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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
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
 
 
 
 
1220 Pacific Drive
Auburn Hills, MI
 
48326-3511
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code +32 2 663 98 00
Securities registered pursuant to Section 12(b) of the Act:
    
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
    
Title of each class
 
 
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                             x  Yes                     o No
    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.        o  Yes                     x No
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


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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
  
Accelerated Filer
 
o
 
 
 
 
Non-Accelerated Filer
 
o
  (Do not check if a smaller reporting company)
Smaller Reporting Company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.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
The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of the close of business on June 30, 2018, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $6.2 billion based on the closing sale price of the common stock on the New York Stock Exchange on that date. The registrant does not have any non-voting common equity.
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
 
 
 
February 5, 2019
 
51,376,541

shares

DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from certain portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year end of December 31, 2018.



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WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-K
Year ended December 31, 2018
TABLE OF CONTENTS
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
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Item 16.
Form 10-K Summary
 

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Information Concerning Forward Looking Statements

Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management's expectations and beliefs, are forward-looking statements. These forward-looking statements were based on various facts and were derived utilizing numerous important assumptions and other important factors, and changes in such facts, assumptions or factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, financial condition, liquidity, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “strategies”, “prospects”, “intends”, “projects”, “estimates”, "continues", "evaluates", “forecasts”, “seeks”, “plans”, "goals", "potential", “may increase”, “may fluctuate”, and similar expressions 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 1. Business”, “Item 1A. Risk Factors”, and “Item 7. 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;
difficulties in international trade caused by geopolitical developments including tariffs, sanctions and the United Kingdom’s exit from the European Union;
cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;
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 of a reasonable quality level 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, collaborations and cooperations or to realize benefits from completed acquisitions, collaborations and cooperations;
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;
our ability to complete and realize the tax benefits associated with certain projects relating to the reorganization of our treasury function and the establishment of a regulated insurance company to better manage our group unfunded pension liabilities;

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our ability to mitigate any tax risks, including, but not limited to, those risks associated with changes in legislation, tax audits and the loss of the benefits associated with our tax rulings and incentives in certain jurisdictions;
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.

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PART I

ITEM 1.    BUSINESS

Overview

Except as otherwise indicated or unless context otherwise requires “WABCO”, “WABCO Holdings Inc.,” “we,” “us,” “our,” and “the Company” refer to WABCO Holdings Inc. and its consolidated subsidiaries.

WABCO is a leading global supplier of electronic, mechanical, electro-mechanical and aerodynamic products for the world's major manufacturers of commercial trucks, buses and trailers, as well as passenger cars. We engineer, develop, manufacture and sell integrated systems controlling advanced braking, stability, suspension, steering, transmission automation, as well as air compression and processing. These systems improve vehicle safety, efficiency and performance while reducing overall vehicle operating costs. We estimate that approximately two out of every three commercial vehicles with advanced and conventional vehicle control systems worldwide are equipped with our products. For passenger cars, including sports utility vehicles (SUVs), we supply products for sophisticated, niche applications. We continue to grow in more parts of the world as we increasingly provide additional components and systems throughout the life of a vehicle, from design and development to the aftermarket. By leveraging fleet connectivity, WABCO mobilizes vehicle intelligence to advance fleet safety, efficiency and security.

History of Our Company

WABCO was founded in the United States in 1869 as Westinghouse Air Brake Company. We were purchased by American Standard Companies Inc. (American Standard) in 1968 and operated as the Vehicle Control Systems business division within American Standard until we were spun off from American Standard on July 31, 2007. Subsequent to our spin-off, American Standard changed its name to Trane Inc., which we herein refer to as “Trane.” On June 5, 2008, Trane was acquired in a merger with Ingersoll-Rand Company Limited (Ingersoll Rand) and exists today as a wholly owned subsidiary of Ingersoll Rand.

Products and Services

We engineer, develop, manufacture and sell advanced braking, stability, suspension, steering, transmission automation and air management systems primarily for commercial vehicles. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), electronic stability control (ESC) systems, brake controls, automated manual transmission (AMT) systems, air disc brakes (ADB), 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.

We are also a global market leader in hydraulic components, controls and brake systems for heavy-duty, off-highway vehicles used, for example, in agriculture, construction and mining. We are the only supplier with a complete portfolio of pneumatic and hydraulic braking and control systems for off-highway vehicles worldwide. WABCO is also the only supplier that provides a full range of aerodynamic devices for commercial vehicles worldwide. Aerodynamic products reduce the air drag of commercial trucks traveling long distances at highway speeds, thereby lowering fuel consumption and CO2 emissions. Aerodynamic devices help commercial vehicle fleet operators improve their operational efficiency and environmental performance. Furthermore, we supply advanced electronic suspension controls and vacuum pumps to the passenger car and SUV markets in Europe, North America and Asia. We also provide remanufacturing services globally.

Fleet Management Solutions

We also supply commercial vehicle aftermarket distributors and service partners as well as fleet operators with replacement parts, fleet management solutions (FMS), diagnostic tools, training and other expert services.We provide innovative control functions by leveraging rich data from onboard mission-critical systems to advance fleet safety, efficiency and security. With WABCO’s Transics TX-TRAILERGUARD™and TX-SKY™, customers continuously obtain data from onboard mission-critical systems. Simultaneously, all of this information is integrated onto the fleet manager’s displays via TX-CONNECT™ web-based back-office technology. By translating this big data into actionable management insights, fleets gain efficiency and asset utilization improves.

WABCO further expanded its global FMS platform by completing the acquisition of Asset Trackr in 2018, an innovative FMS provider based in Bangalore, India. Asset Trackr helps commercial fleets to track, analyze and optimize their transportation resources and assets in real time through cloud-based solutions.


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WABCO and G7, a technology leader in China’s fleet logistics industry, continued to grow the joint venture they established in 2017. G7 is dedicated to implementing telematics, artificial intelligence and big-data algorithms in the logistics industry. Coupled with WABCO’s Smart Trailer FMS, integrated with WABCO’s Intelligent Trailer Program, which monitors and controls more than 40 onboard functions drives penetration of electronic braking systems and advances vehicle intelligence of tractors and trailers, WABCO and G7 are setting new standards for cargo transportation safety, efficiency and connectivity in China.

WABCO launched TRAXEE FMS in 2018 and offers smaller fleet operators several business-critical functions without incurring large capital investment or management overhead expenses. Launched as a scalable and rapid pay-back solution, TRAXEE enables operators to better coordinate fleet capacity, manage driver activity and improve administrative efficiency. The system also provides real-time status updates on individual trucks and drivers while helping to address tachograph legal compliance requirements across Europe and Turkey.

In 2018, WABCO introduced its Global Intelligent Braking Platform for Trailers, the industry’s first global intelligent braking platform for trailers. It provides the foundation for WABCO’s new generation Trailer Anti-Lock Braking System (iABS™) and Electronic Braking System (iEBS™). It also features simplified interchange between iABS and iEBS, enhances trailer system functionality and supports the globalization strategies of trailer manufacturers due to increased standardization and modularity.

WABCO also signed a strategic agreement with RIO in 2018, the digital brand of global commercial vehicle manufacturer, the TRATON GROUP to extend its FMS portfolio into a fully digital, cloud-based open platform for freight transport that supports all brands of truck. Under the agreement, RIO will leverage WABCO’s advanced FMS within its cloud-based connectivity environment to support the European logistics industry. WABCO’s advanced FMS solutions will interface with RIO’s partners and will be available to RIO customers in early 2019. Specifically, RIO will integrate WABCO’s TX-SOCIAL™ which analyzes and manages tachograph and driver recorded data as well as TX-TRAILERPULSE™, a trailer-specific telematics solution. RIO, which is expanding its customer base across Europe, matches leading suppliers with the best tailored solutions to support fleets and enable them to pick and choose from a broad range of digital tools.

Steering Technologies

Steering technology was integrated into the WABCO product portfolio with the 2017 acquisition of R.H. Sheppard Co., Inc. (Sheppard), a leading North America steering manufacturer. This enables WABCO to combine steering technologies with active braking, electronic stability control and other advanced driver assistance systems. This represents a major step toward providing lateral control through active steering, which is a cornerstone to WABCO’s ability to control longitudinal movement through active breaking, stability and suspension controls.

Transmission Automation

WABCO AMT products include control technology that boosts fuel economy while reducing emissions. It enables drivers to focus further attention on road and traffic conditions, resulting in increased comfort and safety. It also helps to minimize any performance gap between highly skilled and less experienced drivers. Our industry continues to adopt AMT technology with great growth potential in the United States and Brazil, Russia, India and China (BRIC) as original equipment manufacturer (OEM) and fleet operators seek to increase driver comfort and safety.

Advanced Braking Systems

WABCO's ABS prevents the wheel from locking during emergency braking situations and thereby helps commercial vehicle drivers to maintain stability of the vehicle. ABS also helps to bring a vehicle to a complete stop with the shortest possible stopping distance and in the safest possible way. Electronic activation of the EBS braking components reduces response and build-up times in brake cylinders. This in turn reduces braking distance by several meters, which can be decisive in some situations. The integrated ABS function ensures driving stability and steerability throughout the braking procedure.

A new generation of ADB products was released in 2018 as part of our MAXX™ product suite. This is a new generation of high-performance single-piston ADB for trucks, buses and trailers world-wide, and is expected to further accelerate the industry’s conversion from conventional drum brakes to ADB. WABCO showcased this pioneering suite of MAXX ADB technology at IAA Commercial Vehicles 2018 in Hanover, Germany.

With over six million single-piston ADB systems sold, including more than one million systems proven in the field for 30,000 Nm heavy-duty applications, WABCO is the well-established global market leader for this advanced technology. WABCO’s fifth generation range of single-piston ADB technology is suitable for all types of light, medium and heavy-duty vehicles. Superbly

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engineered, MAXX’s new lighter weight, high-performance and low drag-torque design further boosts fuel efficiency and enables increased transport payloads.

