WABCO Europe BVBA
WABCO Holdings Inc. (Form: 10-Q, Received: 07/20/2016 07:03:11)
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 June 30, 2016
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.)
Chaussée de la Hulpe 166
1170 Brussels, Belgium
 
 
 
 
2770 Research Drive
Rochester Hills, MI
 
48309-3511
(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
 
 
July 14, 2016
 
55,787,796



Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter ended June 30, 2016
Contents
 
 
 
 
 
 
Item 1.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Item 2.
Item 3.
Item 4.
Item 1A.
Item 2.
Item 6.
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(Amounts in millions, except share and per share data)
2016
 
2015
 
2016
 
2015
Sales
$
732.2

 
$
661.1

 
$
1,420.8

 
$
1,313.3

Cost of sales
502.2

 
453.6

 
977.3

 
892.2

Gross profit
230.0

 
207.5

 
443.5

 
421.1

Operating expenses:
 
 
 
 
 
 
 
Selling and administrative expenses
98.9

 
90.2

 
189.3

 
178.2

Product engineering expenses
32.9

 
36.2

 
67.6

 
74.6

Other operating expense, net
1.3

 
0.5

 
2.7

 
2.2

Operating income
96.9

 
80.6

 
183.9

 
166.1

Equity income of unconsolidated joint ventures, net
5.3

 
8.0

 
12.5

 
14.6

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

 
(0.9
)
 
0.2

 
1.0

Interest expense, net
(3.0
)
 
(0.9
)
 
(6.0
)
 
(1.6
)
Income before income taxes
99.3

 
86.8

 
190.6

 
180.1

Income tax expense
20.4

 
18.5

 
121.5

 
37.0

Net income including noncontrolling interests
78.9

 
68.3

 
69.1

 
143.1

Less: net income attributable to noncontrolling interests
3.8

 
2.5

 
7.4

 
5.4

Net income attributable to Company
$
75.1

 
$
65.8

 
$
61.7

 
$
137.7

Net income attributable to Company per common share
 
 
 
 
 
 
 
Basic
$
1.34

 
$
1.13

 
$
1.10

 
$
2.37

Diluted
$
1.33

 
$
1.12

 
$
1.09

 
$
2.35

Cash dividends per share of common stock
$

 
$

 
$

 
$

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
56,074,209

 
58,063,388

 
56,279,630

 
58,159,649

Diluted
56,298,672

 
58,493,352

 
56,511,879

 
58,663,339

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 (Amounts in millions)
2016
 
2015
 
2016
 
2015
Net income including noncontrolling interests
$
78.9

 
$
68.3

 
$
69.1

 
$
143.1

Foreign currency translation (losses)/gains
(28.5
)
 
29.3

 
8.4

 
(71.3
)
Unrealized gains/(losses) on benefit plans, net
8.1

 
(6.5
)
 
4.8

 
18.1

Unrealized gains/(losses) on hedges, net

 

 
0.1

 
(1.3
)
Comprehensive income
58.5

 
91.1

 
82.4

 
88.6

Less: comprehensive income attributable to noncontrolling interests
2.9

 
1.5

 
6.7

 
4.9

Comprehensive income attributable to Company
$
55.6

 
$
89.6

 
$
75.7

 
$
83.7


See Notes to Condensed Consolidated Financial Statements.


4

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Amounts in millions, except share data)
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
599.2

 
$
515.2

Short-term investments
44.6

 
43.8

Accounts receivable, less allowance for doubtful accounts of $5.9 in 2016 and $5.9 in 2015
506.6

 
444.0

Inventories:
 
 
 
Finished products
115.9

 
95.7

Products in process
14.8

 
7.8

Raw materials
113.2

 
109.2

Taxes receivable

 
13.2

Guaranteed notes receivable
50.7

 
53.9

Other current assets
150.6

 
103.6

Total current assets
1,595.6

 
1,386.4

Property, plant and equipment, less accumulated depreciation
414.4

 
398.0

Goodwill
432.3

 
377.7

Deferred tax assets
202.3

 
280.8

Investments in unconsolidated joint ventures
21.0

 
24.7

Intangible assets, net
73.4

 
62.8

Other assets
65.5

 
59.5

TOTAL ASSETS
$
2,804.5

 
$
2,589.9

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Loans payable to banks
$
2.1

 
$
5.0

Accounts payable
184.0

 
159.7

Accrued payroll
107.9

 
105.2

Current portion of warranties
24.7

 
23.1

Taxes payable
13.4

 

Accrued expenses
61.2

 
61.9

Other accrued liabilities
145.7

 
109.9

Total current liabilities
539.0

 
464.8

Long-term debt
681.8

 
498.7

Post-retirement benefits
567.1

 
552.7

Deferred tax liabilities
134.1

 
137.1

Long-term income tax liabilities
14.0

 
16.3

Other liabilities
74.0

 
84.0

TOTAL LIABILITIES
2,010.0

 
1,753.6

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: 78,670,533 in 2016; 78,500,084 in 2015; and shares outstanding: 55,660,712 in 2016; 56,759,566 in 2015
0.8

 
0.8

Capital surplus
854.9

 
852.6

Treasury stock, at cost: 23,009,821 shares in 2016; 21,740,518 shares in 2015
(1,621.4
)
 
(1,497.3
)
Retained earnings
1,999.9

 
1,938.5

Accumulated other comprehensive loss
(493.9
)
 
(507.9
)
Total shareholders’ equity
740.3

 
786.7

Noncontrolling interests
54.2

 
49.6

Total equity
794.5

 
836.3

TOTAL LIABILITIES AND EQUITY
$
2,804.5

 
$
2,589.9


See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months
Ended June 30,
(Amounts in millions)
2016
 
2015
Operating activities:
 
 
 
Net income including noncontrolling interests
$
69.1

 
$
143.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
35.3

 
36.9

Amortization of intangibles
11.0

 
9.9

Equity in earnings of unconsolidated joint ventures, net of dividends received
3.7

 
(2.1
)
Non-cash stock compensation
7.7

 
7.0

Non-cash interest expense and debt issuance cost amortization
7.8

 

Deferred income tax expense/(benefit)
75.5

 
(0.3
)
Post-retirement benefit expense
20.8

 
20.9

(Gain)/loss on sale or disposal of property, plant and equipment
(0.3
)
 
0.2

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(49.7
)
 
(68.8
)
Inventories
(12.7
)
 
(21.5
)
Accounts payable
25.4

 
45.4

Other accrued liabilities and taxes
31.0

 
20.7

Other current and long-term assets
13.3

 
(9.8
)
Other long-term liabilities
(19.0
)
 
(1.6
)
Post-retirement benefit payments
(10.9
)
 
(10.0
)
Net cash provided by operating activities
208.0

 
170.0

Investing activities:
 
 
 
Purchases of property, plant and equipment
(46.9
)
 
(37.7
)
Investments in capitalized software
(5.0
)
 
(5.8
)
Purchases of short-term investments, net
(45.9
)
 
(82.5
)
Cost of preferred stock investment

 
(20.0
)
Acquisitions of businesses, net
(92.9
)
 

Net cash used in investing activities
(190.7
)
 
(146.0
)
Financing activities:
 
 
 
Borrowings of long-term debt and revolving credit facilities
183.0

 
577.8

Repayments of long-term revolving credit facilities

 
(385.0
)
Net repayments of short-term debt
(2.9
)
 
(4.8
)
Purchases of treasury stock
(115.6
)
 
(120.5
)
Taxes withheld and paid on employee stock award vestings
(5.9
)
 
(5.0
)
Dividends to noncontrolling interest holders
(2.1
)
 
