WABCO Europe BVBA
WABCO Holdings Inc. (Form: 10-Q, Received: 11/02/2012 07:01:26)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
OR
o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              .
Commission file number 1-33332
WABCO Holdings Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
20-8481962
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Chaussee de Wavre, 1789
1160 Brussels, Belgium
 
 
 
 
One Centennial Avenue,
P.O. Box 6820, Piscataway, NJ
 
08855-6820
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code +32 2 663 98 00
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     o   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     o   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).  
Large Accelerated Filer
 
x
  
Accelerated Filer
 
o
 
 
 
 
Non-Accelerated Filer
 
o
  
Smaller Reporting Company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o   Yes     x   No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  
Common stock, $.01 par value, outstanding at
 
 
October 31, 2012
 
63,175,211 shares


Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
Nine months ended September 30, 2012
Contents
 
 
 
 
 
 
Item 1.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
(Amounts in millions, except share and per share data)
2012
 
2011
 
2012
 
2011
Sales
$
588.3

 
$
706.3

 
$
1,880.8

 
$
2,122.2

Cost of sales
413.1

 
501.9

 
1,315.8

 
1,503.7

Gross Profit
175.2

 
204.4

 
565.0

 
618.5

Costs and expenses:
 
 
 
 
 
 
 
Selling and administrative expenses
76.4

 
82.3

 
229.6

 
253.2

Product engineering expenses
25.5

 
28.4

 
77.7

 
80.6

Other operating expense, net
0.1

 
1.3

 
2.2

 
5.2

Operating income
73.2

 
92.4

 
255.5

 
279.5

Equity income of unconsolidated joint ventures, net
4.1

 
3.9

 
13.8

 
12.4

Other non-operating (expense) / income, net
(0.8
)
 
0.1

 
(2.0
)
 
(1.7
)
Indemnification and other settlements

 

 

 
23.1

Interest expense, net
(0.3
)
 
(0.4
)
 
(1.2
)
 
(1.6
)
Income before income taxes
76.2

 
96.0

 
266.1

 
311.7

Income tax (benefit) / expense
(3.3
)
 
9.1

 
15.7

 
16.6

Net income
79.5

 
86.9

 
250.4

 
295.1

Less: net income attributable to noncontrolling interests
2.0

 
3.1

 
8.1

 
8.0

Net income attributable to Company
$
77.5

 
$
83.8

 
$
242.3

 
$
287.1

Net income attributable to Company per common share
 
 
 
 
 
 
 
Basic
$
1.22

 
$
1.25

 
$
3.78

 
$
4.28

Diluted
$
1.19

 
$
1.22

 
$
3.69

 
$
4.13

Cash dividends per share of common stock
$

 
$

 
$

 
$

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
63,628,835

 
66,811,299

 
64,184,823

 
67,154,389

Diluted
64,904,085

 
68,656,306

 
65,638,742

 
69,483,447

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 (Amounts in millions)
2012
 
2011
 
2012
 
2011
Comprehensive income
$
102.0

 
$
36.8

 
$
249.4

 
$
272.8

Less: comprehensive income attributable to noncontrolling interests
4.7

 

 
$
8.1

 
$
5.2

Comprehensive income attributable to Company
$
97.3

 
$
36.8

 
$
241.3

 
$
267.6


See Notes to Condensed Consolidated Financial Statements.


4

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2012
 
December 31,
2011
(Amounts in millions, except share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
225.0

 
$
102.4

Accounts receivable, less allowance for doubtful accounts of $3.4 in 2012 and $3.4 in 2011
318.3

 
296.3

Inventories:
 
 
 
Finished products
84.8

 
82.4

Products in process
7.2

 
8.6

Raw materials
113.0

 
107.0

Taxes receivable on income

 
18.5

Future income tax benefits
18.2

 
8.7

Restricted cash
29.4

 
34.4

Guaranteed notes receivable
44.5

 
40.0

Other current assets
41.5

 
52.4

Total current assets
881.9

 
750.7

Facilities, less accumulated depreciation
370.0

 
357.4

Goodwill
365.2

 
363.9

Long-term future income tax benefits
61.5

 
58.8

Investments in unconsolidated joint ventures
19.2

 
16.5

Intangible assets, net
39.4

 
35.6

Other assets
40.1

 
40.3

TOTAL ASSETS
$
1,777.3

 
$
1,623.2

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Loans payable to banks
$
123.1

 
$
26.2

Accounts payable
143.6

 
137.8

Accrued payroll
103.3

 
108.1

Current portion of warranties
41.2

 
42.3

Taxes payable
8.3

 

Indemnification liabilities
11.6

 
11.2

Income tax liabilities
3.9

 
4.9

Other accrued liabilities
126.4

 
121.1

Total current liabilities
561.4

 
451.6

Long-term debt

 
52.0

Post-retirement benefits
340.8

 
348.6

Deferred tax liabilities
27.9

 
25.8

Long-term income tax liabilities
46.1

 
67.0

Other liabilities
39.1

 
42.4

Total liabilities
1,015.3

 
987.4

Shareholders’ equity:
 
 
 
Preferred stock, 4,000,000 shares authorized; none issued and outstanding

 

Common stock, $.01 par value, 400,000,000 shares authorized; shares issued: 75,491,138 in 2012; 74,242,930 in 2011; and shares outstanding: 63,312,083 in 2012; 64,765,655 in 2011
0.7

 
0.7

Capital surplus
723.8

 
693.4

Treasury stock, at cost: 12,179,055 shares in 2012; 9,477,275 shares in 2011
(605.9
)
 
(456.8
)
Retained earnings
658.9

 
416.6

Accumulated other comprehensive income:
 
 
 
Foreign currency translation adjustments
(18.1
)
 
(16.1
)
Unrealized losses on benefit plans, net of tax
(49.7
)
 
(50.6
)
Total shareholders’ equity
709.7

 
587.2

Noncontrolling interests
52.3

 
48.6

Total equity
762.0

 
635.8

TOTAL LIABILITIES AND EQUITY
1,777.3

 
1,623.2


See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months
Ended September 30,
 
2012
 
2011
(Amounts in millions)
 
 
 
Operating activities:
 
 
 
Net income
$
250.4

 
$
295.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
49.7

 
49.9

Amortization of intangibles
8.3

 
8.8

Equity in earnings of unconsolidated joint ventures, net of dividends received
(1.7
)
 
(4.1
)
Non-cash stock compensation
11.0

 
10.1

Deferred income tax expense
(15.6
)
 
(11.6
)
Loss on sale or disposal of property, plant and equipment
0.1

 
0.7

Indemnification settlements

 
(23.1
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(24.9
)
 
(70.5
)
Inventories
(9.3
)
 
(52.5
)
Accounts payable
6.8

 
4.1

Other accrued liabilities and taxes
2.7

 
40.0

Other current and long-term assets
32.1

 
15.5

Other long-term liabilities
(27.5
)
 
(16.4
)
Net cash provided by operating activities
282.1

 
246.0

Investing activities:
 
 
 
Purchases of property, plant and equipment
(60.5
)
 
(59.9
)
Investments in capitalized software
(6.8
)
 
(5.7
)
(Acquisitions) / divestitures, net
(5.1
)
 

Net cash used in investing activities
(72.4
)
 
(65.6
)
Financing activities:
 
 
 
Net borrowings / (repayments) of revolving credit facilities
47.4

 
(11.6
)
Borrowings / (repayments) of long-term debt
0.7

 
(0.2
)
Net (repayments) / borrowings of short-term debt
(6.2
)
 
4.6

Purchases of treasury stock
(146.9
)
 
(125.4
)
Dividends to noncontrolling interest holders
(4.6
)
 
(3.9
)
Proceeds from exercise of stock options
21.5

 
34.7

Net cash used in financing activities
(88.1
)
 
(101.8
)
Effect of exchange rate changes on cash and cash equivalents
1.0

 
(1.0
)
Net increase in cash and cash equivalents
122.6

 
77.6

Cash and cash equivalents at beginning of period
102.4

 
67.1

Cash and cash equivalents at end of period
$
225.0

 
$
144.7

Cash paid during the period for:
 
 
 
Interest
$
0.8

 
$
0.7

Income taxes
$
23.5

 
$
43.0

Non cash items for the period:
 
 
 
Treasury stock purchase accrual
$
4.0

 
$
5.8

See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)

NOTE 1.
Basis of Financial Statement Presentation
WABCO Holdings Inc. and its subsidiaries (collectively “WABCO” or the “Company”) develops, manufactures and sells advanced braking, stability, suspension and transmission control systems primarily for commercial vehicles. WABCO’s largest selling products are pneumatic anti-lock braking systems (“ABS”), electronic braking systems (“EBS”), automated manual transmission systems, air disk brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for heavy and medium-sized trucks, trailers and buses. WABCO sells its products to four groups of customers around the world: truck and bus original equipment manufacturers (“OEMs”), trailer OEMs, aftermarket distributors of replacement parts and services and automotive OEMs.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, including normal recurring items, considered necessary for a fair presentation of financial data have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K.
Based on the organizational structure, as well as the nature of financial information available and reviewed by the Company’s chief operating decision maker to assess performance and make decisions about resource allocations, the Company has concluded that its total WABCO operations represent one reportable segment and that WABCO’s performance and future net cash flow perspectives are best understood and assessed as such. All majority-owned subsidiaries of WABCO are included in the consolidated financial statements and intercompany transactions are eliminated upon consolidation. WABCO’s investments in unconsolidated joint ventures are included at cost plus its equity in undistributed earnings less dividends and changes in foreign currency in accordance with the equity method of accounting and reflected as investments in unconsolidated joint ventures in the consolidated balance sheet. Certain amounts in prior years’ condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 14 to the Consolidated Financial Statements for the year ended December 31, 2011, in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first nine months of 2012.