The latest MAXX design provides enhanced safety and braking efficiency levels, outperforming the requirements for all major vehicle applications. With 20 percent fewer parts than the current design, and over 40 percent fewer parts compared to other ADB brands, the platform offers reliability and an excellent weight-performance ratio. Delivering enhanced fuel efficiency, the compact design offers an average weight of 35 kilograms per ADB in a six-by-two wheel truck application - 12 kilograms less per truck than other manufacturers’ European heavy-duty ADB systems.

WABCO has accelerated its single-piston ADB technology leadership in China with the launch of a new joint venture for vehicle control systems in 2018. This new joint venture with FAW Jiefang Automotive Company is designed to advance the safety and efficiency of commercial vehicles in China. A major focus of the joint venture will be heavy-duty trucks given WABCO’s mastery of single-piston ADB technology for 30,000 Nm applications which have a compact, lightweight design with fewer components and are proven to deliver the highest standards of safety, performance and reliability. WABCO’s industry-leading, high-performance single-piston ADB technology is best suited for all types of commercial vehicles - light, medium and heavy-duty platforms.

Advanced Driver Assistance Systems

WABCO also offers a comprehensive suite of Advanced Driver Assistance Systems (ADAS) that include lane departure warning systems (LDWS) and collision mitigation systems. Safety regulations driven by the European Union started in 2015 and mandated LDWS on new commercial vehicles. This new regulation is addressed by WABCO’s OnLane™ camera-based LDWS technology. Once it detects unintended lane drift, OnLane prompts the driver via acoustic, visual and haptic signals to take corrective measures. It also features an advanced option to warn against driver drowsiness. In 2017, WABCO introduced OnSide™, an advanced blind-spot detection system for commercial trucks and trailers. This new radar-based system alerts drivers to the presence of a moving vehicle in a truck’s blind spot and provides a side-collision warning to reduce the risk of accidents. When used in conjunction with WABCO’s OnLaneASSIST™ lane-keeping assist system, OnSide can go beyond warning to enable active collision avoidance. WABCO’s OnLaneASSIST is the first application of active steering technology in our portfolio of advanced driver assistance systems and OnSide provides a critical capability for the autonomous commercial vehicles of the future.

WABCO is the global industry supplier of collision mitigation systems and ADAS to OEMs with more than 450,000 OnGuard safety systems sold world-wide. The scalable and modular architecture of OnGuard solutions offer a number of powerful differentiating benefits for OEMs. WABCO was the first supplier of advanced emergency braking systems (AEBS) homologated in Europe in accordance with European Union regulations. WABCO's OnGuardACTIVE™ AEBS for trucks and buses complies with European Union regulations that came into effect at the tail end of 2015. It detects moving, stopping and stationary vehicles ahead. It alerts the driver via acoustic, visual and haptic signals. OnGuardACTIVE autonomously applies the brakes and can bring the vehicle to a complete stop, helping to prevent or mitigate rear-end collisions.

In 2018, WABCO announced the latest functionalities added to its industry-leading suite of OnGuard™ collision mitigation systems (CMS) featuring a new radar sensor which offers the commercial vehicle industry’s longest radar detection range, as well as the widest near-range field of view. WABCO’s OnGuardACTIVE can now provide up to full autonomous emergency braking on moving and stationery vehicles from a highway speed up to 80 km per hour - even in poor visibility conditions. WABCO’s OnGuardMAX utilizes the radar sensor integrated with a new jointly developed Mobileye® camera powered by its industry-leading EyeQ®4 chip. This system further differentiates itself by enabling autonomous collision avoidance with pedestrians intruding in front of the vehicle at speeds up to 20km/h.

Additionally, in 2018, WABCO signed a Memorandum of Understanding (MoU) with Valeo, an automotive technology leader at the center of several automotive industry innovations, to develop and industrialize the next generation of ADAS, which is among the key building blocks for vehicle autonomy. Within the scope of this agreement, the parties intend to develop sensor technologies helping pave the way for Valeo to supply WABCO with advanced short and mid-range sensors, including 77GHz radar and solid-state LiDAR. The first market application using Valeo’s sensing technologies will be WABCO’s OnCityALERT™, an urban turning driver assistance solution that warns about cyclists and pedestrians potentially crossing the predicted driving path, prompting the driver to take corrective action. On average, traffic accidents involving heavy trucks in the European community result in about 7,200 fatalities and over 100,000 injuries each year. 23 percent of all traffic-related severe injuries are unprotected road users and of that number, 20 percent of accidents occur during a turning maneuver to the nearside.





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Autonomous Driving

Taking the next step towards autonomous driving solutions and to further complement our ADAS technology, WABCO signed an MOU in 2018 with Baidu to collaborate on developing a best-in-class, cost-effective and highly standardized suite of solutions for Level 4 Autonomous Driving in hub-to-hub highway applications for commercial vehicles. This will be a cornerstone of an open platform allowing OEMs and fleets to utilize WABCO’s and Baidu’s core safety and AI technologies while providing them an opportunity to develop customized, differentiated solutions. Baidu will bring the power of Apollo, its open autonomous driving software platform, proven in the passenger car segment, while WABCO will provide access to its own ADOPT™ (Autonomous Driving Open Platform Technology) ecosystem to simplify entry into WABCO’s world of advanced technologies for the commercial vehicle industry. WABCO and Baidu will work together to combine the required content of Baidu’s Apollo software platform, integrating all the safety and redundancy protocols necessary for road release in order to develop turnkey, hub-to-hub, Level 4 highway solutions for the commercial vehicle world. Our goal is to be able to commercialize these solutions over the next three years.

Electrification

In 2018, WABCO announced a prototype of its first electric trailer - named eTrailer - developed to maximize operating efficiency and lower fuel consumption. This eTrailer prototype uses an intelligent electric motor control to recuperate electric energy during braking, which can then be reutilized to power the vehicle’s traction or to operate onboard electric auxiliaries. Furthermore, commercial fleet operators that connect eTrailer to a truck equipped with WABCO’s intelligent braking and stability control systems will further enhance the operating efficiency of the truck-trailer combination. WABCO estimates that its eTrailer could deliver fuel savings up to 20 percent on short haul routes and up to 10 percent for long hauls in a truck-trailer combination.

Continuing on the path of electrification, in 2018, WABCO signed a MoU with Nidec Motor Corporation ("Nidec"), a subsidiary of Nidec Corporation, the world’s number one Comprehensive Motor Manufacturer (TSE: 6594) to define, develop, manufacture and commercialize fully integrated electric drivetrain and brake control solutions for longitudinal control of commercial vehicles. The fully integrated electric drivetrain solution will operate on vehicle control information received from driver inputs (use of accelerator and brake pedals) to automate decision flow on how to accelerate or decelerate the vehicle in the most prudent and economic way. By introducing advanced, fully integrated electric drivetrain solutions in this market segment, WABCO and Nidec will provide efficient energy management, while maintaining stable vehicle dynamics. Also, the electric drivetrain solution will enable improved energy recuperation across all use cases which will contribute to additional efficiency gains.


Our key product groups and functions are described below.
 

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WABCO KEY PRODUCT GROUPS
SYSTEM / PRODUCT
 
FUNCTION
Actuator
 
Converts energy stored in compressed air into mechanical force applied to foundation brake to slow or stop commercial vehicles
Air Compressor and Air Processing/Air Management System
 
Provides compressed, dried air for braking, suspension and other pneumatic systems on trucks, buses and trailers
Foundation Brake
 
Transmits braking force to slow, stop or hold vehicles
Anti-lock Braking System (ABS)
 
Prevents wheel locking during braking to ensure steerability and stability
Conventional Braking System
 
Mechanical and pneumatic devices for control of braking systems in commercial vehicles
Electronic Braking System (EBS)
 
Electronic controls of braking systems for commercial vehicles
Electronic and Conventional Air Suspension Systems
 
Level and pressure control of air springs in trucks, buses, trailers and cars
Transmission Automation
 
Automates transmission gear shifting for trucks and buses including clutch operation
Vehicle Electronic Stability Control (ESC) and Roll Stability Support (RSS)
 
Enhances driving stability
Advanced Driver Assistance Systems (ADAS)
 
Promotes driver safety through lane departure warnings, collision mitigation and emergency braking systems
Fleet Management Solutions (FMS)
 
Improves vehicle safety and efficiency for fleet managers through real-time online commercial vehicle telematics and communications
Steering Technologies
 
Controls the lateral movement of the vehicle

Key Markets and Trends

Electronically controlled products and systems are important for the growth of our business. Our markets are driven primarily by the electronics content of control systems in commercial vehicles. At the same time, major original equipment manufacturers (OEMs) are transforming toward modularization of their various vehicle platforms. Modularity enables more efficiency and cost-effectiveness in development, manufacturing and marketing of their commercial vehicles. These trends have been increasing steadily with each successive vehicle platform introduction, as OEMs seek to improve vehicle safety, efficiency and performance through added functionalities, and to meet evolving and rising regulatory standards around the world. Overall, engineering trends in commercial vehicle design show a shift in demand toward increased electronics content and platform modularity. Although their pace varies by region, these trends are similar in all major geographies.

In particular, braking systems are part of the shift from conventional to advanced electronic systems on the path towards fully autonomous driverless trucks. In addition to increasing safety, improving stopping distances, and reducing installation complexity, electronic braking systems also enable new functionalities to be integrated more cost effectively. New functionalities include stability control, adaptive cruise control, transmission automation, active steering brake performance warning, vehicle diagnostics, driver assistance systems as well as engine braking and engine speed controls, among others. Our automated transmission controls optimize gear shifting, resulting in better fuel efficiency, less component wear and fewer parts. This technology further enhances driver safety and comfort requiring less physical effort.

The global commercial vehicle industry is also trending toward environmental sustainability. WABCO's technology leadership continues to deliver products and systems that increase fuel efficiency, reduce emissions, decrease vehicle weight and optimize energy recovery, among other advancements that enhance environmental compliance of trucks, buses and trailers over the lifetime of the vehicle. For example, a truck equipped with all of WABCO's green technologies can have significantly improved fuel efficiency. These include advanced transmission automation systems, innovative aerodynamic solutions, sophisticated electronic driver assistance systems, electronic control of air suspension and breakthrough air compression technologies. We reduce vehicle weight and recuperate energy through engineering and lighter materials, resulting in higher fuel efficiency and a reduction in emissions.