(1.5
)
Proceeds from exercise of stock options
2.7

 
15.9

Net cash provided in financing activities
59.2

 
76.9

Effect of exchange rate changes on cash and cash equivalents
7.5

 
(24.0
)
Net increase in cash and cash equivalents
84.0

 
76.9

Cash and cash equivalents at beginning of period
515.2

 
411.7

Cash and cash equivalents at end of period
$
599.2

 
$
488.6

Cash paid during the period for:
 
 
 
Interest
$
7.8

 
$
2.1

Income taxes
$
18.9

 
$
33.2

Non cash items for the period:
 
 
 
Treasury stock purchase accrual
$
11.2

 
$
3.9

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

NOTE 1.
Basis of Financial Statement Presentation

WABCO Holdings Inc. and its subsidiaries (collectively WABCO or the Company) engineers, develops, manufactures and sells integrated systems controlling advanced braking, stability, suspension and transmission automation as well as air compression and processing primarily for commercial vehicles. WABCO’s largest selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), electronic stability control (ESC), automated manual transmission systems, air disc brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for medium- and heavy-duty trucks, buses and trailers. In addition, we supply commercial vehicle aftermarket distributors and service partners as well as fleet operators with replacement parts, fleet management solutions, diagnostic tools, training and other expert services. WABCO sells its products primarily to four groups of customers around the world: truck and bus original equipment manufacturers (OEMs), trailer OEMs, commercial vehicle aftermarket distributors of replacement parts and services, and automotive OEMs. We also provide remanufacturing services globally.

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, 2015 , 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 the prior year's 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 15 to the Consolidated Financial Statements for the year ended December 31, 2015 , in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in the 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 six months of 2016 .


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.

In March 2016, the FASB issued Accounting Standard Update 2016-09 (ASU 2016-09) Compensation - Stock Compensation , in order to simplify certain aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liability, classification of excess tax benefits, and taxes withheld and paid on employee stock award vestings on the statement of cash flows. ASU 2016-09 requires that companies elect to account for

7


forfeitures based on an estimate of the number of awards for which the requisite service period will not be rendered or to account for forfeitures as they occur. ASU 2016-09 is effective for the interim and annual periods ending after December 15, 2016. Early adoption is permitted, and the Company adopted the provisions of ASU 2016-09 as of January 1, 2016. The impact from adoption of the provisions related to forfeiture rates was reflected in the Company's condensed consolidated financial statements on a modified retrospective basis, resulting in an adjustment of $0.4 million to retained earnings as of January 1, 2016. Provisions related to income taxes have been adopted prospectively resulting in a tax benefit of $1.1 million for the first quarter of 2016, and provisions related to the statement of cash flows have been adopted retrospectively.

In February 2016, the FASB issued ASU 2016-02 Leases , which requires lessees to recognize most leases as on the balance sheet. ASU 2016-02 is effective for the interim and annual periods in fiscal years beginning after December 15, 2018. The Company is currently assessing the potential impact of the adoption of this guidance on its condensed consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements - Going Concern , which provides guidance about management's responsibility in evaluating whether there is substantial doubt relating to an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. ASU 2014-15 is effective for the interim and annual periods ending after December 15, 2016. The Company does not expect any material impact from adoption of this guidance on the Company's condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers , which is a new comprehensive revenue recognition standard on the financial reporting requirements for revenue from contracts entered into with customers. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. The FASB subsequently deferred the effective date of this standard to December 15, 2017 with early adoption permitted as of December 15, 2016. The Company is currently assessing the potential impact of the adoption of this guidance on its condensed consolidated financial statements.


NOTE 3.
Accumulated Other Comprehensive Loss
    
The table below presents the changes in accumulated other comprehensive loss for the three and six month periods ended June 30, 2016 and 2015 .

8


 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(Amount in millions)
2016
 
2015
 
2016
 
2015
Foreign currency translation adjustments:
 
 
 
 
 
 
 
   Balance at beginning of period
$
(235.7
)
 
$
(248.0
)
 
$
(271.2
)
 
$
(148.1
)
   Adjustment for the period
(30.2
)
 
30.3

 
5.3

 
(69.6
)
   Balance at end of period
(265.9
)
 
(217.7
)
 
(265.9
)
 
(217.7
)
 
 
 
 
 
 
 
 
Losses on intra-entity transactions (1) :
 
 
 
 
 
 
 
   Balance at beginning of period
(14.0
)
 
(11.1
)
 
(15.2
)
 
(9.9
)
   Adjustment for the period
2.6

 

 
3.8

 
(1.2
)
   Balance at end of period
(11.4
)
 
(11.1
)
 
(11.4
)
 
(11.1
)
 
 
 
 
 
 
 
 
Unrealized gains on investments:
 
 
 
 
 
 
 
   Balance at beginning of period
0.2

 
0.2

 
0.2

 
0.2

   Adjustment for the period

 

 

 

   Amounts reclassified to earnings, net

 

 

 

   Balance at end of period
0.2

 
0.2

 
0.2

 
0.2

 
 
 
 
 
 
 
 
Unrealized losses on hedges:
 
 
 
 
 
 
 
   Balance at beginning of period
(1.1
)
 
(1.3
)
 
(1.2
)
 

   Adjustment for the period  (2)

 

 

 
(1.3
)
   Amounts reclassified to earnings, net

 

 
0.1

 

   Balance at end of period
(1.1
)
 
(1.3
)
 
(1.1
)
 
(1.3
)
 
 
 
 
 
 
 
 
Pension and post-retirement plans:
 
 
 
 
 
 
 
   Balance at beginning of period
(223.8
)
 
(220.3
)
 
(220.5
)
 
(244.9
)
   Other comprehensive income before reclassifications
5.3

 
(9.1
)
 
0.9

 
13.1

   Amounts reclassified to earnings, net (3)
2.8

 
2.6

 
3.9

 
5.0

   Balance at end of period
$
(215.7
)
 
$
(226.8
)
 
$
(215.7
)
 
$
(226.8
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss at end of period
$
(493.9
)
 
$
(456.7
)
 
$
(493.9
)
 
$
(456.7
)

(1) Relates to intra-entity foreign currency transactions that are of a long term investment nature, when the entities to the transaction are consolidated, combined or accounted for by the equity method in the Company's financial statements.

(2) The adjustment for the period is net of taxes of $0.7 million for the six months ended June 30, 2015 . See Note 14 for further discussion.

(3) This accumulated other comprehensive loss component, net of taxes of $1.1 million and $1.0 million for the three months ended June 30, 2016 and 2015 and $2.3 million and $2.0 million for the six months ended June 30, 2016 and 2015 , is included in the computation of net periodic pension cost. See Note 13 for additional details.


NOTE 4.
Financing Receivables

The Company's receivables available for financing include receivables from reputable state owned and public enterprises in China that are settled through bankers acceptance drafts, which are registered and endorsed to the Company. These notes receivable are fully guaranteed by banks and generally have contractual maturities of six months or less, but the ultimate recourse remains against the trade debtor. These guaranteed drafts are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first six months of 2016 and

9


2015 were $ 50.0 million and $45.7 million , respectively. Expenses related to discounting these notes were immaterial for the six months ended June 30, 2016 and 2015 . The fair value of these guaranteed notes receivable is determined based on Level 2 inputs including credit ratings and other criteria observable in the market. The fair value of these notes equal their carrying amounts of $ 50.7 million and $ 53.9 million as of June 30, 2016 and December 31, 2015 , respectively.

The Company monitors the credit quality of both the drawers of the drafts and guarantors on a monthly basis by reviewing various factors such as payment history, level of state involvement in the institution, size, national importance as well as current economic conditions in China. Since the Company has not experienced any historical losses nor is expecting future credit losses based on a review of the various credit quality indicators described above, we have not established a loss provision against these receivables as of June 30, 2016 or December 31, 2015 .

    
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) and deferred stock units (DSUs) after assuming that the Company would use the proceeds from the exercise of options to repurchase stock. The weighted average incremental shares also includes the net amount of shares issuable for performance stock units (PSUs) at the end of the reporting period, if any, based on the number of shares issuable if the end of the period were the end of the vesting period.