NOTE 2.
Recently Issued Accounting Standards
The adoption of recently issued accounting standards did not have a material impact on the condensed consolidated financial statements, nor do we expect the pending adoption of recently issued accounting standards to have a material impact on the condensed consolidated financial statements.
In 2011, the FASB issued Accounting Standards Update 2011-5, Presentation of Comprehensive Income ("ASU 2011-5") and ASU 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 ("ASU 2011-12"). 
ASU 2011-5 improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income.  ASU 2011-5 is effective for interim and annual periods beginning after December 15, 2011.  As ASU 2011-5 relates specifically to presentation and disclosures the adoption of these provisions did not have any other impact on our consolidated financial statements.

7


The main purpose of ASU 2011-12 was to the defer the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income in ASU 2011-05, therefore it did not have an impact on Company's condensed consolidated financial statements.


NOTE 3.
Comprehensive Income and Noncontrolling Interests

Total comprehensive income attributable to Company consisted of the following (amounts in millions):  
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
79.5

 
$
86.9

 
$
250.4

 
$
295.1

Foreign currency translation gains / (losses)
24.2

 
(52.9
)
 
(1.9
)
 
(23.7
)
Unrealized (losses) / gains on benefit plans, net
(1.7
)
 
2.8

 
0.9

 
1.4

Comprehensive income
102.0

 
36.8

 
249.4

 
272.8

Less: Net income attributable to noncontrolling interests
2.0

 
3.1

 
8.1

 
8.0

Foreign currency translation gains / (losses), attributable to noncontrolling interests
2.7

 
(3.1
)
 

 
(2.8
)
Comprehensive income attributable to Company
$
97.3

 
$
36.8

 
$
241.3

 
$
267.6


Dividends to noncontrolling interest holders for the three and nine month periods ending September 30, 2012 were $ 1.7 million and $ 4.6 million , respectively. Dividends to noncontrolling interest holders for the three and nine month periods ending September 30, 2011 were $ 0.9 million and $ 3.9 million , respectively.

NOTE 4.
Accounts Receivable Securitization Program & Financing Receivables
On September 23, 2009, the Company established an accounts receivable securitization program (the “Accounts Receivable Securitization Program”) with Société Générale Bank Nederland N.V. The maximum funding from receivables that may be sold into the Accounts Receivable Securitization Program and outstanding at any point in time is € 100 million ; however, there can be no assurance that the Company will generate sufficient eligible receivables to access the maximum availability. The original term of the Accounts Receivable Securitization Program was for one year, with the possibility of four additional annual extensions, assuming the Company and the participating sellers are in compliance with the applicable covenants. The Company extended the Accounts Receivable Securitization Program in September 2012 for one additional year.
During the nine months ended September 30, 2012 , the Company sold all of its eligible receivables into the Accounts Receivable Securitization Program. The receivables were removed from the balance sheet in accordance with the guidance under ASC topic 860, Transfers and Servicing . The total amount of receivables sold under the Accounts Receivable Securitization Program during the nine months ended September 30, 2012 was € 557.2 million ($ 714.5 million at weighted average September 30, 2012 year-to-date exchange rates). The amount of eligible receivables sold and outstanding at September 30, 2012 amounted to € 71.3 million ($ 92.1 million at September 30, 2012 exchange rates). As a result of the sale, accounts receivable decreased by $ 92.1 million and cash and cash equivalents increased by $ 54.4 million . The remaining amount of proceeds of $ 37.7 million is a subordinated deposit with Société Générale Bank Nederland N.V. at September 30, 2012 .
The fair value of the receivables sold equaled the carrying cost at time of sale, and no gain or loss was recorded as a result of the sale. The Company estimated the fair value of sold receivables using Level 3 inputs and based the estimate on historical and anticipated performance of similar receivables, including historical and anticipated credit losses (if any). As part of the Accounts Receivable Securitization Program, the Company continues to service the receivables. The Company sells the receivables at face value, but receives actual funding net of the subordinated deposit account until collections are received from customers for the receivables sold. The Company is exposed to the credit losses of sold receivables up to the amount of its subordinated deposit account at each settlement date. Credit losses for receivables sold and past due amounts outstanding at September 30, 2012 were both immaterial. Servicing fees paid for the program were $ 0.7 million and $ 1.0 million for the nine months ended September 30, 2012 and September 30, 2011 respectively.

8


In addition to the above, the Company has the ability to access cash on a daily basis related to collections on sold receivables, which provided the Company with $ 26.0 million of additional cash as of September 30, 2012 . Of these cash receipts, $ 17.7 million is classified on the consolidated balance sheet as loans payable to bank and $ 8.3 million reduced the subordinated deposit to $ 29.4 million which is classified as restricted cash on the consolidated balance sheet at September 30, 2012 . Also, the Company has pledged unsold receivables under the Accounts Receivable Securitization Program of € 11.6 million ($ 15.0 million at September 30, 2012 exchange rates).
On April 15, 2009, the Company entered into a € 35 million factoring program, which has a term of five years, in respect to accounts receivable from one of our customers. To date, we have not utilized this facility.
Other financing receivables include sales to reputable state owned and public enterprises in China that are settled through notes receivable which are registered and endorsed to the Company. These notes receivable are fully secured and generally have contractual maturities of six months or less. These guaranteed notes are available to be discounted with banking institutions in China or transferred to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first nine months of 2012 and 2011 were $ 33.5 million and $ 55.2 million , respectively, resulting in expenses of $ 0.1 million and $ 0.6 million for the nine months ended September 30, 2012 and 2011, respectively, and are included in “Other non-operating expense, net.” The carrying amounts of these guaranteed notes receivable are $ 44.5 million and $ 40.0 million as of September 30, 2012 and December 31, 2011 , respectively. The Company monitors the credit quality of these notes monthly through historical losses and current economic conditions with Chinese banks. As these receivables are guaranteed by banks and the Company has not experienced any historical losses nor is the Company expecting future credit losses, we have not established a loss provision against these receivables as of September 30, 2012 or December 31, 2011.

NOTE 5.
Net Income Attributable to Company per Share
Basic net income attributable to Company per share has been computed using the weighted average number of WABCO common shares outstanding. The average number of outstanding shares of common stock used in computing diluted net income attributable to Company per share includes weighted average incremental shares when the impact is not anti-dilutive. The weighted average incremental shares represent the net amount of shares the Company would issue upon the assumed exercise of in-the-money stock options and vesting of restricted stock units (“RSUs”) after assuming that the Company would use the proceeds from the exercise of options to repurchase treasury stock. Anti-dilutive options, if applicable, are excluded and represent those options whose exercise price was greater than the average price of the Company’s common stock.
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Weighted average incremental shares included
1,275,250

 
1,845,007

 
1,453,919

 
2,329,058

Shares excluded due to anti-dilutive effect
510,997

 
240,114

 
472,459

 


NOTE 6.
Capital Stock
The following is a summary of net shares outstanding and shares issued or reacquired during the first nine months of 2012.  
 
Number of Shares of Common Stock
 
Total Shares
 
Treasury Shares
 
Net Shares
Outstanding
Balance, December 31, 2011
74,242,930

 
(9,477,275
)
 
64,765,655

Shares issued upon exercise of stock options
1,049,107

 

 
1,049,107

Shares issued upon vesting of RSUs
199,101

 

 
199,101

Shares purchased for treasury

 
(2,701,780
)
 
(2,701,780
)
Balance, September 30, 2012
75,491,138

 
(12,179,055
)
 
63,312,083

The Company accounts for purchases of treasury stock under the cost method with the costs of such share purchases reflected in treasury stock in the accompanying condensed consolidated balance sheets. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired since the inception of the share buy back programs, net of shares previously reissued and the Company reflects the difference between the average cost paid and the amount received for the reissued shares in capital surplus. As of September 30, 2012 , no shares have been reissued.

9


The Company's Board of Directors has approved a program to purchase shares of the Company's common stock. The authorization by the Board of Directors on May 26, 2011 approved the purchase of shares in an amount not to exceed $ 400 million which expires on May 31, 2013. As of September 30, 2012 , the Company had repurchased a total of $ 329.6 million of shares leaving an unexpended balance of $ 70.4 million available to repurchase shares in the future. Subsequent to September 30, 2012 , the Company has repurchased an additional 190,763 shares for a total of $ 10.9 million . The Company plans to continue to purchase shares at prevailing market prices. Timing will vary depending on market conditions and other factors.
On October 26, 2012, the Board of Directors authorized the Company to enter into an additional share repurchase program. This board authorization allows for the repurchase of a further $400 million of common shares at the discretion of management for a period until December 31, 2014.

