerken acquisition following table summarizes final fair value assets acquired liabilities assumed date acquisition acquisitions listed include escrow deposits 444 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 21178 million 13896 million 7282 million related goodwill intangible assets respectively allocation 7282 million acquired intangible assets 3809 million assigned trade names 3369 million assigned customer relationships 50 million assigned intellectual property trade names considered indefinite useful life intellectual property customer relationships’ useful life 20 years company also made smaller acquisitions listed individually collectively immaterial following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2016 historical consolidated financial information company acquisitions detailed adjusted pro forma information give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact combined results pro forma data may indicative results would obtained acquisitions occurred beginning periods presented intended projection future results 4 supplemental cash flow disclosures 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 667 million 471 million 431 million 2017 2016 2015 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2017 2016 change carrying amount goodwill segment year ended december 31 2017 follows december 31 2017 2016 company’s trade names net carrying amount 6034 million 5105 million respectively company believes intangibles indefinite lives intangible assets company goodwill trade names consist following remaining weighted average useful lives patents customer relationships intellectual property 10 years 17 years 15 years respectively amortization expense intangible assets 365 million 227 million 217 million years ended december 31 2017 2016 2015 respectively estimated amortization expense five succeeding years follows thousands 8 longterm debt longterm debt consisted following wabtecs acquisition controlling stake faiveley transport triggered early repayment syndicated loan mandatory offer investors repay us schuldschein private placements syndicated loan us private placements repaid full december 2016 345 senior notes due november 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 27 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provides company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement facility expires june 22 2021 2016 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2017 company available bank borrowing capacity net 354 million letters credit approximately 6790 million subject certain financial covenant restrictions term loan drawn november 25 2016 company incurred 10 basis point commitment fee june 22 2016 initial draw november 25 2016 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points december 31 2017 weighted average interest rate company’s variable rate debt 292 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converted portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit ratings history performance company currently believes risk nonperformance negligible 2016 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2016 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt ebitda ratio 325 company compliance restrictions covenants 2016 refinancing credit agreement expect measurements limit company executing operating activities schuldschein loan due 2016 conjunction acquisition faiveley transport wabtec acquired 1372 million schuldshein private placement loan originally issued faiveley transport march 5 2014 germany approximately 20 international investors participated loan denominated euros subsequent acquisition faiveley transport company repaid 1253 million outstanding schuldschein loan remaining balance 120 million december 31 2017 matures march 5 2024 bears fixed rate 400 debt capital leases 9 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 433 million 445 million december 31 2017 2016 respectively aggregate accumulated benefit obligation international pension plans 3443 million 3122 million december 31 2017 2016 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2017 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2017 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2018 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date see note 18 “fair value measurement” included herein plan assets asset category december 31 2017 2016 follows us plan target asset allocation 55 equity securities 45 debt securities international plan target asset allocation 30 equity securities 40 debt securities 30 investments investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis following tables summarize pension plan assets measured fair value recurring basis fair value hierarchy level see note 18 following table presents reconciliation level 3 assets cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 73 million 00 million international us plans respectively 2018 benefit payments expected paid plan participants follows postretirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date postretirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2017 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2017 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2018 assumed health care cost trend rate us plans grades initial rate 630 ultimate rate 450 2027 international plans 623 450 2027 10 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans less 01 million 2017 increase accumulated postretirement benefit obligation less 01 million 03 million respectively 10 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans less 01 million 2017 decrease accumulated postretirement benefit obligation less 01 million 03 million respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2017 2016 plan held behalf participants 495274 shares market value 403 million 551482 shares market value 458 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2017 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted funding improvement plan october 21 2015 continuing existing plan increased weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates december 31 2017 3 number employees covered fund decreased due closure bensenville illinois facility affected periodtoperiod comparability 2016 2017 contributions 4 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 surcharge ended october 21 2015 rehabilitation plan commenced “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2017 2016 plan years ended 2016 2015 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2017 “surcharge imposed” column indicates whether company’s contribution rate 2017 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities december 23 2017 french government enacted finance act 2018 published official bulletin december 31 2017 finance act reduced french corporate tax rate 28 2020 25 enacting additional 15 reduction year 2021 2022 december 22 2017 us government enacted comprehensive tax legislation commonly referred tax cuts jobs act tax act tax act makes broad complex changes us tax code affect fiscal 2017 including limited requiring onetime transition tax certain unrepatriated earnings foreign subsidiaries payable eight years transition tax act also establishes new tax laws affect 2018 later years including limited reduction us federal corporate tax rate 35 21 repeals domestic manufacturing deduction general elimination us federal income taxes dividends foreign subsidiaries new provisions designed tax global intangible lowtaxed income gilti tax certain deductible base erosion payments called base erosion antiabuse tax “beat” new interest expense limitation provisions relation initial analysis impact tax law changes company recorded net tax expense 43 million includes provisional expense us tax reform bill 550 million well net benefit revaluation deferred tax assets liabilities 507 million company completed accounting income tax effects tax act company able make reasonable estimates effects analysis yet complete company recorded provisional amounts accordance sec staff accounting bulletin 118 company yet able make reasonable estimates impact certain elements company recorded amounts related elements continued accounting accordance asc 740 basis tax laws effect immediately prior enactment tax act companys accounting following impacted areas tax act incomplete however company able make reasonable estimates certain effects therefore recorded provisional amounts follows revaluation deferred tax assets liabilities tax act reduces us federal corporate tax rate 35 21 tax years beginning december 31 2017 addition tax act makes certain changes depreciation rules implements new limits deductibility certain executive compensation company evaluated changes recorded provisional benefit net deferred taxes 246 million company still completing calculation impact changes deferred tax balances transition tax unrepatriated foreign earnings transition tax unrepatriated foreign earnings tax previously untaxed accumulated current earnings profits ep companys foreign subsidiaries determine amount transition tax company must determine among factors amount post1986 ep foreign subsidiaries well amount nonus income taxes paid earnings company able make reasonable estimate transition tax recorded provisional transition tax expense 518 million company continuing gather additional information precisely compute amount transition tax complete calculation ep well final determination nonus income taxes paid companys accounting following elements tax act incomplete yet able make reasonable estimates effects items therefore provisional amounts recorded global intangible low taxed income gilti tax act creates new requirement certain income ie gilti earned foreign subsidiaries must included currently gross income us shareholder due complexity new gilti tax rules company continuing evaluate provision tax act application asc 740 us gaap company permitted make accounting policy election either treat taxes due future inclusions us taxable income related gilti currentperiod expense incurred factor amounts companys measurement deferred taxes company yet completed analysis gilti tax rules yet able reasonably estimate effect provision tax act make accounting policy election asc 740 treatment gilti tax therefore company recorded amounts related potential gilti tax financial statements yet made policy decision regarding whether record deferred taxes gilti indefinite reinvestment assertion beginning 2018 tax act provides 100 deduction dividends received 10percent owned foreign corporations us corporate shareholders subject oneyear holding period although dividend income exempt us federal tax hands us corporate shareholders companies must still apply guidance asc 740 account tax consequences outside basis differences tax impacts investments nonus subsidiaries company accrued transition tax deemed repatriated earnings previously indefinitely reinvested company unable determine reasonable estimate remaining tax liability tax act remaining outside basis differences evaluate tax act affect companys existing accounting position indefinitely reinvest unremitted foreign earnings therefore company included provisional amount item financial statements fiscal 2017 company record amounts needed item beginning first reporting period measurement period company obtains necessary information able analyze prepare reasonable estimate components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided 65 decrease effective tax rate due france tax rate change result adopted tax legislation reduces corporate income tax rate france 280 250 period 2021 2022 79 decrease effective tax rate due us tax rate change result adopted tax legislation reduces corporate income tax rate us 350 210 effective january 1 2018 156 increase effective tax rate due us tax reform previously discussed deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2017 valuation allowance certain foreign carryforwards 257 million primarily brazil china united kingdom south africa net operating loss carryforwards amount 657 million expire various periods december 31 2018 december 31 2037 december 31 2017 liability income taxes associated unrecognized tax benefits 69 million 44 million recognized would favorably affect company’s effective income tax rate december 31 2016 liability income taxes associated unrecognized tax benefits 84 million 42 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2017 total interest penalties accrued approximately 07 million 01 million respectively december 31 2016 total interest penalties accrued approximately 08 million 03 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2012 time company believes reasonably possible unrecognized tax benefits approximately 52 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows options purchase approximately 24000 20000 13000 shares common stock outstanding 2017 2016 2015 respectively included computation diluted earnings impact would antidilutive 12 stockbased compensation plans december 31 2017 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan amended restated “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan term may 10 2027 december 31 2017 number shares available future grants 2011 plan 3192453 shares includes remaining shares grant 2000 plan amendment restatement 2011 plan approved stockholders wabtec may 10 2017 company also maintains 1995 nonemployee directors’ fee stock option plan amended restated “the directors plan” amendment restatement directors plan approved stockholders wabtec may 10 2017 directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2017 2016 2015 company issued total 16500 16972 11256 shares restricted stock nonemployee directors total number shares issued plan december 31 2017 881192 shares stockbased compensation expense plans 213 million 208 million 260 million years ended december 31 2017 2016 2015 respectively company recognized associated tax benefits related stockbased compensation plans 89 million 149 million 153 million respective periods included stockbased compensation expense 2017 17 million expense related stock options 70 million related nonvested restricted stock 46 million related restricted stock units 65 million related incentive stock units 15 million related units issued directors’ fees december 31 2017 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 246 million recognized weighted average period 12 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2017 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2017 company estimates achieve 84 77 91 incentive stock units expected vest based performance three year periods ending december 31 2017 2018 2019 respectively recorded incentive compensation expense accordingly estimate number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 13 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2017 follows reclassifications accumulated comprehensive loss yearended december 31 2017 follows changes accumulated comprehensive loss component net tax yearended december 31 2016 follows reclassifications accumulated comprehensive loss yearended december 31 2016 follows 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2017 2016 2015 346 million 272 million 202 million respectively amounts shown net sublease rentals immaterial years 2017 2016 2015 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2017 2016 preferred stock issued outstanding 17 derivative financial instruments hedging foreign currency hedging company uses forward contracts mitigate foreign currency exchange rate exposure due forecasted sales finished goods future settlement foreign currency denominated assets liabilities derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item contracts scheduled mature within two years twelve months ended december 31 2017 amount reclassified income 04 million activities company enters certain derivative contracts accordance risk management strategy meet criteria hedge accounting impact largely mitigating foreign currency exposure foreign exchange contracts accounted full mark market basis earnings gains losses recorded component expense net unrealized gain related contracts 21 million twelve months ended december 31 2017 notional amount fair value foreign exchange contracts meet criteria hedge accounting december 31 2017 material contracts scheduled mature within one year following table summarizes gross notional amounts fair values designated nondesignated hedged discussed sections interest rate hedging company uses interest rate swaps manage interest rate exposures company exposed interest rate volatility regard existing floating rate debt primary exposure includes london interbank offered rates libor derivatives used hedge risk associated changes fair value certain variablerate debt primarily designated fair value hedges consequently changes fair value derivatives along changes fair value debt obligations recognized current period earnings see longterm debt footnote fair value measurement footnote information current interest rate swaps december 31 2017 company recorded current liability 12 million accumulated comprehensive loss 07 million net tax related agreements 18 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2017 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2016 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2017 december 31 2016 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represents accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 2016 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreements 2013 2016 notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future april 21 2016 siemens industry inc filed lawsuit company federal district court delaware alleging company infringed seven patents owned siemens relate positive train control technology november 2 2016 siemens amended complaint add six additional patents also claim infringed company’s positive train control products company filed answers asserted counterclaims response siemens’ complaints case still preliminary stages company begun filing interparties review proceedings us patent trademark office seeking invalidate siemens patents wabtec believes claims without merit vigorously defending xorail inc wholly owned subsidiary company “xorail” received notices denver transit constructors “denver transit” alleging breach contract related operating constant warning wireless crossings late delivery train management dispatch system “tmds” denver eagle p3 project owned denver regional transit district rtd damages asserted alleged late delivery tmds xorail final stages successfully implementing recovery plan concerning tmds issues regard wireless crossings september 8 2017 denver transit alleged total damages 368 million july 31 2017 continuing accumulate crossings certified use without flaggers denver transit alleges due xorails failure achieve constant warning times satisfactory federal railway administration fra public utility commission puc claims filed denver transit regard either issue xorail denied denver transit’s assertions regarding wireless crossings denver transit also notified rtd denver transit considers new certification requirements imposed fra andor puc change law neither denver transit subcontractors liable xorail worked denver transit modify system meet fra’s pucs previously undefined evolving certification requirements september 28 2017 fra granted 5 year approval modified wireless crossing system currently implemented however puc granted approval modified system therefore crossings still certified use without flaggers denver transit rtd continuing seek approval puc company believe liability respect wireless crossing issue time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically regional trains high speed trains subway cars lightrail vehicles buses builds new commuter locomotives refurbishes subway cars provides heating ventilation air conditioning equipment doors buses subways customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations intersegment sales accounted prices generally established reference similar transactions unaffiliated customers corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies following geographic area data years ended december 31 2017 2016 2015 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 4480 million 4705 million 5084 million years ended december 31 2017 2016 2015 respectively sales product follows 21 guarantor subsidiaries financial information obligations companys 2016 notes 2013 notes revolving credit facility term loan fully unconditionally guaranteed us subsidiaries guarantors guarantor 100 owned parent company accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2017 balance sheet december 31 2016 income statement year ended december 31 2017 income statement year ended december 31 2016 income statement year ended december 31 2015 condensed statement cash flows year ended december 31 2017 condensed statement cash flows year ended december 31 2016 condensed statement cash flows year ended december 31 2015 22 expense income net components expense income net follows 23 selected quarterly financial data unaudited 1 results fourth quarter 2017 include project adjustments related prior periods decreased income operations approximately 148 million effect project adjustments material company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges applicable signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 26 2018 raymond betler raymond betler president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicateditem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan certain schedules omitted pursuant item 601b2 regulation sk wabtec hereby undertakes furnish supplementally copies omitted schedules upon request sec management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded annax gmbh annax assessment internal controls financial reporting december 31 2018 company acquired annax effective march 22 2018 annax subsidiary whose total assets net assets customer revenues net income represents 10 16 11 10 respectively related consolidated financial statement amounts year ended december 31 2018 based assessment management concluded company maintained effective internal control financial reporting december 31 2018 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2018 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion financial statements audited accompanying consolidated balance sheets westinghouse air brake technologies corporation company december 31 2018 2017 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 152 collectively referred “consolidated financial statements” opinion based audits report auditors consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity us generally accepted accounting principles audit preacquisition historical basis consolidated financial statements faiveley transport sa consolidated subsidiary statements reflect total revenues constituting 38 2016 related consolidated total statements audited auditors whose report furnished us opinion insofar relates amounts included faiveley transport sa based solely report auditors audited adjustments necessary convert preacquisition historical amounts included faiveley transport sa basis reflected company’s 2016 consolidated financial statements also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 27 2019 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits report auditors provide reasonable basis opinion ernst young llp served companys auditor since 2002 pittsburgh pennsylvania february 27 2019 report independent registered public accounting firm management board faiveley transport opinion consolidated statement income comprehensive income shareholders’ equity cash flows present fairly material respects results operations cash flows faiveley transport subsidiaries period november 30 2016 december 31 2016 presented separately herein conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit financial statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 company applied push accounting acquisition wabtec pricewaterhousecoopers audit philippe vincent partner neuillysurseine france february 23 2017 report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion internal control financial reporting audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion westinghouse air brake technologies corporation company maintained material respects effective internal control financial reporting december 31 2018 based coso criteria indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls annax gmbh annax included 2018 consolidated financial statements company constituted 10 16 total net assets respectively december 31 2018 11 10 revenues net income respectively year ended audit internal control financial reporting company also include evaluation internal control financial reporting annax also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2018 2017 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 152 report dated february 27 2019 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp pittsburgh pennsylvania february 27 2019 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased equipment systems services global passenger transit freight rail industries highly engineered products intended enhance safety improve productivity reduce maintenance costs customers found locomotives freight cars passenger transit cars buses around world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 30 countries products found 100 countries throughout world 2018 67 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controls consolidated subsidiaries companys ownership less 100 outside shareholders interests shown noncontrolling interests statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 169 million 123 million december 31 2018 2017 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company computes book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases goodwill intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment reporting unit level least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2018 company opted proceed directly quantitative impairment test reporting units goodwill first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units income approach market approach weighted 50 respectively arriving fair value discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units estimated fair value reporting units excess respective carrying value resulted conclusion impairment existed additionally company proceeded directly quantitative impairment test trade names indefinite lives fair value trade names subject quantitative impairment test exceeded respective carrying value resulting conclusion impairment existed trade names subject quantitative testing company opted perform qualitative trade name impairment assessment determined qualitative assessment likely estimated fair values trade names less carrying values therefore analysis required assessing qualitative factors determine whether likely fair value trade name less carrying amount assess relevant events circumstances may impact fair value carrying amount trade name identification relevant events circumstances may impact trade name’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 580 million 504 million 289 million 2018 2017 2016 respectively accrued warranty 1537 million 1531 million december 31 2018 2017 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company uses forward contracts mitigate foreign currency exchange rate exposure foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis information regarding foreign currency forward contracts see footnote 19 company uses interest rate swaps manage interest rate exposures company entered interest rate swap agreement notional value 150 million december 19 2018 interest swap agreement expired information regarding interest rate swap agreement see footnote 19 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized income net 57 million 66 million 40 million 2018 2017 2016 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2018 2017 net loss attributable noncontrolling interests 32 million year ended december 31 2018 net income attributable noncontrolling interest 85 million year ended december 31 2016 net income attributable noncontrolling interests year ended december 31 2017 material revenue recognition january 1 2018 company adopted asc 606 “revenue contracts customers” new guidance provides fivestep analysis transactions determine revenue recognized requires entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer approximately 75 company’s revenues derived performance obligations satisfied point time control passes customer generally time shipment accordance agreed upon delivery terms remaining revenues earned time approach consistent revenue recognition approach prior years company also longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use without significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination additionally company customer agreements involving creation enhancement asset customer controls also require revenue recognized time approach consistent revenue recognition approach prior years generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined contract assets include unbilled amounts resulting sales longterm contracts revenue recognized time revenue exceeds amount billed customer based terms contract assets classified current assets caption “unbilled accounts receivable” consolidated balance sheet company elected use practical expedient consider unbilled amounts anticipated paid within one year significant financing components contract liabilities include customer deposits made prior incurrence costs related newly agreed upon contract advanced customer payments excess revenue recognized contract liabilities classified current liabilities caption “customer deposits” consolidated balance sheet contract liabilities considered significant financing component used meet working capital demands higher early stages contract revenue associated contract liabilities expected recognized within one year contract liabilities also include provisions estimated losses uncompleted contracts provisions loss contracts 712 million 940 million december 31 2018 2017 respectively provisions estimated losses classified current liabilities included within caption “other accrued liabilities” consolidated balance sheet due nature work required performed company’s longterm projects estimation total revenue cost completion subject many variables requires significant judgment contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontractors may associated contract disciplined quarterly estimateatcompletion process management reviews progress long termprojects part process management reviews information including key contract matters progress towards completion identified risks opportunities information could impact company’s estimates revenue costs completing analysis quarterly adjustments net sales cost goods sold related impact operating income recognized necessary period become known generally company’s revenue contains single performance obligation distinct good pricing defined contracts line item basis includes estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts liquidating damages performance bonuses sales returns allowances also estimated recognized period related revenue recognized based upon company’s experience remaining performance obligations represent transaction price firm customer orders subject standard industry cancellation provisions substantial scopeofwork adjustments december 31 2018 companys remaining performance obligations 45 billion company expects recognize revenue approximately 55 remaining performance obligations next 12 months remainder recognized thereafter letters credit ordinary course business company issues letters credit related commercial products outstanding amount including letters credit issues credit facility 3542 million 3646 million december 31 2018 2017 respectively preproduction costs certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 164 million 202 million december 31 2018 2017 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2018 2017 2016 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2018 2017 2016 company incurred costs approximately 875 million 952 million 714 million respectively earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 13 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation refer recently adopted accounting pronouncements use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ materially estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recently issued accounting pronouncements february 2018 financial accounting standards board fasb issued accounting standards update asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income amendments update address certain stranded income tax effects accumulated comprehensive income aoci resulting tax cuts jobs act tax act current guidance requires effect change tax laws rates deferred tax balances reported income continuing operations accounting period includes period enactment even related income tax effects originally charged credited directly aoci amendments update allow reclassification accumulated comprehensive income retained earnings stranded effects resulting tax act amount reclassification would include effect change us federal corporate income tax rate gross deferred tax amounts related valuation allowances date enactment tax act related items aoci updated guidance effective reporting periods beginning december 15 2018 applied retrospectively period effect tax act related items remaining aoci recognized beginning period adoption company evaluated potential impact adopting guidance determined material impact consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments update eliminate requirement perform step 2 goodwill impairment test instead entity perform goodwill impairment test comparing fair value reporting unit carrying amount recognize impairment charge amount carrying amount exceeds reporting units fair value carrying amount goodwill asu effective public companies fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted impact adopting guidance could result change overall conclusion whether reporting units goodwill impaired amount impairment charge recognized event reporting units carrying value exceeds fair value companys reporting units fair values greater carrying value companys last quantitative goodwill impairment test performed october 1 2018 company currently evaluating potential impact adopting guidance consolidated financial statements february 2016 fasb issued asu 201602 leases topic 814 requires lessees recognize right use asset lease liability balance sheet leases terms longer 12 months leases terms less 12 months lessee permitted make accounting policy election class underlying asset recognize right use asset lease liability guidance requires enhanced disclosures regarding amount timing uncertainty cash flows arising leases effective interim annual periods beginning december 15 2018 early adoption permitted guidance becomes effective company january 1 2019 company plans elect practical expedient require capitalization leases terms 12 months less company plan elect practical expedient allows hindsight used determine term lease company completed accumulation lease portfolio lease management system validated information accuracy completeness company implemented system used primary source company’s lease information related accounting management expects record rightofuse asset lease liability consolidated balance sheet several types operating leases including land buildings plant equipment vehicles amount respective asset liability estimated within range 165 million 185 million fasb recently proposed transition alternative would allow application guidance beginning period adopted rather requiring adjustment prior comparative periods company adopted transition alternative january 1 2019 adoption date recently adopted accounting pronouncements may 2014 fasb issued asu 201409 “revenue contracts customers” asu supersedes previous revenue recognition requirements us gaap requires entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entity’s nature amount timing uncertainty revenue cash flows arising contracts customers asu became effective public companies interim annual reporting periods beginning december 15 2017 company adopted accounting standard update using modified retrospective method impact adopting new standard material consolidated statement income consolidated balance sheet march 2017 fasb issued asu 201707 compensation retirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost amendments update require service cost component net benefit costs reported line item items compensation costs arising services rendered pertinent employees period components net benefit costs required presented income statement separately service cost component outside income operations update also allows service cost component eligible capitalization applicable accordance update company began recognizing interest expense component net periodic benefit cost interest expense income statement expected return plan assets net amortizationdeferrals curtailments income expense net income statement update adopted company applied retrospectively presentation service cost component components net benefit costs accordance asu impact adoption resulted increases 06 million 92 million 98 million selling general administrative expense interest expense net income net respectively income statement year ended december 31 2017 impact adoption resulted increases 18 million 77 million 95 million selling general administrative expense interest expense net income net respectively income statement year ended december 31 2016 also capitalization service cost component net benefit cost adopted prospectively accordance asu november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash amendments update require statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows requirements update adopted company applied retrospectively result restricted cash related acquisition faiveley transport included change cash years ended december 31 2017 2016 3 acquisitions faiveley transport november 30 2016 company acquired majority ownership faiveley transport terms share purchase agreement faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valueadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured step acquisition follows • november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest terms share purchase agreement directed company pay €100 per share faiveley transport payable 25 45 cash election shareholders remainder payable wabtec stock faiveley family’s ownership interest acquired company represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport upon completion share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash 11538 shares wabtec common stock per share faiveley transport common stock portion consideration subject cap issuance wabtec common shares equivalent rates cash stock elected 51 owners • february 3 2017 initial cash tender offer closed resulted company acquiring approximately 27 additional outstanding share capital voting rights faiveley transport approximately 4118 million cash 252 million wabtec stock initial cash tender offer company owned approximately 78 outstanding share capital 76 voting rights • march 6 2017 final cash tender offer closed resulted company acquiring approximately 21 additional outstanding share capital 22 additional outstanding voting rights faiveley transport approximately 3032 million cash 03 million wabtec stock final cash tender offer company owned approximately 99 share capital 98 voting rights faiveley transport • march 21 2017 mandatory squeezeout procedure finalized resulted company acquiring faiveley transport shares tendered offers approximately 175 million cash resulted company owning 100 share capital voting rights faiveley transport november 30 2016 date company acquired 51 share capital 49 voting interest faiveley transport faiveley transport consolidated variable interest entity model company concluded primary beneficiary faiveley transport possessed power direct activities faiveley transport significantly impact economic performance possessed obligation right absorb losses benefits faiveley transport purchase price paid 100 ownership faiveley transport 1507 million 7447 million included deposits escrow consolidated balance sheet december 31 2016 cash designated use consideration tender offers fair values assets acquired liabilities assumed determined using income cost market approaches fair value measurements primarily based significant inputs observable market considered level 3 december 31 2016 consolidated balance sheet includes assets liabilities faiveley transport measured fair value fair value noncontrolling interest determined using market price faiveley transport’s publicly traded common stock multiplied number publicly traded common shares outstanding acquisition date considered level 1 acquisition noncontrolling interest three months ended march 31 2017 resulted 89 million increase additional paidin capital consolidated balance sheet represents difference consideration paid acquire noncontrolling interest carrying value noncontrolling interest acquisition following table summarizes final fair values faiveley transport assets acquired liabilities assumed acquisitions company made following acquisitions operating business unit component business unit freight segment • december 4 2017 company acquired melett limited melett leader design manufacture supply highquality turbochargers replacement parts turbocharger aftermarket purchase price approximately 719 million net cash acquired resulting goodwill 267 million none deductible tax purposes • april 5 2017 company acquired thermal transfer corporation ttc leading provider heat transfer solutions industrial applications purchase price approximately 325 million net cash acquired resulting goodwill 141 million deductible tax purposes • march 13 2017 company acquired aero transportation products atp manufacturer engineered covering systems hopper freight cars purchase price approximately 653 million net cash acquired resulting goodwill 290 million deductible tax purposes following table summarizes final fair values assets acquired liabilities assumed date acquisitions company made following acquisitions operating business unit component business unit transit segment • march 22 2018 company acquired annax gmbh annax leading supplier public address passenger information systems transit vehicles purchase price approximately 287 million net cash acquired resulting preliminary goodwill 255 million none deductible tax purposes • october 2 2017 company acquired general contractor general manufacturer safety systems mainly transit rail cars purchase price approximately 104 million net cash acquired resulting goodwill 61 million none deductible tax purposes annax acquisition following table summarizes preliminary estimated fair value assets acquired liabilities assumed date acquisition general acquisition following table summarizes final fair value assets acquired liabilities assumed date acquisition acquisitions listed include escrow deposits 244 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 1995 million 1014 million 981 million related goodwill intangible assets respectively allocation 981 million acquired intangible assets 223 million assigned trade names 702 million assigned customer relationships trade names considered indefinite useful life intellectual property customer relationships’ useful life 20 years company also made smaller acquisitions listed individually collectively immaterial following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2017 historical consolidated financial information company acquisitions detailed adjusted pro forma information give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact combined results pro forma data may indicative results would obtained acquisitions occurred beginning periods presented intended projection future results 4 merger wabtec ge transportation wabtec general electric company ge transportation system holdings inc spinco newly formed wholly owned subsidiary ge wabtec us rail holdings inc merger sub newly formed wholly owned subsidiary company entered original merger agreement may 20 2018 ge spinco wabtec us rail holdings inc direct sale purchaser entered original separation agreement may 20 2018 together provided combination wabtec ge transportation original merger agreement original separation agreement subsequently amended january 25 2019 merger completed february 25 2019 connection direct sale certain assets ge transportation including equity interests certain pretransaction subsidiaries ge compose part ge transportation sold direct sale purchaser cash payment 2875 billion direct sale purchaser assumed certain liabilities ge transportation connection purchase thereafter ge transferred spinco business spinco subsidiaries extent already held spinco subsidiaries spinco issued ge shares spinco class preferred stock spinco class b preferred stock spinco class c preferred stock additional shares spinco common stock spinco transfer following issuance additional spinco common stock ge immediately prior distribution ge owned 8700000000 shares spinco common stock 15000 shares spinco class preferred stock 10000 shares spinco class b preferred stock one share spinco class c preferred stock constituted outstanding stock spinco following direct sale ge distributed distribution shares spinco spinoff transaction immediately distribution merger sub merged spinco whereby separate corporate existence merger sub ceased spinco continued surviving company wholly owned subsidiary wabtec except respect shares spinco class preferred stock held ge merger subject adjustment accordance merger agreement share spinco common stock converted right receive number shares wabtec common stock based common stock exchange ratio set forth merger agreement share spinco class c preferred stock converted right receive 10000 shares wabtec convertible preferred stock b number shares wabtec common stock equal 99 fullydiluted pro forma wabtec shares immediately prior merger wabtec paid 100 million cash ge exchange shares spinco class b preferred stock upon consummation merger calculated based wabtec’s outstanding common stock fullydiluted asconverted asexercised basis december 31 2018 approximately 492 outstanding shares wabtec common stock would held collectively ge spinoff record date holders ge common stock 99 held ge directly shares wabtec common stock 15 underlying shares wabtec convertible preferred stock held ge approximately 508 outstanding shares wabtec common stock would held premerger wabtec stockholders following effective time merger ge also 15000 shares spinco class preferred stock wabtec hold 10000 shares spinco class b preferred stock shares wabtec common stock wabtec convertible preferred stock held ge subject ge’s obligations shareholders agreement including among things case subject certain exceptions restrictions ability sell transfer otherwise divest shares period 30 days ii obligation sell transfer otherwise divest later 120 days following closing date merger ge’s affiliates’ ownership wabtec common stock andor wabtec convertible preferred stock ge together affiliates beneficially owns less 149 199 number shares wabtec common stock outstanding immediately closing merger b later one year following closing date merger ge’s affiliates’ ownership wabtec common stock andor wabtec convertible preferred stock ge together affiliates beneficially owns 185 number shares wabtec common stock outstanding immediately closing merger case clauses b treating wabtec convertible preferred stock wabtec common stock convertible purposes determining number shares wabtec common stock owned purposes determining number shares wabtec common stock outstanding c later third anniversary closing date merger subject shares ge together affiliates beneficially owns iii obligation vote shares wabtec common stock proportion required shareholders agreement estimated