Anti-dilutive shares, if applicable, are excluded and represent those options, RSUs, DSUs and PSUs whose assumed proceeds were greater than the average price of the Company’s common stock.
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
Weighted average incremental shares included
224,463

 
429,964

 
232,249

 
503,690

Shares excluded due to anti-dilutive effect
525

 

 
35,542

 
190


NOTE 6.
Capital Stock
The following is a summary of net shares outstanding and shares issued or reacquired during the six month period ended June 30, 2016 .  
 
Number of Shares of Common Stock
 
Total Shares
 
Treasury Shares
 
Net Shares
Outstanding
Balance, December 31, 2015
78,500,084

 
(21,740,518
)
 
56,759,566

Shares issued upon exercise of stock options
60,226

 

 
60,226

Shares issued upon vesting of RSUs
102,428

 

 
102,428

Shares issued for DSUs
6,695

 

 
6,695

Shares issued for stock awards
1,100

 

 
1,100

Shares purchased for treasury

 
(1,308,200
)
 
(1,308,200
)
Treasury shares reissued

 
38,897

 
38,897

Balance, June 30, 2016
78,670,533

 
(23,009,821
)
 
55,660,712


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 repurchase 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 June 30, 2016 the Company has reissued a total of 38,897 treasury shares related to certain employee vestings under its equity incentive program.


10


On May 26, 2011, the Board of Directors approved the repurchase of shares in an amount not to exceed $400 million , which expired on May 31, 2013. On October 26, 2012, the Board of Directors authorized the Company to enter into an additional share repurchase program for $400 million of common shares. An additional repurchase program for $200 million of common shares was further authorized on October 29, 2013. Both of these authorizations expired on December 31, 2014. On December 5, 2014, the Board of Directors approved a repurchase program for an additional $500 million of common shares. This authorization expires on December 31, 2016.

As of June 30, 2016 , the Company has repurchased a total of $ 1,347.8 million of shares under these four repurchase programs, leaving an unexpended balance of $ 124.0 million available to repurchase shares in the future. Subsequent to June 30, 2016 , the
Company repurchased an additional 85,000 shares for a total of $7.6 million . The Company plans to continue to purchase shares at prevailing market prices. The timing and amount of share repurchases, if any, will depend on a variety of factors, including, among other things, share price, market conditions and applicable regulatory requirements.


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 recognizes that as an expense in the condensed consolidated statements of operations over the requisite service period. The estimated fair value of the award is based on the closing market price of the Company’s common stock on the date of grant.

As part of its equity incentive program, the Company grants PSUs, the vesting of which would occur, if at all, and at levels depending upon, the achievement of three-year cumulative goals tied to earnings per share. The Company assesses the expected achievement levels at the end of each reporting period. The grant date fair value of the number of awards expected to vest based on the Company’s best estimate of ultimate performance against the respective targets is recognized as compensation expense on a straight-line basis over the requisite vesting period of the awards. As of June 30, 2016 , the Company believes it is probable that the performance conditions will be met and has recognized compensation expense accordingly.

The Company also grants DSUs to its non-management directors as part of the equity portion of their annual retainer. The DSUs are fully vested at grant. Each DSU provides the right to the issuance of a share of our common stock, within ten days after the earlier of the director’s death or disability, the 13-month anniversary of the grant date or the director’s separation from service. Each director may also elect within a month after the grant date to defer the receipt of shares for five or more years. No election can be made to accelerate the issuance of stock from a DSU.

Total stock-based compensation cost recognized during the three and six month periods ended June 30, 2016 and 2015 was as follows:
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(Amount in millions)
2016
 
2015
 
2016
 
2015
Stock-based compensation
$
4.3

 
$
3.3

 
$
7.7

 
$
7.0


The total number and type of awards granted during the periods presented and the related weighted-average grant-date fair values were as follows:
 
Six Months
Ended June 30, 2016
 
Six Months
Ended June 30, 2015
 
Underlying
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Underlying
Shares
 
Weighted
Average
Grant Date
Fair Value
RSUs Granted
89,868

 
$
92.27

 
65,394

 
$
116.51

PSUs Granted
82,558

 
$
91.35

 
58,630

 
$
116.38

DSUs Granted
9,194

 
$
105.52

 
5,512

 
$
130.73

Stock Awards Granted
1,100

 
$
107.47

 

 
$

Total Awards
182,720

 

 
129,536

 
 

The RSUs granted during the periods presented above have vesting terms as follow:

11


 
Six Months
Ended June 30,
 
2016
 
2015
Vest in equal annual installments over three years
84,966

 
62,055

Vest after two years

 
652

Vest after three years
4,902

 
2,687

Total RSUs granted
89,868

 
65,394



NOTE 8.
Debt

Senior Notes

On May 8, 2015 , the Company entered into a note purchase agreement (the Note Purchase Agreement) for the issuance of $150 million of 2.83% senior unsecured notes due June 25, 2022 (the Series A Notes), $200 million of 3.08% senior unsecured notes due June 25, 2025 (the Series B Notes) and $150 million of 3.18% senior unsecured notes due June 25, 2027 (the Series C Notes; and together with the Series A Notes and the Series B Notes, collectively, the Senior Notes). The Senior Notes were issued and funded on June 25, 2015 . The Company paid approximately $2.1 million of debt issuance costs in connection with the Senior Notes, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest on the Senior Notes is payable semi-annually on January 1 and July 1 of each year (other than July 1, 2015). As of June 30, 2016 , the outstanding debt balance, net of unamortized debt issuance costs, was $ 498.1 million .

The proceeds from the Senior Notes were partially utilized to repay the outstanding balance on our revolving credit facilities. The remaining proceeds are intended to fund our share repurchase program, finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Subject to certain conditions, the Company may, at its option, prepay all or part of the Senior Notes plus any accrued and unpaid interest to the date of prepayment and certain penalties as defined in the Note Purchase Agreement. The Company may also be required, subject to certain events and conditions, to make an offer to prepay all of the Senior Notes including any accrued and unpaid interest to the date of prepayment. Each holder has the option to accept or reject such offer to prepay.

The Note Purchase Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness ratio and a consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio and a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of fiscal quarter, always based upon the preceding twelve consecutive months. The Note Purchase Agreement also provides for customary events of default, the occurrence of which could result in an acceleration of the Company's obligations under the Note Purchase Agreement. We were in compliance with all of the covenants as of June 30, 2016 .

Revolving Credit Facilities

On July 8, 2011 , the Company entered into a $400 million multi-currency five -year senior unsecured revolving credit facility which was amended and restated on September 30, 2015 (the 2015 Facility, previously referred to as the 2011 Facility) to, among other things, extend the original expiry date to September 30, 2020 subject to two 1-year extension options and amend the applicable margins on the original revolving credit facility. As of June 30, 2016 , this is our principal bank credit facility.

On December 17, 2014 , the Company entered into a new $100 million multi-currency five -year senior unsecured revolving credit facility (the 2014 Facility) which will expire on December 17, 2019 .

Under the revolving credit facilities, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $500 million . Up to $30 million under the 2015 Facility may be used for issuing letters of credit, of which $30 million was unused as of June 30, 2016 , and up to $50 million is available in the form of swing line loans, all $50 million of which was available for use as of June 30, 2016 .

The following table summarizes the balance outstanding on these facilities:


12


 
As of June 30, 2016
 
As of December 31, 2015
(Amounts in millions)
Outstanding borrowings
 
Letters of credit
 
Outstanding borrowings
 
Letters of credit
2014 Facility
$
50.0

 
$

 
$

 
$

2015 Facility (previously the 2011 Facility)
133.0

 

 

 

 
$
183.0

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Incremental ability to borrow
$
317.0

 
 
 
$
500.0

 
 

The carrying amounts of the facilities approximated fair value based upon Level 2 inputs as of each of the periods presented above.