NOTE 7.
Stock-Based Compensation
The Company records stock-based compensation based on the estimated fair value of the award at the grant date and is recognized as an expense in the condensed consolidated statements of income over the requisite service period. Total stock-based compensation cost recognized during the three and nine month periods ended September 30, 2012 and 2011 were as follows:
 
Three Months
Ended September 30,
Nine Months
Ended September 30,
 
2012
 
2011
2012
 
2011
Stock-based compensation
$
3.4

 
$
3.5

$
11.0

 
$
10.1

The total number and type of awards granted during the periods presented and the related weighted-average grant-date fair values were as follows:
 
Nine months ended 
September 30, 2012
 
Nine months ended
September 30, 2011
 
Underlying
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted
Average
Grant Date
Fair Value
 
Underlying
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted
Average
Grant Date
Fair Value
Options Granted
284,691

 
$
58.71

 
$
23.10

 
276,287

 
$
59.24

 
$
22.94

RSUs Granted
133,804

 
$

 
$
58.47

 
220,181

 
$

 
$
62.44

Total Awards
418,495

 
 
 
 
 
496,468

 
 
 
 
In the nine months ended September 30, 2012 , a total of 284,691 options were granted of which all are exercisable in equal installments over a period of three years. In the nine months ended September 30, 2011 , a total of 276,287 options were granted of which all are exercisable in equal installments over a period of three years. In 2012, a total of 133,804 RSUs were granted of which 105,649 vest ratably over a period of three years. Of the remaining 28,155 RSUs granted in 2012, 10,027 vest immediately, 3,588 vest after two years and 14,540 vest after three years. In 2011, a total of 220,181 RSUs were granted of which 101,647 vest ratably over a period of three years. Of the remaining 118,534 RSUs granted in 2011, 3,973 vest after two years, 41,064 vest after three years and 73,497 vest after four years.
The weighted average grant date fair value was calculated under the Black-Scholes option-pricing model. The following table summarizes the significant assumptions used for the grants during the nine month periods ended September 30, 2012 and 2011:
Assumption
September 30, 2012
 
September 30, 2011
Risk-free interest rate
0.81
%
 
2.30
%
Expected volatility
44.48
%
 
42.82
%
Expected holding period
5 Years

 
5 Years

Expected forfeiture rate
2.6
%
 
2.3
%
Expected dividend yield
0.0
%
 
0.47
%

10


The risk free interest rate is based on the yield of U.S. Treasury securities that correspond to the expected holding period of the options. WABCO reviewed the historic volatility of its common stock over a four -year period, the common stock of its peer group over a three -year period, and the implied volatility for at the money options to purchase shares of its common stock. Based on this data, the Company chose to use a weighted average of the implied volatility of WABCO, the most recent four-year historical volatility of WABCO and the median most recent three -year historical volatility of WABCO’s peer group prior to the spin-off date. The expected holding period was calculated by reviewing the historical exercise pattern of all holders that were granted options and the exercise behavior of officers versus non-officers. The results of the analysis support one expected holding period for all groups of employees. The expected forfeiture rate was determined based on the historical stock option forfeiture data of the Company. The dividend yield was based on an expected future dividend amount for the period at the time of grant.

NOTE 8.
Debt

On July 8, 2011 , the Company entered into a $400 million multi-currency five -year senior unsecured revolving credit facility (the "Facility") with the lenders and agent banks party thereto, including Banc of America Securities Limited as agent, issuing bank and swingline lender, and Banc of America Securities Limited, Citigroup Global Markets Limited, Fortis Bank S.A./N.V., ING Belgium SA/NV, Société Générale Corporate & Investment Banking, The Bank of Tokyo-Mitsubishi UFJ, Ltd and The Royal Bank of Scotland NV, (Belgium) Branch, as mandated lead arrangers and bookrunners and Credit Lyonnais and Unicredit Bank AG as lead arrangers.

As of September 30, 2012 , this is our principal bank credit facility, and the Facility will expire on September 1, 2016 . It replaced the $800 million multi-currency five -year senior unsecured revolving credit facility entered into by WABCO on May 31, 2007 with, among others, J.P. Morgan Securities, Inc. as lead arranger and bookrunner and JPMorgan Chase Bank, N.A., as agent, issuing bank and swingline lender.

Under the Facility, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $400 million . Up to $50 million under this facility may be used for issuing letters of credit, of which $ 48.7 million was unused as of September 30, 2012 , and up to $50 million is available in the form of swingline loans, of which $ 50.0 million was unused as of September 30, 2012 . At September 30, 2012 , the carrying amount of the Facility approximated fair value. The balance outstanding on the Facility as of September 30, 2012 , was $ 103.3 million in addition to $ 1.3 million of letters of credit. The balance outstanding is classified as loans payable to banks on the condensed consolidated balance sheets.
 
The proceeds of the borrowings under the Facility will be available to repurchase WABCO shares, finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Interest on loans under the Facility will be calculated at a rate per annum equal to an applicable margin, which can vary from 0.80% to 1.55% based on the Company's leverage ratio, plus LIBOR for loans denominated in U.S. Dollars, EURIBOR for loans denominated in Euros, HIBOR for loans denominated in Hong Kong Dollars and SIBOR for loans denominated in Singapore Dollars, plus mandatory costs, if any.

The Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Our primary financial covenant is a leverage test which requires net indebtedness not to exceed three times adjusted four quarter trailing EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items). Additional financial covenants include an interest coverage test and a maximum subsidiary indebtedness test. The interest coverage test requires three times interest expense not to exceed adjusted four quarter trailing EBITDA. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of WABCO's subsidiaries, excluding indebtedness under the Facility, to $400 million , of which not more than $150 million may be secured. At September 30, 2012 the Company had the ability to borrow an incremental $ 295.4 million under the Facility and was in compliance with all the covenants.
Financial covenants, as determined on the date the Facility was signed, are not subject to any future changes in U.S. GAAP accounting standards and all cash on the balance sheet can be deducted for net indebtedness purposes. In addition, expenses and payments related to any streamlining of WABCO’s operations are excluded when calculating the four quarter trailing adjusted EBITDA. Other covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, ERISA and U.S. regulations, limitations on liens, mergers and sales of assets and change of business.

11


Also, various subsidiaries had borrowings from banks totaling $ 19.8 million , of which $ 17.7 million relates to our Accounts Receivable Securitization Program referred to in Note 4 above. The remaining $ 2.1 million supports local working capital requirements.

NOTE 9.
Warranties, Guarantees, Commitments and Contingencies
Warranties
Products sold by WABCO are covered by a basic limited warranty with terms and conditions that vary depending upon the product and country in which it was sold. The limited warranty covers the equipment, parts and labor (in certain cases) necessary to satisfy the warranty obligation generally for a period of two years. Estimated product warranty expenses are accrued in cost of goods sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on warranty claims experience and specific customer contracts. Warranty expenses include accruals for basic warranties for product sold, as well as accruals for product recalls, service campaigns and other related events when they are known and estimable. To the extent WABCO experiences changes in warranty claim activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly. Warranty accrual estimates are updated based upon the most current warranty claims information available.
The following is a summary of changes in the Company’s product warranty liability for the three and nine months ended September 30, 2012 and 2011 (amounts in millions).
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Balance of warranty costs accrued, beginning of period
$
52.1

 
$
54.7

 
$
52.6

 
$
44.9

Warranty costs accrued
4.5

 
10.6

 
20.1

 
31.8

Warranty claims settled
(6.5
)
 
(7.2
)
 
(20.5
)
 
(21.9
)
Foreign exchange translation effects
1.8

 
(2.4
)
 
(0.3
)
 
0.9

Balance of warranty costs accrued, end of period
$
51.9

 
$
55.7

 
$
51.9

 
$
55.7

Current liability, included in current portion of warranties
$
41.2

 
$
52.0

 
$
41.2

 
$
52.0

Long-term liability, included in other liabilities
$
10.7

 
$
3.7

 
$
10.7

 
$
3.7

Guarantees and Commitments
The Company has bank guarantees for $ 29.4 million which is comprised of uncollateralized bank guarantees, of which $ 23.3 million is related to tax and other litigation, $ 1.3 million is related to letters of credit and $ 4.8 million is related to other items.
The Company has inventory and receivables that are pledged against a local bank facility in India to support local working capital requirements of approximately $ 10.0 million . Also, the Company has pledged unsold receivables under the Accounts Receivable Securitization Program of € 11.6 million ($ 15.0 million at September 30, 2012 exchange rates).
Contingencies
General
We are subject to proceedings, lawsuits and other claims related to products and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable and reasonably possible losses. A determination of the amount of liability to be recorded, if any, for these contingencies is made after careful analysis of each individual issue.
Litigation
On June 23, 2010, the European Commission (the “Commission”) issued a decision imposing a total of € 326.1 million in fines, or approximately $ 400 million on the date of assessment (the “EC Fine”), on the former American Standard Companies Inc. (now Trane Inc., hereinafter referred to as “American Standard” or “Trane”), and certain of its European subsidiaries engaged in the Bath and Kitchen business and successor entities for infringements of European Union competition rules relating to the distribution of bathroom fixtures and fittings in a number of European countries. Pursuant to our