We have entered into collaborations, the most recent being a MoU with Nidec, to define, develop, manufacture and commercialize fully integrated electric drivetrain and brake control solutions for longitudinal control of commercial vehicles. We

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have also made investments in electrification, the most recent being our investment in Nikola Motor Company, a leader in design and manufacturing of hydrogen-electric vehicles, vehicle components, energy storage systems and electric vehicle drivetrains.

We believe customers value how WABCO has been laying the foundations of autonomous driving for commercial vehicles as well as WABCO's extensive track record for mobilizing vehicle intelligence. This has made WABCO a leading partner of choice globally for the development and systems integration of sensor, control and actuation technology alongside its expertise in local product applications.

WABCO joined the ENSEMBLE consortium in 2018 to develop advanced safety technologies for multi-brand platooning on roads in Europe. Jointly funded as a public and corporate initiative, the ENSEMBLE consortium is expected to demonstrate multi-brand truck platooning on public roads in 2021 and to assess the impact of platooning on infrastructure, road safety and traffic flow. WABCO will support the ENSEMBLE consortium’s development and testing of multi-brand platooning by delivering platooning algorithm and connectivity enhancements for WABCO’s OnGuard autonomous emergency braking systems (AEBS), active cruise control (ACC) and WABCO’s electronic braking system (EBS).

WABCO is also increasingly contributing to the efficiency and safety of commercial and government-owned fleets worldwide. WABCO empowers fleets through its differentiated and expanding portfolio of leading fleet management solutions, its Intelligent Trailer Program offering more than 40 key trailer functions, and WABCO's growing connectivity between off-vehicle data analytics support and intelligent on-vehicle safety and efficiency systems. Fleets are also empowered through big data from WABCO's onboard electronic braking, stability, efficiency and driver assistance systems which are integrated with fleet management solutions. 

A fundamental driver of demand for our products is commercial truck and bus production. The number of new commercial vehicles built fluctuates from year to year in different regions of the world. Nonetheless, over the last five years, we have demonstrated our ability to outperform the market by increasing the amount of WABCO content on board each vehicle. During the five year period through 2018, WABCO's European sales to truck and bus (T&B) OEM customers, excluding the impact of foreign currency exchange rates, outperformed the rate of European T&B production by an average of 2% per year.

Year to Year Change
 
2014
 
2015
 
2016
 
2017
 
2018
Sales to European T&B OEMs (at a constant FX rate)
 
(7
)%
 
8
%
 
8
%
 
6
%
 
3
%
European T&B Production
 
(9
)%
 
6
%
 
1
%
 
8
%
 
2
%

Customers

We sell our products primarily to five groups of customers around the world:

Truck and bus OEMs;
Commercial vehicle aftermarket distributors for replacement parts and services and commercial vehicle fleet operators for management solutions and services;
Trailer OEMs;
Major car manufacturers, and
Manufacturers of heavy duty, off-highway vehicles in agriculture, construction, mining and similar industries.

Our largest customers are Daimler and Volvo and account for approximately 14% and 11% of our sales, respectively. Other key customers include Ashok Leyland, TRATON, China National Heavy Truck Corporation (CNHTC), Cummins, Fiat (Iveco), Hino, Paccar and TATA Motors. For the fiscal years ended December 31, 2018, 2017 and 2016, our top 10 customers accounted for approximately 49%, 44% and 44% of our sales, respectively.

The largest group of our customers, representing approximately 55% of sales (57% in 2017), consists of truck and bus OEMs who are large, increasingly global and few in number due to industry consolidation, as well as a smaller number of off-highway (agricultural and construction) OEMs. As truck and bus OEMs grow globally, they expect suppliers to expand with them beyond their traditional markets and become reliable partners, especially in the development of new technologies. WABCO has a strong reputation for technological innovation and collaborates closely with major OEM customers to design, develop and deliver technologies used in their products. Our products play an important role in enabling further vehicle safety and efficiency. At the same time, there are few other suppliers who compete across the breadth of products that we supply globally.

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The second largest group, representing approximately 25% of sales (24% in 2017), consists of the aftermarket distributor network that provides commercial vehicle operators with replacement parts as well as a range of services. This distributor network is a fragmented and diverse group of customers, covering a broad spectrum from large OEM-affiliated or OEM-owned distributors to small independent local distributors. The increasing number of trucks, buses and trailers on the road worldwide that are equipped with our products continuously increases market demand for replacement parts and services which, in turn, generates a growing stream of recurring aftermarket sales. In addition, we continue to develop an array of service offerings - such as diagnostics, training and fleet management solutions - for repair shops and fleet operators that further enhance our presence and growth in the commercial vehicle aftermarket.

The next largest group, representing approximately 10% of sales (9% in 2017), consists of trailer manufacturers. This is a particularly fragmented group of local and regional players that are widely diverse in business size, focus and operation. Smaller trailer manufacturers are highly dependent on suppliers such as WABCO to provide technical expertise and product knowledge. Similar to truck and bus OEMs, trailer manufacturers rely significantly on WABCO products for safety and efficiency functions through superior technologies and customized technology applications.

The remaining two groups, passenger car and SUV manufacturers and off-highway (agricultural and construction) OEMs represent approximately 5% (6% in 2017) and 5% (4% in 2017) of sales respectively. We supply passenger car and SUV manufacturers with our electronic air suspension systems and vacuum pumps. Electronic air suspension is a luxury feature with increasing penetration that exceeds market growth. Vacuum pumps are used with diesel and gasoline direct injection (GDI) engines. These customers are typically large, global and sophisticated; they demand high quality products and services.

We support our customers through our global sales force. It is organized around key accounts and customer groups and interfaces with product marketing and management to identify opportunities and meet customer needs across our product portfolio and throughout the world.

As a result of the 2017 acquisitions, the sales proportion, in percentage, of sales in Europe and Asia decreased and increased in North America, whereas sales, in absolute value, increased in all these regions. Europe represented approximately 49% of our sales in 2018 (52% in 2017), with the remainder coming primarily from Asia and the Americas. Our products are also manufactured in Europe, Asia and the Americas. WABCO's growth in Asia is enhanced by our strong roots in China and India where we have achieved leading market positions through close connectivity to customers. We are further strengthened in Asia by a network of suppliers, manufacturing sites and engineering hubs.

WABCO SALES
By Geography
FY 2018 % of Sales
FY 2017 % of Sales
 
By Major End-Market
FY 2018 % of Sales
FY 2017 % of Sales
     Europe
49
%
52
%
 
     Truck & Bus Products (OEMs)
55
%
57
%
     Asia
23
%
26
%
 
     Aftermarket
25
%
24
%
     North America
23
%
18
%
 
     Trailer Products
10
%
9
%
     South America
3
%
3
%
 
     Car Products
5
%
6
%
     Other
2
%
1
%
 
     Off Highway Products
5
%
4
%

Additional information on the geographic distribution of our sales and our long-lived assets for the past three years may be found in Note 19 ("Geographic Information") in Notes to the Consolidated Financial Statements.

Backlog

Information on our backlog is set forth under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Backlog” of this annual report.

Seasonality

Information on the seasonality of our business is set forth under Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality” of this annual report.

Growth Strategy


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In 2018, WABCO continued its three-pillar growth strategy - technology leadership, globalization, and excellence in execution - which further differentiates WABCO within the global commercial vehicle industry. Key drivers of excellence in execution are set out in “Manufacturing and Operations” below.

Technology Leadership

WABCO remains focused on global technology trends that are important to our customers. Our technology strategy has three pillars to create value for manufacturers of commercial vehicles and fleet customers in every region of the world. The first pillar is advanced vehicle and driver safety to reduce the number of accidents involving commercial vehicles. The second pillar is vehicle efficiency to improve the environmental sustainability of trucks, buses and trailers, and to reduce their total cost of operation through better fuel economy and other improvements. Solidly anchored in the fully autonomous driverless vehicle vision, the third pillar is connectivity. This works with the other two pillars to enable WABCO to mobilize vehicle efficiency and empower fleets around the world leveraging off-vehicle data analytics support and intelligent on-vehicle safety and efficiency systems.

We continue to drive market outperformance by leveraging our expertise in developing electronic systems that control braking, stability, steering suspension, transmission automation and air management. We have a strong track record of innovation and we are responsible for many of the commercial vehicle industry's most important innovations including:

First heavy-duty truck anti-lock braking system (ABS)
First electronically controlled air suspension (ECAS) system for commercial vehicles
First commercial vehicle automated manual transmission (AMT) controls system
First electronic braking system (EBS) for commercial vehicles
First electronic stability control (ESC) system for heavy-duty commercial vehicles
First collision mitigation system (CMS) with active braking for commercial vehicles
First autonomous emergency braking system (AEBS) for commercial vehicles
First collision safety system with active braking developed for the North American market based on Adaptive Cruise Control (ACC) technology
First hydraulic ABS integrated with ESC for medium-duty commercial vehicles
First modular braking system platform (mBSP™) that enables vehicle makers to interchangeably equip their truck and bus platforms with either ABS or electronic braking systems (EBS) anywhere in the world
First technology (TX-TRAILERGUARD™) that provides comprehensive operating data on the performance of the truck, trailer and driver in a single integrated real-time view
First technology (OptiLink™) that provides a single user interface via a mobile device, such as a smartphone, to monitor and control multiple functions on both the truck and trailer
First door lock control technology (OptiLock™) that provides high security locking systems for trailers and container doors seamlessly connected with telematics systems
First Evasive Maneuver Assist (EMA) capabilities that combines WABCO's world-class braking, stability and vehicle dynamics control systems on trucks and trailers with ZF's top active steering technology
OnSide™, an advanced blind-spot detection system for commercial trucks and trailers. A radar-based system alerts drivers to the presence of a moving vehicle in a truck’s blind spot and provides a side-collision warning to reduce the risk of accidents

We continue to expand our technology portfolio by introducing new product applications and functionalities, and by improving the market penetration of our existing technologies. Advanced products and functionalities are typically developed and adopted first in Europe and then migrated to North America and emerging economies. Examples include the adoption of ABS and automated transmission systems. These technologies were first widely adopted in European markets before starting to penetrate North America as well as China, India and other emerging markets. In terms of commitment to innovation, WABCO's net expenditures for product engineering, including research activities and product development amounted to approximately $184.4 million in 2018.