Interest on loans under the revolving credit facilities will be calculated at a rate per annum equal to an applicable margin, which can vary from 0.45% to 1.00% for both the 2014 Facility and the 2015 Facility 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 revolving credit facilities contain terms and provisions (including representations, covenants and conditions) customary for credit agreements 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. 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 facilities, to $500 million under both the 2014 Facility and the 2015 Facility, of which not more than $150 million may be secured. All cash, cash equivalents and short-term investments 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. We were in compliance with all of the covenants as of June 30, 2016 .

Other Debt

As of June 30, 2016 , the Company's various subsidiaries had borrowings from banks totaling $2.8 million , of which $0.7 million was classified as long-term debt. The remaining $ 2.1 million supports local working capital requirements. This is in comparison to $5.7 million as of December 31, 2015 of which $0.7 million was classified as long-term debt.

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 six month periods ended June 30, 2016 and 2015 .

13


 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(Amount in millions)
2016
 
2015
 
2016
 
2015
Balance of warranty costs accrued, beginning of period
$
43.4

 
$
41.0

 
$
40.9

 
$
45.2

Warranty costs accrued
6.9

 
6.5

 
12.7

 
11.6

Warranty claims settled
(6.8
)
 
(5.7
)
 
(11.5
)
 
(10.9
)
Foreign exchange translation effects
(0.8
)
 
1.1

 
0.6

 
(3.0
)
Balance of warranty costs accrued, end of period
$
42.7

 
$
42.9

 
$
42.7

 
$
42.9

Current liability, included in current portion of warranties
$
24.7

 
$
24.8

 
$
24.7

 
$
24.8

Long-term liability, included in other liabilities
$
18.0

 
$
18.1

 
$
18.0

 
$
18.1

 
 
 
 
 
 
 
 
Warranty costs net of recoveries
$
6.9

 
$
6.5

 
$
12.1

 
$
11.6


Guarantees and Commitments

The Company has uncollateralized bank guarantees for $ 78.8 million , of which $ 74.0 million is related to tax and other litigation, $ 0.8 million is related to letters of credit, and $ 4.0 million is related to other individually immaterial items.

Right of Recourse

As discussed in Note 4, the Company may receive bankers acceptance drafts from customers in China in payment of outstanding accounts receivable in the ordinary course of business. These banker's acceptance drafts are non-interest bearing obligations of the issuing bank and generally have contractual maturities of six months or less. The Company may use these bankers acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Bankers acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date. As of June 30, 2016 , the Company had approximately $19.4 million of bankers acceptance drafts subject to customary right of recourse provisions, which were transferred to vendors and had not reached their scheduled maturity date. Historically, the bankers acceptance drafts have settled upon maturity without any claim of recourse against the Company.

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.

Other

In conjunction with the Tax Sharing Agreement, as further discussed in Note 11, WABCO is responsible for certain tax and indemnification liabilities. These liabilities include probable indemnification liabilities to Trane of $ 0.7 million as of June 30, 2016 . It is reasonably possible that the Company could incur losses in excess of the amount accrued. Although 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 was $121.5 million on pretax income of $190.6 million before adjusting for noncontrolling interest for the six months ended June 30, 2016 , and $37.0 million on pretax income of $180.1 million for the six months ended June 30, 2015 . Income tax expense is the net result of taxes on the mix of earnings in multiple tax jurisdictions, the accrual of interest on uncertain tax positions, and certain foreign tax planning. During the first quarter of 2016, the income tax provision included a non-cash tax expense of $86.4 million related to the Belgian excess profit ruling program (EPR Program) as further discussed below. The income tax provision for the first quarter of 2016 also included $1.1 million of tax benefit arising from the adoption of ASU 2016-09 as discussed in Note 2.

14



The corporate tax environment in Europe has been subject to review and discussion over recent years at both a European level and by international bodies such as the Organization for Economic Co-operation and Development (OECD). Against this background, the European Commission has launched several investigations into tax laws and arrangements within several European countries. The European Commission has used its powers under State Aid control to address fiscal laws in some European countries, Belgium being one of them.
    
The Belgian Tax Code contains provisions to reduce the taxable base of companies, through rulings granted by the Belgian Government under the EPR Program. The EPR Program has been part of Belgian law since 2004. We understand approximately 35 companies of varying size, activities and geographical operations participate in the EPR Program.
 
On January 11, 2016, the European Commission ruled that the above provision of Belgian law is illegal and incompatible with European State Aid law (hereinafter referred to as the "Decision"). As a result, the European Commission requires Belgium to stop applying the EPR Program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). As stated above, the Company has recorded an income tax provision of $86.4 million in Q1 2016 with respect to the clawback of the tax benefits obtained under the EPR Program for tax years 2012 - 2015. This income tax provision should not have any cash impact because the Company has net operating losses available to deduct against any incremental taxable profit.

The Belgium Government has announced that it has submitted an appeal of the Decision to the General Court of the European Union (General Court). The Company will be submitting a separate appeal during Q3 2016, since it is directly affected by the Decision. If an appeal is successful, the income tax provision of $86.4 million may be entirely or partly reversed.

The Belgium Government has indicated that affected companies, like WABCO, may take advantage of alternative tax relief programs that may have been available to them during any of the years that they relied on the EPR Program and re-file tax returns claiming applicable benefits. We understand that the Belgium Government is currently in discussions with the European Commission regarding how these procedures will work in practice. We are currently assessing the extent to which we would be eligible to claim such alternative tax relief for the prior periods subject to clawback.

During the first six months of 2016, we have discussed with the Belgium Government our ability to claim alternative tax relief in our open tax returns for 2015 and 2016, namely, in the form of a Patent Income Deduction (PID). On the basis that we believed it was more likely than not that we would be successful in claiming this tax relief for 2016, we recognized this benefit in our Q1 2016 tax provision. Subsequent to June 30, 2016, WABCO received a ruling from the Belgium Government that a Patent Income Deduction (PID) is available for both 2015 and 2016. The benefit for 2016 remains within our Q2 2016 provision and the benefit for 2015 will be recognized when we file the Belgium tax return in Q3 2016.

Unrecognized tax benefits at June 30, 2016 amounted to $ 102.8 million , of which $ 14.0 million was classified as a long-term liability. The remaining unrecognized tax benefits of $ 88.8 million , including the $86.4 million related to the clawback under the EPR Program, were classified as a reduction to deferred tax assets, since they are non-cash unrecognized tax benefits. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

The Company is subject to taxation in the United States and various state 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 2008.


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 of June 30, 2016 , the Company had indemnification liabilities of $ 0.7 million which were classified within long-term liabilities on the balance sheet.

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 Trane. 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 June 30, 2016 was $ 33.8 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.



15


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.

In the third quarter of 2015, the Company announced proposals to cease manufacturing at two production facilities to preserve the Company’s global competitiveness for certain mechanical products. These proposals are expected to result in a workforce reduction of approximately 320 positions and includes a smaller program initiated in the fourth quarter of 2014 (the 2014/2015 Program). We currently anticipate that production at both facilities would be transferred to other facilities within the Company’s globally integrated supply chain by the end of 2017.

Based on the Company’s efforts to maintain our global footprint, the Company has periodically entered 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 six month period ended June 30, 2016 .
 
(Amounts in millions)
 
2014 / 2015 Program
 
Balance as of December 31, 2015
$
43.8

Charges during the first six months of 2016
5.8

Payments during the first six months of 2016
(2.5
)
FX effects
1.0

Balance as of June 30, 2016
$
48.1

Other Programs
 
Balance as of December 31, 2015
$
24.9

Charges during the first six months of 2016
1.3

Payments during the first six months of 2016
(6.1
)
FX effects
0.3

Balance as of June 30, 2016
$
20.4

Total streamlining liability as of June 30, 2016
$
68.5


A balance of $ 40.8 million has been included in other liabilities (non-current) and $ 27.7 million has been included in other accrued liabilities (current) as of June 30, 2016 .