total value consideration paid wabtec transactions subject market price shares wabtec common stock date closing using wabtec’s closing stock price nyse february 22 2019 total value consideration transactions approximately 102 billion including direct sale purchase price contingent consideration assumed debt net cash acquired september 14 2018 wabtec completed public offering sale 500 million aggregate principal amount floating rate senior notes ii 750 million aggregate principal amount 2024 senior notes iii 125 billion aggregate principal amount 2028 senior notes company used net proceeds offering sale notes combined proceeds 400 million delayed draw term loan entered june 8 2018 finance direct sale wabtec used portion proceeds september 14 2018 notes pay debt associated revolving credit facility remaining proceeds classified restricted cash consolidated balance sheet company used cash amounts finance direct sale refer footnote 10 information regarding debt merger spinco wabtec’s wholly owned subsidiary except respect shares spinco class preferred stock held ge holds spinco business direct sale purchaser also wabtec’s wholly owned subsidiary holds assets purchased liabilities assumed connection direct sale together spinco direct sale purchaser operate posttransaction ge transportation shares company’s common stock including issued merger listed nyse company’s current trading symbol “wab” date distribution ge subsidiaries spinco transferred subsidiaries entered additional agreements relating among things intellectual property employee matters tax matters research development transition services 5 supplemental cash flow disclosures 6 inventories components inventory net reserves 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 664 million 667 million 471 million 2018 2017 2016 respectively 8 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2018 2017 change carrying amount goodwill segment year ended december 31 2018 follows december 31 2018 2017 company’s trade names net carrying amount 5828 million 6034 million respectively company believes intangibles indefinite lives intangible assets company goodwill trade names consist following remaining weighted average useful lives patents customer relationships intellectual property 10 years 16 years 13 years respectively amortization expense intangible assets 398 million 365 million 227 million years ended december 31 2018 2017 2016 respectively estimated amortization expense five succeeding years follows thousands 9 contract assets contract liabilities contract assets include unbilled amounts resulting sales longterm contracts revenue recognized time revenue exceeds amount billed customer based terms contract liabilities include customer deposits made prior incurrence costs related newly agreed upon contract advanced customer payments excess revenue recognized provisions estimated losses uncompleted contracts change carrying amount contract assets contract liabilities twelve months ended december 31 2018 follows 10 longterm debt longterm debt consisted following september 14 2018 company issued 25 billion senior notes three different maturities • floating rate senior notes due 2021 company issued 5000 million floating rate senior notes due 2021 floating rate notes floating rate notes noncallable one year issued 100 face value interest floating rate notes accrues floating rate per annum equal threemonth libor plus 105 basis points interest rate floating rate notes initial interest period threemonth libor plus 105 basis points determined september 12 2018 payable quarterly december 15 march 15 june 15 september 15 year company incurred 35 million deferred financing costs related issuance floating rate notes • 4150 senior notes due 2024 company issued 7500 million 4150 senior notes due 2024 notes 2024 notes issued 99805 face value interest 2024 notes accrues rate 4150 per annum payable semiannually march 15 september 15 year company incurred 74 million deferred financing costs related issuance 2024 notes • 470 senior notes due 2028 company issued 12500 million 470 senior notes due 2028 notes together floating rate notes 2024 notes senior notes 2028 notes issued 99889 face value interest 2028 notes accrues rate 4700 per annum payable semiannually march 15 september 15 year company incurred 106 million deferred financing costs related issuance 2028 notes net proceeds issuance sale senior notes used finance cash portion ge transportation acquisition principal balances due full maturity senior notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture senior notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sales assets change control mergers consolidations incurrence liens february 12 2019 rating assigned moodys decreased ba1 accordingly pursuant respective terms senior notes issued september 14 2018 interest rate shall increased 025 interest rate increase shall take effect next interest period following february 12 2019 company compliance restrictions covenants indenture senior notes issued expects restrictions covenants type limiting factor executing operating activities 345 senior notes due november 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 27 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2018 refinancing credit agreement june 8 2018 company entered credit agreement “2018 refinancing credit agreement” replaced company’s thenexisting “2016 refinancing credit agreement” part 2018 refinancing credit agreement company entered 12 billion revolving credit facility “revolving credit facility” replaced company’s revolving credit facility 2016 refinancing credit agreement includes letter credit subfacility 4500 million swing line subfacility 750 million ii 3500 million term loan “refinancing term loan” refinanced term loan 2016 refinancing credit agreement iii new 4000 million delayed draw term loan “delayed draw term loan” 2018 refinancing credit agreement also provided bridge loan facility “bridge loan facility” amount exceed 25 billion facility become effective company’s request commitments respect bridge loan facility terminated upon issuance sale senior notes september 14 2018 addition 2018 refinancing credit agreement contains uncommitted accordion feature allowing company request aggregate amount exceed 6000 million increases borrowing commitments revolving credit facility new incremental term loan commitment december 31 2018 company available bank borrowing capacity net 292 million letters credit approximately 11708 million subject certain financial covenant restrictions revolving credit facility matures june 8 2023 unsecured refinancing term loan matures june 8 2021 unsecured delayed draw term loan matures third anniversary date borrowed unsecured applicable interest rate borrowings 2018 refinancing credit agreement includes interest rate spreads based lower pricing corresponding company’s ratio total debt less unrestricted cash 3000 million ebitda “leverage ratio” ii company’s public rating case range 1000 1875 liborcdorbased borrowings 00 0875 alternate base rate based borrowings obligations company 2018 refinancing credit agreement guaranteed certain company’s subsidiaries 2018 refinancing credit agreement contains customary representations warranties company subsidiaries including customary use materiality material adverse effect knowledge qualifiers company subsidiaries also subject customary affirmative covenants impose certain reporting obligations company subsidiaries ii customary negative covenants including limitations indebtedness liens restricted payments fundamental changes business activities transactions affiliates restrictive agreements changes fiscal year use proceeds addition company required maintain interest coverage ratio least 300 100 period four consecutive fiscal quarters ending last day fiscal quarter ii leverage ratio calculated last day fiscal quarter period four consecutive fiscal quarters 325 100 less provided event company completes direct sale merger material acquisition cash consideration paid exceeds 5000 million maximum leverage ratio permitted 375 100 end fiscal quarter acquisition consummated three fiscal quarters immediately following fiscal quarter 350 100 end fourth fifth full fiscal quarters consummation acquisition company compliance restrictions covenants 2018 refinancing credit agreement expect measurements limit company executing operating activities december 31 2018 weighted average interest rate company’s variable rate debt 368 june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provided company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement 2016 refinancing credit agreement borrowings bore variable interest rates indexed described 2016 refinancing credit agreement company could elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points debt capital leases 11 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 388 million 433 million december 31 2018 2017 respectively aggregate accumulated benefit obligation international pension plans 3011 million 3443 million december 31 2018 2017 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2018 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2018 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2019 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date see note 20 “fair value measurement” included herein plan assets asset category december 31 2018 2017 follows us plan target asset allocation 50 equity securities 50 debt securities international plan target asset allocation 31 equity securities 40 debt securities 29 investments investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis following tables summarize pension plan assets measured fair value recurring basis fair value hierarchy level see note 20 following table presents reconciliation level 3 assets cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 64 million international plans 2019 company expect make contributions us plans 2019 benefit payments expected paid plan participants follows postretirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date postretirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2018 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2018 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2019 assumed health care cost trend rate us plans grades initial rate 630 ultimate rate 450 2028 international plans 604 450 2027 cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2018 2017 plan held behalf participants 442239 shares market value 311 million 495274 shares market value 403 million respectively additionally company stock option based benefit plans described note 14 company contributes multiemployer defined benefit pension plan collective bargaining agreement covers certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2018 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2018 2017 plan years ended 2017 2016 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2018 “surcharge imposed” column indicates whether company’s contribution rate 2018 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 12 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities december 23 2017 french government enacted finance act 2018 published official bulletin december 31 2017 finance act reduced french corporate tax rate 28 2020 25 enacting additional 15 reduction year 2021 2022 december 22 2017 us government enacted comprehensive tax legislation commonly referred tax cuts jobs act tax act tax act makes broad complex changes us tax code affected fiscal 2017 including limited requiring onetime transition tax certain unrepatriated earnings foreign subsidiaries payable eight years transition tax act also established new tax laws affect 2018 later years including limited reduction us federal corporate tax rate 35 21 repeals domestic manufacturing deduction general elimination us federal income taxes dividends foreign subsidiaries new provisions designed tax global intangible lowtaxed income gilti tax certain deductible base erosion payments called base erosion antiabuse tax “beat” new interest expense limitation provisions relation analysis impact tax law changes company recorded net tax expense 43 million fiscal 2017 included provisional expense us tax reform bill 550 million well net benefit revaluation deferred tax assets liabilities 507 million amount net tax expense 272 million related tax act benefit 229 million related french finance act 2018 current year company completed accounting income tax effects tax act company adjusted provisional amounts previously recorded accordance sec staff accounting bulletin 118 company included following tax provisions financial statements december 31 2018 revaluation deferred tax assets liabilities tax act reduces us federal corporate tax rate 35 21 tax years beginning december 31 2017 addition tax act made certain changes depreciation rules implemented new limits deductibility certain executive compensation company evaluated changes recorded provisional benefit net deferred taxes 246 million december 31 2017 result completion 2017 us corporate tax return current year company adjusted us deferred tax balances resulted current period benefit 51 million company completed calculation impact changes deferred tax balances december 31 2018 company completed analysis impact tax act deductibility certain executive compensation result adjustments made december 31 2018 transition tax unrepatriated foreign earnings transition tax unrepatriated foreign earnings tax previously untaxed accumulated current earnings profits ep companys foreign subsidiaries determine amount transition tax company determine among factors amount post1986 ep foreign subsidiaries well amount nonus income taxes paid earnings company able make reasonable estimate transition tax recorded provisional transition tax expense 518 million december 31 2017 december 31 2018 company completed calculation transition tax resulted benefit 144 million twelve months ended december 31 2018 global intangible low taxed income gilti tax act created new requirement certain income ie gilti earned foreign subsidiaries must included currently gross income us shareholder us gaap company permitted make accounting policy election either treat taxes due future inclusions us taxable income related gilti currentperiod expense incurred factor amounts companys measurement deferred taxes company made election treat taxes due future inclusions related gilti current period expense included current period expense 93 million financial statements december 31 2018 indefinite reinvestment assertion beginning 2018 tax act provides 100 deduction dividends received 10percent owned foreign corporations us corporate shareholders subject oneyear holding period although dividend income exempt us federal tax hands us corporate shareholders companies must still apply guidance asc 740 account tax consequences outside basis differences tax impacts investments nonus subsidiaries company finalized calculation transition tax deemed repatriated earnings previously indefinitely reinvested company unable determine reasonable estimate remaining tax liability tax act remaining outside basis differences therefore company included provisional amount item financial statements fiscal year ended december 31 2018 components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided decrease effective tax rate 2018 primarily due application us tax rate change resulted reduction corporate income tax rate us 350 210 higher earnings mix lower tax jurisdictions well benefit completion accounting income tax effects tax act adjustment provisional amounts previously recorded accordance sec staff accounting bulletin 118 components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2018 valuation allowance certain foreign deferred tax asset carryforwards 418 million primarily china france netherlands united kingdom south africa net operating loss carryforwards amount 3425 million expire various periods december 31 2019 december 31 2038 december 31 2018 liability income taxes associated unrecognized tax benefits 95 million 84 million recognized would favorably affect company’s effective income tax rate december 31 2017 liability income taxes associated unrecognized tax benefits 69 million 44 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2018 total interest penalties accrued approximately 09 million december 31 2017 total interest penalties accrued approximately 08 million limited exception company longer subject examination various us foreign taxing authorities years 2013 time company believes reasonably possible unrecognized tax benefits approximately 41 million may change within next 12 months due expiration statutory review periods current examinations 13 earnings per share computation earnings per share operations follows options purchase approximately 135000 24000 20000 shares common stock outstanding 2018 2017 2016 respectively included computation diluted earnings impact would antidilutive 14 stockbased compensation plans december 31 2018 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan amended restated “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan term may 10 2027 december 31 2018 number shares available future grants 2011 plan 2800836 shares includes remaining shares grant 2000 plan amendment restatement 2011 plan approved stockholders wabtec may 10 2017 company also maintains 1995 nonemployee directors’ fee stock option plan amended restated “the directors plan” amendment restatement directors plan approved stockholders wabtec may 10 2017 directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2018 2017 2016 company issued total 12960 16500 16972 shares restricted stock nonemployee directors total number shares issued plan december 31 2018 894152 shares stockbased compensation expense plans 253 million 213 million 208 million years ended december 31 2018 2017 2016 respectively company recognized associated tax benefits related stockbased compensation plans 63 million 89 million 149 million respective periods included stockbased compensation expense 2018 16 million expense related stock options 71 million related nonvested restricted stock 51 million related restricted stock units 103 million related incentive stock units 12 million related units issued directors’ fees december 31 2018 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 271 million recognized weighted period 13 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2018 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2018 company estimates achieve 81 97 107 incentive stock units expected vest based performance three year periods ending december 31 2018 2019 2020 respectively recorded incentive compensation expense accordingly estimates number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 15 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2018 follows reclassifications accumulated comprehensive loss yearended december 31 2018 follows changes accumulated comprehensive loss component net tax yearended december 31 2017 follows reclassifications accumulated comprehensive loss yearended december 31 2017 follows 16 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2018 2017 2016 401 million 346 million 272 million respectively amounts shown net sublease rentals immaterial years 2018 2017 2016 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 17 warranties following table reconciles changes company’s product warranty reserve follows 18 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2018 2017 preferred stock issued outstanding 19 derivative financial instruments hedging foreign currency hedging company uses forward contracts mitigate foreign currency exchange rate exposure due forecasted sales finished goods future settlement foreign currency denominated assets liabilities derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item contracts scheduled mature within two years ended december 31 2018 2017 2016 amounts reclassified income material activities company enters certain derivative contracts accordance risk management strategy meet criteria hedge accounting impact largely mitigating foreign currency exposure foreign exchange contracts accounted full mark market basis earnings gains losses recorded component expense net unrealized gain related contracts 29 million 21 million years ended december 31 2018 2017 respectively net unrealized gain related contracts year ended december 31 2016 material contracts scheduled mature within one year following table summarizes gross notional amounts fair values designated nondesignated hedges discussed sections december 31 2018 following table summarizes gross notional amounts fair values designated nondesignated hedged discussed sections december 31 2017 interest rate hedging company used interest rate swaps manage interest rate exposures company exposed interest rate volatility regard existing floating rate debt primary exposure includes london interbank offered rates libor derivatives used hedge risk associated changes fair value certain variablerate debt primarily designated fair value hedges consequently changes fair value derivatives along changes fair value debt obligations recognized current period earnings refer footnote 20 information interest rate swaps 20 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2017 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2018 december 31 2017 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represents accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 2016 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreements notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 21 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition ingersoll rand successorininterest american standard inc “ingersoll” indemnified company certain items including among things certain environmental claims company asserted prior 2000 ingersoll unable honor meet indemnifications company would responsible items opinion management ingersoll currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future april 21 2016 siemens industry inc filed lawsuit company federal district court delaware alleging company infringed seven patents owned siemens related positive train control ptc technology november 2 2016 siemens amended complaint add six additional patents also claim infringed company’s ptc products end train eot products siemen patent case company filed answers asserted counterclaims response siemens’ complaints additionally filings company us patent trademark office’s patent trail appeal board ptab granted interparties review ipr proceedings ten 10 patents asserted siemens contest validity following pretrial rulings greatly reduced siemens’ alleged damages jury trial held federal district court delaware january 2019 eight patents two still subject ipr decision validity ptab conclusion trial jury awarded siemens damages 56 million related ptc patents 11 million related eot patents february 25 2019 final verdict yet entered court since jury’s verdict issued one ptc patents found infringed held invalid ptab ruling another ptc patents still pending verdict entered parties file posttrial motions could also potentially affect verdict potential appeals could follow wabtec’s initial counterclaims siemens patent case alleging siemens violated three 3 wabtec’s patents severed siemens patent case refiled wabtec separate case pending federal district court delaware wabtec patent case trial date april 13 2020 set case july 19 2018 siemens amended pleadings wabtec patent case add new counterclaims alleging violations federal antitrust state trade practices laws related wabtec’s ptc sales january 29 2019 wabtec’s motion sever antitrust claims granted expected siemens refile antitrust claims separate action siemens antitrust case xorail inc wholly owned subsidiary company “xorail” received notices denver transit constructors “dtc” alleging breach contract related operating constant warning wireless crossings late delivery train management dispatch system “tmds” denver eagle p3 project owned denver regional transit district rtd damages asserted alleged late delivery tmds formal claim filed xorail final stages successfully implementing recovery plan concerning tmds issues regard wireless crossing issue september 8 2017 dtc alleged total damages 368 million july 31 2017 continuing accumulate majority damages stems delay approval wireless crossing system federal railway administration fra public utility commission puc resulting use flaggers crossings pending approval wireless crossing system certification crossings dtc alleged delay due xorails failure achieve constant warning times crossings accordance approval requirements imposed fra puc xorail denied dtcs assertions stating system satisfied contractual requirements xorail worked dtc modify system implement fras pucs previously undefined approval requirements fra puc approved modified wireless crossing system august 2018 dtc completed process certifying crossings eliminating use flaggers september 21 2018 dtc filed complaint rtd colorado state court breach contract related nonpayments costs flaggers asserting changeinlaw arising frapuc’s new certification requirements complaint generally supports xorail’s position name implicate xorail dtc updated notices xorail formal claim filed xorail dtc april 3 2018 united states department justice entered proposed consent decree resolving allegations company knorrbremse ag maintained unlawful agreements compete other’s employees allegations also related faiveley transport acquired company november 2016 proposed consent decree pending review approval us district court district columbia monetary fines penalties imposed company elected settle matter department justice avoid cost distraction litigation putative class action lawsuits filed several different federal district courts naming company knorr defendants connection allegations contained proposed consent decree lawsuits seek unspecified damages behalf employees company including faiveley transport knorr allegedly caused defendants’ actions federal multidistrict litigation mdl panel decided consolidate cases western district pennsylvania october 12 2018 consolidated class action complaint filed western district pa five named plaintiffs three company employees litigation early stages company believe diminished competition talent marketplace intends contest claims vigorously company filed motion dismiss pending time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 22 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically regional trains high speed trains subway cars lightrail vehicles buses builds new commuter locomotives refurbishes subway cars provides heating ventilation air conditioning equipment doors buses subways customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations intersegment sales accounted prices generally established reference similar transactions unaffiliated customers corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies following geographic area data years ended december 31 2018 2017 2016 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 5125 million 4480 million 4705 million years ended december 31 2018 2017 2016 respectively sales product follows 23 guarantor subsidiaries financial information obligations companys 2016 notes 2013 notes revolving credit facility term loan fully unconditionally guaranteed us subsidiaries guarantors guarantor 100 owned parent company accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2018 balance sheet december 31 2017 income statement year ended december 31 2018 income statement year ended december 31 2017 income statement year ended december 31 2016 condensed statement cash flows year ended december 31 2018 condensed statement cash flows year ended december 31 2017 condensed statement cash flows year ended december 31 2016 24 income net components income net follows 25 selected quarterly financial data unaudited 1 results fourth quarter 2017 include project adjustments related prior periods decreased income operations approximately 148 million effect project adjustments material company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges applicable signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 27 2019 raymond betler raymond betler president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicateditem 15exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan certain schedules omitted pursuant item 601b2 regulation sk wabtec hereby undertakes furnish supplementally copies omitted schedules upon request sec management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded ge transportation assessment internal controls financial reporting december 31 2019 company acquired ge transportation effective february 25 2019 ge transportation subsidiary whose total assets customer revenues represents 61 47 respectively related consolidated financial statement amounts year ended december 31 2019 based assessment management concluded company maintained effective internal control financial reporting december 31 2019 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2019 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion financial statements audited accompanying consolidated balance sheets westinghouse air brake technologies corporation company december 31 2019 2018 related consolidated statements income comprehensive income cash flows shareholders equity three years period ended december 31 2019 related notes financial statement schedule listed index item 152 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 24 2020 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgements communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate accounting business combinations description matteras described note 3 consolidated financial statements company completed merger ge transportation net consideration approximately 103 billion february 25 2019 transaction accounted business combination auditing companys accounting merger ge transportation complex due significant estimation determining fair value acquired intangible assets approximately 32 billion included contract backlog customer relationships intellectual property assumed liabilities included certain offmarket customer contract liabilities totaling 05 billion significant estimation determining fair value assets liabilities primarily due sensitivity respective fair values underlying assumptions company used discounted cash flow model estimate fair values acquired contract backlog customer relationships intellectual property intangibles assumed offmarket customer contract liabilities significant assumptions used estimate value intangible assets offmarket customer contract liabilities included revenue growth rates projected profit margins discount rates royalty rates customer attrition rates revenue obsolescence rates market participant profit margins significant assumptions forwardlooking could affected future economic market conditions addressed matter auditwe obtained understanding evaluated design tested operating effectiveness companys controls accounting acquisitions including controls recognition measurement identifiable intangible assets offmarket customer contract liabilities managements judgments evaluation underlying assumptions regard valuation models applied also tested managements controls validate data used valuation models complete accurate test estimated fair value company’s identifiable intangible assets offmarket customer contract liabilities audit procedures included among others evaluating companys selection valuation methodology evaluating methods significant assumptions used companys valuation specialist evaluating completeness accuracy underlying data supporting significant assumptions estimates example evaluating assumptions related revenue growth rates projected profit margins customer attrition rates revenue obsolescence rates market participant profit margins compared assumptions past performance ge transportation contractual arrangements ge transportation customers companys history related similar acquisitions thirdparty industry data available also performed sensitivity analyses significant assumptions evaluate changes fair value would result changes assumptions evaluating assumptions related discount rates royalty rates compared assumptions company’s history related similar acquisitions thirdparty industry data involved valuation specialist assist evaluation methodologies used company significant assumptions included fair value estimates including discount rates royalty rates procedures also included comparison selected discount rates acquired business’s weighted average cost capital evaluation relationship weighted average cost capital internal rate return weightedaverage return assets consideration guideline public company benchmarking analyses reflecting composition purchase prices similar transactions time revenue recognition longterm contracts description matteras described note 2 consolidated financial statements company longterm customer arrangements involving design production highly engineered products require revenue recognized time company uses inputbased measures determining amount revenue cost gross margin recognize time customer arrangements input methods used arrangements include costs material labor year ended december 31 2019 material amount companys total revenues derived performance obligations satisfied time auditing companys measurement revenue recognized time longterm contracts especially challenging involves subjective management assumptions regarding estimated remaining costs longterm contract could span several years assumptions could impacted future cost materials labor availability productivity complexity work performed performance suppliers customers subcontractors may associated contract may affected future market economic conditions addressed matter auditwe obtained understanding evaluated design tested except contracts pertaining ge transportation operating effectiveness controls companys process recognize revenue time longterm contracts including controls management’s review significant underlying assumptions described audit procedures also included among others evaluating significant assumptions accuracy completeness underlying data used managements calculations included example inspection executed contract testing managements cost estimates comparing inputs company’s historical data experience similar contracts performance sensitivity analysis performance retrospective review analysis prior management cost estimates actual costs incurred completed contracts addition sample contracts involved construction engineering specialists assist evaluation management’s cost estimates completion ernst young llp served companys auditor since 2002 pittsburgh pennsylvania february 24 2020 report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion internal control financial reporting audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion westinghouse air brake technologies corporation company maintained material respects effective internal control financial reporting december 31 2019 based coso criteria indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls ge transportation included 2019 consolidated financial statements company constituted 61 total assets december 31 2019 47 revenues year ended audit internal control financial reporting company also include evaluation internal control financial reporting ge transportation also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2019 2018 related consolidated statements income comprehensive income cash flows shareholders’ equity three years period ended december 31 2019 related notes financial statement schedule listed index item 152 report dated february 24 2020 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp pittsburgh pennsylvania february 24 2020 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers locomotives valueadded technologybased equipment systems services global freight rail passenger transit industries highly engineered products intended enhance safety improve productivity reduce maintenance costs customers found locomotives freight cars passenger transit cars buses around world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 50 countries products found 100 countries throughout world 2019 60 company’s net sales came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controls consolidated subsidiaries companys ownership less 100 outside shareholders interests shown noncontrolling interests statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 199 million 169 million december 31 2019 2018 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company computes book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified financing lease remaining arrangements treated operating leases rightofuse lease assets classified longterm assets caption noncurrent assets lease liabilities classified captions accrued liabilities longterm liabilities goodwill intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment reporting unit level least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2019 company opted proceed directly quantitative impairment test reporting units goodwill discounted cash flow approach market approach used estimate fair value reporting unit using weighting 75 25 respectively discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures discount rate terminal revenue growth rate revenue growth rate period beyond years forecasted reporting units reporting unit market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units estimated fair value reporting units excess respective carrying value resulted conclusion impairment existed additionally company proceeded directly quantitative impairment test trade names indefinite lives fair value material trade names subject quantitative impairment test exceeded respective carrying value resulting conclusion material impairment existed trade names subject quantitative testing company opted perform qualitative trade name impairment assessment determined qualitative assessment likely estimated fair values trade names less carrying values therefore analysis required assessing qualitative factors determine whether likely fair value trade name less carrying amount assess relevant events circumstances may impact fair value carrying amount trade name identification relevant events circumstances may impact trade name’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact equity method investments company invests privatelyheld companies accounted using equity method equity method applied situations company ability exercise significant influence control investee equity method investments 952 million 308 million december 31 2019 2018 respectively warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 1055 million 580 million 504 million 2019 2018 2017 respectively accrued warranty 2677 million 1537 million december 31 2019 2018 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities normal course business company exposed interest rate commodity price foreign currency exchange rate fluctuations times company limits risks use derivatives crosscurrency swaps foreign currency forward contracts interest rate swaps commodity forwards futures accordance companys policy derivatives used hedging purposes company use derivatives trading speculative purposes foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis information regarding foreign currency forward contracts see note 18 foreign currency translation certain international operations determined local currency functional currency whereas others determined us dollar functional currency assets liabilities foreign subsidiaries functional currency local currency translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions asc 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized income net 135 million 57 million 66 million 2019 2018 2017 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2019 2018 net loss attributable noncontrolling interests material years ended december 31 2019 2018 2017 respectively revenue recognition january 1 2018 company adopted asc 606 “revenue contracts customers” new guidance provides fivestep analysis transactions determine revenue recognized requires entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer majority company’s revenues derived performance obligations satisfied point time control passes customer generally time shipment accordance agreed upon delivery terms remaining revenues earned time company also longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use without significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination additionally company customer agreements involving creation enhancement asset customer controls also require revenue recognized time generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation contract revenues cost estimates reviewed revised periodically year adjustments reflected accounting period amounts determined contract assets include unbilled amounts resulting sales longterm contracts revenue recognized time revenue exceeds amount billed customer based terms contract current portion contract assets classified current assets caption “unbilled accounts receivable” noncurrent contract assets classified assets caption noncurrent assets consolidated balance sheet noncurrent contract assets 1094 million december 31 2019 material december 31 2018 included noncurrent contract assets certain costs specifically related contract however directly contribute transfer control tangible product created preproduction costs company elected use practical expedient consider unbilled amounts anticipated paid within one year significant financing components contract liabilities include customer deposits made prior incurrence costs related newly agreed upon contract advanced customer payments excess revenue recognized current portion contract liabilities classified current liabilities caption “customer deposits” noncurrent contract liabilities classified noncurrent liabilities caption longterm liabilities consolidated balance sheet noncurrent contract liabilities 770 million december 31 2019 material december 31 2018 contract liabilities considered significant financing component used meet working capital demands higher early stages contract revenue associated contract liabilities expected recognized within one year contract liabilities also include provisions estimated losses uncompleted contracts provisions loss contracts 1185 million 712 million december 31 2019 2018 respectively provisions estimated losses classified current liabilities included within caption “other accrued liabilities” consolidated balance sheet due nature work required performed company’s longterm projects estimation total revenue cost completion subject many variables requires significant judgment contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontractors may associated contract disciplined process management reviews progress long termprojects periodically throughout year part process management reviews information including key contract matters progress towards completion identified risks opportunities information could impact company’s estimates revenue costs completing analysis adjustments net sales cost goods sold related impact operating income recognized necessary period become known generally company’s revenue contains single performance obligation distinct good however single contract may multiple performance obligations comprising multiple promises customers multiple performance obligations revenue allocated based relative standalone selling price pricing defined contracts line item basis includes estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts price escalation clauses liquidating damages performance bonuses sales returns allowances also estimated recognized period related revenue recognized based upon company’s experience remaining performance obligations represent allocated transaction price unsatisifed partially unsatisfied performance obligations december 31 2019 companys remaining performance obligations 213 billion company expects recognize revenue approximately 25 remaining performance obligations next 12 months remainder recognized thereafter sec regulations require revenue categories exceed 10 total revenue presented separately companys statement income company displayed sales goods sales services related cost line regulations additionally regulations also require goods include sales tangible products services must include sales note 21 refer sales goods spare parts equipment upgrades related services monitoring maintenance repairs sales services product line letters credit ordinary course business company issues letters credit related commercial products outstanding amount including letters credit issues credit facility 7140 million 3542 million december 31 2019 2018 respectively preproduction costs certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 880 million 164 million december 31 2019 2018 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2019 2018 2017 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales engineering expenses engineering expenses charged expense incurred years ended december 31 2019 2018 2017 company incurred costs approximately 2099 million 875 million 952 million respectively earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 12 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation refer recently adopted accounting pronouncements use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ materially estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recently issued accounting pronouncements december 2019 financial accounting standards board fasb issued asu 201912 “income taxes simplifying accounting income taxes” amendments update simplify accounting certain income tax transactions removing specific exceptions general principles topic 740 income taxes guidance effective fiscal years beginning december 15 2020 early adoption permitted company currently evaluating potential impact adopting guidance consolidated financial statements january 2017 fasb issued accounting standards update asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment amendments update eliminate requirement perform step 2 goodwill impairment test instead entity perform goodwill impairment test comparing fair value reporting unit carrying amount recognize impairment charge amount carrying amount exceeds reporting units fair value carrying amount goodwill asu effective public companies fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted impact adopting guidance could result change overall conclusion whether reporting units goodwill impaired amount impairment charge recognized event reporting units carrying value exceeds fair value companys reporting units fair values greater carrying value companys last quantitative goodwill impairment test performed october 1 2019 june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments updated guidance sets forth current expected credit loss model based expected losses model entity recognizes allowance expected credit losses based historical experience current conditions forecasted information rather current methodology delaying recognition credit losses probable loss incurred guidance effective fiscal years beginning december 15 2019 early adoption permitted company evaluated potential impact adopting guidance consolidated financial statements expect impact adopting new standard material recently adopted accounting pronouncements february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income amendments update address certain stranded income tax effects accumulated comprehensive income aoci resulting tax cuts jobs act tax act current guidance requires effect change tax laws rates deferred tax balances reported income continuing operations accounting period includes period enactment even related income tax effects originally charged credited directly aoci amendments update allow reclassification aoci retained earnings stranded effects resulting tax act amount reclassification would include effect change us federal corporate income tax rate gross deferred tax amounts related valuation