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We are also focused on long-term opportunities as WABCO continues to anticipate and fulfill our industry's constant search for technology that advances vehicle safety and efficiency in mature and emerging markets on a cost-competitive basis.

WABCO safety technologies encompass braking systems, stability control, collision mitigation, steering systems as well as accident mitigation and prevention. In 2018 - among other major accomplishments - we formed multiple new alliances, announced breakthrough technologies and further strengthened existing partnerships. We also continued to expand and enrich our portfolio of differentiated capabilities that improve the safety, efficiency and connectivity of commercial vehicles.

As our customers move toward intelligent vehicles and autonomous driving, WABCO is firmly positioned for the autonomous, electrified and connected future of our industry. This means leveraging WABCO’s breadth and depth of capabilities which will further enable the continued success of OEMs and fleet operators in every region of the world. The combination of steering technologies from the Sheppard acquisition with WABCO’s technologies represents a major step toward providing both lateral and longitudinal control through active steering, active braking, stability and suspension controls, a cornerstone of autonomous vehicles.

In 2017, we further strengthened our market leadership in advanced driver assistance systems through the launch in North America of OnLANE™ and OnLaneASSIST ™ systems. WABCO’s mBSP, the industry's first modular braking system platform, is at the heart of a commercial vehicle's braking system. It enables commercial vehicle makers to interchangeably equip their diverse global truck and bus platforms with ABS or EBS systems anywhere in the world. WABCO's mBSP uniquely features commonality of components and electronics, enabling truck and bus builders to save development time and production costs, and to bring new vehicles to market faster in every region of the world.     

In 2018, WABCO continued to increase adoption of our breakthrough MAXX ADB the industry’s lightest and highest performing single-piston ADB for commercial vehicles. Compactly engineered, MAXX braking technology fits virtually every wheel size for commercial trucks, buses and trailers around the globe. In particular, WABCO continued to expand ADB market penetration for trucks in North America, Europe and China where major customers value MAXX differentiators such as shorter stopping distances compared with drum brakes.

WABCO efficiency technologies deliver fuel economy, emissions reduction, energy recovery, weight reduction, lower maintenance costs and increased driver capability. In 2018, WABCO increased adoption of OptiDrive systems at original equipment makers in emerging economies such as India and China. As of 2018, over 4.5 million WABCO AMT systems have been sold, including our OptiDrive™ system - our modular automated manual transmission technology - which increases fuel economy up to 5% through optimized gear shifting. OptiRide™ is an ECAS technology that identifies axle overload, provides automatic load transfer and improves traction, which helps to reduce vehicle wear-and-tear and other operational costs. WABCO’s OptiRide delivers fuel savings up to 3% under certain conditions, while providing optimal ride performance. In 2018, WABCO continued to expand the use of the OptiFlow™ product range offering efficiency to trailer builders and major fleets through aerodynamic devices. Aerodynamic products reduce air drag of commercial trucks traveling long distances at highway speeds, thereby lowering fuel consumption by up to 7% as well as reducing CO2 emissions.

Globalization

Americas

WABCO’s regional headquarters for the Americas was recently relocated to a new facility in Auburn Hills, Michigan, which will also be our customer experience center and the location for the launch of WABCO Academy. It further anchors WABCO as a global technology leader and tier-one supplier to the commercial vehicle and automotive industries. It also further demonstrates WABCO’s commitment to closely connect with original equipment manufacturers and fleet operators in North and South America by leveraging our local capabilities and distribution channels for our vehicle safety and efficiency products and services.

North America remains a long-term growth market for WABCO, particularly in the United States, due to its expected volume of truck and bus production and the increasing adoption of vehicle safety and efficiency technologies. In prior years, we participated in this market through our North American joint venture, Meritor WABCO. In October 2017, WABCO acquired the remaining ownership stake from Meritor and consolidated all products under one WABCO brand in the North American market. WABCO can unlock further value for our customers, including offering them seamless access to WABCO's powerful technology and services portfolio, backed by the flexibility and efficiency of an integrated global supply chain. WABCO North America is focused on the application and delivery of WABCO’s braking and active safety systems, electronic suspension control and air management products in addition to all other technologies such as ADB, AMT and compressors in the North American market. In 2018, we increased WABCO's ADB penetration and market share and expanded adoption of high-performance ADB in North America. WABCO’s AMT also continued its successful sales penetration to Daimler Trucks North

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America and Volvo. Lastly, WABCO integrated the Sheppard acquisition into its global footprint, and began exporting steering products to India. WABCO also continued to develop advanced safety technologies specifically designed for electric commercial vehicles, including electronic braking systems and traction and stability controls for electric truck manufacturer, Nikola, in which WABCO made a $10 million investment in 2017.

WABCO’s OnGuard is one of North America's leading collision mitigation systems. More than 250 fleets are currently utilizing the system to help keep their truck drivers, vehicles, and fellow motorists safe. Heavy-duty truck fleets have reported a reduction in accidents of up to 87% and up to an 89% reduction in accident costs since adopting OnGuard.

South America remains a long-term growth market for WABCO, particularly Brazil, due to its expected volume of truck and bus production and the increasing adoption of vehicle safety and efficiency technologies. WABCO continues to have a leadership position across all products and expects the continuous adoption of new technologies, such as AMT and ADB. WABCO's South American headquarters near São Paulo serves as a regional hub in the manufacturing and sales network of WABCO products and systems. It also has a world-class production facility and a distribution center in the Campinas region. WABCO South America’s enhanced capabilities include product and applications engineering, aftermarket service, supply chain management and manufacturing. WABCO connects with the specific needs of customers in South America through specially developed and locally adapted systems and products for emerging markets.

China

China remains a long-term growth market for WABCO due to its expected volume of truck and bus production and the increasing adoption of vehicle safety and efficiency technologies. In 2018, WABCO continued to leverage its position as market leader and supplier of choice for control systems for trucks, buses and trailers in China, the world’s largest market for commercial vehicles. As the leading provider of ADAS, EBS, ESC, ADB, LDWS systems in China, WABCO is well positioned for growth as new regulations related to these products are released and implemented in the coming years.

WABCO continues to leverage its traditional partnerships with leading OEMs (China National Heavy Truck Corporation (CNHTC), Yutong) and furthered support for additional growth, establishing a new joint venture for vehicle control systems with FAW Jiefang Automotive Company to advance the safety and efficiency of commercial vehicles in China. This includes accelerating WABCO’s single-piston air disc brake (ADB) technology leadership in China. This is the first step in a much broader collaboration. WABCO and FAW Jiefang are also planning to cooperate on advanced braking systems development in the areas of autonomous driving, active safety systems and fleet management systems (FMS) to help support commercial vehicle manufacturers and fleets in China further improve safety and efficiency.

Additionally, WABCO signed a MoU with Baidu to collaborate on developing a best-in-class, cost-effective and highly standardized suite of solutions for Level 4 Autonomous Driving in hub-to-hub highway applications for commercial vehicles.

WABCO also continued to grow the joint venture with G7, a technology leader in China’s fleet logistics industry. G7 is dedicated to implementing telematics, artificial intelligence and big- data algorithms in the logistics industry. WABCO and G7 are setting new standards for cargo transportation safety, efficiency and connectivity in China.

Since 2014, WABCO remains the first and predominant supplier of ECAS systems for truck and bus manufacturers in China. Several major Chinese heavy duty truck manufacturers - including CNHTC, DFLQ and Shaanqi - continue to increase adoption of OptiRide electronically controlled air suspension (ECAS) in series production.

We believe customers value WABCO’s local capabilities for product application development and engineering as our strategy is to “design for China,” which involves our four world-class factories located there. This strategy delivers optimal localized solutions to improve vehicle safety and efficiency, enhance driver effectiveness and sustain environmental friendliness.

India

Due to its expected volume of truck and bus production and the increasing adoption of vehicle safety and efficiency technologies, India remains a long-term growth market for WABCO. We participate in this market through our subsidiary WABCO INDIA, which has a market leadership position for over 55 years in conventional braking products, advanced braking systems, air-assisted products, and automated manual transmission systems. In particular, all commercial vehicle manufacturers in India relied on WABCO’s test track located in Chennai to homologate over 50 vehicle platforms -truck and trailer to comply with the new national axle load regulation that came into effect from July 2018 for trucks and trailers In 2018, WABCO INDIA together with Tata International DLT one of the leading trailer OEM’s launched the award winning Intelligent Trailer Program. The Intelligent Trailer Program, an industry-first initiative leverages capabilities of WABCO’s trailer anti-lock or electronic braking

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control systems to provide a platform for upto40 innovative trailer operating functions. Designed to enhance trailer safety, security and efficiency, the Intelligent Trailer Program offers significant added value for India’s trailer manufacturers, fleet operators and cargo owners. The Intelligent Trailer Program also paves the way for India’s trailer industry to upgrade from basic braking systems to the next level of advanced braking and suspension technologies required for higher levels of vehicle automation.