The following is a summary of current and cumulative streamlining costs related to the above programs:
 
 
Charges for three months
Ended June 30, 2016
 
Charges for six months
Ended June 30, 2016
 
Cumulative Charges
as of June 30, 2016
(Amounts in millions)
2014/2015 Program
 
Other
Programs
 
2014/2015 Program
 
Other
Programs
 
2014/2015 Program
 
Other
Programs
Employee-related charges – cost of sales
$
(0.3
)
 
$
0.1

 
$
3.4

 
$
0.3

 
$
37.4

 
$
33.1

Employee-related charges – selling and administrative
0.1

 
1.0

 
1.8

 
1.0

 
13.7

 
44.4

Asset write-offs

 

 

 

 
8.5

 
2.1

Other streamlining charges
0.4

 
0.1

 
0.6

 

 
1.6

 
0.2

Total program costs
$
0.2

 
$
1.2

 
$
5.8

 
$
1.3

 
$
61.2

 
$
79.8







16


NOTE 13.
Post-retirement Benefits

Post-retirement pension, health and life insurance costs had the following components for the three and six month periods ended June 30, 2016 and 2015 :
 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
(Amounts in millions)
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
$
4.4

 
$

 
$
4.3

 
$
0.1

 
$
8.9

 
$

 
$
8.9

 
$
0.1

Interest cost on the projected benefit obligation
4.4

 
0.2

 
4.4

 
0.1

 
8.8

 
0.3

 
8.8

 
0.2

Less: assumed return on plan assets
(1.7
)
 

 
(1.9
)
 

 
(3.4
)
 

 
(3.9
)
 

Amortization of net loss
3.7

 
0.2

 
3.3

 
0.1

 
5.8

 
0.4

 
6.6

 
0.2

Defined benefit plan cost
$
10.8

 
$
0.4

 
$
10.1

 
$
0.3

 
$
20.1

 
$
0.7

 
$
20.4

 
$
0.5


The Company makes contributions to funded pension plans that, at a minimum, meet all statutory funding requirements. Contributions in 2016 , as well as payments of benefits incurred by unfunded plans, were in line with the expectations for 2016 and also in line with the contributions made during 2015 .

Defined benefit plan cost is included in selling and administrative expenses and cost of sales on the condensed consolidated statements of operations.

NOTE 14.
Derivative Instruments and Hedging Activities

ASC 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 on the condensed 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 condensed 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 condensed consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income 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. During the first quarter of 2015, the Company entered into and settled treasury rate lock agreements which were designated as cash flow hedges in anticipation of issuing the Senior Notes as discussed in Note 8. A loss related to these cash flow hedges of $1.3 million , net of taxes of $0.7 million , was recognized in other comprehensive income at the time of settlement. The related amount of hedge ineffectiveness was immaterial. The amount of unrealized loss reclassified to earnings for the six months ended June 30, 2016 was $0.1 million .

Foreign exchange contracts are also 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 June 30, 2016 , forward contracts for an aggregate notional amount of € 113.9 million ($ 126.7 million at June 30, 2016 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 gain for the six months ended June 30, 2016 was $ 0.4 million . The majority of these exchange contracts were entered into on June 30, 2016 . The fair value of the derivatives was $0.2 million at June 30, 2016 .



17


NOTE 15.
Business Combinations

Acquisition of MICO, Inc.

On February 1, 2016 , the Company acquired MICO, Inc. (MICO) for cash consideration of $67.2 million , excluding cash acquired of $6.4 million , resulting in net cash paid of $60.8 million . MICO manufactures and markets hydraulic components, controls and brake systems for heavy-duty, off-highway vehicles in agriculture, construction, mining and similar industries.

The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date is provisional as of June 30, 2016 , pending receipt of a final valuation. The following table summarizes the preliminary allocation of the net purchase consideration:

(Amounts in millions)
 
Cash and cash equivalents
$
6.4

Trade receivables
5.8

Inventory
11.8

Property, plant and equipment
17.5

Intangible assets
14.3

Other assets acquired
2.7

Other liabilities assumed
(7.4
)
   Identifiable net assets acquired
$
51.1

Goodwill
16.1

   Net purchase consideration
$
67.2


The intangible assets include amounts recognized for the fair value of trade name, customer-based and technology-related assets. The fair values of the intangible assets were determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately 11 years and are deductible for tax purposes. The goodwill generated is primarily attributable to expected synergies and is deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within other non-operating expense. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.

Acquisition of Laydon Composites Ltd.

On April 15, 2016 , the Company acquired Laydon Composites Ltd. (LCL), a manufacturer of aerodynamic devices for heavy-duty trucks and trailers, for total consideration of $34.1 million . The Company paid $31.0 million , excluding cash acquired of $0.8 million , with additional contingent consideration of up to $4.3 million contingent upon the achievement of certain goals tied to annual and cumulative sales and earnings over a three year period. The range of undiscounted amounts the Company could be required to pay under this arrangement is between $ 0 and $4.3 million . As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $3.1 million .

The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date is provisional as of June 30, 2016 , pending receipt of a final valuation of tangible and intangible assets. The following table summarizes the preliminary allocation of the net purchase consideration:


18


(Amounts in millions)
 
Purchase price, cash consideration
$
31.0

Purchase price, fair value of contingent consideration
3.1

   Net purchase consideration
$
34.1

 
 
Cash and cash equivalents
$
0.8

Other assets acquired
3.3

Other liabilities assumed
(1.1
)
   Identifiable net assets acquired
$
3.0

Goodwill and intangibles
31.1

   Net purchase consideration
$
34.1


The goodwill generated is primarily attributable to expected synergies and is not deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within other non-operating expense. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.

Other Acquisitions

On February 1, 2016, the Company acquired assets from Trans-Safety LOCKS GmbH for $ 1.9 million .



19


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
    
Our sales in the same period compared to one year ago increased by 10.8% on a reported basis and 11.5% excluding foreign currency translation effects, with acquisitions contributing 2.3% to our sales growth, both on a reported basis and excluding foreign currency translation effects. Our global aftermarket sales increased 4.8% ( 5.6% excluding foreign currency translation effects) in the second quarter of 2016 . This increase was generated by the continuous offering of differentiated products and services in the aftermarket, a key pillar to our market outperformance strategy.

During the second quarter of 2016 , the WABCO Operating System (WOS) continued to enable fast and flexible responses to major market changes, delivering $20.7 million of materials and conversion productivity, a continued solid performance for us. Gross materials productivity represented 5.4% of total materials cost, while deflation in raw material prices resulted in net materials productivity of 5.8% . Conversion productivity represented 6.4% , a continued robust result for us.
    
As previously disclosed in our 2015 Form 10-K and further discussed in Note 10 of Notes to Condensed Consolidated Financial Statements, on January 11, 2016 the European Commission ruled that the excess profit ruling program (EPR Program) granted by the Belgian Government is illegal and incompatible with European State Aid law. As a result, the European Commission requires Belgium to stop applying the EPR Program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). The Belgium Government filed an appeal against the Decision to the General Court of the European Union. The Company will be submitting a separate appeal during Q3 2016, since it is directly affected by the Decision. During Q1 2016, we recorded a non-cash income tax provision of $ 86.4 million related to the clawback. This income tax provision should not have any cash impact because the Company has net operating losses available to deduct against any incremental taxable profit. If an appeal is successful, the income tax provision of $ 86.4 million may be entirely or partly reversed.