allowances date enactment tax act related items aoci updated guidance became effective reporting periods beginning december 15 2018 company adopted accounting standard beginning period elected retrospectively apply new standard impact adopting new standard material consolidated statement income consolidated balance sheet february 2016 fasb issued asu 201602 leases topic 814 requires lessees recognize right use asset lease liability balance sheet leases terms longer 12 months leases terms less 12 months lessee permitted make accounting policy election class underlying asset recognize right use asset lease liability guidance became effective company january 1 2019 company elected practical expedient require capitalization leases terms 12 months less company elect practical expedient allows hindsight used determine term lease company adopted standard using transition alternative allowed application guidance beginning period adopted rather requiring adjustment prior comparative periods information regarding companys adoption new standard see note 15 3 acquisitions general electric transportation wabtec general electric company ge transportation wabtec company formerly known transportation system holdings inc spinco newly formed wholly owned subsidiary ge wabtec us rail holdings inc merger sub newly formed wholly owned subsidiary company entered original merger agreement may 20 2018 ge spinco wabtec us rail inc direct sale purchaser entered original separation agreement may 20 2018 together provided combination wabtec ge transportation original merger agreement original separation agreement subsequently amended january 25 2019 merger completed february 25 2019 part merger certain assets ge transportation including equity interests certain pretransaction subsidiaries ge compose part ge transportation sold direct sale purchaser cash payment 2875 billion direct sale purchaser assumed certain liabilities ge transportation connection purchase direct sale thereafter ge transferred spinco business spinco subsidiaries extent already held spinco subsidiaries spinco issued ge shares spinco class preferred stock spinco class b preferred stock spinco class c preferred stock additional shares spinco common stock following issuance additional spinco common stock ge immediately prior distribution defined ge owned 8700000000 shares spinco common stock 15000 shares spinco class preferred stock 10000 shares spinco class b preferred stock one share spinco class c preferred stock constituted outstanding stock spinco following direct sale ge distributed distribution shares spinco spinoff transaction stockholder distribution immediately distribution merger sub merged spinco merger whereby separate corporate existence merger sub ceased spinco continued surviving company wholly owned subsidiary wabtec except respect shares spinco class preferred stock held ge merger subject adjustment accordance merger agreement share spinco common stock converted right receive number shares wabtec common stock based common stock exchange ratio set forth merger agreement share spinco class c preferred stock converted right receive 10000 shares wabtec convertible preferred stock b number shares wabtec common stock equal 99 fullydiluted pro forma wabtec shares immediately prior merger wabtec paid 100 million cash ge exchange shares spinco class b preferred stock upon consummation merger wabtec issued 46763975 shares common stock holders ge common stock 19018207 shares common stock ge 10000 shares preferred stock ge made cash payment ge 2885 billion result calculated based wabtec’s outstanding common stock fullydiluted asconverted asexercised basis february 25 2019 approximately 492 outstanding shares wabtec common stock held collectively ge holders ge common stock 99 held ge directly shares wabtec common stock 15 underlying shares wabtec convertible preferred stock held ge approximately 508 outstanding shares wabtec common stock would held premerger wabtec stockholders case calculated fullydiluted asconverted asexercised basis following merger ge also retained 15000 shares spinco class nonvoting preferred stock wabtec held 10000 shares spinco class b nonvoting preferred stock merger spinco wabtec’s wholly owned subsidiary except respect shares spinco class preferred stock held ge direct sale purchaser also wabtec’s wholly owned subsidiary together spinco direct sale purchaser operate posttransaction ge transportation shares company’s common stock including issued merger listed nyse company’s current trading symbol “wab” date distribution ge spinco directly subsidiaries entered additional agreements relating among things intellectual property employee matters tax matters research development transition services may 6 2019 ge completed sale approximately 8780 shares wabtecs series preferred stock converted upon sale 25300000 shares wabtecs common stock august 9 2019 ge completed sale remaining shares series preferred stock outstanding converted approximately 3515500 shares common stock well 16969656 shares common stock owned directly ge finally september 12 2019 ge completed sale remaining shares common stock wabtec approximately 2048515 shares conjunction secondary offerings company waived requirements shareholders agreement ge maintain certain ownership levels wabtecs stock following closing date merger company receive proceeds sale shares total future consideration paid wabtec ge includes fixed payment 4700 million directly related timing tax benefits expected realized wabtec result acquisition ge transportation payment considered contingent consideration timing cash payments ge directly related future timing tax benefits received company result acquisition ge transportation estimated total value consideration paid wabtec acquisition transactions approximately 103 billion including cash paid direct sales assets equity transferred spinco contingent consideration assumed debt net cash acquired consideration based company’s closing share price 7336 february 22 2019 fair value contingent consideration fair values assets acquired liabilities assumed determined using income cost market approaches discounted cash flow models used estimate fair values acquired contract backlog customer relationships intellectual property intangibles belowmarket customer contracts liabilities fair value measurements primarily based significant inputs observable market considered level 3 december 31 2019 consolidated balance sheet includes assets liabilities ge transportation initially measured fair value noncontrolling interest includes equity interests ge transportations brazil operations held third parties date acquisition time acquisition quotable market prices noncontrolling interest existed therefore noncontrolling interest ge transportation brazil operations measured using level 1 input april 2019 company acquired noncontrolling interest ge transportations brazil operations 562 million approximated fair value assigned noncontrolling interest date acquisition remaining noncontrolling interest value determined based inputs observable market considered level 3 following table summarizes preliminary fair value ge transportation assets acquired liabilities assumed estimates preliminary nature however company final stages completing purchase price allocation expect final allocation differ materially preliminary allocation included table necessary adjustments finalized within one year date acquisition year ended december 31 2019 estimated fair value current liabilities noncurrent liabilities decreased 921 million increased 1291 million respectively primarily due estimate revisions long term contracts deferred tax liabilities revisions initial estimates based information existed date acquisition substantially accounts receivable acquired expected collectible trade names customer relationships patents backlog intangible assets subject amortization contingent liabilities assumed part transaction material contingent liabilities related legal tax matters contingent liabilities recorded fair value purchase accounting aside pertaining uncertainty income taxes exception fair value basis accounting included noncurrent liabilities approximately 5047 million customer contracts whose terms unfavorable compared market terms date consummation ge transportation acquisition goodwill calculated difference acquisition date fair value consideration transferred fair value net assets acquired represents future economic benefits including synergies assembled workforce expected achieved result consummation acquisition ge transportation majority purchased goodwill expected deductible tax purposes goodwill allocated freight segment included companys consolidated statement income year ended december 31 2019 38 billion revenues 3580 million operating income ge transportation costs related acquisition ge transportation approximately 630 million year ended december 31 2019 included selling general administrative expenses consolidated statements income acquisitions company made following acquisition operating business unit component business unit transit segment •on march 22 2018 company acquired annax gmbh annax leading supplier public address passenger information systems transit vehicles purchase price approximately 452 million net cash acquired including contingent consideration resulting final goodwill 385 million none deductible tax purposes payment 101 million made three months ended june 30 2019 related contingent consideration associated purchase annax following table summarizes final estimated fair value assets acquired liabilities assumed date acquisition annax 117 million total acquired intangible assets includes 38 million assigned trade names 75 million assigned customer relationships trade names determined indefinite useful lives customer relationships’ average useful lives 20 years company also made smaller acquisitions listed individually collectively immaterial following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2018 historical consolidated financial information company acquisitions detailed adjusted pro forma information give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact combined results pro forma data may indicative results would obtained acquisitions occurred beginning periods presented intended projection future results 4 supplemental cash flow disclosures 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 1578 million 664 million 667 million 2019 2018 2017 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite lived intangible assets impaired december 31 2019 2018 change carrying amount goodwill segment year ended december 31 2019 follows december 31 2019 2018 company’s trade names net carrying amount 6231 million 5828 million respectively company believes intangibles indefinite lives exception ge transportation trade name company assigned useful life 5 years intangible assets company goodwill trade names consist following remaining weighted average useful lives backlog intellectual property customer relationships intangibles 14 years 9 years 18 years 13 years respectively amortization expense intangible assets 2384 million 398 million 365 million years ended december 31 2019 2018 2017 respectively estimated amortization expense five succeeding years follows millions 8 contract assets contract liabilities contract assets include unbilled amounts resulting sales longterm contracts revenue recognized time revenue exceeds amount billed customer based terms contract liabilities include customer deposits made prior incurrence costs related newly agreed upon contract advanced customer payments excess revenue recognized provisions estimated losses uncompleted contracts change carrying amount contract assets contract liabilities twelve months ended december 31 2019 2018 follows 9 longterm debt longterm debt consisted following 1 see note 19 information fair value measurement companys longterm debt securities premium discount time issuance company amortizes amount interest expense based maturity date first date holders may require company repurchase debt securities applicable premium would result decrease interest expense discount would result increase interest expense future periods additionally company debt issuance costs related certain financing transactions also amortized interest expense december 31 2019 2018 company total unamortized debt issuance costs 213 million 265 million respectively debt transactions see note 3 information regarding company’s acquisition ge transportation senior notes september 14 2018 order fund ge acquisition related fees expenses issued total 25 billion aggregate principal amount unsecured senior notes two separate series fixed rate unsecured senior notes “senior notes” one series floating rate unsecured senior notes “floating senior notes” collectively refer floating senior notes senior notes “notes” upon issuance senior notes floating senior notes reflected consolidated balance sheets net discount 29 million net capitalized debt issuance costs including commissions offering expenses 180 million amortized interest expense respective maturity dates series unsecured senior notes using effective interest method floating senior notes bear interest floating rate equal threemonth libor rate plus 1050 per year senior notes due 2024 bear interest 4150 per year senior notes due 2028 bear interest 4700 per year interest rate payable notes subject adjustment based certain rating events interest senior notes payable semiannually arrears march 15th september 15th year commencing march 15 2019 interest floating senior notes payable quarterly arrears december 15 march 15 june 15 september 15 year commenced december 15 2018 issuance comprised following three series notes consistent companys existing senior notes newly issued notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sales assets change control mergers consolidations incurrence liens covenants require company maintain financial ratios specified levels net worth liquidity company may redeem series notes time whole time part accordance provisions indenture series notes issued upon occurrence change control repurchase event respect notes holder notes right require company purchase holder’s notes price equal 101 principal amount thereof plus accrued unpaid interest unless company exercised option redeem notes february 12 2019 rating assigned moodys decreased ba1 accordingly pursuant respective terms senior notes issued september 14 2018 interest rate increased 025 interest rate increase took effect next interest period following february 12 2019 company compliance restrictions covenants indenture notes issued expects restrictions covenants type limiting factor executing operating activities term loan agreement june 8 2018 company arranged 3500 million term loan proceeds used refinance existing loans “refinancing term loan” ii new 4000 million delayed draw term loan order fund ge acquisition related fees expenses “delayed draw term loan” company collectively refers refinance term loans delayed draw term loans “term loans” consistent debt securities term loan agreement includes covenants among things limit liens certain consolidated subsidiaries addition requires us maintain financial maintenance covenants discussed loans term loan bear interest variable rate based company’s option either abr rate libor rate defined term loan agreement plus applicable margin determined based credit ratings company’s ratio total debt less unrestricted cash 3000 million ebitda “leverage ratio” december 31 2019 applicable margin 0375 base rate loans 1375 eurodollar rate loans senior credit facility june 8 2018 company entered credit agreement “senior credit facility” replaced company’s thenexisting “2016 refinancing credit agreement” senior credit facility syndicate lenders provides borrowings consisting term loans denominated euros us dollars ii multicurrency revolving loan facility providing equivalent us dollars 12000 million multicurrency revolving loans inclusive swingline loans 750 million letters credit 4500 million multicurrency revolving loan facility mature june 8 2023 term loans mature june 8 2021 subject mandatory optional prepayments term loans required repaid quarterly basis amount equal 25 principal amount drawn final payment due maturity following table presents availability credit facilities senior credit facility elect receive advances bearing interest based either abr rate libor rate defined credit agreement plus applicable margin determined based credit ratings company’s leverage ratio december 31 2019 applicable margin 0375 base rate advances 1375 libor rate advances company also pays fees related senior credit facility largest fees commitment fee unused portion multicurrency revolving loan facility 010 030 per annum currently 015 per annum depending credit ratings leverage ratio none fees material interest expense obligations senior credit facility guaranteed wabtec’s wholly owned subsidiaries collectively “subsidiary guarantors” addition senior credit facility contains number customary affirmative negative covenants addition customary covenants senior credit facility require maintain financial covenants listed end fiscal quarter period four fiscal quarters ended company compliance covenants credit agreement term loans december 31 2019 1 interest coverage ratio defined ebitda defined credit agreement term loan agreement net interest expense four quarters ended 2 leverage ratio defined net debt last day fiscal quarter ebitda defined amendment credit agreement term loan agreement four quarters ended 2018 senior credit facility contains uncommitted accordion feature allowing company request establishment aggregate amount exceed 6000 million incremental borrowing commitments revolving credit facility incremental term loan commitment december 31 2019 weighted average interest rate company’s variable rate debt 308 cash pooling wabtec aggregates companys domestic cash position daily basis outside united states company uses cash pooling arrangements banks help manage liquidity requirements pooling arrangements wabtec subsidiary “participants” agree single bank cash balances pool participants bank subject full right setoff amounts participants owe bank provides overdrafts long net balance participants exceed agreedupon level typically participant pays interest outstanding overdrafts receives interest cash balances companys consolidated balance sheets reflect cash net bank overdrafts pooling arrangements 10 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s significant defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 402 million 388 million december 31 2019 2018 respectively aggregate accumulated benefit obligation international pension plans 3360 million 3011 million december 31 2019 2018 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2019 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2019 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2020 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date see note 19 “fair value measurement” included herein plan assets asset category december 31 2019 2018 follows us plan target asset allocation 55 equity securities 45 debt securities international plan target asset allocation 26 equity securities 53 debt securities 21 investments investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis following tables summarize pension plan assets measured fair value recurring basis fair value hierarchy level see note 19 following table presents reconciliation level 3 assets cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 21 million 88 million us international plans respectively 2020 benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2019 2018 plan held behalf participants 431744 shares market value 336 million 442239 shares market value 311 million respectively additionally company stock option based benefit plans described note 13 company contributes multiemployer defined benefit pension plan collective bargaining agreement covers certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2019 outlined table plans individually significant company total amount contributions presented aggregate 1the company’s contribution represents 5 total contributions plan “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2019 2018 plan years ended 2019 2018 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded cthe “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2019 “surcharge imposed” column indicates whether company’s contribution rate 2019 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities december 23 2017 french government enacted finance act 2018 published official bulletin december 31 2017 finance act reduced french corporate tax rate 28 2020 25 enacting additional 15 reduction year 2021 2022 december 22 2017 us government enacted comprehensive tax legislation commonly referred tax cuts jobs act tax act tax act makes broad complex changes us tax code affected fiscal 2017 including limited requiring onetime transition tax certain unrepatriated earnings foreign subsidiaries payable eight years transition tax act also established new tax laws affect 2018 later years including limited reduction us federal corporate tax rate 35 21 repeals domestic manufacturing deduction general elimination us federal income taxes dividends foreign subsidiaries new provisions designed tax global intangible lowtaxed income gilti tax certain deductible base erosion payments called base erosion antiabuse tax “beat” new interest expense limitation provisions relation analysis impact tax law changes company recorded net tax expense 43 million fiscal 2017 included provisional expense us tax reform bill 550 million well net benefit revaluation deferred tax assets liabilities 507 million amount net tax expense 272 million related tax act benefit 229 million related french finance act 2018 fiscal 2018 company completed accounting income tax effects tax act company adjusted provisional amounts previously recorded accordance sec staff accounting bulletin 118 company included following tax provisions financial statements year ending december 31 2018 revaluation deferred tax assets liabilities tax act reduced us federal corporate tax rate 35 21 tax years beginning december 31 2017 addition tax act made certain changes depreciation rules implemented new limits deductibility certain executive compensation company evaluated changes recorded provisional benefit net deferred taxes 246 million december 31 2017 result completion 2017 us corporate tax return fiscal 2018 company adjusted us deferred tax balances resulted benefit 51 million recorded fiscal 2018 company completed calculation impact changes deferred tax balances december 31 2018 company completed analysis impact tax act deductibility certain executive compensation result adjustments made year ended december 31 2018 transition tax unrepatriated foreign earnings transition tax unrepatriated foreign earnings tax previously untaxed accumulated current earnings profits ep companys foreign subsidiaries determine amount transition tax company determine among factors amount post1986 ep foreign subsidiaries well amount nonus income taxes paid earnings company able make reasonable estimate transition tax recorded provisional transition tax expense 518 million december 31 2017 december 31 2018 company completed calculation transition tax resulted benefit 144 million twelve months ended december 31 2018 global intangible low taxed income gilti tax act created new requirement certain income ie gilti earned foreign subsidiaries must included currently gross income us shareholder us gaap company permitted make accounting policy election either treat taxes due future inclusions us taxable income related gilti currentperiod expense incurred factor amounts companys measurement deferred taxes company made election treat taxes due future inclusions related gilti current period expense included current period expense 119 million 93 million financial statements twelve months ended december 31 2019 december 31 2018 respectively indefinite reinvestment assertion beginning 2018 tax act provides 100 deduction dividends received 10percent owned foreign corporations us corporate shareholders subject oneyear holding period although dividend income exempt us federal tax hands us corporate shareholders companies must still apply guidance asc 740 account tax consequences outside basis differences tax impacts investments nonus subsidiaries company finalized calculation transition tax deemed repatriated earnings previously indefinitely reinvested company unable determine reasonable estimate remaining tax liability tax act remaining outside basis differences therefore company recorded deferred taxes item financial statements fiscal year ended december 31 2019 components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided increase effective tax rate 2019 primarily result nondeductible transaction related expenses incurred result acquisition ge transportation higher earnings mix higher tax jurisdictions increased estimated liabilities resulting provisions 2017 tax cuts jobs act well benefit completion accounting income tax effects tax act recorded tax year ending december 31 2018 components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2019 valuation allowance certain foreign deferred tax asset carryforwards 580 million primarily china france netherlands united kingdom south africa net operating loss carryforwards amount 3905 million expire various periods december 31 2019 december 31 2039 december 31 2019 liability income taxes associated unrecognized tax benefits 172 million 172 million recognized would favorably affect company’s effective income tax rate december 31 2018 liability income taxes associated unrecognized tax benefits 95 million 84 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2019 total interest penalties accrued approximately 40 million december 31 2018 total interest penalties accrued approximately 09 million limited exception company longer subject examination various us foreign taxing authorities years 2014 time company believes reasonably possible unrecognized tax benefits approximately 76 million may change within next 12 months due expiration statutory review periods current examinations 12 earnings per share computation earnings per share operations follows options purchase approximately 312000 135000 24000 shares common stock outstanding 2019 2018 2017 respectively included computation diluted earnings impact would antidilutive 13 stockbased compensation plans december 31 2019 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan amended restated “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan term may 10 2027 december 31 2019 number shares available future grants 2011 plan 1870396 shares includes remaining shares grant 2000 plan amendment restatement 2011 plan approved stockholders wabtec may 10 2017 company also maintains 1995 nonemployee directors’ fee stock option plan amended restated “the directors plan” amendment restatement directors plan approved stockholders wabtec may 10 2017 directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2019 2018 2017 company issued total 15729 12960 16500 shares restricted stock nonemployee directors total number shares issued plan december 31 2019 909881 shares stockbased compensation expense plans 500 million 253 million 213 million years ended december 31 2019 2018 2017 respectively company recognized associated tax benefits related stockbased compensation plans 14 million 63 million 89 million respective periods included stockbased compensation expense 2019 23 million expense related stock options 208 million related nonvested restricted stock 94 million related restricted stock units 165 million related incentive stock units 10 million related units issued directors’ fees december 31 2019 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 419 million recognized weighted period 14 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable three year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2019 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests three years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2019 company estimates achieve 115 111 108 incentive stock units expected vest based performance three year periods ending december 31 2019 2020 2021 respectively recorded incentive compensation expense accordingly estimates number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 14 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2019 follows reclassifications accumulated comprehensive loss yearended december 31 2019 follows changes accumulated comprehensive loss component net tax yearended december 31 2018 follows reclassifications accumulated comprehensive loss yearended december 31 2018 follows 15 leases first quarter 2019 company adopted asu 201602 leases topic 842 requires leases durations greater twelve months recognized balance sheet company adopted standard using modified retrospective approach effective date beginning fiscal year january 1 2019 prior year financial statements recast new standard therefore amounts presented company leases property equipment finance operating leases terms greater 12 months company records related asset obligation present value lease payments many companys leases include rental escalation clauses renewal options andor termination options factored determination lease payments appropriate company separate lease nonlease components companys leases provide readily stated discount rate company must estimate incremental borrowing rate discount lease payments company established discount rates geographic region ranging 10 123 components lease expense follows scheduled payments lease liabilities follows following table summarizes remaining lease term discount rate assumptions used develop present value lease liabilities 16 warranties following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2019 2018 preferred stock issued outstanding 18 derivative financial instruments hedging activities normal course business exposed interest rate commodity price foreign currency exchange rate fluctuations times limit risks use derivatives crosscurrency swaps foreign currency forward contracts interest rate swaps commodity forwards futures accordance policy derivatives used hedging purposes use derivatives trading speculative purposes foreign currency exchange risk company uses forward contracts mitigate foreign currency exchange rate exposure due forecasted sales finished goods future settlement foreign currency denominated assets liabilities derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item contracts scheduled mature within two years ended december 31 2019 2018 2017 amounts reclassified income material company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates conduct business worldwide us dollars functional currencies foreign subsidiaries including euro indian rupee british pound sterling australian dollars several foreign currencies changes foreign currency exchange rates could material adverse impact financial results reported us dollars also exposed foreign currency exchange rate risk related foreign subsidiaries including intercompany loans denominated nonfunctional currencies net purchases sales nonfunctional currencies certain foreign currency exchange rate risk programs use foreign currency forward contracts crosscurrency swaps forward contracts crosscurrency swaps generally used offset potential income statement effects intercompany loans denominated nonfunctional currencies addition company uses forward contracts mitigate foreign currency exchange rate exposure due forecasted sales finished goods future settlement foreign currency denominated assets liabilities programs reduce entirely eliminate foreign currency exchange rate risk derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item contracts scheduled mature within two years twelve months ended december 31 2019 amounts reclassified income material company enters certain derivative contracts accordance risk management strategy meet criteria hedge accounting impact largely mitigating foreign currency exposure foreign exchange contracts accounted full mark market basis earnings gains losses recorded component expense net gain related contracts 16 million three months ended december 31 2019 contracts scheduled mature within one year following table summarizes gross notional amounts fair values designated nondesignated hedges discussed sections december 31 2019 following table summarizes gross notional amounts fair values designated nondesignated hedged discussed sections december 31 2018 interest rate risk company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk twelve months ended december 31 2019 amounts reclassified income material commodity price risk company may use commodity forward contracts futures manage exposure commodity price changes reduce overall cost manufacturing twelve months ended december 31 2019 amounts reclassified income material 19 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides assets liabilities carried fair value measured recurring basis december 31 2019 included current assets liabilities consolidated balance sheet result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2019 december 31 2018 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represents accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 2016 notes considered level 2 based fair value valuation hierarchy 20 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition ingersoll rand successorininterest american standard inc “ingersoll” indemnified company certain items including among things certain environmental claims company asserted prior 2000 ingersoll unable honor meet indemnifications company would responsible items opinion management ingersoll currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” vast majority claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated limited number claims covered insurance subject indemnity nonaffiliated parties wabtec incurred defense administrative indemnity costs connection actions costs material company information would suggest costs would become material foreseeable future based company’s history resolving asbestos claims last twenty years management believes costs company’s asbestosrelated cases material company’s overall financial position results operations cash flows april 21 2016 siemens industry inc filed lawsuit company federal district court delaware alleging company infringed seven patents owned siemens related companys positive train control ptc technology november 2 2016 siemens amended complaint add six additional patents also claimed infringed companys ptc products end train eot products siemens patent case company filed answers asserted counterclaims response siemens’ complaints additionally filings company us patent trademark office’s patent trail appeal board ptab granted interparties review ipr proceedings eight 8 patents asserted siemens contest validity following pretrial rulings greatly reduced siemens’ alleged damages jury trial held federal district court delaware january 2019 eight patents two still subject ipr decision validity ptab conclusion trial jury awarded siemens damages 56 million related ptc patents 11 million related eot patents august 15 2019 court entered final judgement amount 141 million favor siemens included postdiscovery damages wabtec ptc eot sales july 2019 parties appealed final judgement september 27 2019 parties entered global settlement agreement settling ongoing litigation part patent litigation including antitrust claims siemens made wabtec initially xorail inc wholly owned subsidiary company “xorail” received notices denver transit constructors “dtc” alleging breach contract related operating constant warning wireless crossings late delivery train management dispatch system “tmds” denver eagle p3 project owned denver regional transit district rtd damages asserted alleged late delivery tmds formal claim filed xorail successfully completed remediation plan concerning tmds issues regard wireless crossing issue september 8 2017 dtc alleged total damages 368 million july 31 2017 continuing accumulate majority damages stems delay approval wireless crossing system federal railway administration fra public utility commission puc resulting use flaggers crossings pending approval wireless crossing system certification crossings dtc alleged delay due xorails failure achieve constant warning times crossings accordance approval requirements imposed fra puc xorail denied dtcs assertions stating system satisfied contractual requirements xorail worked dtc modify system implement fras pucs previously undefined approval requirements fra puc approved modified wireless crossing system august 2018 dtc completed process certifying crossings eliminated use flaggers september 21 2018 dtc filed complaint rtd colorado state court breach contract related nonpayments costs flaggers asserting changeinlaw arising frapuc’s new certification requirements jury trial scheduled begin may 2020 dtc’s complaint generally supports xorail’s position name implicate xorail dtc updated notices xorail filed formal claim xorail april 3 2018 company knorrbremse ag entered consent decree united states department justice resolving allegations company knorrbremse ag maintained unlawful agreements compete other’s employees allegations also related faiveley transport acquired company november 2016 monetary fines penalties imposed company elected settle matter department justice avoid cost distraction litigation putative class action lawsuits thereafter filed several different federal district courts naming company knorr defendants connection allegations contained consent decree lawsuits seek unspecified damages behalf employees company including faiveley transport knorr allegedly caused defendants’ actions federal multidistrict litigation mdl panel consolidated cases western district pennsylvania october 12 2018 consolidated class action complaint filed western district pa five named plaintiffs august 13 2019 company notified codefendant knorrbremse settled plaintiffs january 21 2020 following courtsponsored early mediation company entered memorandum understanding plaintiffs agreeing settle claims case parties intend seek court approval agreed settlement terms amount time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 21 segment information company two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type initiatives integrate ge transportation operations wabtec including recent restructuring programs announced late 2019 resulted changes companys organizational structure financial reporting utilized companys chief operating decision maker assess performance allocate resources result certain asset groups reorganized freight segment transit segment vice versa change company’s reportable segments effective fourth quarter 2019 reflected 2019 retrospective revision 2018 2017 segment information company believes changes better present managements new view business company’s business segments freight segment primarily builds new locomotives manufactures services components new existing freight cars locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically regional trains high speed trains subway cars lightrail vehicles buses refurbishes subway cars provides heating ventilation air conditioning equipment doors buses subways customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations intersegment sales accounted prices generally established reference similar transactions unaffiliated customers corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges changes asset groups comprising freight transit segments reflected retrospective revision prior period segment information following geographic area data years ended december 31 2019 2018 2017 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 9052 million 5125 million 4480 million years ended december 31 2019 2018 2017 respectively net sales product line follows 22 guarantor subsidiaries financial information obligations companys senior notes senior credit facility fully unconditionally guaranteed certain companys us subsidiaries guarantors guarantor 100 owned parent company exception ge transportation wabtec company 15000 shares outstanding class nonvoting preferred stock held general electric company accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2019 balance sheet december 31 2018 income statement year ended december 31 2019 income statement year ended december 31 2018 income statement year ended december 31 2017 condensed statement cash flows year ended december 31 2019 condensed statement cash flows year ended december 31 2018 condensed statement cash flows year ended december 31 2017 23 income net components income net follows 24 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2actual disbursements andor charges applicable signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 24 2020bys rafael santana rafael santana president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicateditem 15exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan certain schedules omitted pursuant item 601b2 regulation sk wabtec hereby undertakes furnish supplementally copies omitted schedules upon request sec management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate based assessment management concluded company maintained effective internal control financial reporting december 31 2020 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2020 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion financial statements audited accompanying consolidated balance sheets westinghouse air brake technologies corporation company december 31 2020 2019 related consolidated statements income comprehensive income cash flows shareholders equity three years period ended december 31 2020 related notes financial statement schedule listed index item 152 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 19 2021 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matter critical audit matter communicated matter arising current period audit financial statements communicated required communicated audit committee 1 relates accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matter alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates time revenue recognition longterm contracts description matteras described note 2 consolidated financial statements company longterm customer arrangements involving design production highly engineered products require revenue recognized time company uses inputbased measures determining amount revenue cost gross margin recognize time customer arrangements input methods used arrangements include costs material labor year ended december 31 2020 material amount companys total revenues derived performance obligations satisfied time auditing companys measurement revenue recognized time longterm contracts especially challenging involves subjective management assumptions regarding estimated remaining costs longterm contract could span several years assumptions could impacted future cost materials labor availability productivity complexity work performed performance suppliers customers subcontractors may associated contract may affected future market economic conditions addressed matter auditwe obtained understanding evaluated design tested operating effectiveness controls companys process recognize revenue time longterm contracts including controls management’s review significant underlying assumptions described audit procedures also included among others evaluating significant assumptions accuracy completeness underlying data used managements calculations included example inspection executed contract testing managements cost estimates comparing inputs company’s historical data experience similar contracts performance sensitivity analysis performance retrospective review analysis prior management cost estimates actual costs incurred completed contracts addition sample contracts involved construction engineering specialists assist evaluation management’s cost estimates completion ernst young llp served companys auditor since 2002 pittsburgh pennsylvania february 19 2021 report independent registered public accounting firm shareholders board directors westinghouse air brake technologies corporation opinion internal control financial reporting audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion westinghouse air brake technologies corporation company maintained material respects effective internal control financial reporting december 31 2020 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2020 2019 related consolidated statements income comprehensive income cash flows shareholders’ equity three years period ended december 31 2020 related notes financial statement schedule listed index item 152 report dated february 19 2021 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp pittsburgh pennsylvania february 19 2021 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers locomotives valueadded technologybased equipment systems services global freight rail passenger transit industries highly engineered products intended enhance safety improve productivity reduce maintenance costs customers found locomotives freight cars passenger transit cars buses around world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 50 countries products found 100 countries throughout world 2020 approximately 58 company’s net sales came customers outside us march 11 2020 world health organization designated outbreak novel strain coronavirus known covid19 global pandemic governments businesses around world taken unprecedented actions mitigate spread covid19 including limited shelterinplace orders quarantines significant restrictions travel well restrictions prohibit many employees going work top concern remains health wellbeing employees around world date covid19 surfaced nearly regions around world impacted sales channels supply chain manufacturing operations workforce key aspects operations outbreak preventive measures taken help curb spread including temporary plant closures china india italy countries outbreaks stayathome orders prevalent adverse impact operations business results year ended december 31 2020 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controls consolidated subsidiaries companys ownership less 100 outside shareholders interests shown noncontrolling interests statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate expected losses inherent receivable portfolio determined basis historical experience relevant credit forecast information changes customers solvency currently available evidence allowance doubtful accounts 365 million 199 million december 31 2020 2019 respectively inventories stated lower cost net realizable value cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company computes book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified financing lease remaining arrangements treated operating leases rightofuse lease assets classified longterm assets caption noncurrent assets lease liabilities classified captions accrued liabilities longterm liabilities goodwill intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment reporting unit level least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed equity method investments company invests privatelyheld companies accounted using equity method equity method applied situations company ability exercise significant influence control investee equity method investments classified assets caption noncurrent assets consolidated balance sheet equity method investments 1000 million 952 million december 31 2020 2019 respectively depreciation expense depreciation property plant equipment related manufacturing products services provided included cost goods cost services depreciation property plant equipment attributable manufacturing products services provided included selling general administrative expenses engineering expense extent property plant equipment used research development purposes warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities normal course business company exposed interest rate commodity price foreign currency