Tata Motors, in 2018, partnered with WABCO India to launch WABCO’s Advanced Driver Assistance Systems (ADAS) for the PRIMA and SIGNA range of trucks. Designed to help mitigate some of the most common causes of accidents involving commercial vehicle, WABCO’s ADAS solution enhances vehicle safety, driver comfort and effectiveness. With the introduction of ADAS, Tata Motors became the first Indian OEM to provide a host of specific safety technologies in their vehicles including ESCsmart TM - electronic stability control, automatic traction control (ATC), hill start aid, ADAS which includes WABCO’s OnGuardASSISTTM- collision mitigation system and OnLaneALERTTM- lane departure warning system. OnGuardASSISTTM alerts the driver to potentially critical driving situations via acoustic, visual and haptic signals, should the driver fail to take corrective action, the system provides active braking on moving and stationary vehicles to mitigate or prevent impending collision. OnLaneALERT TM helps prevent unintentional lane departure, one of the most common causes of accidents involving commercial vehicles.
During the year 2018, WABCO India also partnered with Escorts group to launch India’s first automated tractor concept. Escorts group is one of India’s leading engineering conglomerate operating in agri machinery, material handling and construction equipment and railway equipment. WABCO India is India’s first technological solution provider to develop the concept of automated agricultural tractor by integrating automated manual transmission (AMT), brake controls and steering technologies.

WABCO INDIA connects with global OEMs based in India and other regions of the world through five world-class manufacturing sites located in Ambattur, Jamshedpur, Mahindra World City, Pantnagar and Lucknow. In addition there are facilities in Chennai and Pune for software and application engineering. In India, over 500 engineers support the design of new products, applications and systems to meet the technical and economic needs of customers in emerging markets around the world. At the same time, they continue to contribute to global development of WABCO’s advanced technologies. Furthermore, WABCO INDIA continued in 2018 to be recognized by key customers for its excellence in innovation, quality, cost and overall performance, among other attributes that further differentiate WABCO as a leading supplier based on customer satisfaction. Also, WABCO INDIA remains a market leader in its domestic aftermarket through an extensive national distribution network of more than 7,000 WABCO outlets, to provide fleet customers with access to full product and service support. To enhance connectivity, WABCO completed the acquisition of Asset Trackr in 2018, an innovative FMS provider based in Bangalore, India. Asset Trackr helps commercial fleets to track, analyze and optimize their transportation resources and assets in real time through cloud-based solutions.

Demonstrating WABCO’s strong commitment to expand and to globalize its steering business beyond the U.S., we have secured an important first milestone in delivering leading steering solutions to customers internationally with a supply agreement to Tata Motors. As a full systems tier-I supplier to Tata Motors, WABCO is equipping the manufacturer with its hydraulic power steering systems, helping them to meet increasing demand for new heavy-duty trucks locally following the recent legislative changes on axle load.

Eastern Europe

Truck and bus production in Eastern Europe is mainly in the Commonwealth of Independent States (CIS), which includes Russia as its major market. This is another long-term growth market for WABCO. Headquartered in Moscow, WABCO Russia has a factory in Miass and a distribution center in the Moscow region, supplying makers of trucks, trailers and buses, as well as aftermarket customers. In 2018, WABCO delivered 100% of the braking systems (ADB, APU, ABS and all conventional valves) for the newest platforms of trucks and buses for Russia’s largest medium-duty commercial vehicle manufacturer.

WABCO is further differentiated in Russia by our local engineers support customers throughout product development and completion of successful homologation. WABCO has been connecting with markets within the CIS for more than 40 years. WABCO Russia alone also has 7 regional sales offices, 27 dealers, over 200 authorized WABCO shops and more than 230 Service Partners across the country.

Competition

Given the importance of technological leadership, vehicle life-cycle expertise, a reputation for quality and reliability, and the growing joint collaboration between OEMs and suppliers to drive new product development, the space in which we largely operate has not historically had a large number of competitors. Our principal competitors are Knorr-Bremse (Knorr's U.S. subsidiary is Bendix Commercial Vehicle Systems) and, in certain categories, Haldex. In the advanced electronics categories, automotive players such as Bosch (automotive) and Continental have recently been present in some commercial vehicle applications. In the mechanical product categories, several Asian competitors are emerging, primarily in China, who are focused on such products.

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In each of our product categories, we compete on the basis of product design, manufacturing and distribution capabilities, product quality and reliability, price, delivery and service.

Manufacturing and Operations

Most of our manufacturing sites and distribution centers produce and/or house a broad range of products and serve different types of customers. Currently, approximately 68% of our manufacturing workforce is located in best cost countries such as China, India, Brazil and Poland up from approximately 45% in 2007. Facilities in best cost countries have historically helped to reduce costs on more labor-intensive products, while our facilities in Western Europe are generally producing more technologically advanced products. However, the increasing need for more advanced products and systems in emerging markets leads us to expand local supply chain capabilities to progressively cover more complex manufacturing.

All facilities worldwide are deploying Six Sigma Lean initiatives and global standards to continuously generate productivity and improve service levels. By applying Six Sigma policy, methodologies and tools, we seek to improve quality and predictability of our processes on a continual basis. Lean is geared toward eliminating waste in our supply chain, manufacturing and administrative processes. Methodologies are customer driven and data based. In addition, our global supply chain team is tightly connected throughout regions and at each site. They make decisions on where to manufacture each product taking into account factors such as local and export demand, customer approvals, cost, key supplier locations and factory capabilities. WABCO's global manufacturing and logistics also support our customers in the aftermarket as we continue to perform for on-time delivery and inventory fulfillment, among other drivers of customer satisfaction.

In 2018, WABCO opened a new Global Technology and Innovation Center in Hanover, Germany. Significantly expanding WABCO’s global product development and engineering capabilities, the nearly $30 million facility will play an important role in ensuring WABCO’s technology leadership is sustained through future generations of innovation within WABCO’s integrated network of product development and engineering centers that now spans four continents. This includes developing pioneering technologies to support the industry’s migration towards increasingly autonomous, connected and electric commercial vehicles.

Our global sourcing organization purchases a wide variety of components, including electrical, electro-mechanical and cast aluminum products, as well as parts containing materials such as steel, copper, rubber and plastic. These items represent a substantial portion of manufacturing costs. We source products on a global basis from three key regions: Western Europe, Central and Eastern Europe, and Asia. To support WABCO's continuing shift of manufacturing to best cost countries, we are migrating more of our sourcing to best cost regions. Under the leadership of the global sourcing organization, which is built around commodity and product groups, we identify and develop key suppliers and seek to integrate them as partners within our extended enterprise. Many of our Western European suppliers are accompanying us toward best cost countries. Since 2007, the share of our sourcing from best cost regions has increased from 36% to approximately 51%.

We have developed a strong position in the engineering, design, development and testing of products, components and systems. We are generally regarded within our global industry as a systems expert. This recognition reflects our in-depth technical knowledge and capabilities to support the development of advanced technology applications that are appropriately and optimally integrated with all of the vehicle's other systems and controls. Key customers depend on us and will typically involve us very early in the development process as they begin designing next generation platforms. We have approximately 2,855 employees - of which approximately 55% are located in best cost countries - dedicated to engineering and developing new products, components and systems as well as supporting and enhancing technology applications and manufacturing processes. These include 331 software engineers in India who support the local design of new products and systems for emerging markets and contribute to the global development of advanced technologies for commercial vehicles. They are dedicated to continuously improving the cost effectiveness and efficiency of WABCO's business processes and operations worldwide through services that are optimally leveraged and shared within our own organization and connected with suppliers, customers and others.

Our global sales organization hosts application engineers that are based near customers in different regions around the world and are partially resident at some customer locations. We also have significant resources in best cost countries where we perform functions such as drawing, testing and software component development. We operate test tracks in Germany and India as well as in Finland for extreme weather-proving conditions.

Joint Ventures

We use joint ventures globally to expand and enhance our access to customers. Our joint ventures include:

A majority-owned joint venture (90%) in Japan with Sanwa-Seiki (WABCO Japan, Inc.) that distributes WABCO's products in the local market

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A majority-owned (70%) manufacturing partnership in the United States with Cummins Engine Co. (WABCO Compressor Manufacturing Co.) formed to produce air compressors designed by WABCO
A majority-owned joint venture (70%) with Fuwa Mechanical Engineering Company Ltd, (FUWA) formed to produce air disc brakes for commercial trailers in China. FUWA is the largest manufacturer of commercial trailer axles in China and in the world
A majority-owned joint venture (60%) with FAW Jiefang (FAW Jiefang Automotive Co., Ltd) to advance the safety and efficiency of commercial vehicles in China. This newly created joint venture will commence the manufacturing of ADB in 2019
A 50% owned joint venture in Germany with RuC Holding GmbH (WABCOWURTH Workshop Services GmbH) that supplies commercial vehicle workshops, fleet owners and operators and end users internationally with multi-brand technology diagnostic systems
A 50% owned joint venture in China with Beijing Huitong Tianxia IOT Technology Co., Ltd (Shanghai G7 WABCO IOT Technology Co Ltd), to develop innovative Trailer FMS solutions for the Chinese fleet market
A 50% owned joint venture in China with Northstars Automobile Steering System Ltd (Sino-American RH Sheppard Hubei Steering Systems LTD), that is specialized insteering gears distribution on the Chinese market
A 37.5% owned joint venture with Shanghai Qingchuang Metal Products Trading Co., Ltd (China Source Engineered Components Trading Corporation Ltd) that wholesales machined parts, fasteners, hydraulic components and other automotive parts.

 Employees

We have 16,135 employees. Approximately 46% of our employees are salaried and 54% are hourly. Approximately 42% of our workforce is in Europe, 44% is in Asia, and the remaining 14% is in the Americas.

Employees located in our sites in Europe, Asia and South America are subject to collective bargaining, with internal company agreements or external agreements or laws at the region or country level. Currently approximately 50% of our workforce is covered by collective bargaining agreements. The employees' right to strike is typically protected by law and union membership is confidential information which does not have to be provided to the employer. The collective bargaining agreements are typically renegotiated on an annual basis. Our U.S. facilities are non-union. We have maintained good relationships with our employees around the world and historically have experienced very few work stoppages.

Intellectual Property

Patents, trademarks and other intellectual property rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations, and licensing opportunities to maintain and improve our competitive position; and to protect certain confidential information, we rely on copyright and trade secret law and enter into confidentiality agreements as applicable. We review third-party intellectual property rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party intellectual property rights, identify licensing opportunities, and monitor the intellectual property claims of others.