12


Indemnification and Cooperation Agreement with Trane, WABCO Europe BVBA (an indirect wholly-owned subsidiary of WABCO) is responsible for, and is liable to indemnify Trane Inc. and Ideal Standard International (representing the successor to the Bath and Kitchen business, and owner of certain of the former American Standard subsidiaries) and their owners against the EC Fine.
As required by the Indemnification and Cooperation Agreement, WABCO paid the fine amount into escrow on August 30, 2010, using € 230.0 million of cash on hand and € 96.1 million of additional borrowings. The funds were subsequently released from escrow and paid to the Commission. After reviewing all of the elements of the case, WABCO decided to appeal the decision in order to try to have the fine reduced. On September 8, 2010, WABCO filed its appeal in the General Court of the European Union, located in Luxembourg. On March 27, 2012, the oral hearing for the appeal took place before the court. This was the final step in the procedure before a judgment is handed down. The Company now believes that a decision on the appeal will be made in the next six months.
Other
In conjunction with the Tax Sharing Agreement, as further discussed in "Note 11. Tax and Indemnification Liabilities Transferred from Trane to WABCO", WABCO is responsible for certain tax and indemnification liabilities. These liabilities include indemnification liabilities to Trane of $ 15.0 million as of September 30, 2012 . It is reasonably possible that the Company could incur losses in excess of the amount accrued. Altho ugh this amount cannot be estimated, we believe that any additional losses would not have a material adverse impact on the condensed consolidated financial statements.

NOTE 10.
Income Taxes
The income tax expense for the first nine months of 2012 was $ 15.7 million on pretax income of $ 266.1 million before adjusting for noncontrolling interest. Income tax expense is the net result of taxes on earnings in profitable jurisdictions, income offset by fully valued net operating losses, the accrual of interest on uncertain tax positions, and certain foreign tax planning. Additionally, the income tax expense for the first nine months of 2012 is offset by the release of tax accruals for uncertain tax positions due to certain government filings submitted in January 2012 of approximately $ 24.8 million as adjusted by the filing of the Company's U.S. Federal income tax return in September 2012. During the third quarter of 2012, the Company also recorded an additional tax benefit of $ 4.1 million related to the filing of its 2011 U.S. Federal income tax return in September 2012.
The accompanying September 30, 2012 condensed consolidated balance sheet continues to reflect a full valuation allowance for certain foreign tax losses as it has been determined as of September 30, 2012 that it is more likely than not that the losses will not be utilized in the foreseeable future.
Unrecognized tax benefits at September 30, 2012 amounted to $ 45.9 million related to the WABCO business and $ 4.2 million related to WABCO obligations directly to tax authorities for Trane’s Bath and Kitchen business as further discussed in "Note 11. Tax and Indemnification Liabilities Transferred from Trane to WABCO". The Company believes that it is reasonably possible that certain unrecognized tax benefits will be recognized within the next 12 months. As a result, $ 45.9 million of the unrecognized tax benefits are classified as long-term liabilities and $ 4.2 million are classified as short-term liabilities. Approximately $ 0.1 million of these long-term unrecognized tax benefits and $ 4.1 million of the short-term unrecognized tax benefits relate to WABCO’s obligations to tax authorities for Trane’s Bath and Kitchen business. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. No significant penalties have been accrued related to these unrecognized tax benefits.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With no material exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2007.

NOTE 11.
Tax and Indemnification Liabilities Transferred from Trane to WABCO
Pursuant to the Tax Sharing Agreement between Trane and WABCO, entered into on July 16, 2007, and other agreements with Trane as filed in WABCO’s Form 10 prior to its spin-off from Trane, WABCO is responsible for certain tax contingencies and indemnification liabilities. As noted in "Note 10. Income Taxes", the liabilities as of September 30, 2012 include $ 4.2 million related to non-U.S. entities of Trane’s former Bath and Kitchen business but for which WABCO entities have obligations directly to non-U.S. tax authorities. In addition, as of September 30, 2012 , the Company had indemnification liabilities of $ 15.0 million , of which $ 3.4 million is classified within long-term liabilities on the balance sheet and $ 11.6 million is classified within short-term liabilities.

13


Under an indemnification agreement, WABCO Brazil is responsible for certain claims related to its business for periods prior to the spin-off of WABCO from American Standard. In particular, there are tax claims pending in various stages of the Brazilian legal process related to income, social contribution and/or value added taxes for which a contingency exists and which may or may not ultimately be incurred by the Company. The estimated total amount of the contingency as of September 30, 2012 is $ 46.4 million including interest. However, based on management’s assessment and advice of our external legal counsel, the Company believes that it has valid arguments in all of these cases and thus no accrual is required at this time.

NOTE 12.
Streamlining Expenses
The Company accounts for employee-related streamlining charges as either a one-time benefit arrangement or an ongoing benefit arrangement as appropriate. From time to time the Company also has streamlining charges that are not related to employees, such as facility exit costs.
Based on market declines occurring in the fourth quarter of 2008, we commenced a streamlining program on October 28, 2008 (the “2008/2009 Program”), which began with a consultative process with works councils and employee representatives globally. The 2008/2009 Program reduced our global workforce by approximately 1,800 employees. This level of reduction in workforce brought our capacity in line with market demand, while still allowing us to continue our focus on core strategies, including technology, new products, globalization, and quality and productivity initiatives. We believe the completion of these actions created sufficient flexibility in production and helped us to cope with anticipated demand volatility. The Company does not expect to incur any further charges on the 2008/2009 Program.
Based on the Company’s efforts to maintain our global footprint, the Company will periodically enter into other streamlining programs as deemed necessary (“Other Programs”).
The following is a summary of changes in the Company’s streamlining program liabilities for the nine months ended September 30, 2012 (amounts in millions). Activity for the period consisted of termination payments and employee-related charges. Non-employee-related charges, such as facility exit costs, were not incurred during the period.
 
2008 / 2009 Program
 
Balance as of December 31, 2011
$
17.5

Charges during the first nine months of 2012

Payments during the first nine months of 2012
(5.1
)
Balance as of September 30, 2012
$
12.4

Other Programs
 
Balance as of December 31, 2011
$
2.3

Charges during the first nine months of 2012
7.7

Payments during the first nine months of 2012
(2.8
)
Balance as of September 30, 2012
$
7.2

Foreign exchange translation effects
$
(0.1
)
Total streamlining liability as of September 30, 2012
$
19.5

A balance of $ 12.2 million is classified as long term and is included in other liabilities. The remaining $ 7.3 million is classified as short term and is included in other accrued liabilities as of September 30, 2012 .

14


The following is a summary of current and cumulative streamlining costs (including employee-related costs shown above as well as asset write-offs and other charges).
 
 
Charges for Quarter
Ended September 30, 2012
 
Charges for Nine Months
Ended September 30, 2012
 
Cumulative Charges
as of September 30, 2012
 
2008/2009
Program
 
Other
Programs
 
2008/2009
Program
 
Other
Programs
 
2008/2009
Program
 
Other
Programs
Employee-related charges – cost of sales
$

 
$
1.8

 
$

 
$
3.7

 
$
45.7

 
$
8.5

Employee-related charges – selling and administrative

 
1.0

 

 
3.9

 
45.8

 
5.9

Asset write-offs – cost of sales

 

 

 
0.1

 

 
0.9

Total program costs
$

 
$
2.8

 
$

 
$
7.7

 
$
91.5

 
$
15.3


NOTE 13.
Post-retirement Benefits
Post-retirement pension, health and life insurance costs had the following components for the three and nine months ended September 30, 2012 and 2011 (amounts in millions):
 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2012
 
2012
 
2011
 
2011
 
2012
 
2012
 
2011
 
2011
 
Pension
Benefits
 
Health
& Life
Ins.
Benefits
 
Pension
Benefits
 
Health
& Life
Ins.
Benefits
 
Pension
Benefits
 
Health
& Life
Ins.
Benefits
 
Pension
Benefits
 
Health
& Life
Ins.
Benefits
Service cost-benefits earned during period
$
2.2

 
$

 
$
2.1

 
$

 
$
6.7

 
$

 
$
6.4

 
$

Interest cost on the projected benefit obligation
5.9

 
0.2

 
6.1

 
0.1

 
17.8

 
0.4

 
18.3

 
0.5

Plan amendments

 

 

 


 
(4.3
)
 

 


 


Less assumed return on plan assets
(2.4
)
 

 
(2.2
)
 

 
(6.8
)
 

 
(6.4
)
 

Amortization of net loss
0.7

 
0.1

 
0.6

 
0.2

 
1.9

 
0.3

 
1.6

 
0.7

Defined benefit plan cost
$
6.4

 
$
0.3

 
$
6.6

 
$
0.3

 
$
15.3

 
$
0.7

 
$
19.9

 
$
1.2

Accretion expense as reflected in selling and administrative expenses and cost of sales
$
3.5

 
$
0.2

 
$
3.9

 
$
0.1

 
$
11.0

 
$
0.4

 
$
11.9

 
$
0.5


The plan amendment of $4.3 million recorded during the second quarter of 2012 related to an adjustment to our UK pension obligation.