Subsequent to June 30, 2016, WABCO received a ruling from the Belgium Government that a Patent Income Deduction (PID) is available for both 2015 and 2016. On the basis that we believed it was more likely than not that we would be successful in claiming this tax relief for 2016, we recognized this benefit in our Q1 2016 tax provision. The benefit for 2016 remains within our Q2 2016 provision and the benefit for 2015 will be recognized when we file the Belgium tax return in Q3 2016. We expect that the total benefit for both years to be between $ 35 million to $ 40 million . We plan to investigate whether this tax relief would have been available to WABCO in years prior to 2015 if no EPR benefit had been claimed.  Any related benefit for years prior to 2015 will be recognized as and when our assessment is complete and we are able to file tax returns claiming this benefit.
Results of Operations
Approximately 86% of our sales are outside the United States, 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, cost of sales, gross profit and expenses for 2016 compared with 2015 are presented both with and without the effects of foreign currency translation. Changes in sales, cost of sales, gross profit and expenses excluding foreign exchange effects are calculated using current year sales, cost of sales, gross profit and expenses translated at prior year exchange rates. Presenting changes in sales, cost of sales, gross profit and expenses 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, cost of sales, gross profit and expenses 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.

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Second Quarter Results of Operations for 2016 Compared with 2015
 
 
Three Months
Ended June 30,
 
Excluding foreign
exchange translation **
(Amounts in millions)
2016
 
2015
 
% change
reported
 
2016
adjusted
amount
 
% change
adjusted
Sales
$
732.2

 
$
661.1

 
10.8
 %
 
$
736.8

 
11.5
 %
Cost of sales
502.2

 
453.6

 
10.7
 %
 
506.1

 
11.6
 %
Gross profit
230.0

 
207.5

 
10.8
 %
 
230.7

 
11.2
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
133.1

 
126.9

 
4.9
 %
 
132.9

 
4.7
 %
Equity income of unconsolidated joint ventures
5.3

 
8.0

 
(33.8
)%
 
5.3

 
(33.8
)%
Other non-operating income/(expense), net
0.1

 
(0.9
)
 
*
 
0.1

 
*
Interest expense, net
(3.0
)
 
(0.9
)
 
*
 
(2.9
)
 
*
Income tax expense
20.4

 
18.5

 
10.3
 %
 
20.8

 
12.4
 %

* Percentage change not meaningful
** Amounts translated using average exchange rates for the three month period ending June 30, 2015

Sales

Our sales for the second quarter of 2016 were $ 732.2 million , an increase of 10.8% ( 11.5% excluding foreign currency translation effects) from $661.1 million in 2015 .

Total sales in Europe, our largest market, increased approximately 13.6% ( 12.1% excluding foreign currency translation effects) for the second quarter of 2016 . This increase was primarily driven by approximately 9% growth in European original equipment manufacturer production, as well as increased content per vehicle including contributions from the AEBS mandate, introduction of ADB at a key customer, and an increase of our market share of AMT.

Sales in North America decreased 5.8% ( 4.0% excluding foreign currency translation effects), driven by an estimated 19% decrease in production of new trucks and buses. WABCO is mainly supplying to the heavy duty truck segment which dropped 32%. Sales in South America increased 0.2% ( 13.9% excluding foreign currency translation effects), driven by new business launches in the region, partially offset by an estimated 10% decline in the production of new trucks and buses in the region.

Total sales in Asia increased 18.7% ( 20.6% excluding foreign currency translation effects) compared to an estimated 20% increase in new vehicle production in the region. This sales growth was mainly driven by an increase in WABCO content per vehicle in India supported by the ABS mandate for a wide range of commercial vehicles built as of October 2015. Sales in India increased 44.4% ( 52.3% excluding foreign currency translation effects), Japan increased 10.9% (decreased 1.3% excluding foreign currency translation effects) and China increased 12.1% ( 18.1% excluding foreign currency translation effects). Sales in Korea however decreased 10.6% ( 6.9% excluding foreign currency translation effects) following the low vehicle production volumes impacted by a slow-down in exports.

WABCO's aftermarket sales, included in the geographic numbers provided above, increased by 4.8% ( 5.6% excluding foreign currency translation effects). This increase demonstrates the continued success of the Company's aftermarket strategies.

Cost of Sales and Gross Profit

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 6.4% of production and conversion cost savings, as well as 5.4% of material savings before the impact of commodity deflation, which had a positive impact of 0.4% , bringing net materials productivity to 5.8% for the year.


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Table of Contents

(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the three months ended June 30, 2015
$
453.6

 
$
207.5

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(13.7
)
Sales price reductions as % of sales

 
 
1.8
%
Volume, mix and absorption
71.1

 
18.3

Material productivity
(14.2
)
 
14.2

Conversion productivity
(6.5
)
 
6.5

Labor inflation
3.7

 
(3.7
)
Foreign exchange effects *
(7.4
)
 
2.8

Other
1.9

 
(1.9
)
Net increase
48.6

 
22.5

 
 
 
 
Cost of sales / gross profit for the three months ended June 30, 2016
$
502.2

 
$
230.0


* Foreign exchange impacts include both translational and transactional effects.

Operating Expenses

Operating expenses include selling and administrative expenses, product engineering expenses and other operating expenses.

(Amounts in millions)
 
Operating expenses for the three months ended June 30, 2015
$
126.9

 
 
Increase/(decrease) due to:
 
Labor inflation
3.4

Incentive compensation
2.3

Incremental costs from acquisitions
4.0

Streamlining expenses
(4.8
)
Employee-related costs
1.6

Foreign exchange translation
0.2

Savings net of investments
(0.5
)
Net increase
6.2

 
 
Operating expenses for the three months ended June 30, 2016
$
133.1


Equity Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased by $ 2.7 million to $ 5.3 million for the second quarter of 2016 as compared to $ 8.0 million for the second quarter of 2015 , primarily driven by lower income from our North American joint venture due to the market decline.

Other Non-Operating Income/(Expense), net

Non-operating income was $0.1 million for the second quarter of 2016 compared to an expense of $ 0.9 million for the second quarter of 2015 , mainly driven by higher tax indemnification liabilities in 2015.

Interest Expense, net


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Table of Contents

Interest expense was $ 3.0 million for the second quarter of 2016 compared to $ 0.9 million for the second quarter of 2015 , mainly as a result of interest expense incurred on our Senior Notes issued in 2015 as discussed in Note 8 of Notes to Condensed Consolidated Financial Statements.

Income Taxes

The income tax expense for the second quarter of 2016 was $20.4 million on pre-tax income of $ 99.3 million before adjusting for noncontrolling interest, compared with an expense of $ 18.5 million on pre-tax income of $86.8 million before adjusting for noncontrolling interest in the second quarter of 2015 . In the three months ended June 30, 2016 and June 30, 2015 , the income tax provision was primarily the net result of taxes on the mix of earnings in multiple tax jurisdictions, the accrual of interest on uncertain tax positions, and certain foreign tax planning.


Year to Date Results of Operations for 2016 Compared with 2015
 
 
Six Months
Ended June 30,
 
Excluding foreign
exchange translation **
(Amounts in millions)
2016
 
2015
 
% change
reported
 
2016
adjusted
amount
 
% change
adjusted
Sales
$
1,420.8

 
$
1,313.3

 
8.2
 %
 
$
1,452.1

 
10.6
 %
Cost of sales
977.3

 
892.2

 
9.5
 %
 
1,000.7

 
12.2
 %
Gross profit
443.5

 
421.1

 
5.3
 %
 
451.4

 
7.2
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
259.6

 
255.0

 
1.8
 %
 
263.7

 
3.4
 %
Equity income of unconsolidated joint ventures
12.5

 
14.6

 
(14.4
)%
 
12.5

 
(14.4
)%
Other non-operating income, net
0.2

 
1.0

 
(80.0
)%
 
0.7

 
(30.0
)%
Interest expense, net
(6.0
)
 
(1.6
)
 
*
 
(5.8
)
 
*
Income tax expense
121.5

 
37.0

 
*
 
120.2

 
*

* Percentage change not meaningful
** Amounts translated using average exchange rates for the six month period ending June 30, 2015

Sales

Our sales for the first six months of 2016 were $ 1,420.8 million , an increase of 8.2% ( 10.6% excluding foreign currency translation effects) from $ 1,313.3 million in 2015 .