We own a large portfolio of patents that principally relate to our products and technologies, and we have, from time to time, licensed some of our patents. Patents for individual products and processes extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patent protection is obtained.

We protect our brands by trademark registrations in key markets in which our products are sold. Such trademark protections apply to our core WABCO brand as well as many of our product brand names. Our trademarks allow us to further distinguish our company and our products and are important in our relationships with customers, suppliers and partners.

While we consider our patents and trademarks to be valuable assets, we do not believe that our competitive position is materially dependent upon any single patent or group of related patents. At the same time, we recognize that technical leadership is an ongoing pillar of success and our intellectual property portfolio will continue to grow in importance for the company as a whole as a result. We believe that the combination of our technology, patents, know-how and other intellectual property rights and assets creates an advantage for our business and we continue to focus on successful patent prosecution to build a strong patent portfolio, trademark protection and the exploitation and protection of other intellectual property rights in terms of our intellectual property, R&D and business strategies.


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Environmental Regulation

Our operations are subject to local, state, federal and foreign environmental laws and regulations that govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. Generally, the international requirements that impact the majority of our operations tend to be no more restrictive than those in effect in the U.S.

Throughout the world, we have been dedicated to being an environmentally responsible manufacturer, neighbor and employer. We have a number of proactive programs in place to minimize our impact on the environment and believe that we are in substantial compliance with environmental laws and regulations. Manufacturing facilities are audited on a regular basis. Twenty-four of our manufacturing (M) and logistic (L) sites have Environmental Management Systems (EMS), which have been certified as ISO 14001 compliant. In addition, two of our test tracks (TT) have also been certified as ISO 14001 compliant. These sites are those located in :
Campinas, Brazil (M, L)
Jeverson, Germany (TT)
Stanowice, Poland (M)
Jinan, China (M)
Ambattur, India (M)
Wroclaw, Poland (2 plants, M)
Qingdao, China (M)
Jamshedpur, India (M)
Charleston, United States (M)
Taishan, China (M)
Mahindra World City, India (M)
Rochester Hills, United States (M)
Hanover, Germany (M)
Lucknow, India (M)
North Mankato, United States (M)
Langehagen, Germany (L)
Chennai, India (TT)
Hanover, United States (M)

Gronau, Germany (M)
Pantnagar, India (M)
Wytheville, United States (M)
Mannheim, Germany (M)
Pyungtaek, Korea (M)
Hebron, United States (M)

A number of our facilities are undertaking responsive actions to address groundwater and soil issues. Expenditures in 2018 to evaluate and remediate these sites were not material, and are also not expected to be material in 2019. Additional sites may be identified for environmental remediation in the future, including properties previously transferred and with respect to which the Company may have contractual indemnification obligations.

Available Information

Our web site is located at www.wabco-auto.com. Our periodic reports and all amendments to those reports required to be filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the web site. During the period covered by this report, we posted our periodic reports on Form 10-Q and our current reports on Form 8-K and any amendments to those documents to our web site as soon as such reports were filed or furnished electronically with the Securities Exchange Commission (SEC). We will continue to post to our web site such reports and amendments as soon as reasonably practicable after such reports are filed with or furnished to the SEC.

The Separation of WABCO from Trane

The spin-off by Trane of its Vehicle Control Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to Trane's shareholders (the Distribution). The Distribution was effected through a separation and distribution agreement pursuant to which Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares of outstanding Trane common stock to each shareholder on the record date. Trane received a private letter ruling from the Internal Revenue Service (IRS) and an opinion from tax counsel indicating that the spin-off was tax free to the shareholders of Trane and WABCO.

Code of Conduct and Ethics

Our Code of Conduct and Ethics, which applies to all employees, including all executive officers and senior financial officers and directors, is posted on our web site www.wabco-auto.com. The Code of Conduct and Ethics is compliant with Item 406 of SEC Regulation S-K and the NYSE corporate governance listing standards. Any changes to the Code of Conduct and Ethics that affect the provisions required by Item 406 of Regulation S-K will also be disclosed on the web site.

Any waivers of the Code of Conduct and Ethics for our executive officers, directors or senior financial officers must be approved by our Audit Committee and those waivers, if any are ever granted, would be disclosed on our web site under the caption “Exemptions to the Code of Conduct and Ethics.” There have been no waivers to the Code of Conduct and Ethics.

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ITEM 1A.    RISK FACTORS
Any of the following factors could have a material adverse effect on our future operating results as well as other factors included in “Management's Discussion and Analysis of Financial Condition and Results of Operations - Information Concerning Forward Looking Statements.”
Risks Relating to Our Business

Our sales could decline due to macro-economic factors, downturns in the industry, regulatory changes, and other factors outside of our control.

Changes in economic conditions, significant downturns in our industry, regulatory changes impacting our supply chain and the purchasing patterns of commercial vehicles, including the ability to trade across borders and import and export our products, and changes in the local economies of the countries or regions in which we sell our products, such as changes in consumer confidence, increases in interest rates, inflation and increases in unemployment, could affect demand for our products, which could negatively affect our business and results of operations.

Demand for new trucks and buses in the markets in which we operate has a significant impact on our sales. Adverse economic conditions in our markets, particularly in Europe, and other factors may cause our customers to reduce truck and bus production, which could have an adverse effect on our results of operations and financial condition.

A global recession would negatively impact our customers and result in reduced demand for our products, which would therefore have a significant negative impact on our business.               

During the 2008-2009 recession, the credit markets experienced a period of unprecedented turmoil and upheaval characterized by significantly reduced availability of credit and increased borrowing costs.  The disruptions in the credit markets and impacts of the global recession negatively impacted consumer spending patterns and caused our customers to reduce truck and bus production.  During 2012, the commercial vehicle industry experienced an abrupt slowdown to the significant recovery seen in 2010 and 2011 in our more developed markets, in addition to double digit declines in some of our emerging markets, namely Brazil and China. A further global recession could cause our customers to again reduce truck and bus production, which would have a negative impact on our business and results of operations, our operating cash flows and our financial condition.

Our exposure to exchange rate fluctuations on cross border transactions and the translation of local currency results into U.S. Dollars could negatively impact our results of operations.

We conduct business through subsidiaries in many different countries, including most of the major countries of Western and Eastern Europe, Brazil, Russia, China, South Korea, India, Thailand and Japan, and fluctuations in currency exchange rates have a significant impact on the reported results of our operations, which are presented in U.S. Dollars. In 2018, approximately 78% of our combined sales occurred outside of the United States. A significant and growing portion of our products are manufactured in best-cost countries and sold in various countries. Cross border transactions, both with external parties and intercompany relationships, result in exposure to foreign currency exchange effects. Accordingly, fluctuations in the currency exchange rates could negatively impact our results of operations, especially fluctuations in the exchange rates of the currencies for the countries referred to above. Additionally, our results of operations are translated into U.S. Dollars for reporting purposes. The strengthening or weakening of the U.S. Dollar results in unfavorable or favorable translation effects as the results of foreign locations are translated into U.S. Dollars.

The Company could be subject to an increase in its tax rates following the adoption of new U.S. or international tax legislation.

The Company is subject to taxes in the U.S. and numerous foreign jurisdictions where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, the tax rate in various jurisdictions may be subject to significant changes. The Company’s overall effective tax rate could be affected by changes in the mix of earnings in countries with different statutory tax rates or changes in tax laws or their interpretation.

The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles relating to Base Erosion and Profit Shifting (BEPS). These changes are being adopted and implemented by many of the countries in which we do business and may increase our taxes in these countries. In addition, the European Commission has launched several initiatives to implement BEPS actions including an anti-tax avoidance directive and having a common (consolidated) corporate tax base. One impact for the Company is that the group's Dutch hybrid financing structure will no longer be effective as of January 1, 2019. The Company is in the process of establishing new treasury function in Switzerland but this

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change will give rise to an increase in our effective tax rate.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (The Tax Act). The Tax Act includes a reduction in the corporate tax rate to 21%, from 35%, implementing a territorial tax system, a one-time transition tax on unrepatriated earnings of foreign subsidiaries at reduced tax rates regardless of whether the earnings are repatriated and the modification or repeal of many business deductions and credits.

While the Tax Act provides for a territorial tax system, beginning in 2018, it includes the global intangible low-taxed income (GILTI) provision. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on foreign subsidiary's tangible assets. The GILTI tax expense is primarily caused by a U.S. foreign tax credit limitation which requires an allocation of interest expense to the GILTI income, effectively rendering the allocated interest expense non-deductible. The GILTI provision has resulted in a $1.5 million increase in income tax expense for 2018.

The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. During 2017, the Company recognized provisional income tax expense of $100.0 million. The provisional U.S. tax is comprised of the estimated transition tax payable with the Company's U.S. tax filings of $196.4 million offset by the reversal of previously recorded deferred tax liabilities on outside basis differences in foreign subsidiaries of $96.4 million. During 2018, the Company recognized $5.8 million of income tax expense related to the final transition tax payable of $202.2 million included on the Company's 2017 U.S. tax filing. In addition, we recognized $2.0 million of income tax expense related to changes in the revaluation of deferred tax assets and liabilities, which was primarily due to finalization of R.H. Sheppard Co., Inc. purchase accounting. The accounting for the tax effects of the Tax Act has been completed in 2018.

The ultimate impact of the Tax Act may differ from our assessment and amounts recorded as income tax expense may require further adjustment due to, among other things, additional analysis, changes in interpretations or applications of the Tax Act, and additional regulatory guidance that may be issued.

Our annual effective tax rate will likely increase, perhaps significantly, which would negatively impact our results of operations.

Our overall effective tax rate (ETR) is equal to our total expense as a percentage of our total profit or loss before tax. However, tax expenses and benefits are determined separately for each tax paying entity or group of entities that is consolidated for tax purposes in each jurisdiction.

The Company’s ETR of 10.6% for the year ended December 31, 2018 included non-recurring items which resulted in our ETR being significantly lower than our statutory rate of 21%. See Note 17 of Notes to the Consolidated Financial Statements for a detailed explanation of the ETR for the year ended December 31, 2018. The main non-recurring items in 2018 reduced the ETR in aggregate by 9.7%. In addition, other tax risks identified separately may give rise to an increase in our ETR.