The Company makes contributions to funded pension plans that, at a minimum, meet all statutory funding requirements. Contributions in 2012, as well as payments of benefits incurred by unfunded plans were in line with the expectations for 2012 and also in line with the contributions made during 2011.

NOTE 14.
Derivative Instruments and Hedging Activities

ASC topic 815, Derivatives and Hedging , requires a company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies and has been designated as a relationship hedge. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
    
The Company recognizes all derivative financial instruments in the consolidated balance sheet at fair value using Level 2 inputs and these are classified as “other current assets,” “other assets,” “other accrued liabilities” or “other liabilities” on the consolidated balance sheet. Level 2 inputs used by the Company in valuing its derivative instruments include model-based valuation techniques for which all significant assumptions are observable in the market.

15


The earnings impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income ("AOCI") for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.

Foreign exchange contracts are used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of September 30, 2012 , forward contracts for an aggregate notional amount of € 45.3 million ($ 58.4 million at September 30, 2012 exchange rates) were outstanding with an average duration of one month. These foreign exchange contracts have offset the revaluation of assets and liabilities. The combined net non-operating loss for the nine months ended September 30, 2012 was $ 0.3 million . The majority of these exchange contracts were entered into on September 27, 2012 . The fair value of the derivatives was immaterial.


NOTE 15.
Business Combinations
On September 13, 2012, the Company completed its acquisition of Ephicas, based in the Netherlands, a pioneering company in the field of innovative aerodynamic solutions for commercial vehicles. The Company acquired all of the equity interests in Ephicas and also assumed certain liabilities. Leveraging Ephicas’ expertise and patented technologies, the Company will develop a range of aerodynamic products – branded OptiFlow™ – that are designed to increase vehicle efficiency and reduce fuel consumption for trucks, trailers and buses.
The acquisition is recorded in accordance with ASC 805 - Business Combinations ("ASC 805"). ASC 805 requires that all identifiable intangible assets be recognized as an asset apart from goodwill if the asset arises from contractual or other legal rights, or is separable from the acquired entity. The fair value of the Ephicas business identified intangible assets is $ 2.1 million and goodwill is $ 3.6 million .

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
    
In the third quarter of 2012, the production of new trucks and buses greater than 6 tons declined in virtually every market, and we estimate that commercial vehicle production declined 12.3% globally. Wabco’s sales in the same period decreased by 7.2% excluding foreign currency translation effects, or 16.7% as reported, compared to one year ago.

Emerging markets again accounted for more than half of the world's truck and bus production in the third quarter of 2012. The Company continued to benefit from its well anchored position in these markets, and has successfully increased the level of adoption of WABCO technologies and systems, resulting in a higher value of WABCO content per vehicle.

During the third quarter of 2012, WABCO's Operating System continued to enable fast and flexible responses to major market changes, delivering $17.1 million of materials and conversion productivity. Gross materials productivity represented 5.3% of total materials cost but, as anticipated, the impact of commodity inflation reduced net materials productivity to 4.6%. Conversion productivity represented 6.1%, another robust result.
Results of Operations
Approximately 88% of our sales are outside the U.S., and therefore changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in U.S. dollars. Quarter-over-quarter changes in sales, gross profit, expenses, pre-tax income and net income attributable to Company for 2012 compared with 2011 are presented both with and without the effects of foreign currency translation. Changes in sales, gross profit, expenses, pre-tax income and net income attributable to Company excluding foreign exchange effects are calculated using current year sales, gross profit, expenses, pre-tax income and net income attributable to Company translated at prior year exchange rates. Presenting changes in sales, gross profit, expenses, pre-tax income and net income attributable to Company excluding the effects of foreign currency translation is not in conformity with U.S. GAAP, but management analyzes the data in this manner because it is useful to us in understanding the operating performance of our business. We believe this data is also useful to shareholders for the same reason. The changes in sales, gross profit, expenses, pre-tax income and net income attributable to Company excluding the effects of foreign exchange translation are not meant to be a substitute for measurements prepared in conformity with U.S. GAAP, nor to be considered in isolation. Management believes that presenting these non-U.S. GAAP financial measures is

16

Table of Contents

useful to shareholders because it enhances their understanding of how management assesses the operating performance of the Company’s business.
Third Quarter Results of Operations for 2012 Compared with 2011
(amounts in millions)
 
 
Three Months
Ended September 30,
 
 
 
 
 
 
 
Excluding foreign
exchange translation (a)
 
2012
 
2011
 
% change
reported
 
2012
adjusted
Amount
 
% change
adjusted
Sales
$
588.3

 
$
706.3

 
(16.7
)%
 
$
655.2

 
(7.2
)%
Cost of sales
413.1

 
501.9

 
(17.7
)%
 
459.3

 
(8.5
)%
Gross profit
175.2

 
204.4

 
(14.3
)%
 
195.9

 
(4.2
)%
Operating expenses
102.0

 
112.0

 
(8.9
)%
 
112.9

 
0.8
 %
Operating income
73.2

 
92.4

 
(20.8
)%
 
83.0

 
(10.2
)%
Equity income of unconsolidated joint ventures
4.1

 
3.9

 
5.1
 %
 
4.1

 
5.1
 %
Other non-operating (expense)/income, net
(0.8
)
 
0.1

 
*

 
(0.7
)
 
*

Interest expense, net
(0.3
)
 
(0.4
)
 
(25.0
)%
 
(0.3
)
 
(25.0
)%
Income before income taxes
76.2

 
96.0

 
(20.6
)%
 
86.1

 
(10.3
)%
Income tax (benefit)/expense
(3.3
)
 
9.1

 
(136.3
)%
 
(2.1
)
 
(123.1
)%
Net income
79.5

 
86.9

 
(8.5
)%
 
88.2

 
1.5
 %
Less: net income attributable to noncontrolling interests
2.0

 
3.1

 
(35.5
)%
 
2.3

 
(25.8
)%
Net income attributable to Company
$
77.5

 
$
83.8

 
(7.5
)%
 
$
85.9

 
2.5
 %
* Percentage change not meaningful
 
 
 
 
 
 
 
 
 


(a)
The 2012 amounts adjusted for foreign currency translation were calculated using average exchange rates for the three month period ending September 30, 2011 .
Sales
Our sales for the third quarter of 2012 were $ 588.3 million , a decrease of 16.7% ( 7.2% excluding foreign currency translation effects) from $706.3 million in 2011. The decrease, excluding foreign currency translation effects, was predominately driven by a 12.3% decline in the global production of new trucks and buses greater than 6 tons. Total sales in Europe, our largest market, decreased approximately 19.6% (9.7% excluding foreign currency translation effects) for the third quarter of 2012, driven mainly by lower levels of truck, bus and trailer production. Total sales increased 1.7% in North America, despite a slight decline in commercial vehicle production. Total sales in Asia decreased 12.5% (5.6% excluding foreign currency translation effects). The sales reduction in Asia primarily included a decrease in total sales in India of 25.6% (10.3% excluding foreign currency translation effects), a decrease in total sales in Korea of 25.7% (20.5% excluding foreign currency translation effects), a decrease in total sales in Japan of 7.9% (6.7% excluding foreign currency translation effects), partially offset by an increase of sales in China of 6.9% (5.9% excluding foreign currency translation effects). Total sales in South America decreased 37.4% (23.8% excluding foreign currency translation effects) driven by the anticipated decline in production of new trucks and buses in Brazil resulting from higher levels of production in 2011 ahead of the 2012 emission mandate as well as the termination of a government sponsored incentive program at the end of 2011. WABCO's aftermarket sales, included in the geographic numbers provided above, decreased by 4.7% at reported rates, but the growth was 7.0% excluding foreign currency translation effects.