Total sales in Europe, our largest market, increased approximately 10.8% ( 11.3% excluding foreign currency translation effects) for the first six months of 2016 compared to an estimated 7% growth in European new truck and bus production. This increase was also driven by increased content per vehicle.

Sales in North America decreased 4.0% ( 1.8% excluding foreign currency translation effects), driven by an estimated 13% decrease in production of new trucks and buses. Sales in South America decreased 19.7% ( 0.5% excluding foreign currency translation effects), driven primarily by an estimated 25% decrease in the production of new trucks and buses in the region, partially offset by increased WABCO content per vehicle and new business launches in the region.

Total sales in Asia increased 14.4% ( 17.8% excluding foreign currency translation effects) compared to an estimated 13% increase in new vehicle production in the region. This sales growth was mainly driven by an increase in WABCO content per vehicle in India supported by the ABS mandate for a wide range of commercial vehicles built as of October 2015. Sales in India increased 45.0% ( 55.2% excluding foreign currency translation effects), Japan increased 11.7% ( 3.9% excluding foreign currency translation effects) and China increased 2.7% ( 8.0% excluding foreign currency translation effects). Sales in Korea however decreased 14.6% ( 10.0% excluding foreign currency translation effects) driven by low vehicle production volumes impacted by a slow-down in exports.


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Table of Contents

WABCO's aftermarket sales, included in the geographic numbers provided above, increased by 3.6% ( 6.3% excluding foreign currency translation effects). This increase demonstrates the continued success of the Company's aftermarket strategies.

Cost of Sales and Gross Profit

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 6.4% of production and conversion cost savings, as well as 5.5% of material savings before the impact of commodity deflation, which had a positive impact of 0.5% , bringing net materials productivity to 6.0% for the year.

(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the six months ended June 30, 2015
$
892.2

 
$
421.1

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(26.7
)
Sales price reductions as % of sales

 
 
1.8
%
Volume, mix and absorption
133.9

 
31.6

Material productivity
(27.5
)
 
27.5

Conversion productivity
(12.9
)
 
12.9

Labor inflation
7.2

 
(7.2
)
Foreign exchange effects *
(23.3
)
 
(8.0
)
Other
7.7

 
(7.7
)
Net increase
85.1

 
22.4

 
 
 
 
Cost of sales / gross profit for the six months ended June 30, 2016
$
977.3

 
$
443.5


* Foreign exchange impacts include both translational and transactional effects.

Operating Expenses

Operating expenses include selling and administrative expenses, product engineering expenses and other operating expenses.

(Amounts in millions)
 
Operating expenses for the six months ended June 30, 2015
$
255.0

 
 
Increase/(decrease) due to:
 
Labor inflation
6.8

Incentive compensation
1.7

Incremental costs from acquisitions
6.0

Streamlining expenses
(3.5
)
Employee-related costs
1.3

Foreign exchange translation
(4.1
)
Savings net of investments
(3.6
)
Net increase
4.6

 
 
Operating expenses for the six months ended June 30, 2016
$
259.6


Equity Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased by $2.1 million to $12.5 million for the six months ended June 30, 2016 as compared to $14.6 million for the six months ended June 30, 2015 , primarily driven by lower income from our North American joint venture due to the market decline.

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Other Non-Operating Income, net

Non-operating income was $0.2 million for the six months ended June 30, 2016 compared to $1.0 million for the six months ended June 30, 2015 with the decrease mainly due to a net reversal of tax indemnification liabilities in 2015.

Interest Expense, net

Interest expense was $6.0 million for the six months ended June 30, 2016 compared to $1.6 million for the six months ended June 30, 2015 , mainly as a result of interest expense incurred on our Senior Notes issued in 2015 as discussed in Note 8 of Notes to Condensed Consolidated Financial Statements.

Income Taxes

The income tax expense for the six months ended June 30, 2016 was $121.5 million on pre-tax income of $190.6 million before adjusting for noncontrolling interest, compared with an expense of $37.0 million on pre-tax income of $180.1 million before adjusting for noncontrolling interest for the six months ended June 30, 2015 . In the six months ended June 30, 2016 and June 30, 2015 , the income tax provision was primarily the net result of taxes on the mix of earnings in multiple tax jurisdictions, the accrual of interest on uncertain tax positions, and certain foreign tax planning.

As discussed in our Executive Overview above, on January 11, 2016 the European Commission ruled that the excess profit ruling program (EPR Program) granted by the Belgian Government is illegal and incompatible with European State Aid law. As a result, the European Commission requires Belgium to stop applying the EPR Program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). The Belgium Government filed an appeal against the Decision to the General Court of the European Union. The Company will be submitting a separate appeal during Q3 2016, since it is directly affected by the Decision. During Q1 2016, we recorded a non-cash income tax provision of $ 86.4 million related to the clawback. This income tax provision should not have any cash impact because the Company has net operating losses available to deduct against any incremental taxable profit. If an appeal is successful, the income tax provision of $ 86.4 million may be entirely or partly reversed.

Subsequent to June 30, 2016, WABCO received a ruling from the Belgium Government that a Patent Income Deduction (PID) is available for both 2015 and 2016. On the basis that we believed it was more likely than not that we would be successful in claiming this tax relief for 2016, we recognized this benefit in our Q1 2016 tax provision. The benefit for 2016 remains within our Q2 2016 provision and the benefit for 2015 will be recognized when we file the Belgium tax return in Q3 2016. We expect that the total benefit for both years to be between $35 million to $40 million . We plan to investigate whether this tax relief would have been available to WABCO in years prior to 2015 if no EPR benefit had been claimed. Any related benefit for years prior to 2015 will be recognized as and when our assessment is complete and we are able to file tax returns claiming this benefit.





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Table of Contents

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, our senior unsecured notes, revolving credit facilities and the use of operating leases.
Cash Flows for the Six Months Ended June 30, 2016

Operating activities - Net cash provided by operating activities was $ 208.0 million and $170.0 million for the first six months of 2016 and 2015 , respectively. The Company recorded net income including noncontrolling interests of $69.1 million for the first six months of 2016 compared with net income of $ 143.1 million for the first six months of 2015 . Net income attributable to the Company in 2016 included noncash elements such as depreciation and amortization of $ 46.3 million and post-retirement benefit expense of $20.8 million . Our use of working capital amounted to $ 37.0 million for the six months ended June 30, 2016 compared to $ 44.9 million for the six months ended June 30, 2015 . This use of working capital was due primarily to higher levels of accounts receivables and inventory resulting from increased business, partially offset by a higher level of accounts payable.

Other accrued liabilities and taxes increased $ 31.0 million for the first six months of 2016 compared to an increase of $ 20.7 million for the first six months of 2015 . The major driver of this increase in 2016 relates to a shift of accruals related to our streamlining liabilities on our expected production site closures from non-current to current as well as higher accruals for tax-related items, partially offset by payments made on our annual incentive compensation. Other current and long-term assets for the first six months of 2016 decreased $ 13.3 million compared to an increase of $ 9.8 million for the first six months of 2015 . This decrease was mainly driven by a decrease in tax-related items and prepaid expenses, partially offset by an increase in guaranteed notes receivable in China. Other long-term liabilities for the first six months of 2016 decreased $ 19.0 million compared to $ 1.6 million for the first six months of 2015 , primarily driven by the shift from non-current to current liabilities on our streamlining accruals as previously discussed.