Management’s current estimate of the 2019 effective tax rate is approximately 18%, which includes the anticipated benefit associated with the reorganization of the Company’s treasury function which will be located in our new corporate headquarters in Switzerland and assumes that we will be able to establish a regulated insurance company to better manage our group unfunded pension liabilities - see "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for 2018 Compared with 2017 - Income Taxes,” and Note 14 of Notes to the Consolidated Financial Statements. If we are not able to establish the regulated insurance company described above and to realize the tax benefits associated with these projects, our ETR could significantly increase, which may materially and adversely impact our results of operations.

The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results.

As of December 31, 2018, we had approximately $161.3 million in net deferred tax assets. These deferred tax assets include post-retirement and other employee benefits and net operating loss carryovers that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is insufficient evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to record or further adjust a valuation allowance to revalue our deferred tax assets. Such a revaluation could result in material non-cash expense in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations.

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The occurrence of tax liabilities arising from tax audits in the jurisdictions in which we operate could materially and adversely affect our overall effective tax rate and our results of operations.

The Company is subject to tax audits in all major countries that it does business. While the Company believes it complies with all local country tax laws, there are many transactions and calculations where the ultimate tax determination is uncertain and significant judgment is required in evaluating uncertain tax positions. Although the Company believes its tax estimates and reserves are adequate for all uncertain tax positions, if the results of an audit or litigation are different from the amounts accrued it could have a material effect on the Company’s consolidated financial statements in the period or periods in which the determination is made. We adjust the estimates and reserves in light of changing facts and circumstances such as the closing of a tax audit or a court decision.

We may have exposure to additional tax liabilities as a result of the Company no longer meeting the requirements for certain tax rulings it has been granted.

WABCO has received a number of tax rulings and incentives in countries in which it is carrying out significant operations. If these incentives are revoked or if the Company no longer complies with the tax incentive requirements, it may have a significant impact on the Company’s global effective tax rate which could have a material adverse effect on our results of operations.

The United Kingdom’s referendum to exit from the European Union will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

The United Kingdom has voted to exit from the European Union (commonly referred to as “Brexit”) and the terms of the withdrawal and the United Kingdom’s relationship with the European Union after the withdrawal are subject to ongoing negotiations. The United Kingdom may decide to leave the European Union on March 29, 2019 with no agreement (a so-called “hard Brexit”).

The Brexit vote and subsequent negotiations have impacted global markets and the value of the British Pound as compared to the U.S. dollar and other major currencies. In addition, there remains considerable uncertainty around Brexit and volatility in the securities markets and in currency exchange rates may continue. The effects of Brexit on the economies of the European Union are also unknown and unpredictable, especially in the case of a hard Brexit. It is possible that the level of economic activity in the United Kingdom and the European region will be adversely impacted and that there will be increased regulatory and legal complexities and costs.

While we have not experienced any material financial impact from Brexit on our business to date, we cannot predict the results of the Brexit negotiations or their future effects. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of negotiations related to tariffs, tax, trade, security and other regulatory matters. The effects of Brexit could be disruptive to our operations and business relationships in the European markets and elsewhere.

We are subject to general risks associated with our foreign operations.

In addition to the currency exchange risks inherent in operating in many different foreign countries, there are other risks inherent in our international operations.

The risks related to our foreign operations that we more often face in the normal course of business include:

increases in non-U.S. tax rates and the amount of non-U.S. earnings relative to total combined earnings could change and impact our combined tax rate;
foreign earnings may be subject to withholding requirements or the imposition of tariffs, price or exchange controls, or other restrictions;
general economic and political conditions in countries where we operate may have an adverse effect on our operations in those countries;
governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas and customs duties and tariffs);
we may have difficulty complying with a variety of foreign laws and regulations, some of which may conflict with United States law, and the uncertainty created by this legal environment could limit our ability to effectively enforce our rights in certain markets; and

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in several of the countries in which we do business, we rely upon the ongoing performance of our joint venture partners who bear risks similar to our risks and also may include obligations they have under related shareholders' agreements and risk of being denied access to the capital markets which could lead to resource demands on the Company in order to maintain or advance its strategy.
 
The ability to manage these risks could be difficult and may limit our operations and make the manufacture and distribution of our products internationally more difficult, which could negatively affect our business and results of operations.

Increasing our financial leverage could affect our operations and profitability.

As of December 31, 2018, our total debt balance was $845.2 million compared to $1,409.8 million as of our prior fiscal year end. Our indebtedness could affect our business and financial condition in various ways, including:

increasing our interest expense under our revolving credit facilities or other variable-rate borrowing if interest rates were to rise; and
potentially limiting our ability to borrow additional funds on favorable terms, or at all.

While we believe we will have the ability to service our debt, respect all of the covenants contained in the credit facilities and obtain additional capital in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control. If we are unable to service our debt or obtain additional capital in the future on favorable terms, our financial condition and results of operations would be adversely affected.

Changes in factors that impact the determination of our non-U.S. pension liabilities may adversely affect us.

Certain of our non-U.S. subsidiaries sponsor defined benefit pension plans, which generally provide benefits based on negotiated amounts for each year of service. The Company’s pension expense and its required contributions to its pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions the Company uses to measure its defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value and the inflation rate. The Company could experience increased pension expense due to a combination of factors, including the decreased investment performance of its pension plan assets, decreases in the discount rate and changes in its assumptions relating to the expected return on plan assets. The Company could also experience increased other post-retirement expense due to decreases in the discount rate, increases in the health care trend rate and changes in demographics. If the actual trends in these factors are less favorable than our assumptions, this could have an adverse effect on our results of operations and financial condition.

We purchase components and parts containing base metals and other commodities. If we are unable to obtain such components and parts or obtain them at reasonable price levels due to fluctuations in the costs of the underlying raw materials, our ability to maintain existing sales margins may be affected.

We purchase a broad range of materials and components and parts throughout the world in connection with our manufacturing activities. Major items include electronic components and parts containing aluminum, steel, copper, zinc, rubber and plastics. The cost of components and parts, which reflect the cost of the raw materials used therein, represents a significant portion of our total costs. Price increases of the underlying commodities may adversely affect our results of operations. Although we maintain alternative sources for components and parts, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials to our suppliers. The sudden inability of a supplier to deliver components or to do so at reasonable prices could have a temporary adverse effect on our production of certain products or the cost at which we can produce those products. In addition, any change in the supply or price of raw materials could materially adversely affect our future business and results of operations.

If we are not able to maintain good relations with our employees, we could suffer work stoppages that could negatively affect our business and results of operations.

Employees located in our sites in Europe, Asia and South America are subject to collective bargaining, with internal company agreements or external agreements at the region or country level. Currently approximately 50% of our workforce is covered by collective bargaining agreements. These employees' right to strike is typically protected by law and union membership is confidential information which does not have to be provided to the employer. Our U.S. facilities are non-union. Any disputes with our employee

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base could result in work stoppages or labor protests, which could disrupt our operations. Any such labor disputes could negatively affect our business and results of operations.

We are dependent on key customers.

We rely on several key customers. For the fiscal year ending December 31, 2018, sales to our top ten customers accounted for approximately 49% of our sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Such customer orders are dependent upon their markets and customers and may be subject to delays or cancellations. As a result of dependence on our key customers, we have experienced and could experience in the future a material adverse effect on our business and results of operations if any of the following were to occur:

the loss of any key customer, in whole or in part;
a declining market in which customers reduce orders or demand reduced prices; or
a strike or work stoppage at a key customer facility, which could affect both its suppliers and customers.
 
We are subject to price reduction demands from our OEM customers. These price reductions could adversely affect the results of our operations

Downward pricing pressure is a characteristic of the automotive industry, and as with other suppliers to commercial vehicle OEMs, we continue to experience price reduction demands from our customers. In the face of lower prices to customers, we must reduce our operating costs in order to maintain profitability. Whilst we have successfully implemented cost reduction initiatives, we anticipate our customers will continue to pursue aggressive pricing strategies. Customers may also request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the price per unit of the applicable component. If the Company is unable to offset customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives, technology enhancements and other initiatives, if a given program is not launched or is launched with significantly lower volumes than planned, or if we are unable to avoid price reductions from our customers, the results of our operations could be adversely affected.

If there are changes in the environmental or other regulations that affect one or more of our current or future products, it could have a negative impact on our business and results of operations.

We are currently subject to various environmental and other regulations in the U.S. and internationally. Risk of environmental liability is inherent in our current and former manufacturing activities. Under certain environmental laws, we could be held jointly and severally responsible for the remediation of any hazardous substance contamination at our past and present facilities and at third party waste disposal sites and could also be held liable for damages to natural resources and any consequences arising out of human exposure to such substances or other environmental damage. See Environmental Regulation for a discussion of the Company’s current remediation efforts. While we have a number of proactive programs underway to minimize the impact of the production and use of our products on the environment and believe that we are in substantial compliance with environmental laws and regulations, we cannot predict whether there will be changes in the environmental regulations affecting our products.

Any changes in the environmental and other regulations which affect our current or future products could have a negative impact on our business if we are unable to adjust our product offering to comply with such regulatory changes. In addition, it is possible that we will incur increased costs as a result of complying with environmental regulations, which could have a material adverse effect on our business, results of operations and financial condition.

We may be subject to product liability, warranty and recall claims, which may increase the costs of doing business and adversely affect our business, financial condition and results of operations.

We are subject to a risk of product liability or warranty claims if our products actually or allegedly fail to perform as expected, whether or not due to defective supplier parts, or the use of our products results, or are alleged to result, in bodily injury and/or property damage. While we maintain reasonable limits of insurance coverage to appropriately respond to such exposures, large product liability claims, if made, could exceed our insurance coverage limits and insurance may not continue to be available on commercially acceptable terms, if at all. We may incur significant costs to defend these claims and may not be able to recover related costs from suppliers. We may also experience any product liability losses in the future. In addition, if any of our designed products are or are alleged to be defective, we may be required to participate in recalls and exchanges of such products. In the past five years, our net warranty expense has fluctuated between approximately 0.8% and 1.1% of sales on an annual basis. Individual quarters were above or below the annual averages. The future cost associated with providing product warranties and/or bearing

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the cost of repair or replacement of our products could exceed our historical experience and have a material adverse effect on our business, financial condition and results of operations.