17

Table of Contents

Cost of Sales and Gross Profit
Our cost of sales for the third quarter of 2012 was $ 413.1 million , a decrease of $ 88.8 million (a decrease of $ 42.6 million excluding foreign currency translation effects) from $ 501.9 million in 2011. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.4% of material savings before the impact of commodity inflation, which had a negative impact of 0.8%, bringing net materials productivity to 4.6% for the quarter. This productivity achievement resulted in $11.5 million of material cost savings. Our second largest expense within the cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor and other cost escalations increased conversion costs by approximately $4.0 million, while our productivity efforts generated $5.6 million of savings, or 6.1% of the conversion costs. Warranty expenses were lower compared to the third quarter of 2011 by $4.8 million, driven by an improvement in warranty claims experience. Absorption of overhead costs and other indirect costs were unfavorable by $13.4 million versus the prior year. Volume and mix reduced cost of sales by $35.7 million, but contributed $8.4 million to decline of gross profit. Sales price reductions had a negative impact of $4.3 million on gross profit, or 0.6% of sales, which is a very low level for the quarter. Streamlining and separation charges adversely affected results by $1.6 million versus last year. Foreign currency translational effects decreased cost of sales by $46.1 million and combined with translational effects on sales they negatively affected gross profit in the amount of $20.7 million. Foreign currency transactional impacts decreased cost of sales by $4.0 million and positively affected gross profit in the amount of $1.3 million. The net result of all these changes was a decrease in gross profit of $ 29.2 million (or $ 8.5 million excluding foreign currency translation effects).
Operating Expenses
Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, decreased by $ 10.0 million (an increase of $ 0.9 million excluding foreign currency translation effects). The increase excluding foreign currency translation effects comprises a reduction in incentive compensation of $3.6 million, offset by an increase in labor and other cost inflation of $2.0 million, an investment in global expansion of $1.9 million, an increase in streamlining and separation expenses of $0.3 million and an increase in research and development investments of $0.3 million.
Equity Income of Unconsolidated Joint Ventures
Equity in net income of unconsolidated joint ventures increased by $ 0.2 million to $ 4.1 million in 2012 as compared to $ 3.9 million in 2011.
Income Taxes
The income tax benefit for the third quarter of 2012 was $ 3.3 million on pre-tax income of $ 76.2 million before adjusting for noncontrolling interest, compared with a provision of $ 9.1 million on a pre-tax income of $ 96.0 million before adjusting for noncontrolling interest in the third quarter of 2011.
In the three months ended September 30, 2012 and September 30, 2011 the income tax expense is primarily the net result of taxes on earnings in profitable jurisdictions offset by fully valued net operating losses, the accrual of interest on uncertain tax positions, adjustments from the filing of the Company's U.S. Federal income tax return in September 2012 and 2011, respectively, and certain foreign tax planning. The income tax expense for the three months ended September 30, 2012 is entirely offset by a tax benefit of $ 4.1 million due to the filing of the Company's 2011 US Federal income tax return in September 2012 and a tax benefit of 11.2 million due to the Company's government filings submitted in January 2012. The tax benefit of $ 11.2 million includes the expected benefit of $ 5.2 million as previously disclosed in the Company's Form 10-K and subsequently adjusted by the filing of the Company's 2011 U.S. Federal income tax return. In 2011, income tax expense was partially offset by the release of tax accruals of approximately $1.6 million as a consequence of the settlement of foreign tax audits and the filing of the Company's 2010 U.S. Federal income tax return in September 2011.


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Year to Date Results of Operations for 2012 Compared with 2011
(amounts in millions)
 
 
Nine Months
Ended September 30,
 
 
 
 
 
 
 
Excluding foreign
exchange translation (a)
 
2012
 
2011
 
% change
reported
 
2012
adjusted
Amount
 
% change
adjusted
Sales
$
1,880.8

 
$
2,122.2

 
(11.4
)%
 
$
2,040.8

 
(3.8
)%
Cost of sales
1,315.8

 
1,503.7

 
(12.5
)%
 
1,425.3

 
(5.2
)%
Gross profit
565.0

 
618.5

 
(8.6
)%
 
615.5

 
(0.5
)%
Operating expenses
309.5

 
339.0

 
(8.7
)%
 
335.2

 
(1.1
)%
Operating income
255.5

 
279.5

 
(8.6
)%
 
280.3

 
0.3
 %
Equity income of unconsolidated joint ventures
13.8

 
12.4

 
11.3
 %
 
13.9

 
12.1
 %
Other non-operating (expense)/income, net
(2.0
)
 
21.4

 
(109.3
)%
 
(2.3
)
 
(110.7
)%
Interest expense, net
(1.2
)
 
(1.6
)
 
(25.0
)%
 
(1.2
)
 
(25.0
)%
Income before income taxes
266.1

 
311.7

 
(14.6
)%
 
290.7

 
(6.7
)%
Income taxes
15.7

 
16.6

 
(5.4
)%
 
18.6

 
12.0
 %
Net income
250.4

 
295.1

 
(15.1
)%
 
272.1

 
(7.8
)%
Less: net income attributable to noncontrolling interests
8.1

 
8.0

 
1.3
 %
 
9.0

 
12.5
 %
Net income attributable to Company
$
242.3

 
$
287.1

 
(15.6
)%
 
$
263.1

 
(8.4
)%

(a)
The 2012 amounts adjusted for foreign currency translation were calculated using average exchange rates for the nine month period ending September 30, 2011 .
Sales
Our sales for the first nine months of 2012 were $ 1,880.8 million , a decrease of 11.4% ( 3.8% excluding foreign currency translation effects) from $ 2,122.2 million in 2011. The decrease, excluding foreign currency translation effects, was predominately driven by a 9.5% decline in the global production of new trucks and buses greater than 6 tons. Total sales in Europe, our largest market, decreased approximately 14.7% (6.7% excluding foreign currency translation effects) for the first nine months of 2012, driven mainly by lower levels of truck, bus and trailer production. Total sales increased 16.0% in North America, which benefited from increased commercial vehicle production. Total sales in Asia decreased 7.3% (2.4% excluding foreign currency translation effects). The sales reduction in Asia included a decrease in total sales in India of 16.4% (2.5% excluding foreign currency translation effects), a decrease in Korea of 21.5% (17.1% excluding foreign currency translational effects), and a decrease in China of 7.4% (10.0% excluding foreign currency translational effects), partially offset by an increase in total sales in Japan of 18.0% (17.1% excluding foreign currency translation effects). Total sales in South America decreased 30.3% (19.1% excluding foreign currency translation effects) driven by the anticipated decline in production of new trucks and buses in Brazil resulting from higher levels of production in 2011 ahead of the 2012 emission mandate as well as the termination of a government sponsored incentive program at the end of 2011. WABCO's aftermarket sales, included in the geographic numbers provided above, decreased by 5.0% at reported rates, but the growth was 3.8% excluding foreign currency translation effects.

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Table of Contents

Cost of Sales and Gross Profit
Our cost of sales for the first nine months of 2012 was $ 1,315.8 million , a decrease of $ 187.9 million (a decrease of $ 78.4 million excluding foreign currency translation effects) from $ 1,503.7 million in 2011. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.3% of material savings before the impact of commodity inflation, which had a negative impact of 1.1%, bringing net materials productivity to 4.2% for the first nine months of 2012. This productivity achievement resulted in $33.1 million of material cost savings. Our second largest expense within the cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor and other cost escalations increased conversion costs by approximately $12.0 million, while our productivity efforts generated $18.4 million of savings, or 6.3% of the conversion costs. Warranty expenses were lower compared to the first nine months of 2011 by $9.6 million, driven by an improvement in warranty claims experience. Absorption of overhead costs and other indirect costs were unfavorable by $32.9 million versus the prior year. Volume and mix decreased cost of sales by $42.2 million and contributed $21.1 million to decline in gross profit. Sales price reductions had a negative impact of $11.8 million on gross profit, or 0.6% of sales, which is at the lowest level we have historically seen. Streamlining and separation charges increase adversely affected results by $2.4 million versus last year. Foreign currency translational effects decreased cost of sales by $109.5 million and combined with the translational effects on sales they negatively affected gross profit in the amount of $50.5 million. Foreign currency transactional impacts decreased cost of sales by $22.4 million and positively affected gross profit in the amount of $16.2 million. The net result of all these changes was a decrease in gross profit of $ 53.5 million (an increase of $ 3.0 million excluding foreign currency translation effects).
Operating Expenses
Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, decreased by $ 29.5 million ($ 3.8 million excluding foreign currency translation effects). The decrease excluding foreign currency translation effects comprises a reduction in incentive compensation of $16.9 million and reduction in our UK pension obligation of $4.3 million, partially offset by an increase in research and development investments of $4.8 million, increases in labor and other cost inflation of $6.0 million, increases in streamlining and separation expenses of $2.9 million and net investments in global expansion of $3.7 million.
Equity Income of Unconsolidated Joint Ventures
Equity in net income of unconsolidated joint ventures increased by $ 1.4 million to $ 13.8 million in 2012 as compared to $ 12.4 million in 2011.
Income Taxes
The income tax provision for the first nine months of 2012 was $ 15.7 million on pre-tax income of $ 266.1 million before adjusting for noncontrolling interest, compared with a provision of $ 16.6 million on a pre-tax income of $ 311.7 million before adjusting for noncontrolling interest in the first nine months of 2011.
Income tax expense is the net result of taxes on earnings in profitable jurisdictions, income offset by fully valued net operating losses, the accrual of interest on uncertain tax positions, and certain foreign tax planning. During the third quarter of 2012, the Company recorded a tax benefit of $ 4.1 million related to the filing of its 2011 U.S. Federal income tax return in September 2012. As a result, the income tax expense for the first nine months ended September 30, 2012 is also offset by the release of tax accruals for uncertain tax positions due to certain government filings submitted in January 2012 of approximately $ 24.8 million , as adjusted from an amount of $ 18.8 million as previously disclosed in the Company's 2011 Form 10K. The tax charge for the first nine months 2011 was partially offset by release of tax accruals of approximately $26.8 million.
Liquidity and Capital Resources
We employ several means to manage our liquidity, and we are not dependent upon any one source of funding. Our sources of financing include cash flows from operations, cash and cash equivalents, the Revolving Credit Facility, the Accounts Receivable Securitization Program and the use of operating leases.
Cash Flows for the Nine Months Ended September 30, 2012
Net cash provided by operating activities was $ 282.1 million for the first nine months of 2012. This compared with net cash provided by operating activities of $ 246.0 million for the first nine months of 2011.