exchange rate fluctuations times company limits risks use derivatives crosscurrency swaps foreign currency forward contracts interest rate swaps commodity forwards futures accordance companys policy derivatives used hedging purposes company use derivatives trading speculative purposes foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis information regarding foreign currency forward contracts see note 17 foreign currency translation certain international operations determined local currency functional currency whereas others determined us dollar functional currency assets liabilities foreign subsidiaries functional currency local currency translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions asc 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized income net 82 million 135 million 57 million 2020 2019 2018 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity consolidated balance sheets december 31 2020 2019 net loss attributable noncontrolling interests material years ended december 31 2020 2019 2018 respectively revenue recognition company accounts revenue asc 606 “revenue contracts customers” guidance provides fivestep analysis transactions determine revenue recognized requires entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer majority company’s revenues derived performance obligations satisfied point time control passes customer generally time shipment accordance agreed upon delivery terms remaining revenues earned time fees billed customer shipping handling classified component net sales costs associated shipping handling classified component cost sales company also longterm customer agreements involving design production highly engineered products require revenue recognized time products alternative use without significant economic loss agreements contain enforceable right payment including reasonable profit margin customer event contract termination additionally company customer agreements involving creation enhancement asset customer controls also require revenue recognized time generally company uses input method determining amount revenue cost gross margin recognize time customer agreements input methods used agreements include costs material labor give accurate representation progress made toward complete satisfaction particular performance obligation contract revenues cost estimates reviewed revised periodically year adjustments reflected accounting period amounts determined additional information respect contract assets liabilities included note 8 due nature work required performed company’s longterm projects estimation total revenue cost completion subject many variables requires significant judgment contract estimates related longterm projects based various assumptions project outcome future events could span several years assumptions include cost materials labor availability productivity complexity work performed performance suppliers customers subcontractors may associated contract disciplined process management reviews progress long termprojects periodically throughout year part process management reviews information including key contract matters progress towards completion identified risks opportunities information could impact company’s estimates revenue costs completing analysis adjustments net sales cost goods sold related impact operating income recognized necessary period become known generally company’s revenue contains single performance obligation distinct good service however single contract may multiple performance obligations comprising multiple promises customers multiple performance obligations revenue allocated based relative standalone selling price pricing defined contracts line item basis includes estimate variable consideration required terms individual customer contract types variable consideration company typically include volume discounts prompt payment discounts price escalation clauses liquidating damages performance bonuses sales returns allowances also estimated recognized period related revenue recognized based upon company’s experience remaining performance obligations represent allocated transaction price unsatisfied partially unsatisfied performance obligations december 31 2020 companys remaining performance obligations 208 billion company expects recognize revenue approximately 25 remaining performance obligations next 12 months remainder recognized thereafter sec regulations require revenue categories exceed 10 total revenue presented separately companys statement income company displayed sales goods sales services related cost line regulations additionally regulations also require goods include sales tangible products services must include sales note 20 refer sales goods spare parts equipment upgrades related services monitoring maintenance repairs sales services product line revolving receivables program may 2020 company entered revolving agreement transfer 1500 million certain receivables certain subsidiaries company originators bankruptcyremote subsidiary financial institution recurring basis exchange cash equal gross receivables transferred customers pay balances transfer additional receivables program resulting gross receivables sold exceeding net cash flow impacts eg collect reinvest sold receivables fully guaranteed bankruptcyremote subsidiary holds additional receivables 1140 million unbilled receivables 197 million december 31 2020 pledged collateral agreement transfers recorded fair value proceeds received obligations assumed less derecognized receivables obligation recorded december 31 2020 estimated expected credit losses receivables sold insignificant maximum exposure loss related receivables transferred limited amount outstanding company agreed guarantee performance originators respective obligations revolving agreement none company except bankruptcyremote consolidated subsidiary referenced originators guarantees collectability receivables revolving agreements following table sets forth summary receivables sold preproduction costs certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 870 million 880 million december 31 2020 2019 respectively preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2020 2019 preferred stock issued outstanding significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2020 2019 2018 reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ materially estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates accounting standards adopted 2020 january 1 2020 company adopted following accounting standard updates asu issued financial accounting standard board fasb none material impact company’s consolidated financial statements •asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments •asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment march 2020 sec amended rules 310 316 regulation sx regarding financial disclosure requirements registered debt offerings involving subsidiaries either issuers guarantors affiliates whose securities pledged collateral new guidance narrows circumstances require separate financial statements subsidiary issuers guarantors streamlines alternative disclosures required lieu statements final rule also allows simplified disclosures included within management’s discussion analysis rule effective january 4 2021 early adoption permitted company elected early adopt rule three months ended june 30 2020 accounting standards adopted future years december 2019 financial accounting standards board fasb issued asu 201912 “income taxes simplifying accounting income taxes” amendments update simplify accounting certain income tax transactions removing specific exceptions general principles topic 740 income taxes guidance effective fiscal years beginning december 15 2020 early adoption permitted company expect adoption standard material impact consolidated financial statements 3 acquisitions general electric transportation wabtec general electric company ge transportation wabtec company formerly known transportation system holdings inc spinco newly formed wholly owned subsidiary ge wabtec us rail holdings inc merger sub newly formed wholly owned subsidiary company entered original merger agreement may 20 2018 ge spinco wabtec us rail inc direct sale purchaser entered original separation agreement may 20 2018 together provided combination wabtec ge transportation original merger agreement original separation agreement subsequently amended january 25 2019 merger completed february 25 2019 part merger certain assets ge transportation including equity interests certain pretransaction subsidiaries ge compose part ge transportation sold direct sale purchaser cash payment 2875 billion direct sale purchaser assumed certain liabilities ge transportation connection purchase direct sale thereafter ge transferred spinco business spinco subsidiaries extent already held spinco subsidiaries spinco issued ge shares spinco class preferred stock spinco class b preferred stock spinco class c preferred stock additional shares spinco common stock following issuance additional spinco common stock ge immediately prior distribution defined ge owned 8700000000 shares spinco common stock 15000 shares spinco class preferred stock 10000 shares spinco class b preferred stock one share spinco class c preferred stock constituted outstanding stock spinco following direct sale ge distributed distribution shares spinco spinoff transaction stockholder distribution immediately distribution merger sub merged spinco merger whereby separate corporate existence merger sub ceased spinco continued surviving company wholly owned subsidiary wabtec except respect shares spinco class preferred stock held ge merger subject adjustment accordance merger agreement share spinco common stock converted right receive number shares wabtec common stock based common stock exchange ratio set forth merger agreement share spinco class c preferred stock converted right receive 10000 shares wabtec convertible preferred stock b number shares wabtec common stock equal 99 fullydiluted pro forma wabtec shares immediately prior merger wabtec paid 100 million cash ge exchange shares spinco class b preferred stock upon consummation merger wabtec issued 46763975 shares common stock holders ge common stock 19018207 shares common stock ge 10000 shares preferred stock ge made cash payment ge 2885 billion result calculated based wabtec’s outstanding common stock fullydiluted asconverted asexercised basis february 25 2019 approximately 492 outstanding shares wabtec common stock held collectively ge holders ge common stock 99 held ge directly shares wabtec common stock 15 underlying shares wabtec convertible preferred stock held ge approximately 508 outstanding shares wabtec common stock would held premerger wabtec stockholders case calculated fullydiluted asconverted asexercised basis following merger ge also retained 15000 shares spinco class nonvoting preferred stock wabtec held 10000 shares spinco class b nonvoting preferred stock merger spinco wabtec’s wholly owned subsidiary except respect shares spinco class preferred stock held ge direct sale purchaser also wabtec’s wholly owned subsidiary together spinco direct sale purchaser operate posttransaction ge transportation shares company’s common stock including issued merger listed nyse company’s current trading symbol “wab” date distribution ge spinco directly subsidiaries entered additional agreements relating among things intellectual property employee matters tax matters research development transition services may 6 2019 ge completed sale approximately 8780 shares wabtecs series preferred stock converted upon sale 25300000 shares wabtecs common stock august 9 2019 ge completed sale remaining shares series preferred stock outstanding converted approximately 3515500 shares common stock well 16969656 shares common stock owned directly ge finally september 12 2019 ge completed sale remaining shares common stock wabtec approximately 2048515 shares conjunction secondary offerings company waived requirements shareholders agreement ge maintain certain ownership levels wabtecs stock following closing date merger company receive proceeds sale shares total future consideration paid wabtec ge includes fixed payment 4700 million 1154 million paid 2020 directly related timing tax benefits expected realized wabtec result acquisition ge transportation payment considered contingent consideration timing cash payments ge directly related future timing tax benefits received company result acquisition ge transportation estimated total value consideration paid wabtec acquisition transactions approximately 103 billion including cash paid direct sales assets equity transferred spinco contingent consideration assumed debt net cash acquired consideration based company’s closing share price 7336 february 22 2019 fair value contingent consideration fair values assets acquired liabilities assumed determined using income cost market approaches discounted cash flow models used estimate fair values acquired contract backlog customer relationships intellectual property intangibles belowmarket customer contracts liabilities fair value measurements primarily based significant inputs observable market considered level 3 noncontrolling interest includes equity interests ge transportations brazil operations held third parties date acquisition time acquisition quotable market prices noncontrolling interest existed therefore noncontrolling interest ge transportation brazil operations measured using level 1 input april 2019 company acquired noncontrolling interest ge transportations brazil operations 562 million approximated fair value assigned noncontrolling interest date acquisition remaining noncontrolling interest value determined based inputs observable market considered level 3 following table summarizes final fair value ge transportation assets acquired liabilities assumed revisions initial estimates based information existed date acquisition trade names customer relationships patents backlog intangible assets subject amortization customer relationship backlog intangible assets amortized using straightline method amortization using shortened estimated useful life projected future cash flow benefits intangible assets contingent liabilities assumed part transaction material related legal tax matters contingent liabilities recorded fair value purchase accounting aside pertaining uncertainty income taxes exception fair value basis accounting included noncurrent liabilities approximately 5246 million customer contracts whose terms unfavorable compared market terms date consummation ge transportation acquisition goodwill calculated difference acquisition date fair value consideration transferred fair value net assets acquired represents future economic benefits including synergies assembled workforce expected achieved result consummation acquisition ge transportation majority purchased goodwill expected deductible tax purposes goodwill allocated freight segment costs related acquisition integration ge transportation approximately 475 million 630 million years ended december 31 2020 2019 respectively included selling general administrative expenses consolidated statements income company also made smaller acquisitions listed individually collectively immaterial following unaudited pro forma consolidated financial information presents income statement results ge transportation acquisition occurred january 1 2019 historical consolidated financial information company ge transportation acquisition detailed adjusted pro forma information give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact combined results pro forma data may indicative results would obtained ge transportation acquisition occurred beginning periods presented intended projection future results 4 supplemental cash flow disclosures 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 1831 million 1578 million 664 million 2020 2019 2018 respectively 7 intangibles goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment 2020 company opted proceed directly quantitative impairment test reporting units goodwill discounted cash flow approach market approach used estimate fair value reporting unit using weighting 75 25 respectively discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures discount rate terminal revenue growth rate revenue growth rate period beyond years forecasted reporting units reporting unit market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units 2020 discounted cash flow approach given weight compared market approach due relatively reduced amount publicly available data companies comparable operations wabtec however valuation approaches resulted conclusion estimated fair value three companys reporting units excess respective carrying value resulted conclusion impairment existed additionally company proceeded directly quantitative impairment test trade names indefinite lives fair value material trade names subject quantitative impairment test exceeded respective carrying value resulting conclusion material impairment existed trade names subject quantitative testing company opted perform qualitative trade name impairment assessment determined qualitative assessment likely estimated fair values trade names less carrying values therefore analysis required assessing qualitative factors determine whether likely fair value trade name less carrying amount company assessed relevant events circumstances may impact fair value carrying amount trade name identification relevant events circumstances may impact trade name’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact change carrying amount goodwill segment year ended december 31 2020 follows december 31 2020 2019 company’s trade names net carrying amount 6507 million 6231 million respectively company believes intangibles indefinite lives exception right use ge transportation trade name company assigned useful life 5 years intangible assets company goodwill trade names consist following remaining weighted average useful lives backlog intellectual property customer relationships intangibles 13 years 12 years 17 years 8 years respectively backlog intangible primarily consists inplace longterm service agreements acquired company conjunction acquisition ge transportation amortization expense intangible assets 2824 million 2384 million 398 million years ended december 31 2020 2019 2018 respectively estimated amortization expense five succeeding years follows millions 8 contract assets contract liabilities contract assets include unbilled amounts resulting sales longterm contracts revenue recognized time revenue exceeds amount billed customer based terms contract current portion contract assets classified current assets caption “unbilled accounts receivable” noncurrent contract assets classified assets caption noncurrent assets consolidated balance sheet noncurrent contract assets 1010 million 1094 million december 31 2020 2019 respectively included noncurrent contract assets certain costs specifically related contract however directly contribute transfer control tangible product created preproduction costs company elected use practical expedient consider unbilled amounts anticipated paid within one year significant financing components contract liabilities include customer deposits made prior incurrence costs related newly agreed upon contract advanced customer payments excess revenue recognized current portion contract liabilities classified current liabilities caption “customer deposits” noncurrent contract liabilities classified noncurrent liabilities caption longterm liabilities consolidated balance sheet noncurrent contract liabilities 796 million 770 million december 31 2020 2019 respectively contract liabilities considered significant financing component used meet working capital demands higher early stages contract revenue associated contract liabilities expected recognized within one year contract liabilities also include provisions estimated losses uncompleted contracts provisions loss contracts 1089 million 1185 million december 31 2020 2019 respectively provisions estimated losses classified current liabilities included within caption “other accrued liabilities” consolidated balance sheet following table reconciles changes company’s contract assets liabilities follows 9 longterm debt longterm debt consisted following 1 see note 18 information fair value measurement companys longterm debt securities premium discount time issuance company amortizes amount interest expense based maturity date first date holders may require company repurchase debt securities applicable premium would result decrease interest expense discount would result increase interest expense future periods additionally company debt issuance costs related certain financing transactions also amortized interest expense december 31 2020 2019 company total unamortized debt issuance costs 205 million 213 million respectively december 31 2020 weighted average interest rate companys variable debt 23 credit facilities senior credit facility june 8 2018 company entered credit agreement senior credit facility replaced companys thenexisting credit agreement senior credit facility syndicate lenders provides borrowings consisting term loans denominated euros us dollars term loans ii multicurrency revolving loan facility providing equivalent us dollars 12000 million multicurrency revolving loans inclusive swingline loans 750 million letters credit 4500 million revolving credit facility revolving credit facility mature june 8 2023 senior credit facility elect receive advances bearing interest based either abr rate libor rate defined senior credit facility plus applicable margin determined based credit ratings companys leverage agreement contains affirmative negative financial covenants events default customary facilities type obligations senior credit facility guaranteed wabtec certain wabtecs us subsidiaries guarantors company agreed long lender commitment senior credit facility letter credit outstanding senior credit facility loan obligation outstanding senior credit facility maintain following end fiscal quarter period four quarters ended 1 interest coverage ratio defined ebitda defined credit agreement term loan agreement net interest expense four quarters ended 2 leverage ratio defined net debt last day fiscal quarter ebitda defined amendment credit agreement term loan agreement four quarters ended company compliance covenants senior credit facility december 31 2020 364day facility april 10 2020 company entered new 600 million 364 day credit facility 364 day facility maturing april 2021 group banks includes 1440 million revolving credit facility 364 day revolver 4560 million term loan 364 term loan agreement calls interest either liborbased rate based prime lending rate agent bank companys option agreement contains affirmative negative financial covenants events default customary facilities type substantially similar existing senior credit facility obligations 364 day facility guaranteed certain companys us subsidiaries guarantors june 12 2020 company amended 364 day facility maturity july 9 2021 company compliance covenants 364 senior credit facility december 31 2020 following table presents availability revolving facilities senior notes senior notes comprises 4375 senior notes due 2023 415 senior notes due 2024 320 senior notes due 2025 345 senior notes due 2026 470 senior notes due 2028 interest fixedrate senior notes payable semiannually company may redeem series notes time whole time part accordance provisions indenture series notes issued senior notes may redeemed redemption price 100 principal amount plus specified makewhole premium accrued interest senior notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company june 29 2020 company issued 5000 million 320 senior notes due 2025 notes 2025 notes issued 99892 face value interest 2025 notes accrues rate 320 per annum payable semiannually june 15 december 15 year beginning december 15 2020 proceeds used redeem floating rate senior notes due 2021 company incurred 15 million deferred financing costs related issuance 2025 notes indentures senior notes issued contain covenants restrictions limit subject certain exceptions certain sale leaseback transactions respect principal properties incurrence secured debt without equally ratably securing senior notes certain merger consolidation transactions covenants require company maintain financial ratios specified levels net worth liquidity company compliance restrictions covenants indentures senior notes issued expects restrictions covenants type limiting factor executing operating activities cash pooling wabtec aggregates companys domestic cash position daily basis outside united states company uses cash pooling arrangements banks help manage liquidity requirements pooling arrangements wabtec subsidiary “participants” agree single bank cash balances pool participants bank subject full right setoff amounts participants owe bank provides overdrafts long net balance participants exceed agreedupon level typically participant pays interest outstanding overdrafts receives interest cash balances companys consolidated balance sheets reflect cash net bank overdrafts pooling arrangements letters credit ordinary course business company issues letters credit related commercial products outstanding amount including letters credit issues credit facility 7366 million 7140 million december 31 2020 2019 respectively 10 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s significant defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 418 million 402 million december 31 2020 2019 respectively aggregate accumulated benefit obligation international pension plans 3718 million 3360 million december 31 2020 2019 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2020 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2020 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2021 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date see note 18 “fair value measurement” included herein plan assets asset category december 31 2020 2019 follows us plan target asset allocation 55 equity securities 45 debt securities international plan target asset allocation 10 equity securities 22 debt securities 68 investments investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis following tables summarize pension plan assets measured fair value recurring basis fair value hierarchy level see note 18 following table presents reconciliation level 3 assets cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 73 million international plan expect make contribution us plan 2021 benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2020 2019 plan held behalf participants 409104 shares market value 299 million 431744 shares market value 336 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income taxes company’s domestic foreign operations years ended december 31 provided consolidated provision income taxes included consolidated statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided decrease effective tax rate 2020 primarily result nondeductible transaction related expenses incurred 2019 result ge transportation acquisition recur 2020 decrease estimated liabilities resulting provisions tax cuts jobs act recognized 2019 decrease foreign tax expense primarily due favorable changes mix foreign earnings partially offset increase state income tax expense recognized 2020 components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2020 valuation allowance certain foreign deferred tax asset carryforwards 417 million primarily brazil china denmark france netherlands south africa net operating loss carryforwards amount 3126 million expire various periods december 31 2021 december 31 2040 december 31 2020 liability income taxes associated unrecognized tax benefits 164 million 148 million recognized would favorably affect company’s effective income tax rate december 31 2019 liability income taxes associated unrecognized tax benefits 172 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2020 total interest penalties accrued approximately 45 million december 31 2019 total interest penalties accrued approximately 40 million limited exception company longer subject examination various us foreign taxing authorities years 2015 time company believes reasonably possible unrecognized tax benefits approximately 62 million may change within next 12 months due expiration statutory review periods current examinations 12 earnings per share computation earnings per share operations follows options purchase approximately 403000 312000 135000 shares common stock outstanding 2020 2019 2018 respectively included computation diluted earnings exercise price exceeded average market price companys common stock 13 stockbased compensation plans december 31 2020 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan amended restated “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan term may 10 2027 december 31 2020 number shares available future grants 2011 plan 1870396 shares includes remaining shares grant 2000 plan company also maintains 1995 nonemployee directors’ fee stock option plan amended restated “the directors plan” directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2020 2019 2018 company issued total 23152 15729 12960 shares respectively restricted stock nonemployee directors total number shares issued directors plan december 31 2020 933033 shares stockbased compensation expense plans 195 million 500 million 253 million years ended december 31 2020 2019 2018 respectively company recognized associated tax benefits related stockbased compensation plans 18 million 14 million 63 million respective periods included stockbased compensation expense 2020 24 million expense related stock options 172 million related nonvested restricted stock 47 million related restricted stock units 12 million related units issued directors’ fees 60 million expense reversal related incentive stock units december 31 2020 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 319 million recognized weighted period 14 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable three year vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2020 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests three years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2020 company estimates achieve 41 0 100 incentive stock units expected vest based performance three year periods ending december 31 2020 2021 2022 respectively recorded incentive compensation expense accordingly estimates number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 14 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2020 follows reclassifications accumulated comprehensive loss yearended december 31 2020 follows changes accumulated comprehensive loss component net tax yearended december 31 2019 follows reclassifications accumulated comprehensive loss yearended december 31 2019 follows 15 leases company leases property equipment finance operating leases terms greater 12 months company records related asset obligation present value lease payments many companys leases include rental escalation clauses renewal options andor termination options factored determination lease payments appropriate company separate lease nonlease components companys leases provide readily stated discount rate company must estimate incremental borrowing rate discount lease payments company established discount rates geographic region ranging 10 123 components lease expense follows scheduled payments lease liabilities follows following table summarizes remaining lease term discount rate assumptions used develop present value lease liabilities 16 warranties following table reconciles changes company’s product warranty reserve follows 17 derivative financial instruments hedging activities normal course business exposed interest rate commodity price foreign currency exchange rate fluctuations times limit risks use derivatives crosscurrency swaps foreign currency forward contracts interest rate swaps commodity forwards futures accordance policy derivatives used hedging purposes use derivatives trading speculative purposes foreign currency exchange risk company uses forward contracts hedge forecasted foreign currency denominated sales finished goods future settlement foreign currency denominated assets liabilities derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item years ended december 31 2020 2019 amounts reclassified income material company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates conduct business worldwide us dollars functional currencies foreign subsidiaries including euro indian rupee british pound sterling australian dollars several foreign currencies changes foreign currency exchange rates could material adverse impact financial results reported us dollars also exposed foreign currency exchange rate risk related foreign subsidiaries including intercompany loans denominated nonfunctional currencies net purchases sales nonfunctional currencies hedge exposures using foreign currency swap contracts crosscurrency swaps offset potential income statement effects intercompany loans denominated nonfunctional currencies programs reduce eliminate foreign currency exchange rate risk entirely company enters certain derivative contracts accordance risk management strategy meet criteria hedge accounting impact largely mitigating foreign currency exposure foreign exchange contracts accounted full mark market basis earnings gains losses recorded component expense net loss related contracts 09 million twelve months ended december 31 2020 contracts scheduled mature within one year following table summarizes gross notional amounts fair values designated nondesignated hedges discussed sections december 31 2020 following table summarizes gross notional amounts fair values designated nondesignated hedged discussed sections december 31 2019 interest rate risk company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk twelve months ended december 31 2020 amounts reclassified income material commodity price risk company may use commodity forward contracts futures manage exposure commodity price changes reduce overall cost manufacturing twelve months ended december 31 2020 amounts reclassified income material 18 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides assets liabilities carried fair value measured recurring basis december 31 2020 included current assets liabilities consolidated balance sheet following table provides assets liabilities carried fair value measured recurring basis december 31 2019 included current assets liabilities consolidated balance sheet result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2020 december 31 2019 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represents accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates senior notes considered level 2 based fair value valuation hierarchy contingent consideration related ge transportation acquisition considered level 3 based fair value valuation hierarchy includes 1300 million classified accrued liabilities companys consolidated balance sheet 2181 million longterm liabilities classified contingent consideration companys consolidated balance sheet fair value approximates carrying value december 31 2020 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition ingersoll rand successorininterest american standard inc “ingersoll” indemnified company certain items including among things certain environmental claims company asserted prior 2000 ingersoll unable honor meet indemnifications company would responsible items opinion management ingersoll currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” vast majority claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated limited number claims covered insurance subject indemnity nonaffiliated parties wabtec incurred defense administrative indemnity costs connection actions costs material company information would suggest costs would become material foreseeable future based company’s history resolving asbestos claims last twenty years management believes costs company’s asbestosrelated cases material company’s overall financial position results operations cash flows xorail inc wholly owned subsidiary company “xorail” received notices denver transit constructors “dtc” alleging breach contract related operating constant warning wireless crossings late delivery train management dispatch system “tmds” denver eagle p3 project owned denver regional transit district rtd damages asserted alleged late delivery tmds formal claim filed xorail successfully completed remediation plan concerning tmds issues regard wireless crossing issue september 8 2017 dtc alleged total damages 368 million july 31 2017 continuing accumulate majority damages stems delay approval wireless crossing system federal railway administration fra public utility commission puc resulting use flaggers crossings pending approval wireless crossing system certification crossings dtc alleged delay due xorails failure achieve constant warning times crossings accordance approval requirements imposed fra puc xorail denied dtcs assertions stating system satisfied contractual requirements xorail worked dtc modify system implement fras pucs previously undefined approval requirements fra puc approved modified wireless crossing system august 2018 dtc completed process certifying crossings eliminated use flaggers dtc updated notices xorail filed formal claim xorail september 21 2018 dtc filed complaint rtd colorado state court breach contract related nonpayments costs flaggers asserting changeinlaw arising frapuc’s new certification requirements dtc’s complaint generally supports xorail’s position name implicate xorail dtcs claim rtd proceeded trial september 21 2020 trial completed included posttrial submission decision expected march april 2021 april 3 2018 company knorrbremse ag entered consent decree united states department justice resolving allegations company knorrbremse ag maintained unlawful agreements compete other’s employees allegations also related faiveley transport acquired company november 2016 monetary fines penalties imposed company elected settle matter department justice avoid cost distraction litigation putative class action lawsuits thereafter filed several different federal district courts naming company knorr defendants connection allegations contained consent decree lawsuits seek unspecified damages behalf employees company including faiveley transport knorr allegedly caused defendants’ actions federal multidistrict litigation mdl panel consolidated cases western district pennsylvania october 12 2018 consolidated class action complaint filed western district pa five named plaintiffs august 13 2019 company notified codefendant knorrbremse settled plaintiffs january 21 2020 following courtsponsored early mediation company entered memorandum understanding plaintiffs agreeing settle claims case march 2020 court issued preliminary approval agreed settlement terms amount december 2020 payments distributed class members time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information company two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type initiatives integrate ge transportation operations wabtec including recent restructuring programs announced late 2019 resulted changes companys organizational structure financial reporting utilized companys chief operating decision maker assess performance allocate resources result certain asset groups reorganized freight segment transit segment vice versa change company’s reportable segments effective fourth quarter 2019 reflected company believes changes better present managements new view business company’s business segments freight segment primarily builds new locomotives manufactures services components new existing freight cars locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically regional trains high speed trains subway cars lightrail vehicles buses also refurbishes subway cars provides heating ventilation air conditioning equipment doors buses subways customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations intersegment sales accounted prices generally established reference similar transactions unaffiliated customers corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges changes asset groups comprising freight transit segments reflected retrospective revision prior period segment information following geographic area data years ended december 31 2020 2019 2018 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries net sales product line follows 21 income net components income net follows schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2actual disbursements andor charges applicable signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 19 2021bys rafael santana rafael santana president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicatednannanitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated january 5 2006 management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded cofren srl “cofren” assessment internal controls financial reporting december 31 2005 cofren acquired company purchase business combination effective february 1 2005 cofren wholly owned subsidiary whose total assets net sales represent 96 25 respectively related consolidated financial statement amounts year ended december 31 2005 based assessment management concluded company maintained effective internal control financial reporting december 31 2005 based criteria internal controlintegrated framework issued coso management’s assessment effectiveness company’s internal control financial reporting december 31 2005 audited ernst young llp independent registered public accounting firm stated report included herein management’s certifications company’s chief executive officer chief financial officer required sarbanesoxley act included exhibits 31 32 company’s 10k addition 2005 company’s chief executive officer provided new york stock exchange annual ceo certification regarding company’s compliance new york stock exchange’s corporate governance listing standards albert j neupaver albert j neupaver president chief executive officer director alvaro garciatunon alvaro garciatunon senior vice president chief financial officer secretary report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2005 2004 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness westinghouse air brake technologies corporation’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 6 2006 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania march 6 2006 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited management’s assessment included accompanying management’s report internal control financial reporting westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls cofren srl included 2005 consolidated financial statements westinghouse air brake technologies corporation constituted 96 total assets december 31 2005 25 net sales year ended management assess effectiveness internal control financial reporting entity cofren srl acquired company purchase business combination effective february 1 2005 audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting cofren srl opinion management’s assessment westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2005 fairly stated material respects based coso criteria also opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2005 2004 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2005 report dated march 6 2006 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania march 6 2006 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 11 countries 2005 76 percent company’s revenues came north american operations wabtec also sold products services 89 countries around world 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 41 million 2 million december 31 2005 2004 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually impairment frequently indicators impairment present amortizable intangible assets reviewed impairment indicators impairment present evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number westinghouse air brake technologies corporation notes consolidated financial statementscontinued significant assumptions estimates involved application dcf model forecasted operating cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair value could realized could differ used evaluate impairment goodwill warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 78 million 149 million 105 million 2005 2004 2003 respectively warranty reserves 162 million 174 million december 31 2005 2004 respectively deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 “accounting deferred compensation arrangements amounts earned held rabbi trust invested” “eitf 9714” issued adoption eitf 9714 required company record treasury stock historical value company’s stock maintained deferred compensation plans income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company uses intrinsic value based method accounting stockbased compensation recognize compensation expense issuance options exercise price equal greater market price stock time grant compensation expense plans determined based fair value grant dates awards company’s net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options’ vesting period westinghouse air brake technologies corporation notes consolidated financial statementscontinued purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received recognized interest expense company concluded interest rate swap contracts qualify “special cash flow hedge accounting” permit recording fair value swap corresponding adjustment comprehensive income loss balance sheet interest rate swaps terminated 2004 company also entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad december 31 2005 company forward contracts notional value 24 million cad 193 million us average exchange rate 080 usd per 1 cad resulting recording current asset increase comprehensive income 877000 net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions statement financial accounting standards “sfas” 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange intercompany transaction losses recognized income 33 million 12 million 28 million 2005 2004 2003 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined westinghouse air brake technologies corporation notes consolidated financial statementscontinued company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 49 million 53 million 34 million december 31 2005 2004 2003 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2005 2004 2003 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2005 2004 2003 company incurred costs approximately 328 million 338 million 329 million respectively employees december 31 2005 approximately 41 company’s workforce covered collective bargaining agreements generally effective 2006 2007 2009 earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements november 2004 financial accounting standards board “fasb” issued statement financial accounting standard “sfas” 151 “inventory costsan amendment arb 43 chapter 4” standard provides clarification abnormal amounts idle facility expense freight handling costs spoilage recognized current period charges additionally standard requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions standard effective westinghouse air brake technologies corporation notes consolidated financial statementscontinued inventory costs incurred fiscal years beginning june 15 2005 company currently evaluating effect standard company’s financial statements results operations december 2004 fasb issued statement financial accounting standard 123 revised 2004 “sharebased payment” statement replaces fasb statement 123 supersedes apb opinion 25 123r eliminates ability account sharebased compensation transactions using intrinsic method currently used company fasb 123r requires transactions accounted using fairvaluebased method would result expense recognized company’s financial statements company required adopt 123r first quarter 2006 result extension granted securities exchange commission april 14 2005 adoption 123r expected reduce quarterly earnings approximately 001 per share 