Investing activities - Net cash used in investing activities amounted to $ 190.7 million and $146.0 million in the first six months of 2016 and 2015 , respectively. The net cash usage for 2016 includes capital expenditures of $ 14.1 million of investments in tooling, $ 32.8 million in plant and equipment and $ 5.0 million in software to support the Company's long-term growth strategies. This is compared to $ 16.7 million of investments in tooling, $ 21.0 million in plant and equipment and $ 5.8 million in software during the first six months of 2015 .

During the first six months of 2016 , we entered into $84.8 million of repurchase agreements and received $38.9 million from the maturity of a repurchase agreement, all of which were classified within other assets on the condensed consolidated balance sheets. We also paid a total of $92.9 million for the acquisitions of MICO, Laydon and Trans-Safety LOCKS as discussed in Note 15 of Notes to Condensed Consolidated Financial Statements. In comparison, during the first six months of 2015 , we purchased $82.5 million of short-term investments and acquired a minority stake in SmartDrive Systems for $20.0 million .

Financing activities - Net cash provided by financing activities amounted to $ 59.2 million for the first six months of 2016 compared to $ 76.9 million for the first six months of 2015 . Our total third-party debt increased $180.1 million for the first six months of 2016 compared to $188.0 million for the first six months of 2015 . This increase was primarily driven by additional borrowings on our revolving credit facilities, mainly to finance our acquisitions of MICO and Laydon, and also to fund our share repurchase program. During the first six months of 2016 and 2015 , we repurchased shares for a total amount of $126.8 million and $124.3 million , respectively, of which $11.2 million and $3.9 million was not settled until after June 30, 2016 and 2015 , respectively.

We received $ 2.7 million of stock option proceeds in 2016 compared with $ 15.9 million in 2015 . We also withheld $5.9 million of shares during the first six months of 2016 related to employee tax payments made during the period for equity award vestings, as compared to $5.0 million during the first six months of 2015 .
Senior Notes

On May 8, 2015 , the Company entered into a note purchase agreement (the Note Purchase Agreement) for the issuance of $150 million of 2.83% senior unsecured notes due June 25, 2022 (the Series A Notes), $200 million of 3.08% senior unsecured notes due June 25, 2025 (the Series B Notes) and $150 million of 3.18% senior unsecured notes due June 25, 2027 (the Series C Notes; and together with the Series A Notes and the Series B Notes, collectively, the Senior Notes). The Senior Notes were issued and funded on June 25, 2015 . The Company paid approximately $2.1 million of debt issuance costs in connection with the Senior Notes, the balance of which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest on the Senior Notes is payable semi-annually on January 1 and July 1 of each year (other than July 1, 2015).


26

Table of Contents

The proceeds from the Senior Notes were partially utilized to repay the outstanding balance on our revolving credit facilities. The remaining proceeds are intended to fund our share repurchase program, finance acquisitions, refinance existing indebtedness and meet general financing requirements.

The Note Purchase Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio and a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of fiscal quarter, always based upon the preceding twelve consecutive months. The Note Purchase Agreement also provides for customary events of default, the occurrence of which could result in an acceleration of the Company's obligations under the Note Purchase Agreement. We were in compliance with all of the covenants as of June 30, 2016 .
Credit Facilities
    
On July 8, 2011 , the Company entered into a $400 million multi-currency five -year senior unsecured revolving credit facility which was amended and restated on September 30, 2015 (the 2015 Facility) to, among other things, extend the original expiry date to September 30, 2020 subject to two 1-year extension options and amend the applicable margins on the original revolving credit facility.

On December 17, 2014 , the Company entered into a new $100 million multi-currency five -year senior unsecured revolving credit facility (the 2014 Facility) which will expire on December 17, 2019 .

Under the revolving credit facilities, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $500 million , of which $ 317.0 million was unused as of June 30, 2016 . The proceeds from the revolving credit facilities are available to finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Also, various subsidiaries had borrowings from banks totaling $2.8 million , of which $0.7 million was classified as long-term debt. The remaining $ 2.1 million supports local working capital requirements.
Derivative Instruments and Hedging Activities

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 June 30, 2016 , forward contracts for an aggregate notional amount of € 113.9 million ($ 126.7 million at June 30, 2016 exchange rates) were outstanding with an average duration of one month. These foreign exchange contracts have offset the revaluation of assets and liabilities and resulted in a net non-operating gain of $ 0.4 million for the six months ended June 30, 2016 . The majority of these exchange contracts were entered into on June 30, 2016 . The fair value of the derivatives was $0.2 million as of June 30, 2016 .

During the first quarter of 2015, the Company entered into and settled treasury rate lock agreements which were designated as cash flow hedges in anticipation of issuing the Senior Notes. A loss related to these cash flow hedges of $1.3 million , net of taxes of $0.7 million , was recognized in other comprehensive income at the time of settlement.

The amount of unrealized loss reclassified to earnings for the six months ended June 30, 2016 was $0.1 million .
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, 2015 disclosed in the Annual Report on Form 10-K. There have been no material changes to those obligations since December 31, 2015 .
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

27

Table of Contents

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”, “continues”, “evaluates”, “forecasts”, “seeks”, “plans”, “goals”, “potential”, “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;

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 products or those of our competitors, and other competitive pressures on pricing and sales;

our ability to receive components and parts from our suppliers or to obtain them at reasonable price levels due to fluctuations in the costs of the underlying raw materials;

our ability to access credit markets or capital markets on a favorable basis or at all;

our ability to service our debt obligations;

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;

our ability to service our pension obligations;

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;

the success of, and costs and savings associated with, our current streamlining initiatives;

labor relations;

the European Commission’s decision relating to the Belgian excess profit ruling program, including the risks that the European Commission’s decision may not be successfully appealed, or the actions that the Company takes to otherwise mitigate the impact of the European Commission’s decision, including availing itself of alternative tax relief in Belgium or pursuing other strategic alternatives, may not be successful;


28

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 and rulings, 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 15 to the Consolidated Financial Statements for the year ended December 31, 2015  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 six months of 2016 .


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, 2015 made in the Company’s Annual Report on Form 10-K.


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 six months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
 
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, 2015 .


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

The Company's Board of Directors has approved four programs as noted below to purchase shares of the Company's common stock. A summary of the repurchase activity for the first six months of 2016 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased (a)
Average price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a)
 
 
 
 
 
 
Total through December 31, 2015
 
15,783,712

$77.36
15,783,712

$250,810,529
 
 
 
 
 
 
January 1 - January 31
 
280,000

$86.54
280,000

$226,579,394
February 1 - February 29
 
225,000

$91.12
225,000

$206,077,678
March 1 - March 31
 
177,000

$100.39
177,000

$188,308,930
Total first quarter
 
682,000

$91.64
682,000

$188,308,930
 
 
 
 
 
 
Total through March 31, 2016
 
16,465,712

$77.95
16,465,712

$188,308,930
 
 
 
 
 
 
April 1 - April 30
 
10,800

$112.89
10,800

$187,089,725
May 1 - May 31
 
269,900

$104.9
269,900

$158,777,516
June 1 - June 30
 
345,500

$100.54
345,500

$124,040,499
Total second quarter
 
626,200

$102.63
626,200

$124,040,499
 
 
 
 
 
 
Total through June 30, 2016
 
17,091,912

$78.85
17,091,912

$124,040,499

(a)
Relates to the share repurchase programs approved in May 2011, October 2012, October 2013 and December 2014 as discussed in Note 6 of Notes to Condensed Consolidated Financial Statements.

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 /    SEAN DEASON
Sean Deason
VP Controller and Assistant Secretary
(Principal Accounting Officer)
July 20, 2016

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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 June 30, 2016, filed with the SEC on July 20, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income/(Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

32


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.
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: July 20, 2016
/s/ Jacques Esculier
Jacques Esculier
Chief Executive Officer and Chairman of the Board




Exhibit 31.2
CERTIFICATIONS
I, Prashanth Mahendra-Rajah, 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)