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The Company recorded net income of $250.4 million for the first nine months of 2012 compared with net income of $ 295.1 million for the first nine months of 2011. Net income attributable to the Company for the first nine months of 2012 included noncash elements such as depreciation and amortization of $ 58.0 million . Our working capital increased as a result of the timing of accounts receivable and inventory, partially offset by accounts payable which are all typically at the lowest level at year end. However the working capital increase for the nine months ended September 30, 2012 of $ 27.4 million was significantly below the increase of $ 118.9 million for the nine months ended September 30, 2011 , when our business had strong growth.
The change in other accrued liabilities and taxes was an increase of $ 2.7 million for the first nine months of 2012 compared to an increase of $ 40.0 million for the first nine months of 2011. The major drivers of this change were increases of tax related items, partially offset by holiday payments and net fluctuations of our incentive compensation accruals and payments. The change in other current and long-term assets for the first nine months of 2012 was a decrease of $ 32.1 million compared to a decrease of $ 15.5 million for the first nine months of 2011. The main drivers of this change were decreases in tax related items, restricted cash under our accounts receivable securitization program and advances to suppliers, partially offset by an increase in notes receivable from our Chinese operations. The change in other long-term liabilities for the first nine months of 2012 was a decrease of $ 27.5 million compared to a decrease of $ 16.4 million for the first nine months of 2011. The main driver of this change was the release of tax accruals for uncertain tax positions due to government filings submitted in January 2012.
The net cash used in investing activities amounted to $ 72.4 million in the first nine months of 2012 compared to net cash used in investing activities of $ 65.6 million in the first nine months of 2011. The net cash usage for 2012 includes capital expenditures of $ 31.8 million of investments in tooling, $ 28.7 million on plant and equipment, $ 6.8 million in software and $5.1 million for acquisitions. This compared with $ 28.6 million of investments in tooling, $ 31.3 million on plant and equipment and $ 5.7 million in software during the first nine months of 2011.
The net cash used by financing activities during the first nine months of 2012 amounted to $ 88.1 million compared to net cash used by financing activities of $ 101.8 million during the first nine months of 2011.
Our total third party debt was $ 123.1 million as of September 30, 2012 compared to $108.7 million as of September 30, 2011 . This consisted primarily of $ 103.3 million borrowed under our $400 million five-year credit facility (described further below under "Credit Facility"). Also, subsidiaries in other countries had borrowings from banks totaling $ 19.8 million . The increase during the first nine months of 2012 is driven by an increase of $51.3 million under our $400 million five-year credit facility offset by a reduction in our loan under a borrowing with Société Générale Bank Nederland N.V related to the Accounts Receivable Securitization Program. The proceeds of the borrowings under our $400 million five-year credit facility will be available to repurchase WABCO shares, finance acquisitions, refinance existing indebtedness and meet general financing requirements.
We received $ 21.5 million of stock option proceeds during 2012 compared with $ 34.7 million in 2011. The number of stock options exercised in the first nine months of 2012 and 2011 were 1,049,107 and 1,594,973 , respectively.
In May 2011, the Company's Board of Directors approved a $400 million program to purchase shares of the Company's common stock. During the first nine months of 2012, the Company repurchased $ 149.1 million of shares of which $ 4.0 million was not settled until after September 30, 2012 . At September 30, 2012 , the Company had the authority to make an additional $ 70.4 million of share repurchases.
On October 26, 2012, the Board of Directors authorized the Company to enter into an additional share repurchase program. This board authorization allows for the repurchase of a further $400 million of common shares at the discretion of management for a period until December 31, 2014.
Credit Facility
On July 8, 2011 , the Company entered into a $400 million multi-currency five -year senior unsecured revolving credit facility (the "Facility") with the lenders and agent banks party thereto, including Banc of America Securities Limited as agent, issuing bank and swingline lender, and Banc of America Securities Limited, Citigroup Global Markets Limited, Fortis Bank S.A./N.V., ING Belgium SA/NV, Société Générale Corporate & Investment Banking, The Bank of Tokyo-Mitsubishi UFJ, Ltd and The Royal Bank of Scotland NV, (Belgium) Branch, as mandated lead arrangers and bookrunners and Credit Lyonnais and Unicredit Bank AG as lead arrangers.

    

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Table of Contents

As of September 30, 2012 , this is our principal bank credit facility, and the Facility will expire on September 1, 2016 . It replaced the $800 million multi-currency five -year senior unsecured revolving credit facility entered into by WABCO on May 31, 2007 with, among others, J.P. Morgan Securities, Inc. as lead arranger and bookrunner and JPMorgan Chase Bank, N.A., as agent, issuing bank and swingline lender.

Under the Facility, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $400 million . Up to $50 million under this facility may be used for issuing letters of credit, of which $ 48.7 million was unused as of September 30, 2012 , and up to $50 million is available in the form of swingline loans, of which $ 50.0 million was unused as of September 30, 2012 . At September 30, 2012 , the carrying amount of this facility approximated fair value. The balance outstanding on this facility as of September 30, 2012 , was $ 103.3 million in addition to $ 1.3 million of letters of credit.
 
The proceeds of the borrowings under the Facility will be available to repurchase WABCO shares, finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Interest on loans under the Facility will be calculated at a rate per annum equal to an applicable margin, which can vary from 0.80% to 1.55% based on the Company's leverage ratio, plus LIBOR for loans denominated in U.S. Dollars, EURIBOR for loans denominated in Euros, HIBOR for loans denominated in Hong Kong Dollars and SIBOR for loans denominated in Singapore Dollars, plus mandatory costs, if any.

The Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Our primary financial covenant is a leverage test which requires net indebtedness not to exceed three times adjusted four quarter trailing EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items). Additional financial covenants include an interest coverage test and a maximum subsidiary indebtedness test. The interest coverage test requires three times interest expense not to exceed adjusted four quarter trailing EBITDA. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of WABCO's subsidiaries, excluding indebtedness under the Facility, to $400 million, of which not more than $150 million may be secured. At September 30, 2012 the Company had the ability to borrow an incremental $ 295.4 million under our principal credit facility and was in compliance with all the covenants.    

Financial covenants are not subject to any future changes in U.S. GAAP accounting standards and all cash on the balance sheet can be deducted for net indebtedness purposes. In addition, expenses and payments related to any streamlining of WABCO’s operations are excluded when calculating the four quarter trailing adjusted EBITDA. Other covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, ERISA and U.S. regulations, limitations on liens, mergers and sales of assets and change of business.

Also, various subsidiaries had borrowings from banks totaling $ 19.8 million , of which $ 17.7 million relates to our Accounts Receivable Securitization Program referred to in Note 4 above. The remaining $ 2.1 million supports local working capital requirements.
Accounts Receivable Securitization Program
As discussed above, we have the ability to use our Accounts Receivable Securitization Program as one of several means to manage our liquidity. Under the terms of the Accounts Receivable Securitization Program that we entered into with Société Générale on September 23, 2009, we have the ability to sell our accounts receivable directly to Société Générale. The maximum funding from receivables that may be sold into the Accounts Receivable Securitization Program and outstanding at any point in time is €100 million; however, there can be no assurance that the Company will generate sufficient eligible receivables to access the maximum availability. The original term of the Accounts Receivable Securitization Program was for one year, with the possibility of four additional annual extensions, assuming the Company and the participating sellers are in compliance with the applicable covenants. The Company extended the Receivables Program in September 2012 for one additional year.
During the nine months ended September 30, 2012 , the Company sold all of its eligible receivables into the Accounts Receivable Securitization Program. The receivables were removed from the balance sheet in accordance with the guidance under ASC topic 860, Transfers and Servicing . The total amount of receivables sold under the Accounts Receivable Securitization Program during the nine months ended September 30, 2012 was € 557.2 million ($ 714.5 million at weighted average September 30, 2012 year-to-date exchange rates). The amount of eligible receivables sold and outstanding at September 30, 2012 amounted to € 71.3 million ($ 92.1 million at September 30, 2012 exchange rates). As a result of the sale, accounts receivable decreased by $ 92.1 million and cash and cash equivalents increased by $ 54.4 million .