2006 december 2004 fasb issued staff position “fsp” 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” fsp 1092 provides guidance sfas 109 “accounting income taxes” respect recording potential impact repatriation provisions american jobs creation act 2004 “jobs act” enterprises’ income tax expense deferred tax liability jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate impact jobs act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company evaluated impact repatriation provisions adjusted tax expense deferred tax liability reflect repatriation provisions jobs act march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” statement requires companies recognize liability fair value legal obligation perform asset retirement activities conditional future event amount reasonably estimated provisions statement effective years ending december 15 2005 company expect adoption fasb 47 material impact company’s financial position results operations june 2005 fasb issued sfas 154 “accounting changes error corrections replacement apb opinion 20 fasb statement 3” sfas 154 requires retrospective application financial statements prior periods changes accounting principle adopted prospectively statement effective fiscal years beginning december 15 2005 company expect adoption sfas 154 material impact company’s financial position results operations 3 acquisitions discontinued operations february 1 2005 company completed acquisition assets rütgers rail spa business operations italy germany france spain acquisition accounted purchase accordingly purchase price allocated respective assets liabilities based upon estimated fair values acquisition date operating results included consolidated statement operations acquisition date forward new company formed hold newly purchased assets rütgers rail spa named cofren srl “cofren” cofren one leading manufacturers brake shoes disc pads interior trim components rail applications europe purchase price 359 million net cash received resulting additional goodwill 57 million westinghouse air brake technologies corporation notes consolidated financial statementscontinued following table summarizes estimated fair values assets acquired liabilities assumed date acquisition 54 million acquired intangible assets exclusive goodwill 35 million assigned customer relationships 12 million assigned patents 412000 assigned trademarks 324000 assigned backlog following unaudited pro forma financial information presents income statement results acquisition occurred january 1 2003 acquisition rutgers rail spa company decided offer sale certain product division part purchase accounting net amount division revalued estimated net realizable value classified assets held sale included noncurrent assets balance sheet november 1 2001 company completed sale certain assets ge transportation systems gets 238 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer terms sales agreement company agreed indemnify gets among things certain potential third party site environmental cleanup remediation costs company purchased insurance policy mitigate exposure environmental indemnities fourth quarter 2001 company decided exit businesses put businesses sale december 31 2003 one businesses sold company actively solicited receive reasonable offers purchase asset response reduced price asset longer actively marketed result company reclassed business continuing operations fourth quarter 2003 reclassification material impact financial statements fourth quarter 2005 company decided liquidate bus door joint venture china westinghouse air brake technologies corporation notes consolidated financial statementscontinued accordance sfas 144 “accounting impairment disposal longlived assets” operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures 5 restructuring impairment charges 2005 company recorded restructuring impairment charges relating consolidating facilities relocating product line canada us completing data center migration closing foundry operation 41 million costs expensed consisting severance costs 12 million 60 employees relocation costs 630000 asset writeoffs 23 million 1 million severance costs paid 2005 costs 29 million charged cost sales 12 million charged selling general administrative expenses 2004 company wrote 13 million various assets 6 inventory components inventory net reserves westinghouse air brake technologies corporation notes consolidated financial statementscontinued 7 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 217 million 228 million 21 million 2005 2004 2003 respectively 8 intangibles goodwill intangible assets indefinite lives longer amortized instead subject periodic assessments impairment applying fairvaluebased test fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill still remaining balance sheet 1182 million 1135 million december 31 2005 2004 respectively december 31 2005 2004 company’s trademarks net carrying amount 199 million 196 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following company reassessed useful lives classification identifiable assets determined continue appropriate weighted average useful life patents 13 years customer relationships 20 years covenants compete five years westinghouse air brake technologies corporation notes consolidated financial statementscontinued amortization expense intangible assets 31 million 24 million 34 million years ended december 31 2005 2004 2003 respectively amortization expense five succeeding years follows thousands change carrying amount goodwill segment year ended december 31 2005 follows 9 longterm debt longterm debt consisted following refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provided 175 million fiveyear revolving credit facility expiring january 2009 november 2005 company entered amendment refinancing credit agreement among things extended expiration agreement december 2010 december 31 2005 company available bank borrowing capacity net 264 million letters credit approximately 1486 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described company borrow refinancing credit agreement year ended december 31 2005 refinancing credit agreement may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 625 175 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 625 basis points westinghouse air brake technologies corporation notes consolidated financial statementscontinued refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company refinancing credit agreement includes following covenants minimum interest coverage ratio 3 maximum debt cash flow ratio 325 minimum net worth 180 million plus 50 consolidated net income since september 30 2003 company compliance measurements covenants 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens scheduled principal repayments outstanding loan balances required december 31 2005 follows 10 employee benefit plans company sponsors defined benefit pension plans cover certain us canadian united kingdom employees provide benefits stated amounts year service employee addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees january 1995 postretirement health care life insurance benefits us salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 westinghouse air brake technologies corporation notes consolidated financial statementscontinued company uses december 31 measurement date us canadian plans uk plan uses october 31 measurement date obligations funded status westinghouse air brake technologies corporation notes consolidated financial statementscontinued accumulated benefit obligation defined benefit pension plans 1421 million 1261 million december 31 2005 2004 respectively aggregate projected benefit obligation fair value plan assets pension plans benefit obligations excess plan assets 1533 million 1203 million respectively december 31 2005 1357 million 1044 million respectively december 31 2004 aggregate accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1421 million 1203 million respectively december 31 2005 122 million 1002 million respectively december 31 2004 components prepaid accrued benefit costs country follows components net periodic benefit costs increase minimum pension liability resulted charge shareholders’ equity net tax 61 million 2005 38 million 2004 assumptions weighted average assumptions used determine benefit obligations follows discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience weighted average assumptions used determine net periodic benefit costs follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy assumed health care cost trend rate grades initial rate 971 ultimate rate 498 six years 1 increase assumed health care cost trend rate increase amount expense recognized postretirement plans approximately 364000 2006 increase service interest cost components accumulated postretirement benefit obligation approximately 68 million 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized postretirement plans approximately 297000 2006 decrease accumulated postretirement benefit obligation approximately 56 million pension plan assets composition plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s asset allocations respective measurement dates 2005 asset category follows investment policies determined respective plan’s pension committee set forth investment policy pursuant investment policy us investment strategy use passive index funds managed bank new york target asset allocation composite benchmarks us plans include following company evaluating allocation policies plans canada uk rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expects contribute 89 million pension plan 2006 expects level funding continue future periods westinghouse air brake technologies corporation notes consolidated financial statementscontinued benefit payments expected paid plan participants follows may 2004 fasb issued fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1062 act signed law president december 8 2003 introduces prescription drug benefit plan medicare part well federal subsidy sponsors retiree health benefit plans provide benefit least actuarially equivalent medicare part fsp 1062 provides guidance companies account impact act postretirement health care plans encourage employers retain provide postretirement drug benefits beginning 2006 federal government provide nontaxable subsidy payments employers sponsor prescription drug benefits retirees actuarially equivalent medicare benefit fsp 1062 effective interim annual financial statements beginning june 15 2004 adoption fsp 1062 significant impact company’s financial position results operations defined contribution plans company also participates certain 401k multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock december 31 2005 2004 plan held behalf participants 646000 shares market value 174 million 695000 shares market value 148 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing westinghouse air brake technologies corporation notes consolidated financial statementscontinued authorities components income loss continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 57 million foreign subsidiaries intended permanently reinvested 2004 jobs creation act fsp 1092 state enterprise allowed time beyond financial reporting period enactment evaluate effect jobs act plan reinvestment repatriation foreign earnings applying sfas 109 company completed evaluation impact repatriation provisions accordingly provided fsp 1092 company adjusted tax expense deferred tax liability reflect repatriation provisions 2004 jobs creation act consolidated provision credit income taxes included statement income consisted following consolidated income tax provision credit included statement income follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided overall effective income tax rate 2004 includes tax benefit 49 million primarily related reversal certain items previously provided closed regulatory examination deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued valuation allowance provided likely portion deferred tax assets realized company recorded valuation allowance 151 million certain state foreign net operating loss carryforwards deferred tax assets anticipated produce tax benefit state foreign net operating loss carryforwards exist amount 169 million 10 million respectively set expire various periods 2006 2025 valuation allowance exists andor established certain net operating loss carryforwards federal tax credits exist approximately 5 million comprised research experimentation credits available 2025 alternative minimum tax credits available indefinitely state tax credits approximately 361000 available consist various machinery equipment research experimentation jobs related credits 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 13000 589000 646000 shares common stock outstanding 2005 2004 2003 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year added shares available grant 2000 plan based adjustment company approximately 11 million shares available 2005 grants available approximately 700000 shares end fiscal 2006 shares available grants given date may exceed 15 wabtec’s total common shares outstanding generally options become exercisable threeyear vesting period expire ten years date grant westinghouse air brake technologies corporation notes consolidated financial statementscontinued part longterm incentive program 1998 company granted options purchase 500020 shares certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors’ stock option plan 500000 shares common stock reserved issuance yearend 2005 company granted nonqualified stock options nonemployee directors purchase total 176000 shares subsequent year end company issued approximately 200000 shares restricted stock certain officers employees vest four years employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants purchase company’s common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2005 172503 shares summary company’s stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2005 westinghouse air brake technologies corporation notes consolidated financial statementscontinued 14 comprehensive loss components accumulated comprehensive loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2005 2004 2003 72 million 78 million 69 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 29 million 22 million 28 million years 2005 2004 2003 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 guarantees 2001 company sold operating assets liabilities noncore business unit business unit’s management team part sale wabtec guaranteed approximately 721000 bank debt buyer assists buyer certain working capital requirements company reason believe debt repaid refinanced westinghouse air brake technologies corporation notes consolidated financial statementscontinued following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2005 2004 preferred stock issued outstanding 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc “asi” indemnified company certain items including among things certain environmental claims company asserted prior 2000 asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations actions filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products since 2000 number claims increased claims made whollyowned subsidiary railroad friction products corporation rfpc based product sold rfpc acquired american standard inc’s asi 50 interest rfpc 1990 acquired remaining interest rfpc 1992 claims include suit rfpc insurers seeking coverage rfpc’s insurance policies april 17 2005 claim company contending company assumed asi’s liability asbestos claims arising exposure rfpc’s products resolved company’s favor claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated westinghouse air brake technologies corporation notes consolidated financial statementscontinued company recorded loss provision 16 million first quarter 2005 related contract assemble locomotive modules boise idaho facility provision based upon customer purchase orders units expected unprofitable specific contract costs third quarter 2005 result termination contract improvements cost entire reserve reversed earnings also third quarter company expensed 12 million capitalized preproduction costs recognized 161000 costs contract termination potentially reduces number locomotive modules company may supply customer immediately allows price increases current future orders company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower industries boise idaho facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents additional 970000 accrued 2004 based refined estimates ongoing monitoring costs company reevaluated reserve reversed 280000 earnings 2005 total company accrued 702000 december 31 2005 estimated remaining costs remediation monitoring company compliance permit december 31 2005 foster wheeler energy corporation “fwec” seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company process remediating site state illinois estimates costs remediate site approximately 5000 accrued december 31 2005 young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 126000 december 31 2005 estimate remaining remediation costs november 3 2000 company settled suit brought 1999 geharris railway electronics llc geharris railway electronics services llc collectively “geharris” september 20 2002 motion lawsuit filed successor geharris ge transportation services global signaling llc “getsgs” motion getsgs contended company acting beyond authority granted parties’ november 2000 settlement license agreement contempt consent order concluded suit time support motion getsgs pointed principally sales offers sell certain railway brake equipment including distributed power equipment australian customers august 2004 united states district court district delaware ruled partially favor getsgs ordering company pay compensatory damages lost licensing profits related mentioned distributed power equipment contracts reimbursement reasonable attorneys’ fees expenses company disagrees ruling intends continue contest ruling liability 32 million recognized 2004 component selling general administrative expense option exercised company’s australian customers additional shipments products distributed power contracts westinghouse air brake technologies corporation notes consolidated financial statementscontinued additional 27 million compensatory damages could owed getsgs additional liability recognized company option exercised company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 33 million established april 2005 amtrak decided suspend acela express train service due cracks spokes cars’ brake discs wabtec design supply braking system acela cars braking system supplied knorr brake corporation brake discs designed faiveley transport wabtec provide machined approximately onethird brake discs cars assisted amtrak others including bombardier corporation alstom transportation inc knorr faiveley evaluation investigation brake disc cracks amtrak claims approximately 30 million damages due suspension acela service resumed limited basis july complete service resumed september wabtec received notice potential claim damages knorr turn provided notice potential claim damages faiveley wabtec believe material liability regard matter march 2006 management began internal investigation related business transactions conducted subsidiary pioneer friction limited “pioneer” west bengal india internal compliance review management discovered disbursements made may violation applicable laws regulations pioneer fourthtier subsidiary wabtec two intermediate subsidiaries australian companies turn owned us holding company transactions inconsequential material overall operations wabtec may result potential penalties management concluded investigation informed wabtec’s audit committee board directors appropriate authorities wabtec recorded reserve related matter december 31 2005 company’s potential exposure cannot estimated based management’s current assessment situation time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment onboard electronic components train coupler equipment revenues derived oem sales components locomotives aftermarket sales freight car repairs services assets sold gets part freight group transit group consists products passenger transit vehicles typically subways rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies westinghouse air brake technologies corporation notes consolidated financial statementscontinued segment financial information 2005 follows segment financial information 2004 follows segment financial information 2003 follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued following geographic area data years ended december 31 2005 2004 2003 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 1056 million 816 million 592 million years ending december 31 2005 2004 2003 respectively 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements westinghouse air brake technologies corporation notes consolidated financial statementscontinued 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2005 westinghouse air brake technologies corporation notes consolidated financial statementscontinued balance sheet december 31 2004 income statement year ended december 31 2005 westinghouse air brake technologies corporation notes consolidated financial statementscontinued income statement year ended december 31 2004 income statement year ended december 31 2003 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries westinghouse air brake technologies corporation notes consolidated financial statementscontinued condensed statement cash flows year ended december 31 2005 condensed statement cash flows year ended december 31 2004 condensed statement cash flows year ended december 31 2003 westinghouse air brake technologies corporation notes consolidated financial statementscontinued 22 expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation albert j neupaver albert j neupaver president chief executive officer date march 16 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets 2 actual disbursements andor charges exhibits filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 filed exhibit company’s annual report form 10k period ended december 31 2004 filed exhibit 31 company’s current report form 8k dated january 5 2006item 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed part company’s registration statement form s4 file 33388903 filed exhibit company’s current report form 8k file 00113782 dated november 13 2001 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2004 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2006 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2007 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded xorail llc “xorail” gb specialties inc “gb” bachsimpson corporation “bachsimpson” swiger coil systems “swiger” assessment internal controls financial reporting december 31 2010 company acquired xorail effective march 12 2010 gb effective july 28 2010 bachsimpson effective august 20 2010 swiger effective november 5 2010 xorail gb bachsimpson swiger wholly owned subsidiaries whose total assets represents 53 36 14 48 respectively net income represents 38 04 03 01 respectively related consolidated financial statement amounts year ended december 31 2010 based assessment management concluded company maintained effective internal control financial reporting december 31 2010 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2010 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2010 2009 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 25 2011 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 25 2011 report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls xorail llc “xorail” gb specialties inc “gb” bachsimpson corporation “bachsimpson” swiger coil systems “swiger” included 2010 consolidated financial statements westinghouse air brake technologies corporation constitute 53 36 14 48 respectively total assets december 31 2010 38 04 03 01 respectively net income year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting xorail gb bachsimpson swiger opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2010 2009 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2010 westinghouse air brake technologies corporation report dated february 25 2011 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 25 2011 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well approximately 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 17 countries 2010 46 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 75 million 73 million december 31 2010 2009 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed reviewed impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate goodwill impairment analysis performed goodwill impairment analysis performed comparing carrying amount reporting unit estimated fair value extent carrying value reporting unit exceeds estimated fair value reporting unit’s carrying value goodwill compared implied fair value goodwill extent carrying value goodwill exceeds implied fair value goodwill impairment exists must recognized company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins fourth quarter 2010 company used discount rate reporting units ranging 11 13 terminal revenue growth rate 1 3 difference discount rates based underlying markets risks associated company’s reporting units market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units fourth quarter 2010 company used ebitda multiples reporting units ranging 60 120 difference ebitda multiples due underlying markets associated company’s reporting units fair value reporting units exceeded carrying value reporting unit 10 date company’s impairment test warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 228 million 204 million 171 million 2010 2009 2008 respectively accrued warranty 355 million 292 million december 31 2010 2009 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value expense must recognized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2010 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2010 company forward contracts notional value 247 million zar 34 million us average exchange rate 719 zar per 1 usd resulting recording current liability 192000 corresponding offset accumulated comprehensive income 122000 net tax december 31 2009 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2009 company forward contracts notional value 101 million zar 12 million us average exchange rate 821 zar per 1 usd resulting recording current liability 110000 corresponding offset accumulated comprehensive income 70000 net tax reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible company concluded interest rate swap agreement qualifies special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet december 31 2010 company interest rate swap agreements notional value 1370 million effectively changed company’s interest rate bank debt december 31 2010 variable rate fixed rate 227 interest rate swap agreements mature various times december 2012 december 31 2010 company recorded current liability 25 million corresponding offset accumulated comprehensive loss 15 million net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions asc 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 10 million 13 million 04 million 2010 2009 2008 respectively noncontrolling interests january 1 2009 company adopted amendment asc 810 “consolidation” related noncontrolling interests consolidated financial statements amendment establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary amendment clarifies noncontrolling interest reported equity consolidated financial statements requires net income attributable parent noncontrolling interest disclosed separately face consolidated statement income presentation disclosure requirements amendment require retrospective application prior periods presented accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2010 2009 net income attributable noncontrolling interests years ended december 31 2010 2009 2008 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 119 million 121 million december 31 2010 2009 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2010 2009 2008 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2010 2009 2008 company incurred costs approximately 402 million 424 million 390 million respectively employees december 31 2010 approximately 28 company’s workforce covered collective bargaining agreements generally effective 2011 2013 agreements expiring 2011 cover approximately 11 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates 3 acquisitions discontinued operations company made following acquisitions operating business unit component business unit freight group • august 20 2010 company acquired bachsimpson corporation “bachsimpson” designer manufacturer electronic instrumentation devices rail transit markets net purchase price approximately 120 million resulting preliminary additional goodwill 34 million 26 million deductible tax purposes • july 28 2010 company acquired gb specialties inc “gb” manufacturer railroad track signaling products net purchase price approximately 318 million net cash received resulting preliminary additional goodwill 130 million none deductible tax purposes • march 12 2010 company acquired xorail llc “xorail” leading provider signal engineering design services purchase price 399 million net cash received resulting preliminary additional goodwill 292 million none deductible tax purposes • october 1 2009 company acquired unifin international lp affiliate cardinal pumps exchangers inc “unifin” manufacturer cooling systems related equipment power generation transmission industry purchase price 929 million net cash received resulting goodwill 564 million 313 million deductible tax purposes • december 5 2008 company acquired standard car truck company “sct” manufacturer designer stabilization systems freight cars including engineered truck undercarriage components springs friction wedges wear plates barber® brand truck design used throughout world holds leading share north american market company also manufactures services locomotives components including compressors pumps purchase price 3026 million net cash received resulting goodwill 1547 million deductible tax purposes included purchase price 3026 million 250 million related escrow deposit may released company indemnity claims accordance purchase escrow agreements • december 5 2008 company acquired majority beijing wabtec huaxia technology company ltd “huaxia” 56 million huaxia manufactures friction products including brake shoes pads linings freight car market china company made following acquisitions operating business unit component business unit transit group • november 5 2010 company acquired substantially assets swiger coil systems “swiger” manufacturer traction motors electric coils rail power generation markets net purchase price approximately 430 million resulting preliminary additional goodwill 184 million deductible tax purposes • june 30 2008 company acquired 100 stock poli spa poli european based manufacturer rail braking equipment including brake discs high speed applications well tread brake units pneumatic brake valves meet international union railways uic standards purchase price 552 million 870 million usd net cash received resulting goodwill 389 million none deductible tax purposes included purchase price 118 million related escrow deposit may released company indemnity claims environmental claims allocation tax liabilities accordance purchase escrow agreements 2010 acquisitions listed include escrow deposits 212 million may released company indemnity claims accordance purchase escrow agreements swiger bachsimpson gb xorail unifin acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition preliminary allocation 148 million acquired intangible assets swiger exclusive goodwill 62 million assigned customer relationships 51 million assigned trade names 24 million assigned longterm contracts 560000 assigned noncompete agreements 510000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years long term contracts average useful life four years noncompete agreements average useful life two years preliminary allocation 51 million acquired intangible assets bachsimpson exclusive goodwill 29 million assigned customer relationships 486000 assigned longterm contracts 914000 assigned trade names 752000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years long term contracts average useful life two years preliminary allocation 159 million acquired intangible assets gb exclusive goodwill 123 million assigned customer relationships 28 million assigned trade names 850000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years preliminary allocation 59 million acquired intangible assets xorail exclusive goodwill 43 million assigned customer relationships 426000 assigned intellectual property 470000 assigned noncompete agreements 750000 assigned customer backlog customer relationships’ average useful life 20 years intellectual property’s average useful life six years noncompete agreements’ average useful life six years allocation 335 million acquired intangible assets unifin exclusive goodwill 148 million assigned trade names 162 million assigned customer relationships 278000 assigned patents 22 million assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 10 years patents’ average useful life three years december 31 2010 company acquired adantech industria e comercio de metal “adantech” manufacturer variety brake shoes pads subway cars locomotives freight cars net purchase price approximately 19 million resulting preliminary additional goodwill 18 million deductible tax purposes september 15 2010 company formed joint venture china manufacture transformer oil coolers generator coolers related products power generation market company invested 15 million 60 interest hubei dengfeng unifin electrical equipment cooling system co ltd “unifin df” july 22 2009 company acquired certain assets related production rubber products 34 million october 27 2008 company acquired certain assets related development sale service maintenance software programs used train management systems 45 million operating results included consolidated statement operations acquisition date forward december 31 2008 company invested 28 million shenyang cnr wabtec railway brake technology company ltd “shenyang” minority interest joint venture company september 9 2010 company invested additional 80 million joint venture shenyang manufactures braking equipment freight car market china following unaudited pro forma financial information presents income statement results unifin xorail gb bachsimpson swiger occurred january 1 2009 4 supplemental cash flow disclosures july 31 2006 board directors authorized repurchase 50 million company’s outstanding shares common stock february 20 2008 board directors authorized repurchase additional 100 million company’s outstanding shares company intends purchase shares open market negotiated block trades time limit set completion program qualifies 2008 refinancing credit agreement well 6875 senior notes currently outstanding first quarter 2010 company repurchased 75000 shares average price 4128 per share second quarter 2010 company repurchased 79600 shares average price 4040 per share third quarter 2010 company repurchased 51960 shares average price 3983 per share additional shares repurchased fourth quarter 2010 purchases open market first quarter 2009 company repurchased 290000 shares average price 2508 per share second quarter 2009 company repurchased 379700 shares average price 3261 per share additional shares repurchased third fourth quarters 2009 purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 284 million 257 million 247 million 2010 2009 2008 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment applying fairvaluebased test frequently indicators impairment present fair value determined using combination discounted cash flow analysis market multiples based upon historical projected financial information goodwill indefinite live intangible assets impaired december 31 2010 2009 goodwill 5458 million 4830 million december 31 2010 2009 respectively adjustment preliminary purchase price allocation 05 million goodwill due ricon unifin change carrying amount goodwill segment year ended december 31 2010 follows december 31 2010 2009 company’s trademarks net carrying amount 1035 million 960 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships intellectual property six years 16 years 17 years respectively amortization expense intangible assets 102 million 98 million 51 million years ended december 31 2010 2009 2008 respectively amortization expense five succeeding years follows thousands 8 longterm debt longterm debt consisted following 2008 refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provides company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities expire january 2013 2008 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2010 company available bank borrowing capacity net 289 million letters credit approximately 1371 million subject certain financial covenant restrictions 2008 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2010 weighted average interest rate company’s variable rate debt 158 reduce impact interest rate changes portion variablerate debt company entered interest rate swap effectively converted portion debt variable fixedrate borrowing term swap contract december 31 2010 notional value interest rate swaps outstanding 1370 million effectively changed company’s interest rate bank debt december 31 2010 variable rate fixed rate 227 interest rate swap agreements mature various times december 2012 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2008 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2008 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company compliance measurements covenants expects measurements type limiting factor executing operating activities 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens debt capital leases scheduled principal repayments debt capital lease balances december 31 2010 follows 9 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date us canadian german uk plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 472 million 465 million december 31 2010 2009 respectively aggregate accumulated benefit obligation international pension plans 1312 million 1190 million december 31 2010 2009 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2010 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2010 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2011 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters composition plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date balanced fund provides longterm growth income investing diversified portfolio approximately 60 equities 40 bonds plan assets considered level 1 based fair value valuation hierarchy see note 17 “fair value measurement” included herein plan assets asset category december 31 2010 2009 follows us international pension plans target asset allocations 60 equity securities 40 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 13 million us plans 59 million international plans 2011 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2010 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2010 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2011 assumed health care cost trend rate us plans grades initial rate 76 ultimate rate 45 2027 international plans 84 45 2030 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 204000 44000 respectively 2011 increase accumulated postretirement benefit obligation approximately 39 million 335000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 173000 37000 respectively 2011 decrease accumulated postretirement benefit obligation approximately 33 million 285000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2010 2009 plan held behalf participants 433300 shares market value 229 million 428000 shares market value 175 million respectively additionally company stock option based benefit plans described note 12 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 1829 million foreign subsidiaries intended permanently reinvested consolidated provision income taxes included statement income consisted following consolidated income tax provision included statement income follows reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided effective income tax rate 2009 included net tax benefit approximately 97 million due primarily settlement examinations various tax jurisdictions deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized state net operating loss carryforwards exist amount 583 million set expire various periods 2012 2031 federal foreign tax credits approximately 18 million related research development credits fully utilized 2010 state tax credits approximately 866000 available consist various machinery equipment research development jobs related credits december 31 2010 liability income taxes associated uncertain tax positions 100 million 31 million recognized would favorably affect company’s effective income tax rate december 31 2009 liability income taxes associated uncertain tax positions 100 million 26 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense total interest penalties accrued december 31 2010 2009 approximately 31 million 17 million respectively internal revenue service currently auditing 2008 2009 tax years limited exception company longer subject examination various us foreign taxing authorities years 2007 time company believes reasonably possible unrecognized tax benefits approximately 34 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share continuing operations follows options purchase approximately 15000 79200 32400 shares common stock outstanding 2010 2009 2008 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2010 company maintains employee stockbased compensation plans stock options nonvested restricted stock incentive stock awards governed 2000 stock incentive plan amended 2000 plan december 31 2010 shares available future grants 2000 plan 669795 shares awards may made 2000 plan subsequent january 31 2016 company also maintains nonemployee directors’ fee stock option plan directors plan stockbased compensation expense 118 million 36 million 105 million years ended december 31 2010 2009 2008 respectively company recognized associated tax benefits related stockbased compensation plans 30 million 16 million 33 million respective periods included stockbased compensation expense 2010 22 million expense related stock options 37 million related nonvested restricted stock 50 million related incentive stock awards 900000 related awards issued directors’ fees december 31 2010 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 136 million recognized weighted average period 13 years stock options 2000 plan stock options granted eligible employees fair market value average high low wabtec stock price date grant generally options become exercisable three four year vesting period expire ten years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant addition compensation directors’ fees total 13500 shares awarded nonemployee directors years ended december 31 2009 2008 awards may made plan subsequent october 31 2016 compensation directors’ fees year ended december 31 2010 company issued total 18302 shares restricted stock nonemployee directors total number shares issued plan december 31 2010 380302 shares following table summarizes company’s stock option activity related information 2000 plan directors plan years ended december 31 options outstanding december 31 2010 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based us treasury bond rates expected life option nonvested restricted stock incentive stock awards 2000 plan eligible employees granted nonvested restricted stock generally vest three four years date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative three year performance goals incentive stock awards included table represent maximum number shares may ultimately vest december 31 2010 based company’s performance estimate majority stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes nonvested restricted stock incentive stock awards activity related information 2000 plan directors plan years ended december 31 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period 13 comprehensive loss components accumulated comprehensive loss 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2010 2009 2008 98 million 85 million 81 million respectively amounts shown net sublease rentals 02 million zero 16 million years 2010 2009 2008 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2010 2009 preferred stock issued outstanding 17 fair value measurement asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2010 included current liabilities condensed consolidated balance sheet following table provides asset carried fair value measured recurring basis december 31 2009 included current assets condensed consolidated balance sheet result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments plan assets considered level 1 based fair value valuation hierarchy see note 9 “employee benefit plans” included herein 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation rfpc based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents reflected commitments contingencies line consolidated balance sheet company accruals approximately 571000 december 31 2010 estimated remaining costs remediation monitoring company compliance permit december 31 2010 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company completed remediation site state’s voluntary cleanup program obtained closure certification site state illinois young ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate reflected commitments contingencies line consolidated balance sheet company reserves 369000 december 31 2010 relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 october 18 2007 faiveley transport malmo ab “faiveley malmo” filed request arbitration international chamber commerce alleging breach contract trade secret violations relating company’s manufacture sale certain components issue limited number used transit industry day faiveley malmo also filed related proceeding company united states district court southern district new york “federal court” requesting preliminary injunction aid arbitration forums faiveley sought prevent company manufacturing selling subject components arbitration panel decides faiveley’s claim arbitration faiveley also sought monetary damages federal court action faiveley malmo’s request preliminary injunction initially granted part august 22 2008 injunction vacated appellate court march 9 2009 case remanded district court proceedings remand faiveley malmo renewed request injunctive relief district court denied request august 31 2009 faiveley malmo appealed denial appellate court faiveley malmo later voluntarily dismissed appeal international arbitration proceeding faiveley malmo originally alleged 128 million damages later reduced claim 91 million damages company stated faiveley malmo’s claims grossly overstated supported facts circumstances surrounding case frivolous respects icc international court arbitration arbitral tribunal heard case first half 2009 issued award dated december 21 2009 pursuant award company required make 39 million royalty payment faiveley malmo respect faiveley malmo’s claims company alleging breach contract trade secret violations faiveley malmo’s parent company faiveley transport stated faiveley entities considering filing claims company arising allegations may 14 2010 faiveley transport usa inc faiveley transport nordic ab faiveley transport amiens sas ellcon national inc filed complaint wabtec corporation us district court southern district new york complaint amended june 8 2010 claims amended complaint include misappropriation trade secrets unfair competition tortious interference prospective business relations tortious interference prospective economic advantage unjust enrichment june 25 2010 company filed motion dismiss faiveley entities’ amended complaint entirety motion dismiss denied november 2010 plaintiffs asserted claim 172 million compensatory unspecified damages company vigorously contesting claims believe would result material legal liability december 10 2010 company filed motion summary judgment plaintiffs filed motion partial summary judgment briefing motions completed december 29 2010 oral argument heard january 7 2011 trial scheduled begin june 13 2011 time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit group primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2010 follows segment financial information 2009 follows segment financial information 2008 follows following geographic area data years ended december 31 2010 2009 2008 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 3272 million 2413 million 2618 million years ended december 31 2010 2009 2008 respectively sales product follows 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2010 balance sheet december 31 2009 income statement year ended december 31 2010 income statement year ended december 31 2009 income statement year ended december 31 2008 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2010 condensed statement cash flows year ended december 31 2009 condensed statement cash flows year ended december 31 2008 22 income expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting calendar accordingly quarters end march 31 june 30 september 30 fiscal year ends december 31 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed part company’s registration statement form s4 file 33388903 filed exhibit company’s current report form 8k file 00113782 dated november 13 2001 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2004 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2006 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2007 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s annual report form 10k file 03390866 period ended december 31 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sectionsitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2007 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s quarterly report form 8k file 03390866 dated november 7 2011 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 filed exhibit company’s annual report form 10k file 03390866 dated february 25 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded brush traction group “brush” bearward engineering “bearward” fulmer company “fulmer” assessment internal controls financial reporting december 31 2011 company acquired brush effective february 25 2011 bearward effective november 3 2011 fulmer effective november18 2011brush bearward fulmer wholly owned subsidiaries whose total assets represents 28 29 07 respectively whose total net assets represents 36 29 13 respectively net income represents 18 04 00 respectively whose customer revenues represents 25 06 01 respectively related consolidated financial statement amounts year ended december 31 2011 based assessment management concluded company maintained effective internal control financial reporting december 31 2011 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2011 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2011 2010 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2011 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 24 2012 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 24 2012 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls brush traction group “brush” bearward engineering “bearward” fulmer company “fulmer” included 2011 consolidated financial statements westinghouse air brake technologies corporation constituted 28 29 07 respectively total assets 36 29 13 respectively total net assets december 31 2011 1804 00 respectively net income 25 06 01 respectively customer revenue year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting brush bearward fulmer opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2011 2010 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2011 report dated february 24 2012 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 24 2012 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 18 countries 2011 47 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 84 million 75 million december 31 2011 2010 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed september 2011 fasb issued accounting standards updated “asu” 201108 amends rules testing goodwill impairment new rules entity option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances entity determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary adopted asu 201108 2011 annual goodwill impairment test assessing qualitative factors determine whether likely fair value reporting unit less carrying amount assess relevant events circumstances may impact fair value carrying amount reporting unit identification relevant events circumstances may impact reporting unit’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact qualitative assessment concludes probable impairment company performs quantitative assessment first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units company reviews goodwill impairment reporting unit level company prepares goodwill impairment analysis comparing estimated fair value reporting unit using income approach discounted cash flow model well market approach carrying value income approach market approach equally weighted arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond three years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 199 million 228 million 204 million 2011 2010 2009 respectively accrued warranty 506 million 355 million december 31 2011 2010 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis december 31 2011 company forward contracts december 31 2010 company forward contracts sale south african rand zar purchase us dollars usd company concluded foreign currency forward contracts qualify cash flow hedge accounting permits recording fair value forward contract corresponding adjustment comprehensive income loss net tax balance sheet december 31 2010 company forward contracts notional value 247million zar 34 million us average exchange rate 719 zar per 1 usd resulting recording current liability 192000 corresponding offset accumulated comprehensive income 122000 net tax reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively converted portion debt variable fixedrate borrowing term swap contract company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible company concluded interest rate swap agreements qualify special cash flow hedge accounting permits recording fair value interest rate swap agreement corresponding adjustment comprehensive income loss net tax balance sheet december 31 2011 company interest rate swap agreements notional value 1070 million effectively changed company’s interest rate bank debt december 31 2011 variable rate fixed rate 219 interest rate swap agreements mature december 31 2012 december 31 2011 company recorded current liability 14 million corresponding offset accumulated comprehensive loss 09 million net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 20 million 10 million 13 million 2011 2010 2009 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2011 2010 net income attributable noncontrolling interests years ended december 31 2011 2010 2009 material comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income consists foreign currency translation adjustments foreign currency hedges foreign exchange contracts interest rate swaps pension post retirement related adjustments revenue recognition revenue recognized accordance asc 605 “revenue recognition” revenue recognized products shipped respective customers title passed price product determined general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 154 million 119 million december 31 2011 2010 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2011 2010 2009 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2011 2010 2009 company incurred costs approximately 372 million 402 million 424 million respectively employees december 31 2011 approximately 25 company’s workforce covered collective bargaining agreements generally effective 2012 2014 agreements expiring 2012 cover approximately 17 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates 3 acquisitions company made following acquisitions operating business unit component business unit freight group • november 3 2011 company acquired bearward engineering “bearward” ukbased manufacturer cooling systems related equipment power generation industrial markets net purchase price approximately 436 million net cash resulting preliminary additional goodwill 222 million none deductible tax purposes • august 20 2010 company acquired bachsimpson corporation “bachsimpson” designer manufacturer electronic instrumentation devices rail transit markets net purchase price approximately 120 million resulting additional goodwill 34 million 26 million deductible tax purposes • july 28 2010 company acquired gb specialties inc “gb” manufacturer railroad track signaling products net purchase price approximately 318 million net cash received resulting additional goodwill 148 million none deductible tax purposes • march 12 2010 company acquired xorail llc “xorail” leading provider signal engineering design services purchase price 399 million net cash received resulting additional goodwill 296 million none deductible tax purposes • october 1 2009 company acquired unifin international lp affiliate cardinal pumps exchangers inc “unifin” manufacturer cooling systems related equipment power generation transmission industry purchase price 929 million net cash received resulting goodwill 564 million 313 million deductible tax purposes bearward acquisition following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition bachsimpson gb xorail acquisitions following table summarizes final fair values assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit group • november 18 2011 company acquired fulmer company “fulmer” leading manufacturer motor components rail power generation industrial markets net purchase price 136 million resulting preliminary additional goodwill 10 million deductible tax purposes • june 29 2011 company acquired aftermarket transit parts business “atp” ge transportation parts supply business propulsion control systems passenger transit car aftermarket north america net purchase price 211 million resulting additional goodwill preliminary basis • february 25 2011 company acquired brush traction group “brush” ukbased provider locomotive overhauls services aftermarket components net purchase price approximately 307 million resulting additional goodwill 205 million preliminary basis deductible tax purposes • november 5 2010 company acquired substantially assets swiger coil systems “swiger” manufacturer traction motors electric coils rail power generation markets net purchase price approximately 430 million resulting additional goodwill 186 million deductible tax purposes fulmer atp brush traction acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition swiger acquisition following table summarizes final fair values assets acquired liabilities assumed date acquisition 2011 acquisitions listed include escrow deposits 67 million may released company indemnity claims accordance purchase escrow agreements preliminary allocation 75 million acquired intangible assets fulmer exclusive goodwill 57 million assigned customer relationships 676000 assigned trade names 908000 assigned noncompete agreements 244000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 20 years noncompete agreements average useful life two years preliminary allocation 199 million acquired intangible assets bearward exclusive goodwill 123 million assigned customer relationships 60 million assigned trade names 12 million assigned noncompete agreements 367000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 20 years noncompete agreements average useful life two years preliminary allocation 211 million acquired intangible assets atp 173 million assigned customer relationships 21 million assigned license agreement 17 million customer backlog customer relationships well license agreement average useful life 20 years preliminary allocation 103 million acquired intangible assets brush traction exclusive goodwill 27 million assigned customer relationships 56 million assigned trade names 20 million assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 10 years allocation 148 million acquired intangible assets swiger exclusive goodwill 62 million assigned customer relationships 51 million assigned trade names 24 million assigned longterm contracts 560000 assigned noncompete agreements 510000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years long term contracts average useful life four years noncompete agreements average useful life two years allocation 51 million acquired intangible assets bachsimpson exclusive goodwill 29 million assigned customer relationships 486000 assigned longterm contracts 914000 assigned trade names 752000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years long term contracts average useful life two years allocation 159 million acquired intangible assets gb exclusive goodwill 123 million assigned customer relationships 28 million assigned trade names 850000 assigned customer backlog trade names considered indefinite useful life customer relationships’ average useful life 15 years allocation 59 million acquired intangible assets xorail exclusive goodwill 43 million assigned customer relationships 426000 assigned intellectual property 470000 assigned noncompete agreements 750000 assigned customer backlog customer relationships’ average useful life 20 years intellectual property’s average useful life six years noncompete agreements’ average useful life six years following unaudited pro forma financial information presents income statement results acquisition xorail gb bachsimpson swiger brush traction atp bearward fulmer occurred january 1 2010 4 supplemental cash flow disclosures may 11 2011 board directors increased stock repurchase authorization 150 million company’s outstanding shares december 31 2011 purchases totaled 260 million leaving 1240 million authorization new share repurchase authorization supersedes previous authorization 150 million 394 million remaining company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2011 refinancing credit agreement 2008 refinancing credit agreement well notes currently outstanding first quarter 2011 shares repurchased second quarter 2011 company repurchased 95000 shares average price 6514 per share third quarter 2011 company repurchased 308600 shares average price 5708 per share fourth quarter 2011 company repurchased 35000 shares average price 6341 per share purchases open market first quarter 2010 company repurchased 75000 shares average price 4128 per share second quarter 2010 company repurchased 79600 shares average price 4040 per share third quarter 2010 company repurchased 51960 shares average price 3983 per share additional shares repurchased fourth quarter 2010 purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 299 million 284 million 257 million 2011 2010 2009 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2011 2010 goodwill 5875 million 5458 million december 31 2011 2010 respectively change carrying amount goodwill segment year ended december 31 2011 follows december 31 2011 2010 company’s trademarks net carrying amount 1146 million 1035 million respectively company believes intangibles indefinite life intangible assets company goodwill trademarks consist following weighted average useful lives patents customer relationships intellectual property five years 16 years 17 years respectively amortization expense intangible assets 150 million 102 million 98 million years ended december 31 2011 2010 2009 respectively amortization expense five succeeding years follows thousands 8 longterm debt longterm debt consisted following 2011 refinancing credit agreement november 7 2011 company refinanced existing revolving credit term loan facility consortium commercial banks “2011 refinancing credit agreement” provides company 600 million fiveyear revolving credit facility company incurred approximately 19 million deferred financing cost related 2011 refinancing credit agreement facility expires november 7 2016 2011 refinancing credit agreement borrowings bear variable interest rates indexed indices described december 31 2011 company available bank borrowing capacity net 489 million letters credit approximately 3061 million subject certain financial covenant restrictions 2011 refinancing credit agreement company may elect base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted libor rates plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios initial base rate margin 25 basis points alternate rate margin 125 basis points december 31 2011 weighted average interest rate company’s variable rate debt 153 reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreements effectively convert portion debt variable fixedrate borrowing term swap contracts december 31 2011 notional value interest rate swaps outstanding 1070 million effectively changed company’s interest rate bank debt december 31 2011 variable rate fixed rate 219 interest rate swap agreements mature december 31 2012 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible january 12 2012 company entered forward starting interest rate swap agreement notional value 150 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement convert portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 company exposed credit risk event nonperformance counterparty however since cash interest payments exchanged exposure significantly less notional amount counterparty large financial institution excellent credit rating history performance company currently believes risk nonperformance negligible 2011 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2011 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt cash flow ratio 325 company expect measurements limit company executing operating activities refinancing credit agreement november 4 2008 company refinanced existing unsecured revolving credit agreement consortium commercial banks “2008 refinancing credit agreement” provided company 300 million fiveyear revolving credit facility 200 million fiveyear term loan facility company incurred 29 million deferred financing cost related 2008 refinancing credit agreement facilities set expire january 2013 2008 refinancing credit agreement company may elected base rate interest rate based london interbank offered rate “libor” interest “the alternate rate” base rate adjusted daily basis greater pnc na prime rate 30day libor plus 150 basis points federal funds effective rate plus 05 per annum plus margin ranges 25 50 basis points alternate rate based quoted libor rates plus margin ranges 125 200 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness cash flow ratios 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrues rate 6875 per annum payable semiannually january 31 july 31 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens debt capital leases scheduled principal repayments debt capital lease balances december 31 2011 follows 9 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 517 million 472 million december 31 2011 2010 respectively aggregate accumulated benefit obligation international pension plans 1339 million 1312 million december 31 2011 2010 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2011 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2011 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2012 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters composition plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally passively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 17 “fair value measurement” included herein plan assets asset category december 31 2011 2010 follows us pension plan target asset allocation 50 equity securities 50 debt securities international pension plans target asset allocations 60 equity securities 40 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 17 million us plans 54 million international plans 2012 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2011 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2011 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2012 assumed health care cost trend rate us plans grades initial rate 74 ultimate rate 45 2027 international plans 82 45 2030 1 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans approximately 206000 29000 respectively 2012 increase accumulated postretirement benefit obligation approximately 423 million 269000 respectively 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans approximately 175000 24000 respectively 2012 decrease accumulated postretirement benefit obligation approximately 36 million 233000 respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2011 2010 plan held behalf participants 403400 shares market value 282 million 433300 shares market value 229 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2011 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 adopted funding improvement plan august 26 2010 reducing accrual rate 80 60 service accruing january 1 2011 new contracts require minimum 15week increase contribution rate year agreement “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2010 2009 plan years ended 2010 2009 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2011 “surcharge imposed” column indicates whether company’s contribution rate 2011 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 3030 million december 31 2011 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation withholding taxes approximately 32 million would payable upon remittance previously unremitted earnings december 31 2011 consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided effective income tax rate 2011 included net tax benefit approximately 19 million due primarily settlement examinations various tax jurisdictions deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized 2011 25 million valuation allowance foreign tax credit carryforwards released related foreign withholding taxes claimed us tax deductions rather carried forward deferred tax asset federal research development credits approximately 15 million fully utilized 2011 state foreign tax credit carryforwards approximately 46 million set expire various periods 2013 2028 state net operating loss carryforwards amount 645 million set expire various periods 2013 2032 december 31 2011 liability income taxes associated uncertain tax positions 82 million 21 million recognized would favorably affect company’s effective income tax rate december 31 2010 liability income taxes associated uncertain tax positions 100 million 31 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated uncertain tax positions follows company includes interest penalties related uncertain tax positions income tax expense december 31 2011 total interest penalties accrued approximately 28 million 15 million respectively december 31 2010 total interest penalties accrued approximately 31 million 17 million respectively internal revenue service currently auditing 2009 2010 tax years limited exception company longer subject examination various us foreign taxing authorities years 2008 time company believes reasonably possible unrecognized tax benefits approximately 18 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows options purchase approximately 25000 15000 79200 shares common stock outstanding 2011 2010 2009 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2011 company maintains employee stockbased compensation plans stock options restricted stock incentive stock awards governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended 2000 plan 2011 plan approved stockholders wabtec may 11 2011 company also maintains nonemployee directors’ fee stock option plan directors plan december 31 2011 number shares available future grants 2000 plan 453322 shares awards may made 2000 plan directors plan subsequent october 31 2016 2011 plan 10 year term march 27 2021 provides maximum 1900000 shares grants awards stockbased compensation expense 186 million 118 million 36 million years ended december 31 2011 2010 2009 respectively company recognized associated tax benefits related stockbased compensation plans 51 million 30 million 16 million respective periods included stockbased compensation expense 2011 27 million expense related stock options 44 million related nonvested restricted stock 106 million related incentive stock awards 900000 related awards issued directors’ fees december 31 2011 unamortized compensation expense related stock options nonvested restricted shares incentive stock awards expected vest totaled 209 million recognized weighted average period 13 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four year vesting period expire 10 years date grant directors plan amended authorizes total 500000 shares common stock issued generally options issued plan become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant addition compensation directors’ fees total 13500 shares awarded nonemployee directors year ended december 31 2009 compensation directors’ fees years ended december 31 2011 2010 company issued total 11636 18302 shares restricted stock nonemployee directors total number shares issued plan december 31 2011 391938 shares following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2011 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 year us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock awards vest one year date grant addition company issued incentive stock awards eligible employees vest upon attainment certain cumulative threeyear performance goals incentive stock awards included table represent number shares may vest performance targets met december 31 2011 based company’s performance estimate stock awards vest recorded compensation expense accordingly estimate number stock awards expected vest changes future accounting period compensation expense could reduced recognized remaining vesting period following table summarizes restricted stock activity 2011plan 2000 plan directors plan incentive stock awards activity 2011 plan 2000 plan related information years ended december 31 compensation expense nonvested restricted stock incentive stock awards based closing price company’s common stock date grant recognized applicable vesting period 13 comprehensive loss components accumulated comprehensive loss 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2011 2010 2009 134 million 98 million 85 million respectively amounts shown net sublease rentals 03 million 02 million zero years 2011 2010 2009 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2011 2010 preferred stock issued outstanding 17 fair value measurement asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2011 included current liabilities condensed consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2010 included current liabilities condensed consolidated balance sheet result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy see note 9 “employee benefit plans” included herein 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future october 18 2007 faiveley transport malmo ab “faiveley malmo” filed request arbitration international chamber commerce alleging breach contract trade secret violations relating company’s manufacture sale certain components international arbitration proceeding faiveley malmo originally alleged 128 million damages later reduced claim 91 million damages icc international court arbitration arbitral tribunal heard case first half 2009 issued award dated december 21 2009 pursuant award company required make 39 million royalty payment faiveley malmo respect faiveley malmo’s claims company alleging breach contract trade secret violations may 14 2010 faiveley transport usa inc faiveley transport nordic ab faiveley transport amiens sas ellcon national inc filed complaint wabtec corporation us district court southern district new york complaint amended june 8 2010 claims amended complaint include misappropriation trade secrets unfair competition tortious interference prospective business relations tortious interference prospective economic advantage unjust enrichment april 13 2011 judge issued order without opinion granted plaintiffs’ motion partial summary judgment three four claims denied wabtec’s motion summary judgment jury trial damages took place june 20 2011 june 28 2011 jury awarded plaintiffs 181 million july 29 2011 considering posttrial motions prejudgment interest potential adjustments jury’s award court entered final verdict amount 181 million plus interest company appealed verdict appeal pending company recorded charge second quarter amount 181 million company wholly owned subsidiary standard car truck company “sctc” sued patent infringement amsted industries incorporated “amsted” us district court southern district illinois amsted allege specific amount damages company moved dismiss amsted’s amended complaint sctc answered amsted’s amended complaint asserting defenses counterclaims including noninfringement patent invalidity unreasonable delays pursuing claim sctc also moved transfer case us district court northern district illinois parties entered settlement agreement resolving matter effective february 17 2012 company believe settlement material effect company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower inc boise idaho facility compliance permit company completed accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents reflected commitments contingencies line consolidated balance sheet company accruals approximately 501000 december 31 2011 estimated remaining costs remediation monitoring company compliance permit december 31 2011 foster wheeler energy corporation fwec seller mountaintop pennsylvania property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement young radiator ceased manufacturing operations racine wisconsin facility early 1990s investigations prior acquisition young revealed levels contamination racine property company completed comprehensive site evaluation implemented groundwater remediation program wisconsin’s voluntary remediation program site monitoring conducted demonstrate attainment wisconsin’s cleanup requirements company believes regulating authority generally agreement selected remediation approach findings presented todate time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit group primarily manufactures services components new existing passenger transit vehicles typically subway cars buses builds new commuter locomotives refurbishes subway cars customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies segment financial information 2011 follows segment financial information 2010 follows segment financial information 2009 follows following geographic area data years ended december 31 2011 2010 2009 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 4106 million 3272 million 2413 million years ended december 31 2011 2010 2009 respectively sales product follows 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2011 balance sheet december 31 2010 income statement year ended december 31 2011 income statement year ended december 31 2010 income statement year ended december 31 2009 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2011 condensed statement cash flows year ended december 31 2010 condensed statement cash flows year ended december 31 2009 22 income expense components expense follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges exhibit index filed herewith filed exhibit company’s registration statement form s1 file 3390866 filed exhibit company’s registration statement form s4 file 333110600 filed exhibit company’s quarterly report form 10q file 03390866 period ended march 31 2006 filed annex company’s schedule 14a proxy statement file 03390866 filed april 13 2006 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2007 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2008 filed exhibit company’s quarterly report form 10q file 03390866 period ended september 30 2008 filed exhibit company’s quarterly report form 8k file 03390866 dated november 7 2011 filed exhibit company’s quarterly report form 10q file 03390866 period ended june 30 2009 filed exhibit company’s current report form 8k file 03390866 dated february 22 2011 filed exhibit company’s annual report form 10k file 03390866 dated february 25 2011 management contract compensatory plan users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sectionsitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits listed filed part annual report management contract compensatory plan applicable management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance us generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded workhorse rail llc workhorse faiveley transport sa faiveley precision turbo engine precision turbo unitrac railroad materials unitrac gerken group sa gerken assessment internal controls financial reporting december 31 2016 company acquired workhorse effective december 14 2016 faiveley effective november 30 2016 precision turbo effective november 17 2016 gerken effective august 1 2016 unitrac effective may 5 2016 workhorse faiveley precision turbo gerken unitrac subsidiaries whose total assets represents 08 557 02 12 02 respectively whose customer revenues represents 01 38 01 05 respectively related consolidated financial statement amounts year ended december 31 2016 based assessment management concluded company maintained effective internal control financial reporting december 31 2016 based criteria internal controlintegrated framework issued coso effectiveness company’s internal control financial reporting december 31 2016 audited ernst young llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation december 31 2016 2015 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2016 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits audit preacquisition historical basis consolidated financial statements faiveley transport sa consolidated subsidiary statements reflect total assets constituting 259 2016 total revenues constituting 38 2016 related consolidated totals company statements audited auditors whose report furnished us opinion insofar relates preacquisition historical amounts included faiveley transport sa based solely report auditors audited adjustments necessary convert preacquisition historical amounts included faiveley transport sa basis reflected company’s consolidated financial statements conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion based audits report auditors financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation december 31 2016 2015 consolidated results operations cash flows three years period ended december 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states westinghouse air brake technologies corporation’s internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 28 2017 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 28 2017 report independent registered public accounting firm management board faiveley transport opinion consolidated balance sheets related consolidated statement income comprehensive income shareholders’ equity cash flows present fairly material respects financial position faiveley transport subsidiaries december 31 2016 november 30 2016 results operations cash flows period november 30 2016 december 31 2016 presented separately herein conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits financial statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 company applied push accounting acquisition wabtec pricewaterhousecoopers audit philippe vincent partner neuillysurseine france february 23 2017 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited westinghouse air brake technologies corporation’s internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls workhorse rail llc workhorse faiveley transport sa faiveley precision turbo engine precision turbo unitrac railroad materials unitrac gerken group sa gerken included 2016 consolidated financial statements westinghouse air brake technologies corporation constituted 08 557 02 12 02 respectively total assets december 31 2016 01 38 01 05 respectively net sales year ended audit internal control financial reporting westinghouse air brake technologies corporation also include evaluation internal control financial reporting workhorse faiveley precision turbo unitrac gerken opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2016 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation december 31 2016 2015 related consolidated statements income comprehensive income shareholders’ equity cash flows three years period ended december 31 2016 report dated february 28 2017 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania february 28 2017 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements comprehensive income accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well 100 countries throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations 30 countries 2016 54 company’s revenues came customers outside us 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controls consolidated subsidiaries companys ownership less 100 outside shareholders interests shown noncontrolling interests statements prepared accordance us generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 73 million 56 million december 31 2016 2015 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company computes book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases goodwill intangible assets goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives amortizable intangible assets reviewed impairment indicators impairment present company tests goodwill indefinitelived intangible assets impairment reporting unit level least annually company performs annual impairment test fourth quarter annual forecasting process completed also tests impairment whenever events changes circumstances indicate carrying value may recoverable periodically management company assesses whether indicator impairment present would necessitate impairment analysis performed 2016 company opted proceed directly twostep quantitative impairment test reporting units goodwill first step quantitative assessment assets liabilities including existing goodwill intangible assets assigned identified reporting units determine carrying value reporting units income approach market approach weighted 45 55 respectively arriving fair value company applied consistently discounted cash flow model requires several assumptions including future sales growth ebit earnings interest taxes margins capital expenditures reporting units discounted cash flow model also requires use discount rate terminal revenue growth rate revenue growth rate period beyond years forecasted reporting units well projections future operating margins market approach requires several assumptions including ebitda earnings interest taxes depreciation amortization multiples comparable companies operate markets company’s reporting units estimated fair value reporting units substantially excess respective carrying value resulted conclusion impairment existed additionally company proceeded directly quantitative impairment test trade names indefinite lives fair value trade names subject quantitative impairment test exceeded respective carrying value resulting conclusion impairment existed trade names subject quantitative testing company opted perform qualitative trade name impairment assessment determined qualitative assessment likely estimated fair values trade names less carrying values therefore analysis required assessing qualitative factors determine whether likely fair value trade name less carrying amount assess relevant events circumstances may impact fair value carrying amount trade name identification relevant events circumstances may impact trade name’s fair value carrying amount involve significant judgments assumptions judgment assumptions include identification macroeconomic conditions industry market considerations cost factors overall financial performance wabtec specific events share price trends making assessment whether relevant factor impact impairment test positively negatively magnitude impact warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 289 million 354 million 341 million 2016 2015 2014 respectively accrued warranty 1390 million 921 million december 31 2016 2015 respectively income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation company recognizes compensation expense stockbased compensation based grant date fair value amortized ratably requisite service period following date grant financial derivatives hedging activities company entered foreign currency forward contracts reduce impact changes currency exchange rates foreign currency forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis information regarding foreign currency forward contracts see footnote 17 reduce impact interest rate changes portion variablerate debt company entered interest rate swap agreement notional value 150 million december 31 2016 company recorded current liability 39 million corresponding offset accumulated comprehensive loss 23 million net tax related agreements information regarding interest rate swap agreement see footnote 8 foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing period foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions accounting standards codification “asc” 830 “foreign currency matters” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component accumulated comprehensive loss effects currency exchange rate changes intercompany transactions denominated currency entity’s functional currency charged credited earnings foreign exchange transaction losses recognized expense income net 40 million 47 million 24 million 2016 2015 2014 respectively noncontrolling interests accordance asc 810 company classified noncontrolling interests equity condensed consolidated balance sheets december 31 2016 2015 net income attributable noncontrolling interests year ended december 31 2016 85 million net income attributable noncontrolling interests years ended december 31 2015 2014 material comprehensive income attributable noncontrolling interests years ended december 31 2016 2015 2014 material revenue recognition revenue recognized accordance asc 605 “revenue recognition” company recognizes revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 established sales price set customer 4 collection sale revenue customer reasonably assured 5 contingencies exist delivery considered occurred customer assumes risk rewards ownership company estimates records provisions quantity rebates sales returns allowances offset revenue period related revenue recognized based upon experience items included reduction deriving net sales general company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method inputbased outputbased measures appropriate used measure progress toward completion individual contracts contract revenues cost estimates reviewed revised quarterly minimum adjustments reflected accounting period amounts determined provisions made currently estimated losses uncompleted contracts unbilled accounts receivables 2749 million 1038 million customer deposits 2566 million 1061 million provisions loss contracts 605 million 118 million december 31 2016 2015 respectively certain preproduction costs relating longterm production supply contracts deferred recognized life contracts deferred preproduction costs 294 million 303 million december 31 2016 2015 respectively significant customers concentrations credit risk company’s trade receivables rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2016 2015 2014 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2016 2015 2014 company incurred costs approximately 714 million 712 million 619 million respectively employees december 31 2016 approximately 35 company’s workforce covered collective bargaining agreements generally effective 2017 2019 agreements expiring 2017 cover approximately 20 company’s workforce earnings per share basic diluted earnings per common share computed accordance asc 260 “earnings per share” unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities included computation earnings per share pursuant twoclass method included asc 2601055 see note 11 “earnings per share” included herein reclassifications certain prior year amounts reclassified necessary conform current year presentation refer recently adopted accounting pronouncements use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recently issued accounting pronouncements november 2016 fasb issued accounting standards update asu 201618 statement cash flows topic 230 restricted cash amendments update require statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows asu effective public companies fiscal years beginning december 15 2017 interim periods within fiscal years early adoption permitted company currently evaluating potential impact adopting guidance consolidated financial statements march 2016 fasb issued asu 201609 “compensation stock compensation topic 718 improvements employee sharebased payment accounting” asu simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu effective public companies fiscal years beginning december 15 2016 interim periods within fiscal years early adoption permitted accordance update company recognize excess tax benefits tax deficiencies sharebased payment awards income tax expense benefit income statement currently excess tax benefits recognized additional paidin capital consolidated balance sheet additionally upon adoption update company classify excess income tax benefits exercise stock options operating activity consolidated statement cash flows currently income tax benefits exercise stock options classified financing activity february 2016 fasb issued asu 201602 leases topic 814 requires lessees recognize right use asset lease liability balance sheet leases terms longer 12 months leases terms less 12 months lessee permitted make accounting policy election class underlying asset recognize right use asset lease liability asu effective public companies fiscal years beginning december 15 2018 interim periods within fiscal years company currently evaluating potential impact adopting guidance consolidated financial statements may 2014 fasb issued asu 20149 “revenue contract customers” asu supersede existing revenue recognition requirements us gaap require entities recognize revenue amount reflects consideration company expects entitled exchange transferring goods services customer new standard also requires significantly expanded disclosures regarding qualitative quantitative information entity’s nature amount timing uncertainty revenue cash flows arising contracts customers board voted propose standard would take effect reporting periods beginning december 15 2017 early adoption would allowed original effective date impact adopting new standard 2016 2015 net sales operating income expected material company also expect material impact consolidated balance sheet impact results anticipated material analysis companys current contracts new revenue recognition standard supports recognition revenue time costtocost method majority contracts consistent current revenue recognition model company plans adopt accounting standard update using modified retrospective method cumulative effect initially applying update recognized first reporting period 2018 company process drafting updated accounting policy evaluating new disclosure requirements identifying implementing appropriate changes business processes systems controls support recognition disclosure new guidance recently adopted accounting pronouncements november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes simplifies presentation deferred income taxes requiring deferred tax assets liabilities classified noncurrent balance sheet company elected early adopt asu december 31 2016 therefore deferred income tax assets liabilities classified noncurrent deferred income taxes lineitems consolidated balance sheet additionally company elected update december 31 2015 balance