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The remaining amount of proceeds of $ 37.7 million is a subordinated deposit with Société Générale Bank Nederland N.V. at September 30, 2012 .
The fair value of the receivables sold equaled the carrying cost at time of sale, and no gain or loss was recorded as a result of the sale. The Company estimated the fair value of sold receivables using Level 3 inputs and based the estimate on historical and anticipated performance of similar receivables, including historical and anticipated credit losses (if any). As part of the Accounts Receivable Securitization Program, the Company continues to service the receivables. The Company sells the receivables at face value, but receives actual funding net of the subordinated deposit account until collections are received from customers for the receivables sold. The Company is exposed to the credit losses of sold receivables up to the amount of its subordinated deposit account at each settlement date. Credit losses for receivables sold and past due amounts outstanding at September 30, 2012 were both immaterial. Servicing fees for the program were $ 0.7 million for the nine months ended September 30, 2012 .
Factoring Program
On April 15, 2009, we entered into a €35 million factoring program, which has a term of five years, with respect to accounts receivable from one of our customers. To date, we have not utilized this program.
Derivative Instruments and Hedging Activities

The Company recognizes all derivative financial instruments in the consolidated balance sheet at fair value using Level 2 inputs and these are classified as “other current assets,” “other assets,” “other accrued liabilities” or “other liabilities” on the consolidated balance sheet. Level 2 inputs used by the Company in valuing its derivative instruments include model-based valuation techniques for which all significant assumptions are observable in the market. The earnings impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income ("AOCI") for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.

Foreign exchange contracts are used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of September 30, 2012 , forward contracts for an aggregate notional amount of € 45.3 million ($ 58.4 million at September 30, 2012 exchange rates) were outstanding with an average duration of one month. These foreign exchange contracts have offset the revaluation of assets and liabilities and result in a net non-operating loss of $ 0.3 million as per September 30, 2012 . As the majority of these exchange contracts were entered into on September 27, 2012 . The fair value of the derivatives was immaterial.
Business Combinations
On September 13, 2012, the Company completed its acquisition of Ephicas, based in the Netherlands, a pioneering company in the field of innovative aerodynamic solutions for commercial vehicles. The Company acquired all of the equity interests in Ephicas and also assumed certain liabilities. Leveraging Ephicas’ expertise and patented technologies, the Company will develop a range of aerodynamic products – branded OptiFlow™ – that are designed to increase vehicle efficiency and reduce fuel consumption for trucks, trailers and buses.
The acquisition is recorded in accordance with ASC 805 - Business Combinations ("ASC 805"). ASC 805 requires that all identifiable intangible assets be recognized as an asset apart from goodwill if the asset arises from contractual or other legal rights, or is separable from the acquired entity. The fair value of the Ephicas business identified intangible assets is $ 2.1 million and goodwill is $ 3.6 million .
Off-Balance Sheet Arrangements
Please see the disclosure above in “Accounts Receivable Securitization Program.”

23

Table of Contents

Aggregate Contractual Obligations
The Company has contractual obligations for debt, operating leases, tax indemnifications, purchase obligations, unfunded pension and post-retirement benefit plans and tax liabilities that were summarized in a table of aggregate contractual obligations for the year ended December 31, 2011 disclosed in the Annual Report on Form 10-K. As disclosed in Note 10. Income Taxes, the Company released tax accruals of approximately $18.8 million in 2012, reducing our overall tax liability obligation, as previously disclosed in our 2011 Form 10-K. There have been no other material changes to those obligations since December 31, 2011.
Information Concerning Forward Looking Statements
Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management’s expectations and beliefs, are forward-looking statements. These forward-looking statements were based on various facts and were derived utilizing numerous important assumptions and other important factors, and changes in such facts, assumptions or factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, financial condition, liquidity, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “strategies,” “prospects,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” and similar expression or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward looking in nature and not historical facts. This report includes important information as to risk factors in “Item 1A. Risk Factors”, and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many important factors could cause actual results to differ materially from management’s expectations, including:
 
the actual level of commercial vehicle production in our end-markets;
adverse developments in the business of our key customers;
periodic changes to contingent liabilities, including those associated with litigation matters and government investigations;
our ability to access credit markets or capital markets on a favorable basis or at all;
adverse developments in general business, economic and political conditions or any outbreak or escalation of hostilities on a national, regional or international basis;
changes in international or U.S. economic conditions, such as inflation, interest rate fluctuations, foreign exchange rate fluctuations or recessions in our markets;
unpredictable difficulties or delays in the development of new product technology;
pricing changes to our supplies or products or those of our competitors, and other competitive pressures on pricing and sales;
our ability to receive component parts from our suppliers;
changes in the environmental regulations that affect our current and future products;
competition in our existing and future lines of business and the financial resources of competitors;
our failure to comply with regulations and any changes in regulations;
our failure to complete potential future acquisitions or to realize benefits from completed acquisitions;
our inability to implement our growth plan;
the loss of any of our senior management;
difficulties in obtaining or retaining the management and other human resource competencies that we need to achieve our business objectives;
labor relations; and

24

Table of Contents

risks inherent in operating in foreign countries, including exposure to local economic conditions, government regulation, currency restrictions and other restraints, changes in tax laws, expropriation, political instability and diminished ability to legally enforce our contractual rights.
We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.
Critical Accounting Policies and Estimates
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Notes 2 and 13 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first nine months of 2012.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosure on this matter for the year ended December 31, 2011 made in the Company’s Annual Report on Form 10-K.


25

Table of Contents

Item 4.
Controls and Procedures
The Company has established a Disclosure Controls Committee that assists the Chief Executive Officer and Chief Financial Officer in their evaluation of the Company’s disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 13a-15(e), are effective to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
These are further described in "Note 9. Warranties, Guarantees, Commitments and Contingencies."

Item 1A.
Risk Factors
There have been no new material risks identified that were not disclosed in the Company’s risk factor disclosure in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

The Company's Board of Directors has approved a program to purchase shares of the Company's common stock. A summary of the repurchase activity for the first nine months of 2012 follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Period
 
Total Number of Shares Purchased
Average price Paid per Share
Total Number of Shares Purchases as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of shares that May Yet Be Purchased Under the Plans or Programs (a)
 
 
 
 
 
 
Total through December 31, 2011
 
3,520,469

$
51.25

3,520,469


 
 
 
 
 
 
January 1 - January 31
 
279,409

$
48.94

279,409

$
205,885,134

February 1 - February 29
 
273,085

$
59.83

273,085

$
189,546,551

March 1 - March 31
 
321,134

$
59.44

321,134

$
170,459,563

Total first quarter
 
873,628

$
56.20

873,628


 
 
 
 
 
 
Total through March 31, 2012
 
4,394,097

$
52.24

4,394,097


 
 
 
 
 
 
April 1 - April 30
 
292,900

$
58.26

292,900

$
153,393,800

May 1 - May 31
 
230,185

$
55.13

230,185

$
140,703,763

June 1 - June 30
 
440,042

$
50.47

440,042

$
118,496,196

Total second quarter
 
963,127

$
53.95

963,127

 
 
 
 
 
 
 
Total through June 30, 2012
 
5,357,224

$
52.55

5,357,224

 
 
 
 
 
 
 
July 1 - July 31
 
291,793

$
50.62

291,793

$
103,372,743

August 1 - August 31
 
181,320

$
57.25

181,320

$
93,393,106

September 1 - September 30
 
391,912

$
58.6

391,912

$
70,426,540

Total third quarter
 
865,025

$
55.57

865,025

 
 
 
 
 
 
 
Total through September 30, 2012
 
6,222,249

$
52.97

6,222,249

 
 
 
 
 
 
 
(a) On May 26, 2011, the Board of Directors approved the purchase of shares in an amount not to exceed $400 million, which expires on May 31, 2013. The unexpended balance of $ 70.4 million under that authorization as of September 30, 2012 will continue to be used to repurchase shares in the future. On October 26, 2012, the Board of Directors authorized the Company to enter into an additional share repurchase program. This board authorization allows for the repurchase of a further $400 million of common shares at the discretion of management for a period until December 31, 2014.

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All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Exchange Act.

Item 6.
Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this quarterly report on Form 10-Q.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
WABCO HOLDINGS INC.
 
/ S /    T ODD  W EINBLATT        
Todd Weinblatt
Vice President and Controller
(Principal Accounting Officer)
November 2, 2012

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Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(The File Number of the Registrant, WABCO Holdings Inc., is 1-33332)
 
Exhibit
No.
 
Description
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial information from WABCO Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, filed with the SEC on November 2, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2012 and 2011, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Condensed Consolidated Balance Sheet at September 30, 2012 and December 31, 2011, (iv) the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 and 2011 and (v) Notes to Consolidated Financial Statements.*
 
 
 
 
 
 
 
 
*
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

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Exhibit 31.1
CERTIFICATIONS
I, Jacques Esculier, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of WABCO Holdings Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 2, 2012
/s/ Jacques Esculier
Jacques Esculier
Chief Executive Officer and Chairman of the Board




Exhibit 31.2
CERTIFICATIONS
I, Ulrich Michel, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of WABCO Holdings Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 2, 2012
/s/ Ulrich Michel
Ulrich Michel
Chief Financial Officer




Exhibit 32.1
WABCO HOLDINGS INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of WABCO Holdings Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jacques Esculier, the Chief Executive Officer and Chairman of the Board of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that
(i)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.  
/s/ Jacques Esculier
Jacques Esculier
Chief Executive Officer and Chairman of the Board
Dated: November 2, 2012




Exhibit 32.2
WABCO HOLDINGS INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of WABCO Holdings Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ulrich Michel, the Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(i)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.  
/s/ Ulrich Michel
Ulrich Michel
Chief Financial Officer
Dated: November 2, 2012