sheet comparative purposes result 717 million current deferred income tax assets previously reported current deferred income taxes 08 million current deferred income tax liabilities previously reported accrued liabilities reclassified noncurrent assets noncurrent deferred tax line items respectively december 31 2015 consolidated balance sheet september 2015 fasb issued asu 201516 business combinations topic 805 simplifying accounting measurementperiod adjustments require acquirer recognize adjustments provisional amounts identified measurement period reporting period adjustment amounts determined effect earnings changes depreciation amortization income effects result change provisional amounts recorded periods financial statements calculated accounting completed acquisition date company adopted asu january 1 2016 adoption asu material impact consolidated financial statements april 2015 fasb issued asu 20153 “simplifying presentation debt issuance costs” “asu 20153” changes presentation debt issuance costs financial statements present costs direct deduction related debt liability rather asset asu 20153 became effective public companies interim annual reporting periods beginning december 15 2015 company retrospectively adopted asu january 1 2016 adoption asu material impact consolidated financial statements 3 acquisitions faiveley transport july 27 2015 company announced plans acquire issued outstanding shares faiveley transport sa faiveley transport terms share purchase agreement share purchase agreement tender offer agreement tender offer agreement october 24 2016 company entered amendments share purchase agreement tender offer agreement faiveley transport leading global provider valueadded integrated systems services railway industry annual sales 12 billion 5700 employees 24 countries faiveley transport supplies railway manufacturers operators maintenance providers range valuedadded technologybased systems services energy comfort air conditioning power collectors converters passenger information access mobility passenger access systems platform doors brakes safety braking systems couplers transaction structured three steps • wabtec made irrevocable offer owners approximately 51 faiveley transports shares purchase price €100 per share payable 25 45 cash election shareholders remainder common stock • upon completion required labor group consultations october 6 2015 51 shareholders entered definitive share purchase agreement amended october 24 2016 faiveley transport entered tender offer agreement wabtec also amended october 24 2016 • upon completing share purchase share purchase agreement wabtec commenced tender offer remaining publicly traded faiveley transport shares public shareholders option elect receive €100 per share cash wabtec common stock common stock portion consideration subject cap issuance faiveley common shares equivalent rates cash stock elected 51 owners wabtec intends delist faiveley transport euronext tender offer minority interests represent less 5 november 30 2016 company acquired majority ownership faiveley transport completing purchase faiveley family’s ownership interest represented approximately 51 outstanding share capital approximately 49 outstanding voting shares faiveley transport variable interest entity model company concluded primary beneficiary faiveley transport possesses power direct activities faiveley transport significantly impact economic performance possesses obligation right absorb losses benefits faiveley transport therefore faiveley transport consolidated wabtec variable interest model acquisition based company’s 8477 stock price november 30 2016 aggregate value consideration paid faiveley transport family’s ownership interest 9781 million including 5347 million stock approximately 63 million shares 2118 million cash 4099 million debt assumed less 1783 million cash acquired company launched tender offer remaining publicly traded faiveley transport shares december 2016 tender offer public shareholders faiveley transport option elect receive €100 per share faiveley transport cash 11538 wabtec common shares per share faiveley transport february 3 2017 initial cash tender offer closed resulted company acquiring additional 275 outstanding share capital faiveley transport approximately 4118 million cash 252 million wabtec stock tender offer reopened dates duration determined french regulator total purchase price 100 shares faiveley transport approximately 17 billion including assumed debt net cash acquired approximate 10 billion cash portion transaction funded cash hand net proceeds recent 750 million senior notes offering company’s existing revolving credit facility term note 7447 million included deposits escrow consolidated balance sheet december 31 2016 cash designated use consideration tender offer company’s 2016 operating results include results faiveley transport following november 30 2016 acquisition date fair value noncontrolling interest preliminarily determined using market price faiveley transport’s publicly traded common stock multiplied number publicly traded common shares outstanding acquisition date considered level 1 fair values assets acquired liabilities assumed preliminarily determined using income cost market approaches fair value measurements primarily based significant inputs observable market considered level 3 december 31 2016 consolidated balance sheet includes assets liabilities faiveley transport measured fair value following table summarizes preliminary estimated fair values faiveley transport assets acquired liabilities assumed estimates preliminary nature subject adjustments could material necessary adjustments finalized within one year date acquisition substantially accounts receivable acquired expected collectible included current liabilities 259 million accrued compensation acquired sharebased stock plans obligated settled cash contingent liabilities assumed part transaction material contingent liabilities related environmental legal tax matters contingent liabilities recorded fair value purchase accounting aside pertaining uncertainty income taxes exception fair value basis accounting goodwill calculated difference acquisition date fair value consideration transferred fair value net assets acquired represents future economic benefits including synergies assembled workforce expect achieve result acquisition purchased goodwill expected deductible tax purposes goodwill preliminarily allocated transit segment 31 day period ended december 31 2016 company’s consolidated statement income included 1108 million revenues 06 million operating income faiveley transport additionally net tax benefit 306 million recognized faiveley transport primarily due enacted legislative change french corporate tax rate benefit charges related repayment debt acquired faiveley transport acquisition related costs 389 million 2016 included selling general administrative expenses consolidated statements income acquisitions company made following acquisitions operating business unit component business unit freight segment • december 14 2016 company acquired workhorse rail llc workhorse supplier engineered freight car components mainly aftermarket purchase price approximately 443 million net cash acquired resulting preliminary goodwill 231 million 378 deductible tax purposes • november 17 2016 company acquired assets precision turbo engine precision turbo designer manufacturer highperformance aftermarket turbochargers wastegates heat exchangers automotive performance market purchase price approximately 138 million net cash acquired resulting preliminary goodwill 39 million deductible tax purposes • may 5 2016 company acquired assets unitrac railroad materials unitrac leading designer manufacturer railroad products track work services purchase price approximately 144 million net cash acquired resulting preliminary goodwill 14 million deductible tax purposes • october 30 2015 company acquired relay monitoring systems pty ltd rms australian based manufacturer electrical protection control products purchase price approximately 187 million net cash acquired resulting preliminary goodwill 89 million none deductible tax purposes • october 8 2015 company acquired track iq australian based manufacturer wayside sensor systems global rail industry purchase price approximately 93 million net cash acquired resulting preliminary goodwill 65 million deductible tax purposes • february 4 2015 company acquired railroad controls lp rcl provider railway signal construction services purchase price approximately 780 million net cash acquired resulting goodwill 148 million deductible tax purposes workhorse precision turbo unitrac acquisitions following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisitions rms track iq rcl acquisitions following table summarizes final fair value assets acquired liabilities assumed date acquisition company made following acquisitions operating business unit component business unit transit segment • august 1 2016 company acquired gerken group sa gerken manufacturer specialty carbon graphite products rail industrial applications purchase price approximately 628 million net cash acquired resulting preliminary goodwill 175 million none deductible tax purposes • june 17 2015 company acquired metalocaucho mtc manufacturer transit products primarily rubber components suspension vibration control systems purchase price approximately 234 million net cash acquired resulting preliminary goodwill 132 million none deductible tax purposes gerken acquisition following table summarizes preliminary estimated fair value assets acquired liabilities assumed date acquisition mtc acquisition following table summarizes final fair value assets acquired liabilities assumed date acquisition acquisitions listed include escrow deposits 420 million may released company indemnity claims accordance purchase escrow agreements total goodwill intangible assets acquisitions listed tables 19856 million 12774 million 7082 million related goodwill intangible assets respectively allocation 7082 million acquired intangible assets 3451 million assigned customer relationships 3531 million assigned trade names 50 million assigned intellectual property 20 million assigned noncompete agreements 18 million assigned customer backlog trade names considered indefinite useful life intellectual property customer relationships’ useful life 20 years noncompete agreements useful life five years following unaudited pro forma financial information presents income statement results acquisitions listed occurred january 1 2015 historical consolidated financial information company acquisitions detailed adjusted pro forma information give effect pro forma events 1 directly attributable transactions 2 factually supportable 3 expected continuing impact combined results pro forma data may indicative results would obtained acquisitions occurred beginning periods presented intended projection future results 4 supplemental cash flow disclosures november 9 2015 board directors amended stock repurchase authorization 350 million company’s outstanding shares december 31 2015 purchases totaled 3167 million leaving 333 million authorization february 9 2016 board directors amended stock repurchase authorization 350 million companys outstanding shares december 31 2016 purchases totaled 2122 million leaving 1378 million authorization new stock repurchase authorization supersedes previous authorization 350 million 333 million remained company intends purchase shares open market negotiated block trades time limit set completion programs conform requirements 2016 refinancing credit agreement well notes currently outstanding first quarter 2016 company repurchased 1950000 shares average price 6858 per share repurchases second quarter 2016 third quarter 2016 company repurchased 1096408 shares average price 7154 per share repurchases fourth quarter 2016 purchases open market first second quarters 2015 shares repurchased third quarter 2015 company repurchased 237027 shares average price 9423 per share fourth quarter 2015 4652000 shares repurchased average price 7856 purchases open market 5 inventories components inventory net reserves 6 property plant equipment major classes depreciable assets follows estimated useful lives property plant equipment follows depreciation expense 471 million 431 million 388 million 2016 2015 2014 respectively 7 intangibles goodwill intangible assets indefinite lives amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually fourth quarter impairment see note 2 “summary significant accounting policies” included herein goodwill indefinite live intangible assets impaired december 31 2016 2015 change carrying amount goodwill segment year ended december 31 2016 follows december 31 2016 2015 company’s trade names net carrying amount 5105 million 1674 million respectively company believes intangibles indefinite lives intangible assets company goodwill trade names consist following remaining weighted average useful lives patents customer relationships intellectual property 10 years 16 years 16 years respectively amortization expense intangible assets 227 million 217 million 224 million years ended december 31 2016 2015 2014 respectively estimated amortization expense five succeeding years follows thousands 8 longterm debt longterm debt consisted following wabtecs acquisition controlling stake faiveley transport triggered early repayment syndicated loan mandatory offer investors repay us schuldschein private placements syndicated loan us private placements repaid full december 2016 345 senior notes due november 2026 october 2016 company issued 7500 million senior notes due 2026 “2016 notes” 2016 notes issued 99965 face value interest 2016 notes accrues rate 345 per annum payable semiannually may 15 november 15 year proceeds used finance cash portion faiveley transport acquisition refinance faiveley transport’s indebtedness general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2016 notes 2016 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2016 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2016 notes issued expects restrictions covenants type limiting factor executing operating activities 4375 senior notes due august 2023 august 2013 company issued 2500 million senior notes due 2023 “2013 notes” 2013 notes issued 99879 face value interest 2013 notes accrues rate 4375 per annum payable semiannually february 15 august 15 year proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes principal balance due full maturity company incurred 26 million deferred financing costs related issuance 2013 notes 2013 notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture 2013 notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens company compliance restrictions covenants indenture 2013 notes issued expects restrictions covenants type limiting factor executing operating activities 2016 refinancing credit agreement june 22 2016 company amended existing revolving credit facility consortium commercial banks “2016 refinancing credit agreement” provides company 12 billion 5 year revolving credit facility 4000 million delayed draw term loan “term loan” company incurred approximately 33 million deferred financing cost related 2016 refinancing credit agreement facility expires june 22 2021 2016 refinancing credit agreement borrowings bear variable interest rates indexed described december 31 2016 company available bank borrowing capacity net 202 million letters credit approximately 7837 million subject certain financial covenant restrictions term loan drawn november 25 2016 company incurred 10 basis point commitment fee june 22 2016 initial draw november 25 2016 refinancing credit agreement company may elect base rate interest us dollar denominated loans certain currencies interest rate based london interbank offered rate “libor” interest rates appropriate currencies case “the alternate rate” base rate adjusts daily basis greater federal funds effective rate plus 050 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranges 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranges 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios initial base rate margin 0 basis points alternate rate margin 175 basis points december 31 2016 weighted average interest rate company’s variable rate debt 251 january 12 2012 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement july 31 2013 termination date november 7 2016 impact interest rate swap agreement converted portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 1415 plus alternate rate margin june 5 2014 company entered forward starting interest rate swap agreement notional value 1500 million effective date interest rate swap agreement november 7 2016 termination date december 19 2018 impact interest rate swap agreement converts portion company’s outstanding debt variable rate fixedrate borrowing term interest rate swap agreement interest rate notional value fixed 256 plus alternate rate margin agreements company exposed credit risk event nonperformance counterparties however since cash interest payments exchanged exposure significantly less notional amount counterparties large financial institutions excellent credit ratings history performance company currently believes risk nonperformance negligible 2016 refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions 2016 refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments imposes minimum interest expense coverage ratio 30 maximum debt ebitda ratio 325 company compliance restrictions covenants 2016 refinancing credit agreement expect measurements limit company executing operating activities 2013 refinancing credit agreement december 19 2013 company amended existing revolving credit facility consortium commercial banks “2013 refinancing credit agreement” provided company 8000 million 5year revolving credit facility company incurred approximately 10 million deferred financing cost related 2013 refinancing credit agreement 2013 refinancing credit agreement replaced 2016 refinancing credit agreement 2013 refinancing credit agreement company could elected base rate interest us dollar denominated loans certain currencies interest rate based libor interest rates appropriate currencies case “the alternate rate” base rate adjusted daily basis greater federal funds effective rate plus 05 per annum pnc na prime rate daily libor rate plus 100 basis points plus margin ranged 0 75 basis points alternate rate based quoted rates specific applicable currency plus margin ranged 75 175 basis points base rate alternate rate margins dependent company’s consolidated total indebtedness ebitda ratios schuldschein loan due 2016 conjunction acquisition faiveley transport wabtec acquired 1372 million schuldshein private placement loan originally issued faiveley transport march 5 2014 germany approximately 20 international investors participated loan denominated euros subsequent acquisition faiveley transport company repaid 385 million outstanding schuldshein loan remaining balance 987 million december 31 2016 divided three tranches original maturities 5 7 10 years bearing fixed variable rates summary tranches december 31 2016 follows schuldschein loan senior unsecured ranks pari passu future senior debt senior existing future subordinated indebtedness faiveley transport schuldschein loan agreement contains covenants undertakings limit among things following factoring receivables incurrence indebtedness sale assets change control mergers consolidations incurrence liens december 31 2016 faiveley transport compliance undertakings covenants contained loan agreement january 2017 company notified investors intention repay variable tranches private placement full totaling 391 million march 6 2017 desire repay fixed tranches private placement full february 28 2017 company repaid 187 million private placement fixed tranches outstanding december 31 2016 debt capital leases 9 employee benefit plans defined benefit pension plans company sponsors defined benefit pension plans cover certain us canadian german united kingdom employees provide benefits stated amounts year service employee company uses december 31 measurement date plans following tables provide information regarding company’s defined benefit pension plans summarized us international components obligations funded status aggregate accumulated benefit obligation us pension plans 445 million 452 million december 31 2016 2015 respectively aggregate accumulated benefit obligation international pension plans 3122 million 1902 million december 31 2016 2015 respectively components net periodic benefit costs changes plan assets benefit obligations recognized comprehensive income 2016 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy december 31 2016 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2017 pension plan assets company established formal investment policies assets associated pension plans objectives include maximizing longterm return acceptable risk levels diversifying among asset classes asset allocation targets based periodic asset liability study results help determine appropriate investment strategies investment policies permit variances targets within certain parameters plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments assets held funds generally actively managed valued net asset value per share multiplied number shares held measurement date generally plan assets considered level 2 based fair value valuation hierarchy see note 18 “fair value measurement” included herein plan assets asset category december 31 2016 2015 follows us canadian german pension plans target asset allocation 50 equity securities 50 debt securities united kingdom plan target asset allocation 30 equity securities 70 debt securities investment policies determined respective plan’s pension committee set forth investment policy rebalancing asset allocation occurs quarterly basis cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense company expects contribute 71 million 05 million international us plans respectively 2017 benefit payments expected paid plan participants follows post retirement benefit plans addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees company obligated pay health care life insurance benefits individuals retired prior 1990 company uses december 31 measurement date post retirement plans following tables provide information regarding company’s post retirement benefit plans summarized us international components obligations funded status 2015 company amended medical plan amongst things provided participants hra funding contributions change resulted 161 million decrease accumulated projected benefit obligation components net periodic benefit cost changes plan assets benefit obligations recognized comprehensive income 2016 follows weighted average assumptions following table represent rates used develop actuarial present value projected benefit obligation year listed also net periodic benefit cost following year discount rate based settling pension obligation high grade high yield corporate bonds december 31 2016 following table represents amounts included comprehensive loss expected recognized components periodic benefit costs 2017 assumed health care cost trend rate us plans grades initial rate 645 ultimate rate 450 2027 international plans 642 450 2027 10 increase assumed health care cost trend rate increase service interest cost components expense recognized us international postretirement plans less 01 million 2016 increase accumulated postretirement benefit obligation less 01 million 03 million respectively 10 decrease assumed health care cost trend rate decrease service interest cost components expense recognized us international postretirement plans less 01 million 2016 decrease accumulated postretirement benefit obligation less 01 million 02 million respectively cash flows benefit payments expected paid plan participants follows defined contribution plans company also participates certain defined contribution plans multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock one investment options december 31 2016 2015 plan held behalf participants 551482 shares market value 458 million 632523 shares market value 450 million respectively additionally company stock option based benefit plans described note 12 company contributes several multiemployer defined benefit pension plans collective bargaining agreements cover certain unionrepresented employees risks participating plans different risks singleemployer plans assets contributed multiemployer plan one employer may used provide benefits employees participating employers participating employer ceases contribute plan unfunded obligations plan may borne remaining participating employers company ceases obligation contribute multiemployer plan contributing employer may required pay plan amount based underfunded status plan history company’s participation plan prior cessation obligation contribute amount employer ceased obligation contribute multiemployer plan required pay plan referred withdrawal liability company’s participation multiemployer plans year ended december 31 2016 outlined table plans individually significant company total amount contributions presented aggregate 1 company’s contribution represents 5 total contributions plan 2 pension fund’s board adopted funding improvement plan october 21 2015 continuing existing plan increased weekly pension fund contribution rates 75 corresponding decreases weekly welfare fund contribution rates december 31 2017 3 critical status triggered 5 surcharge employer contributions effective june 2012 effective january 1 2013 surcharge increases 10 surcharge ended october 21 2015 rehabilitation plan commenced “ein pn” column provides employer identification number threedigit plan number assigned plan internal revenue service b recent pension protection act zone status available 2014 2013 plan years ended 2014 2013 respectively zone status based information provided company participating employers plan certified plan’s actuary plan “red” zone determined “critical status” based criteria established internal revenue code “code” generally less 65 funded plan “yellow” zone determined “endangered status” based criteria established code generally less 80 funded plan “green” zone determined neither “critical status” “endangered status” generally least 80 funded c “fiprp status pendingimplemented” column indicates whether funding improvement plan required code adopted plans “yellow” zone rehabilitation plan required code adopted plans “red” zone pending implemented end plan year ended 2016 “surcharge imposed” column indicates whether company’s contribution rate 2016 included amount addition contribution rate specified applicable collective bargaining agreement imposed plan “critical status” accordance requirements code 10 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income operations provision income taxes company’s domestic foreign operations years ended december 31 provided undistributed earnings company’s foreign subsidiaries amounted approximately 12562 million december 31 2016 earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon repatriation earnings form dividends otherwise company would subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount unrecognized deferred us income tax liability practicable due complexities associated hypothetical calculation consolidated provision income taxes included statement income consisted following reconciliation united states federal statutory income tax rate effective income tax rate operations years ended december 31 provided 65 decrease effective tax rate due france tax rate change result adopted tax legislation reduces corporate income tax rate france 333 280 period 2017 2020 15 increase effective tax rate due transaction costs related acquisitions primarily related nondeductible costs associated acquisition faiveley transport deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows valuation allowance provided likely portion deferred tax assets realized december 31 2016 valuation allowance certain foreign carryforwards 214 million primarily brazil china south africa net operating loss carryforwards amount 594 million expire various periods december 31 2017 december 31 2036 december 31 2016 liability income taxes associated unrecognized tax benefits 84 million 42 million recognized would favorably affect company’s effective income tax rate december 31 2015 liability income taxes associated unrecognized tax benefits 106 million 43 million recognized would favorably affect company’s effective tax rate reconciliation beginning ending amount liability income taxes associated unrecognized tax benefits follows company includes interest penalties related unrecognized tax benefits income tax expense december 31 2016 total interest penalties accrued approximately 08 million 03 million respectively december 31 2015 total interest penalties accrued approximately 20 million 02 million respectively limited exception company longer subject examination various us foreign taxing authorities years 2012 time company believes reasonably possible unrecognized tax benefits approximately 33 million may change within next 12 months due expiration statutory review periods current examinations 11 earnings per share computation earnings per share operations follows options purchase approximately 20000 13000 17000 shares common stock outstanding 2016 2015 2014 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 12 stockbased compensation plans december 31 2016 company maintains employee stockbased compensation plans stock options restricted stock incentive stock units governed 2011 stock incentive compensation plan “2011 plan” 2000 stock incentive plan amended “2000 plan” 2011 plan 10 year term march 27 2021 december 31 2016 number shares available future grants 2011 plan 2469849 shares includes remaining shares grant 2000 plan 2011 plan approved stockholders wabtec may 11 2011 company also maintains 1995 nonemployee directors’ fee stock option plan “the directors plan” directors plan amended authorizes total 1000000 shares common stock issued directors plan options issued become exercisable threeyear vesting period expire ten years date grant restricted stock issued plan vests one year date grant compensation directors’ fees years ended december 31 2016 2015 2014 company issued total 16972 11256 12704 shares restricted stock nonemployee directors total number shares issued plan december 31 2016 864692 shares units may made directors plan subsequent october 31 2016 stockbased compensation expense plans 208 million 260 million 261 million years ended december 31 2016 2015 2014 respectively company recognized associated tax benefits related stockbased compensation plans 149 million 153 million 76 million respective periods included stockbased compensation expense 2016 17 million expense related stock options 60 million related nonvested restricted stock 32 million related restricted stock units 85 million related incentive stock units 14 million related units issued directors’ fees december 31 2016 unamortized compensation expense related stock options nonvested restricted shares incentive stock units expected vest totaled 258 million recognized weighted average period 11 years stock options stock options granted eligible employees directors fair market value average high low wabtec stock price date grant 2011 plan 2000 plan options become exercisable four years vesting period expire 10 years date grant following table summarizes company’s stock option activity related information 2011 plan 2000 plan directors plan years ended december 31 options outstanding december 31 2016 follows fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions dividend yield based company’s dividend rate current market price underlying common stock date grant expected life years determined historical stock option exercise data expected volatility based historical volatility company’s stock riskfree interest rate based 7 years us treasury bond rates expected life option restricted stock incentive stock beginning 2006 company adopted restricted stock program provided 2011 2000 plans eligible employees granted restricted stock generally vests four years date grant directors plan restricted stock units vest one year date grant addition company issued incentive stock units eligible employees vest upon attainment certain cumulative threeyear performance goals based company’s performance three year period ended incentive stock units vest awarded ranging 0 200 initial incentive stock units granted incentive stock units included table represent number shares expected vest based company’s estimate meeting established performance targets december 31 2016 company estimates achieve 117 92 95 incentive stock units expected vest based performance three year periods ending december 31 2016 2017 2018 respectively recorded incentive compensation expense accordingly estimate number stock units expected vest changes future accounting period cumulative compensation expense could increase decrease recognized current period elapsed portion vesting period would change future expense remaining vesting period compensation expense nonvested restricted stock incentive stock units based closing price company’s common stock date grant recognized applicable vesting period following table summarizes restricted stock activity related information 2011 plan 2000 plan directors plan incentive stock units activity related information 2011 plan 2000 plan related information years ended december 31 13 comprehensive loss components accumulated comprehensive loss changes accumulated comprehensive loss component net tax yearended december 31 2016 follows reclassifications accumulated comprehensive loss yearended december 31 2016 follows changes accumulated comprehensive loss component net tax yearended december 31 2015 follows reclassifications accumulated comprehensive loss yearended december 31 2015 follows 14 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options total net rental expense charged operations 2016 2015 2014 272 million 202 million 200 million respectively amounts shown net sublease rentals 01 million 07 million 01 million years 2016 2015 2014 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 15 warranties following table reconciles changes company’s product warranty reserve follows 16 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2016 2015 preferred stock issued outstanding 17 derivative financial instruments hedging foreign currency hedging company uses forward contracts mitigate foreign currency exchange rate exposure due forecasted sales finished goods future settlement foreign currency denominated assets liabilities derivatives used hedge forecasted transactions specific cash flows associated foreign currency denominated financial assets liabilities meet criteria hedge accounting designated cash flow hedges effective portion gains losses deferred component accumulated comprehensive income recognized earnings time hedged item affects earnings line item underlying hedged item contracts scheduled mature within two years twelve months ended december 31 2016 amount reclassified income 06 million activities company enters certain derivative contracts accordance risk management strategy meet criteria hedge accounting impact largely mitigating foreign currency exposure foreign exchange contracts accounted full mark market basis earnings gains losses recorded component expense net unrealized gain related contracts 02 million twelve months ended december 31 2016 notional amount fair value foreign exchange contracts meet criteria hedge accounting december 31 2016 material contracts scheduled mature within one year following table summarizes gross notional amounts fair values designated nondesignated hedged discussed sections interest rate hedging company uses interest rate swaps manage interest rate exposures company exposed interest rate volatility regard existing floating rate debt primary exposure includes london interbank offered rates libor derivatives used hedge risk associated changes fair value certain variablerate debt primarily designated fair value hedges consequently changes fair value derivatives along changes fair value debt obligations recognized current period earnings see longterm debt footnote fair value measurement footnote information current interest rate swaps december 31 2016 company recorded current liability 39 million accumulated comprehensive loss 23 million net tax related agreements 18 fair value measurement fair value financial instruments asc 820 “fair value measurements disclosures” defines fair value establishes framework measuring fair value explains related disclosure requirements asc 820 indicates among things fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability defines fair value based upon exit price model valuation hierarchy asc 820 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions used measure assets liabilities fair value financial asset liability’s classification within hierarchy determined based lowest level input significant fair value measurement following table provides liabilities carried fair value measured recurring basis december 31 2016 included current liabilities consolidated balance sheet following table provides liabilities carried fair value measured recurring basis december 31 2015 included current liabilities consolidated balance sheet reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively converted portion debt variable fixedrate borrowings term swap contracts certain derivative contracts whose fair values based upon trades liquid markets interest rate swaps valuation model inputs generally verified valuation techniques involve significant management judgment fair values financial instruments generally classified within level 2 fair value hierarchy result global operating activities company exposed market risks changes foreign currency exchange rates may adversely affect operating results financial position deemed appropriate company minimizes risks entering foreign currency forward contracts foreign currency forward contracts valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company’s cash equivalents highly liquid investments purchased original maturity three months less considered level 1 fair value valuation hierarchy fair value cash equivalents approximated carrying value december 31 2016 december 31 2015 company’s defined benefit pension plan assets consist primarily equity security funds debt security funds temporary cash equivalent investments generally plan assets considered level 2 based fair value valuation hierarchy investments comprised number investment funds invest diverse portfolio assets including equity securities corporate governmental bonds money markets trusts valued net asset value “nav” determined custodian nav represents accumulation unadjusted quoted close prices reporting date underlying investments divided total shares outstanding reporting dates 2013 2016 notes considered level 2 based fair value valuation hierarchy estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swap agreements 2013 2016 notes based dealer quotes represent estimated amount company would pay counterparty terminate agreement 19 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc known trane “trane” indemnified company certain items including among things certain environmental claims company asserted prior 2000 trane unable honor meet indemnifications company would responsible items opinion management trane currently ability meet indemnification obligations claims filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products claims made wholly owned subsidiary railroad friction products corporation “rfpc” based product sold rfpc prior time company acquired interest rfpc claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors insurers remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated management’s belief potential range loss asbestosrelated bodily injury cases reasonably determinable present due variety factors including 1 asbestos case settlement history company’s wholly owned subsidiary rfpc 2 unpredictable nature personal injury litigation general 3 uncertainty asbestos litigation particular despite uncertainty although results company’s operations cash flows given period could adversely affected asbestosrelated lawsuits management believes final resolution company’s asbestosrelated cases material company’s overall financial position results operations cash flows general belief based upon 1 wabtec’s rfpc’s history settlements dismissals asbestosrelated cases date 2 inability many plaintiffs establish exposure causal relationship rfpc’s product 3 inability many plaintiffs demonstrate identifiable injury compensable loss specifically rfpc management’s belief losses due asbestosrelated cases would material also based fact rfpc owns insurance provides coverage asbestosrelated bodily injury claims date rfpc’s insurers provided rfpc defense indemnity actions overall number new claims filed rfpc dropped significantly recent years however new claims previously filed claims may take significant period time resolve wabtec divisions management’s belief asbestosrelated cases material impact also based position legal liability asbestosrelated bodily injury claims former owners wabtec’s assets retained asbestos liabilities products issue date wabtec able successfully defend basis including two arbitration decisions judicial opinion confirmed wabtec’s position assume asbestos liabilities former owners certain wabtec assets although wabtec incurred defense administrative costs connection asbestos bodily injury actions costs material company information would suggest costs would become material foreseeable future april 21 2016 siemens industry inc filed lawsuit company federal district court delaware alleging company infringed seven patents owned siemens relate positive train control technology november 2 2016 siemens amended complaint add six additional patents also claim infringed company’s positive train control products company filed answers asserted counterclaims response siemens’ complaints case still preliminary stages company begun filing interparties review proceedings us patent trademark office seeking invalidate siemens patents wabtec believes claims without merit vigorously defending time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 20 segment information wabtec two reportable segmentsthe freight segment transit segment key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight segment primarily manufactures services components new existing freight cars locomotives builds new switcher locomotives rebuilds freight locomotives supplies railway electronics positive train control equipment signal design engineering services provides related heat exchange cooling systems customers include large publicly traded railroads leasing companies manufacturers original equipment locomotives freight cars utilities transit segment primarily manufactures services components new existing passenger transit vehicles typically regional trains high speed trains subway cars lightrail vehicles buses builds new commuter locomotives refurbishes subway cars provides heating ventilation air conditioning equipment doors buses subways customers include public transit authorities municipalities leasing companies manufacturers subway cars buses around world company evaluates business segments’ operating results based income operations intersegment sales accounted prices generally established reference similar transactions unaffiliated customers corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results following tables necessarily measure computed accordance generally accepted accounting principles may comparable companies following geographic area data years ended december 31 2016 2015 2014 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 4705 million 5084 million 5217 million years ended december 31 2016 2015 2014 respectively sales product follows 21 guarantor subsidiaries financial information obligations companys 2016 notes 2013 notes revolving credit facility term loan fully unconditionally guaranteed us subsidiaries guarantors guarantor 100 owned parent company accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions balance sheet december 31 2016 balance sheet december 31 2015 income statement year ended december 31 2016 income statement year ended december 31 2015 income statement year ended december 31 2014 condensed statement cash flows year ended december 31 2016 condensed statement cash flows year ended december 31 2015 condensed statement cash flows year ended december 31 2014 22 expense income net components expense income net follows 23 selected quarterly financial data unaudited company operates fourfourfive week accounting quarter quarters end march 31 june 30 september 30 fiscal year ends december 31 schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets impact fluctuations foreign currency exchange rates 2 actual disbursements andor charges signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation date february 28 2017 raymond betler raymond betler president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated exhibit index management contract compensatory plannannanitem 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits listed filed part annual report c exhibits filing method 1027 amendment 1 amended restated stockholders agreement dated march 5 1997 among voting trust vestar harvard aip company 1028 common stock registration rights agreement dated march 5 1997 among company harvard aip voting trust 1029 1998 employee stock purchase plan 1032 westinghouse air brake technologies corporation 2000 stock incentive plan 1033 amendment 1 dated november 16 2000 among company guarantors time party thereto banks time party thereto abn amro bank nv bookrunner cosyndication agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1034 amendment 2 dated march 30 2001 among company guarantors time party thereto banks time party thereto abn amro bank nv bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1035 amendment 3 dated july 18 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association abn amro bank nv bookrunner cosyndication agent bank new york cosyndication agent chase manhattan bank administrative agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1036 amendment 4 dated september 17 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s annual report form 10k period ended december 31 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s annual report form 10k period ended december 31 2001 filed exhibit company’s annual report form 10k period ended december 31 2002 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003 management’s reports wabtec shareholders management’s report financial statements practices accompanying consolidated financial statements westinghouse air brake technologies corporation subsidiaries “company” prepared management responsible integrity objectivity statements prepared accordance generally accepted accounting principles include amounts based management’s best judgments estimates financial information included 10k consistent financial statements management also recognizes responsibility conducting company’s affairs according highest standards personal corporate conduct responsibility characterized reflected key policy statements issued time regarding among things conduct business activities within laws host countries company operates potentially conflicting outside business interests employees company maintains systematic program assess compliance policies management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting company order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act management conducted assessment including testing using criteria internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting standards inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate based assessment management concluded company maintained effective internal control financial reporting december 31 2004 based criteria internal controlintegrated framework issued coso management’s assessment effectiveness company’s internal control financial reporting december 31 2004 audited ernst young llp independent registered public accounting firm stated report included herein management’s certifications company’s chief executive officer chief financial officer required sarbanesoxley act included exhibits 31 32 company’s 10k addition 2004 company’s chief executive officer provided new york stock exchange annual ceo certification regarding company’s compliance new york stock exchange’s corporate governance listing standards william e kassling william e kassling chairman board president chief executive officer director alvaro garciatunon alvaro garciatunon senior vice president chief financial officer secretary report independent registered public accounting firm board directors shareholders westinghouse air brake technologies corporation audited accompanying consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2004 audits also included financial statement schedule listed index item 15a registration statement financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position westinghouse air brake technologies corporation subsidiaries december 31 2004 2003 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein fully discussed note 8 consolidated financial statements effective january 1 2002 westinghouse air brake technologies corporation adopted provisions statement financial accounting standards 142 goodwill intangible assets also audited accordance standards public company accounting oversight board united states effectiveness westinghouse air brake technologies corporation’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 11 2005 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania march 11 2005 report independent registered public accounting firm internal control financial reporting board directors shareholders westinghouse air brake technologies corporation audited management’s assessment included accompanying management’s report internal control financial reporting westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria westinghouse air brake technologies corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment westinghouse air brake technologies corporation maintained effective internal control financial reporting december 31 2004 fairly stated material respects based coso criteria also opinion westinghouse air brake technologies corporation maintained material respects effective internal control financial reporting december 31 2004 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets westinghouse air brake technologies corporation subsidiaries december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2004 report dated march 11 2005 expressed unqualified opinion thereon ernst young llp pittsburgh pennsylvania march 11 2005 westinghouse air brake technologies corporation consolidated balance sheets accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements operations accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements cash flows accompanying notes integral part statements westinghouse air brake technologies corporation consolidated statements shareholders’ equity accompanying notes integral part statements westinghouse air brake technologies corporation notes consolidated financial statements 1 business wabtec one world’s largest providers valueadded technologybased products services global rail industry products found virtually us locomotives freight cars passenger transit vehicles well certain markets throughout world products enhance safety improve productivity reduce maintenance costs customers many core products services essential safe efficient operation freight rail passenger transit vehicles wabtec global company operations nine countries 2004 78 percent company’s revenues came north american operations wabtec also sold products services 82 countries around world 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majority owned subsidiaries statements prepared accordance generally accepted accounting principles sales subsidiaries billed prices consistent sales third parties eliminated consolidation cash equivalents cash equivalents highly liquid investments purchased original maturity three months less allowance doubtful accounts allowance doubtful accounts receivable reflects best estimate probable losses inherent receivable portfolio determined basis historical experience specific allowances known troubled accounts currently available evidence allowance doubtful accounts 2 million 45 million december 31 2004 2003 respectively inventories stated lower cost market cost determined firstin firstout fifo method inventory costs include material labor overhead property plant equipment property plant equipment additions stated cost expenditures renewals improvements capitalized expenditures ordinary maintenance repairs expensed incurred company provides book depreciation principally straightline method accelerated depreciation methods utilized income tax purposes leasing arrangements company conducts portion operations leased facilities finances certain equipment purchases lease agreements cases lease term approximates useful life leased asset lease meets certain prerequisites leasing arrangement classified capital lease remaining arrangements treated operating leases intangible assets company adopted sfas 142 effective january 1 2002 result goodwill intangible assets indefinite lives longer amortized intangibles definite lives amortized straightline basis estimated economic lives goodwill indefinite lived intangible assets reviewed annually impairment frequently indicators impairment present amortizable intangible assets reviewed impairment indicators impairment present evaluation impairment involves comparing current fair value business recorded value including goodwill company uses combination guideline public company market approach discounted cash flow model “dcf model” determine current fair value business number significant assumptions estimates involved application dcf model forecasted operating westinghouse air brake technologies corporation notes consolidated financial statementscontinued cash flows including markets market share sales volume pricing costs produce working capital changes management considers historical experience available information time fair values business estimated however actual fair values could realized actual transaction may differ used evaluate impairment goodwill warranty costs warranty costs accrued based management’s estimates repair upgrade costs per unit historical experience warranty expense 149 million 105 million 176 million 2004 2003 2002 respectively warranty reserves 174 million 133 million december 31 2004 2003 respectively deferred compensation agreements may 1998 consensus emerging issues task force issue 9714 “accounting deferred compensation arrangements amounts earned held rabbi trust invested” “eitf 9714” issued adoption eitf 9714 required company record treasury stock historical value company’s stock maintained deferred compensation plans income taxes income taxes accounted liability method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities measured using enacted tax rates laws provision income taxes includes federal state foreign income taxes stockbased compensation effective january 1 2003 company adopted sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 amends sfas 123 “accounting stockbased compensation” provide alternate methods transition sfas 123’s fair value method accounting stockbased compensation statement amends disclosure requirements sfas 123 require prominent disclosures method accounting compensation cost associated employee stock option plans well effect method used reported results company adopted disclosure requirements sfas 148 changed method measuring compensation cost stock options company continues use intrinsic value based method recognize compensation expense issuance options exercise price equal greater market price stock time grant result adoption sfas 148 impact results operations financial position westinghouse air brake technologies corporation notes consolidated financial statementscontinued compensation expense plans determined based fair value grant dates awards company’s net income earnings per share would set forth following table purposes pro forma disclosures estimated fair value amortized expense options’ vesting period purposes presenting pro forma results fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions financial derivatives hedging activities company periodically enters interest rate swap agreements reduce impact interest rate changes variable rate borrowings interest rate swaps agreements counterparty exchange periodic interest payments pay fixed receive variable calculated notional principal amount interest rate differential paid received recognized interest expense company adopted statement financial accounting standards “sfas” 133 amended sfas 138 “accounting derivative instruments hedging activities” effective january 1 2001 application company concluded interest rate swap contracts qualify “special cash flow hedge accounting” permit recording fair value swap corresponding adjustment comprehensive income loss balance sheet interest rate swaps terminated 2004 result entering interest rate swaps company incurred 262000 additional interest expense 2004 company also entered foreign currency forward contracts reduce impact changes currency exchange rates forward contracts agreements counterparty exchange two distinct currencies set exchange rate delivery set date point future exchange funds delivery date delivery date company either take delivery currency settle net basis outstanding forward contracts sale us dollars usd purchase canadian dollars cad december 31 2004 company forward contracts notional value westinghouse air brake technologies corporation notes consolidated financial statementscontinued 59 million cad 435 million us average exchange rate 074 usd per 1 cad resulting recording current asset increase comprehensive income 36 million net tax foreign currency translation assets liabilities foreign subsidiaries except company’s mexican operations whose functional currency us dollar translated rate exchange effect balance sheet date income expenses translated average rates exchange prevailing year foreign currency gains losses resulting transactions translation financial statements recorded company’s consolidated financial statements based upon provisions statement financial accounting standards “sfas” 52 “foreign currency translation” effects currency exchange rate changes intercompany transactions balances longterm investment nature accumulated carried component shareholders’ equity effects currency exchange rate changes intercompany transactions non us dollar denominated amounts charged credited earnings foreign exchange loss 12 million 28 million 12 million 2004 2003 2002 respectively comprehensive income loss comprehensive income loss defined net income nonowner changes shareholders’ equity company’s accumulated comprehensive income loss consists foreign currency translation adjustments unrealized gains losses derivatives designated qualified cash flow hedges foreign currency hedges pension related adjustments revenue recognition revenue recognized accordance staff accounting bulletins sabs 101 “revenue recognition financial statements” 104 “revision topic 13” revenue recognized products shipped respective customers title passed price product determined company recognizes revenues longterm contracts based percentage completion method accounting unitsofdelivery method outputbased measures appropriate used measure progress individual contracts towards completion contract revenues cost estimates reviewed revised minimum quarterly adjustments reflected accounting period known provisions made currently estimated losses uncompleted contracts certain preproduction costs relating long term production supply contracts deferred amortized life contract deferred preproduction costs 53 million 34 million december 31 2004 2003 respectively significant customers concentrations credit risk company’s trade receivables primarily rail transit industry original equipment manufacturers class railroads railroad carriers commercial companies utilize rail cars operations utility chemical companies one customer accounted 10 company’s consolidated net sales 2004 2003 one customer transit group accounted 11 company’s consolidated net sales 2002 shipping handling fees costs fees billed customer shipping handling classified component net revenues costs associated shipping handling classified component cost sales research development research development costs charged expense incurred years ended december 31 2004 2003 2002 company incurred costs approximately 338 million 329 million 336 million respectively employees december 31 2004 approximately 39 company’s workforce covered collective bargaining agreements generally effective 2005 2006 2007 westinghouse air brake technologies corporation notes consolidated financial statementscontinued earnings per share basic earnings per common share computed dividing net income applicable common shareholders weightedaverage number shares common stock outstanding year diluted earnings per common share computed dividing net income applicable common shareholders weighted average number shares common stock outstanding adjusted assumed conversion dilutive securities employee stock options reclassifications certain prior year amounts reclassified necessary conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles united states requires company make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual amounts could differ estimates ongoing basis management reviews estimates based currently available information changes facts circumstances may result revised estimates recent accounting pronouncements effective december 31 2003 wabtec adopted sfas 132 revised 2003 “employers’ disclosures pensions postretirement benefitsan amendment fasb statements 87 88 106” us pension plans standard requires additional disclosures employer’s pension plans postretirement benefits type plan assets investment strategy measurement date plan obligations cash flows components net periodic benefit costs recognized interim periods see note 10 consolidated financial statements required additional disclosures november 2004 financial accounting standards board “fasb” issued sfas 151 “inventory costs amendment arb 43 chapter 4” standard provides clarification abnormal amounts idle facility expense freight handling costs spoilage recognized current period charges additionally standard requires allocation fixed production overheads costs conversion based normal capacity production facilities provisions standard effective inventory costs incurred fiscal years beginning june 15 2005 company currently evaluating effect standard company’s financial statements results operations sfas 123 revised 2004 “sharebased payment” issued december 2004 standard requires companies measure recognize cost employee services received exchange award equity instruments based grantdate fair value effective date first interim reporting period beginning june 15 2005 wabtec currently evaluating pricing models transition provisions standard begin expensing stock options third quarter 2005 december 2004 fasb issued fsp 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” fsp 1092 provides guidance sfas 109 “accounting income taxes” respect recording potential impact repatriation provisions american jobs creation act 2004 “jobs act” enterprises’ income tax expense deferred tax liability jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate impact jobs act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company yet completed evaluating impact repatriation provisions accordingly provided fsp 1092 company adjusted tax expense deferred tax liability reflect repatriation provisions job act westinghouse air brake technologies corporation notes consolidated financial statementscontinued 3 discontinued operations november 1 2001 company completed sale certain assets ge transportation systems gets 238 million cash assets sold primarily included locomotive aftermarket products services wabtec original equipment manufacturer terms sales agreement company agreed indemnify gets among things certain potential third party offsite environmental cleanup remediation costs time company aware potential liability connection sale assets company reported 487 million tax gain sale 2001 fourth quarter 2001 company decided exit businesses put businesses sale net assets businesses written estimated realizable value based multiple earnings company reported 72 million tax loss writedown entities december 31 2003 one businesses sold company actively solicited receive reasonable offers purchase asset response reduced price asset longer actively marketed result company reclassed business continuing operations fourth quarter 2003 reclassification material impact financial statements accordance sfas 144 operating results businesses classified discontinued operations years presented summarized december 31 follows 4 supplemental cash flow disclosures westinghouse air brake technologies corporation notes consolidated financial statementscontinued 5 mergers acquisitions company made following acquisitions 2002 2005 february 2002 company purchased minority interest business india company already 17 million acquisition accounted purchase method accordingly results operations acquisition included company’s financial statements prospectively acquisition date excess purchase price fair value identifiable net assets approximately 664000 allocated goodwill effective january 1 2002 goodwill longer amortized upon adoption sfas 142 ii february 1 2005 company completed acquisition assets rütgers rail spa acquisition accounted purchase accordingly purchase price allocated respective assets liabilities based upon estimated fair values acquisition date operating results included consolidated statement operations acquisition date forward new company formed hold newly purchased assets rütgers rail spa named cofren srl “cofren” cofren become leading manufacturer brake shoes disc pads interior trim components rail applications europe purchase price 366 million cash purchase price subject adjustment based calculation net worth defined sale purchase agreement adjustment completed within 90 business days acquisition date 6 inventory components inventory net reserves 7 property plant equipment major classes depreciable assets follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued estimated useful lives property plant equipment follows depreciation expense 228 million 21 million 202 million 2004 2003 2002 respectively 2004 company wrote 13 million various assets portion subsequently sold 2005 8 intangibles company adopted sfas 142 “goodwill intangible assets” effective january 1 2002 provisions goodwill intangible assets indefinite lives longer amortized straightline basis assets estimated useful life instead subject periodic assessments impairment applying fairvaluebased test 2002 company completed phase ii assessments wrote carrying value goodwill 90 million 832 million freight group 68 million transit group resulting noncash aftertax charge 617 million fair value reporting units determined using combination discounted cash flow analysis market multiples based upon historical projected financial information company also performed required impairment test 2004 2003 resulted additional impairment charge goodwill still remaining balance sheet 1135 million 1095 million december 31 2004 2003 respectively december 31 2004 2003 company’s trademarks net carrying amount 196 million company believes intangibles indefinite life intangible assets company goodwill trademarks consist following connection adoption sfas 142 company reassessed useful lives classification identifiable assets determined continue appropriate weighted average useful life patents 13 years covenants compete five years amortization expense intangible assets 24 million 34 million 4 million years ended december 31 2004 2003 2002 respectively amortization expense five succeeding years follows thousands westinghouse air brake technologies corporation notes consolidated financial statementscontinued change carrying amount goodwill segment year ended december 31 2004 follows 9 longterm debt longterm debt consisted following refinancing credit agreement january 2004 company refinanced existing unsecured revolving credit agreement consortium commercial banks “refinancing credit agreement” provides 175 million fiveyear revolving credit facility expiring january 2009 december 31 2004 company’s available bank borrowing capacity net 219 million letters credit approximately 1531 million subject certain financial covenant restrictions refinancing credit agreement borrowings bear variable interest rates indexed indices described maximum credit agreement borrowings average credit agreement borrowings weightedaverage contractual interest rate credit agreement borrowings 40 million 367 million 29 respectively 2004 reduce impact interest rate changes portion variablerate debt company entered interest rate swaps effectively convert portion debt variable fixedrate borrowings term swap contracts december 31 2003 notional value interest rate swaps outstanding totaled 40 million effectively changed company’s interest rate bank debt december 31 2003 variable rate fixed rate 398 interest rate swap agreements terminated 2004 conjunction 40 million repayment revolving credit agreement refinancing credit agreement company may elect base interest rate interest rate based london interbank offered rates interest “libor” base interest rate greater lasalle bank national association’s prime rate federal funds effective rate plus 05 per annum libor rate based libor plus margin ranges 100 200 basis points depending company’s consolidated total indebtedness cash flow ratios current margin 100 basis points refinancing credit agreement limits company’s ability declare pay cash dividends prohibits company declaring making distributions subject certain exceptions westinghouse air brake technologies corporation notes consolidated financial statementscontinued refinancing credit agreement contains various covenants restrictions including following limitations incurrence additional indebtedness mergers consolidations sales assets acquisitions additional liens sale leasebacks permissible investments loans advances certain debt payments capital expenditures imposes minimum interest expense coverage ratio maximum debt cash flow ratio refinancing credit agreement contains customary events default including payment defaults failure representations warranties true material respect covenant defaults respect indebtedness company bankruptcy certain judgments company erisa defaults “change control” company 6875 senior notes due august 2013 august 2003 company issued 150 million senior notes due 2013 “the notes” notes issued par interest notes accrue rate 6875 per annum payable semiannually january 31 july 31 year commencing january 31 2004 proceeds used repay debt outstanding company’s existing credit agreement general corporate purposes notes senior unsecured obligations company rank pari passu existing future senior debt senior existing future subordinated indebtedness company indenture notes issued contains covenants restrictions limit among things following incurrence indebtedness payment dividends certain distributions sale assets change control mergers consolidations incurrence liens scheduled principal repayments outstanding loan balances required december 31 2004 follows extinguishment borrowings june 1995 company issued 100 million 9375 senior notes due 2005 “1995 notes” january 1999 company issued additional 75 million 9375 senior notes due 2005 “1999 notes” 1995 notes 1999 notes redeemed par face july 8 2002 use cash hand additional borrowings credit agreement redemption resulted noncash loss 19 million relating writeoff deferred financing costs 10 employee benefit plans company sponsors defined benefit pension plans cover certain us canadian united kingdom employees provide benefits stated amounts year service employee addition providing pension benefits company provided certain unfunded postretirement health care life insurance benefits portion north american employees january 1995 postretirement health care life insurance benefits us salaried employees modified discontinue benefits employees attained age 50 march 31 1995 company obligated pay health care life insurance benefits individuals retired prior 1990 westinghouse air brake technologies corporation notes consolidated financial statementscontinued company uses december 31 measurement date us canadian plans uk plan uses october 31 measurement date obligations funded status projected benefit obligation defined benefit pension plans 1357 million 1131 million december 31 2004 2003 respectively westinghouse air brake technologies corporation notes consolidated financial statementscontinued accumulated benefit obligation defined benefit pension plans 1261 million 1062 million december 31 2004 2003 respectively aggregate projected benefit obligation fair value plan assets pension plans benefit obligations excess plan assets 1357 million 1044 million respectively december 31 2004 1131 million 866 million respectively december 31 2003 aggregate accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 122 million 1002 million respectively december 31 2004 702 million 496 million respectively december 31 2003 components prepaid accrued benefit costs country follows components net periodic benefit costs increase minimum pension liability resulted charge shareholders’ equity net tax 38 million 2004 28 million 2003 assumptions weighted average assumptions used determine benefit obligations follows discount rate based settling pension obligation high grade high yield corporate bonds rate compensation increase based actual experience weighted average assumptions used determine net periodic benefit costs follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued expected return plan assets based historical performance well expected future rates return plan assets considering current investment portfolio mix longterm investment strategy assumed health care cost trend rate grades initial rate 906 ultimate rate 5 six years 1 increase assumed health care cost trend rate increase amount expense recognized postretirement plans approximately 441000 2005 increase service interest cost components accumulated postretirement benefit obligation approximately 67 million 1 decrease assumed health care cost trend rate decrease service interest cost components expense recognized postretirement plans approximately 351000 2005 decrease accumulated postretirement benefit obligation approximately 55 million pension plan assets composition plan assets consists primarily equities corporate bonds governmental notes temporary investments plan’s asset allocations respective measurement dates 2004 asset category follows investment policies determined respective plan’s pension committee set forth investment policy pursuant investment policy us investment strategy use passive index funds managed bank new york target asset allocation composite benchmarks us plans include following company evaluating allocation policies plans canada uk cash flows company’s funding methods based governmental requirements differ methods used recognize pension expense primarily based projected unit credit method applied accompanying financial statements company expects contribute 97 million pension plan 2005 expects level funding continue future periods rebalancing asset allocation occurs quarterly basis westinghouse air brake technologies corporation notes consolidated financial statementscontinued benefit payments expected paid plan participants follows may 2004 fasb issued fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1062 act signed law president december 8 2003 introduces prescription drug benefit plan medicare part well federal subsidy sponsors retiree health benefit plans provide benefit least actuarially equivalent medicare part fsp 1062 provides guidance companies account impact act postretirement health care plans encourage employers retain provide postretirement drug benefits beginning 2006 federal government provide nontaxable subsidy payments employers sponsor prescription drug benefits retirees actuarially equivalent medicare benefit fsp 1062 effective interim annual financial statements beginning june 15 2004 adoption fsp 1062 significant impact company’s financial position results operations defined contribution plans company also participates certain 401k multiemployer pension plans costs recognized plans summarized follows 401k savings plan participant directed defined contribution plan holds shares company’s stock december 31 2004 2003 plan held behalf participants 695000 shares market value 148 million 776000 shares market value 132 million respectively additionally company stock option based benefit plans described note 13 11 income taxes company responsible filing consolidated us foreign combined unitary separate state income tax returns company responsible paying taxes relating returns including westinghouse air brake technologies corporation notes consolidated financial statementscontinued subsequent adjustments resulting redetermination tax liabilities applicable taxing authorities components income loss continuing operations provision income taxes company’s domestic foreign operations years ended december 31 provided provision made us state additional foreign taxes related undistributed earnings 57 million foreign subsidiaries intended permanently reinvested 2004 jobs creation act fsp 1092 state enterprise allowed time beyond financial reporting period enactment evaluate effect jobs act plan reinvestment repatriation foreign earnings applying sfas 109 company yet completed evaluating impact repatriation provisions accordingly provided fsp 1092 company adjusted tax expense deferred tax liability reflect repatriation provisions 2004 jobs creation act consolidated provision credit income taxes included statement income consisted following consolidated income tax provision credit included statement income follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued reconciliation united states federal statutory income tax rate effective income tax rate continuing operations years ended december 31 provided overall effective income tax rate includes tax benefit 49 million 27 million 2004 2003 respectively primarily related reversal certain items previously provided closed regulatory examination deferred income taxes result temporary differences recognition income expense financial income tax reporting purposes deferred income taxes recognized future tax benefits costs temporary differences reverse components deferred tax assets liabilities follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued valuation allowance provided likely portion deferred tax assets realized company recorded valuation allowance 144 million certain net operating loss carryforwards deferred tax assets anticipated produce tax benefit state foreign net operating loss carryforwards exist amount 159 million 24 million respectively set expire various periods 2006 2024 valuation allowance exists andor established certain net operating loss carryforwards federal tax credits exist approximately 43 million comprised research experimentation credits available 2024 alternative minimum tax credits available indefinitely state tax credits approximately 614000 available consist various machinery equipment research experimentation jobs related credits 12 earnings per share computation earnings per share continuing operations follows options purchase approximately 589000 646000 21 million shares common stock outstanding 2004 2003 2002 respectively included computation diluted earnings per share options’ exercise price exceeded average market price common shares 13 stockbased compensation plans stock options 2000 stock incentive plan 2000 plan company may grant options employees initial amount 11 million shares common stock amount subject annual modification based formula 15 total common shares outstanding end preceding fiscal year added shares available grant 2000 plan based adjustment company approximately 14 million shares available 2004 grants available approximately 11 westinghouse air brake technologies corporation notes consolidated financial statementscontinued million shares end fiscal 2005 shares available grants given date may exceed 15 wabtec’s total common shares outstanding generally options become exercisable threeyear vesting period expire ten years date grant part longterm incentive program 1998 company granted options purchase 500020 shares certain executives plan preceded 2000 plan option price 20 per share options vest 100 eight years subject accelerated vesting three years company achieves certain earnings targets established compensation committee board directors grants may made plan company also nonemployee directors’ stock option plan 500000 shares common stock reserved issuance yearend 2004 company granted nonqualified stock options nonemployee directors purchase total 131000 shares employee stock purchase plan 1998 company adopted employee discounted stock purchase plan dspp 500000 shares available issuance participants purchase company’s common stock 85 lesser fair market value first last day offering period stock outstanding plan december 31 2004 209600 shares summary company’s stock option activity related information years indicated follows following table summarizes information stock options outstanding december 31 2004 westinghouse air brake technologies corporation notes consolidated financial statementscontinued 14 comprehensive loss components accumulated comprehensive loss 15 operating leases company leases office manufacturing facilities operating leases terms ranging one 15 years excluding renewal options company sold remanufactured locomotives various financial institutions leased back operating leases terms five 20 years total net rental expense charged operations 2004 2003 2002 78 million 69 million 62 million respectively certain company’s equipment rental obligations operating leases pertain locomotives subleased customers shortterm longterm agreements amounts shown net sublease rentals 22 million 28 million 28 million years 2004 2003 2002 respectively future minimum rental payments operating leases remaining noncancelable terms excess one year follows 16 guarantees 2001 company sold operating assets liabilities noncore business unit business unit’s management team part sale wabtec guaranteed approximately 3 million bank debt buyer used purchase financing debt refinanced june 2004 wabtec’s guarantee reduced 13 million company reason believe debt repaid refinanced westinghouse air brake technologies corporation notes consolidated financial statementscontinued following table reconciles changes company’s product warranty reserve follows 17 preferred stock company’s authorized capital stock includes 1000000 shares preferred stock board directors authority issue preferred stock fix designations powers preferences rights shares class series including dividend rates conversion rights voting rights terms redemption liquidation preferences without vote action company’s shareholders rights preferences preferred stock would superior common stock december 31 2004 2003 preferred stock issued outstanding 18 commitments contingencies company subject variety environmental laws regulations governing discharges air water handling storage disposal hazardous solid waste materials remediation contamination associated releases hazardous substances company believes operations currently comply material respects various environmental laws regulations applicable business however assurance environmental requirements change future incur significant costs comply requirements terms purchase agreement related documents 1990 acquisition american standard inc “asi” indemnified company certain items including among things certain environmental claims company asserted prior 2000 asi unable honor meet indemnifications company would responsible items opinion management asi currently ability meet indemnification obligations actions filed company certain affiliates various jurisdictions across united states persons alleging bodily injury result exposure asbestoscontaining products since 2000 number claims increased claims made whollyowned subsidiary railroad friction products corporation rfpc based product sold rfpc acquired american standard inc’s asi 50 interest rfpc 1990 acquired remaining interest rfpc 1992 claims include suit rfpc insurers seeking coverage rfpc’s insurance policies claim company contending company assumed asi’s liability asbestos claims brought asi alleges claim exposure rfpc’s product claims including rfpc claims submitted insurance carriers defense indemnity nonaffiliated companies retain liabilities asbestoscontaining products issue cannot however assure claims fully covered insurance indemnitors remain financially viable ultimate legal financial liability respect claims case pending litigation cannot estimated westinghouse air brake technologies corporation notes consolidated financial statementscontinued boise idaho company subject rcra part b closure permit “the permit” issued environmental protection agency epa idaho department health welfare division environmental quality relating monitoring treatment groundwater contamination adjacent motivepower industries boise idaho facility compliance permit company completed first phase accelerated plan treatment contaminated groundwater continues onsite offsite monitoring hazardous constituents additional 970000 accrued 2004 based refined estimates ongoing monitoring costs total company accrued 13 million december 31 2004 estimated remaining costs remediation monitoring company compliance permit december 31 2004 mountaintop pennsylvania foster wheeler energy corporation “fwec” seller mountaintop property predecessor one company’s subsidiaries 1989 agreed indemnify company’s predecessor successors assigns certain identified environmental liabilities fwec executed consent order agreement pennsylvania department environmental protection padep epa management believes indemnification arrangement enforceable benefit company fwec financial resources honor obligations indemnification arrangement mattoon illinois prior company’s acquisition young radiator young agreed clean alleged contamination prior production site mattoon illinois company process remediating site state illinois estimates costs remediate site approximately 18000 accrued december 31 2004 racine wisconsin young ceased manufacturing operations racine facility early 1990s investigations prior acquisition young revealed levels contamination racine property company begun remediation efforts company initiated comprehensive site evaluation state wisconsin believes governing body generally agreement findings company accrued approximately 165000 december 31 2004 estimate remaining remediation costs getsgs november 3 2000 company settled suit brought 1999 geharris railway electronics llc geharris railway electronics services llc collectively “geharris” september 20 2002 motion lawsuit filed successor geharris ge transportation services global signaling llc “getsgs” motion getsgs contended company acting beyond authority granted parties’ november 2000 settlement license agreement contempt consent order concluded suit time support motion getsgs pointed principally sales offers sell certain railway brake equipment including distributed power equipment australian customers august 2004 united states district court district delaware ruled partially favor getsgs ordering company pay compensatory damages lost licensing profits related mentioned distributed power equipment westinghouse air brake technologies corporation notes consolidated financial statementscontinued contracts reimbursement reasonable attorneys’ fees expenses company disagrees ruling intends continue contest ruling liability 32 million recognized 2004 component selling general administrative expense option exercised company’s australian customers additional shipments products distributed power contracts additional 27 million compensatory damages could owed getsgs additional liability recognized company option exercised company contingent obligations relating certain sales leaseback transactions locomotives assumed connection motivepower merger 1999 reserves 47 million established time company involved litigation relating claims arising operations ordinary course business date hereof company involved litigation company believes material adverse effect financial condition results operations liquidity 19 segment information wabtec two reportable segmentsthe freight group transit group key factors used identify reportable segments organization alignment company’s internal operations nature products services customer type business segments freight group manufactures products provides services geared production operation freight cars locomotives including braking control equipment engines onboard electronic components train coupler equipment revenues derived oem sales locomotive overhauls aftermarket sales freight car repairs services assets sold gets part freight group transit group consists products passenger transit vehicles typically subways rail buses include braking coupling monitoring systems climate control door equipment engineered meet individual customer specifications revenues derived oem aftermarket sales well repairs services company evaluates business segments’ operating results based income operations corporate activities include general corporate expenses elimination intersegment transactions interest income expense unallocated charges since certain administrative operating expenses items allocated business segments results tables necessarily measure computed accordance generally accepted accounting principles may comparable companies westinghouse air brake technologies corporation notes consolidated financial statementscontinued segment financial information 2004 follows segment financial information 2003 follows segment financial information 2002 follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued following geographic area data years ended december 31 2004 2003 2002 respectively includes net sales based product shipment destination longlived assets consist plant property equipment net depreciation resident respective countries export sales company’s united states operations 816 million 592 million 619 million years ending december 31 2004 2003 2002 respectively following data reflects income loss operations major geographic area attributed company’s operations within following countries regions years ended december 31 2004 2003 2002 respectively 20 fair value financial instruments estimated fair values related carrying values company’s financial instruments follows fair value company’s interest rate swaps see note 9 foreign exchange contracts senior notes based dealer quotes represent estimated amount company would pay counterparty terminate agreements 21 guarantor subsidiaries financial information effective august 2003 company issued 150 million senior notes due 2013 “the notes” obligations notes fully unconditionally guaranteed us subsidiaries guarantors accordance positions established securities exchange commission following shows separate financial information respect parent guarantor subsidiaries nonguarantor subsidiaries principal elimination entries eliminate investment subsidiaries certain intercompany balances transactions westinghouse air brake technologies corporation notes consolidated financial statementscontinued balance sheet december 31 2004 balance sheet december 31 2003 westinghouse air brake technologies corporation notes consolidated financial statementscontinued income statement year ended december 31 2004 income statement year ended december 31 2003 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries westinghouse air brake technologies corporation notes consolidated financial statementscontinued income statement year ended december 31 2002 1 includes elimination gross profit realized certain intercompany transactions guarantor nonguarantor subsidiaries condensed statement cash flows year ended december 31 2004 westinghouse air brake technologies corporation notes consolidated financial statementscontinued condensed statement cash flows year ended december 31 2003 condensed statement cash flows year ended december 31 2002 22 expense components expense follows westinghouse air brake technologies corporation notes consolidated financial statementscontinued 23 selected quarterly financial data unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 company duly caused report signed behalf undersigned thereunto duly authorized westinghouse air brake technologies corporation william e kassling william e kassling chief executive officer date march 11 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities dates indicated schedule ii westinghouse air brake technologies corporation valuation qualifying accounts three years ended december 31 1 reserves acquiredsold companies valuation allowances state foreign deferred tax assets 2 actual disbursements andor charges exhibits filing method chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1036 amendment 4 dated september 17 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions lasalle bank national association chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1037 amendment 5 dated november 14 2001 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner co syndication agent jp morgan chase bank formerly known chase manhattan bank administrative agent bank new york cosyndication agent mellon bank na documentation agent chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 exhibits omitted 1038 amendment 6 dated november 13 2002 among company guarantors time party thereto banks time party thereto lasalle bank national association bookrunner cosyndication agent jp morgan chase bank administrative agent bank new york cosyndication agent mellon bank na documentation agent lasalle bank national association issuing bank abn amro bank nv issuing bank chase manhattan bank usa na successor interest chase manhattan bank delaware issuing bank amended restated refinancing credit agreement dated november 19 1999 amended among company various financial institutions abn amro bank nv chase manhattan bank new york filed exhibit 109 company’s annual report form 10k period ended december 31 1999 1039 asset purchase agreement general electric company ge transportation systems business westinghouse air brake technologies corporation dated july 24 1040 refinancing credit agreement among company guarantors various lenders lasalle bank national association jp morgan chase bank new york citizens bank pennsylvania national city bank pennsylvania bank nova scotia bank tokyomitsubishi trust company pnc bank national association dated january 12 2004 1041 sale purchase agreement rütgers rail spa company dated august 12 2004 filed herewith filed exhibit company’s registration statement form s1 3390866 filed exhibit company’s annual report form 10k period ended december 31 1997 filed exhibit company’s annual report form 10k period ended december 31 1998 filed part company’s registration statement form s4 33388903 filed exhibit company’s annual report form 10k period ended december 31 1999 filed exhibit company’s quarterly report form 10q period ended june 30 2000 filed exhibit company’s annual report form 10k period ended december 31 2000 filed exhibit company’s current report form 8k dated november 13 2001 filed exhibit company’s annual report form 10k period ended december 31 2001 filed exhibit company’s annual report form 10k period ended december 31 2002 filed exhibit company’s registration statement form s4 333110600 filed exhibit company’s annual report form 10k period ended december 31 2003