We are required to plan our capacity well in advance of production and our success depends on having available capacity and effectively using it.

We principally compete for new business at the beginning of the development of our customers' new products. Our customers' new product development generally begins significantly prior to the marketing and production of their new products and our supply of our products generally lasts for the life of our customers' products. Nevertheless, our customers may move business to other suppliers or request price reductions during the life cycle of a product. The long development and sales cycle of our new products, combined with the specialized nature of many of our facilities and the resulting difficulty in shifting work from one facility to another, could result in variances in capacity utilization. In order to meet our customers' requirements, we may be required to supply our customers regardless of the actual cost to us and consequently we may suffer an adverse impact on our operating profit margins and results of operations.

We must continue to make technological advances, or we may not be able to successfully compete in our industry.

We operate in an industry in which technological advancements are necessary to remain competitive. Accordingly, we devote substantial resources and collaborate with technology development partners to improve already technologically complex products and to remain a leader in technological innovation. However, if we fail to continue to make technological improvements or our competitors develop technologically superior products, it could have an adverse effect on our operating results or financial condition.

A disruption in our information technology systems including one related to cyber security could pose a risk to the security of our systems, products and services and could adversely affect our business and financial performance.

We rely on the accuracy, capacity and security of our information technology systems. Despite our efforts to protect data or information, our products, services, and systems, and those of our third-party service providers, may be vulnerable to failures, security breaches, theft, misplaced or lost data, programming and/or human errors. A system failure, security breach or error could result in:
the unauthorized access, use, disclosure, modification or destruction of information;
the compromising of sensitive, confidential or personal data or information, including our intellectual property or trade secrets;
the improper use of our systems, software solutions or networks; and
production downtimes and operational disruptions.
We may incur significant costs related to the threat of any unauthorized access to or malfunction of our systems, products or services, including but not limited to, costs of protecting our products and systems. To the extent that data is inappropriately used or disclosed, lost, modified or destroyed, our business may be interrupted and we may incur significant costs, fines or penalties related to defective products, regulatory investigations, and litigation. The development of products linked to autonomous driving may be vulnerable to security breaches or system failure and entail severe damages in case of accident. Our reputation and brand names could be materially damaged by the threat or perpetration of cyber crime and the sales of our products and services may decrease. Each of these outcomes could adversely affect our competitive position, relationships with our customers, financial condition and results of operations.

We may not be successful in executing and integrating acquisitions into our operations, which could harm our results of operations and financial condition.

We routinely evaluate potential acquisitions and may pursue acquisition opportunities, some of which could be material to our business. We cannot provide assurance whether we will be successful in pursuing any acquisition opportunities or what the consequences of any acquisition would be. We may encounter various risks in any acquisitions, including:

the possible inability to integrate an acquired business into our operations;
diversion of management’s attention;
loss of key management personnel;
unanticipated problems or liabilities; and
increased labor and regulatory compliance costs of acquired businesses.

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Some or all of those risks could impair our results of operations and impact our financial condition. We may finance any future acquisitions from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. Acquisitions may involve the expenditure of significant funds and management time.

Acquisitions may also require us to increase our borrowings under our bank credit facilities or other debt instruments, or to seek new sources of liquidity. Increased borrowings would correspondingly increase our financial leverage, and could result in lower credit assessments and increased future borrowing costs. These risks could also reduce our flexibility to respond to changes in the industry or in general economic conditions. If we are unable to identify or execute on appropriate opportunities for acquisition, investment or growth, our business could be materially adversely affected.

The Public Company Accounting Oversight Board, or PCAOB, is currently unable to inspect the audit work and practices of auditors operating in Belgium, including our auditor.

Our auditors, Ernst & Young Bedrijfsrevisoren BCVBA/Reviseurs d'Entreprises SCCRL, are registered with the Public Company Accounting Oversight Board (PCAOB). Our auditors, like any other independent registered public accounting firms operating in Belgium, are not yet permitted, because of Belgian regulation impediments, to be subject to inspections by the PCAOB that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. As a result, our investors may not realize the potential benefits of such inspections.



Risks Relating to the Separation

We are responsible for certain of Trane's contingent and other corporate liabilities.

Under the Indemnification and Cooperation Agreement, the Separation and Distribution Agreement and the Tax Sharing Agreement, our wholly-owned subsidiary WABCO Europe BVBA has assumed and is responsible for certain contingent liabilities related to Trane's business (including certain associated costs and expenses, whether arising prior to, at or after the Distribution) and will indemnify Trane for these liabilities. Among the contingent liabilities against which we will indemnify Trane and the other indemnities, are liabilities associated with certain non-U.S. tax liabilities and certain U.S. and non-U.S. environmental liabilities associated with certain Trane entities.
 

Risks Relating to Our Common Stock

Your percentage ownership in WABCO may be diluted in the future.

Your percentage ownership in WABCO may be diluted in the future because of equity awards that have already been granted and that we expect will be granted to our directors and officers in the future under our Omnibus Incentive Plan. In addition, we may in the future issue additional equity securities in order to fund working capital needs, capital expenditures and product development, or to make acquisitions and other investments, which may dilute your ownership interest.

We cannot assure you that we will repurchase shares or pay any dividends.

While we have historically returned value to shareholders in the form of share repurchases and/or dividends, our ability to repurchase shares and pay dividends may be limited by available cash, contingent liabilities and surplus. Moreover, all decisions regarding the declaration and payment of dividends and share repurchases will be at the sole discretion of our Board and will be evaluated from time to time in light of our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant.

Provisions in our amended and restated certificate of incorporation and amended and restated by-laws, and certain provisions of Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:


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a Board of Directors that is divided into three classes with staggered terms;
elimination of the right of our shareholders to act by written consent;
rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our Board to issue preferred stock without shareholder approval; and
limitations on the right of shareholders to remove directors.

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board determines is not in the best interests of our shareholders and our company.


ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.


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ITEM 2.    PROPERTIES
    
As of February 15, 2019, our manufacturing activities, test tracks and engineering centers are located at 37 sites in 12 countries.
Site Location
  
Activity and Major Products Manufactured
Campinas, Brazil
  
Vehicle control systems
Jinan, China (2 sites)
  
Braking systems and compressors
Qingdao, China
  
Braking systems
Taishan, China
 
Foundation brakes
Shanghai, China
 
Engineering center
Rovaniemi, Finland
 
Test track
Hanover, Germany (2 sites)
  
Vehicle control systems and engineering center
Gronau, Germany
  
Compressors and hydraulics
Mannheim, Germany
  
Foundation brakes
Jeversen, Germany
 
Test track
Ambattur, India
 
Vehicle control systems
Jamshedpur, India
  
Vehicle control systems
Mahindra World City, India
 
Vehicle control systems
Pantnagar, India
 
Vehicle control systems
Lucknow, India
 
Vehicle control systems
Chennai, India (2 sites)
 
Test track and engineering center
Pune, India
 
Engineering center
Pyungtaek, Korea
  
Braking systems
Stanowice, Poland
  
Remanufactured products
Wroclaw, Poland (3 sites)
  
Vehicle control systems (2 plants) and engineering center
Miass, Russia
 
Actuators and foundation brakes
Chelny, Russia
 
Braking systems
Rayong, Thailand
 
Actuators and foundation brakes
Charleston, SC, United States
  
Air compressors and braking system components
Rochester Hills, MI, United States
 
Remanufactured products
North Mankato, MN, United States
 
Braking systems
Wytheville, VA, United States
 
Steering systems
Hebron, KY, United States
 
Braking systems
Hanover, PA, United States
 
Steering systems and foundry
Auburn Hills, MI, United States
 
Application engineering
Empalme, Mexico
 
Braking systems
Toronto, Canada
 
Aerodynamic products

We own all of the plants described above, except for the Jinan, Shanghai, Rovaniemi, Pune, Taishan, Stanowice, Miass, Chelny, Rayong, Rochester Hills, Charleston, Auburn Hills and Empalme sites which are leased. Our properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry out our business. In 2018, the manufacturing plants, taken as a whole, met our capacity needs.

We also own or lease warehouse and office space for administrative and sales staff. Our headquarters, located in Brussels, Belgium, and our executive offices, located in Auburn Hills are leased.


ITEM 3.    LEGAL PROCEEDINGS
    
We may be party to a variety of legal proceedings with respect to environmental related, employee related, product related, and general liability and automotive litigation related matters that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will

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not have a material adverse effect on our combined results of operations or financial position. For more information on current legal proceedings, refer to Note 16 of Notes to the Consolidated Financial Statements.

ITEM 4.    MINE SAFETY DISCLOSURES

None.


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ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information as of February 15, 2019 with respect to each person who is an executive officer of the Company:
Name
Age
Position(s)
Jacques Esculier
59
Chairman of the Board of Directors and Chief Executive Officer
Roberto Fioroni
49
Chief Financial Officer
Mazen Mazraani
50
Chief Human Resources Officer
Nicolas Bardot
47
Chief Supply Chain Officer
Lisa Brown
40
Chief Legal Officer and Secretary
Jorge Solis*
46
Senior V.P. Corporate Business Development
Nick Rens
55
President EMEA
Sean Deason
47
Vice President Controller and Investor Relations
Christian Brenneke
44
Chief Technology Officer

* Current employment will end on February 28, 2019.

Each officer of the Company is appointed by the Board of Directors to a term of office expiring on the date of the first Board meeting after the Annual Meeting of Shareholders next succeeding his or her appointment or such officer's earlier resignation or removal.

Jacques Esculier has served as our Chief Executive Officer and director since July 2007. In May 2009, he was appointed Chairman of our Board of Directors. Prior to July 2007, Mr. Esculier served as Vice President of Trane and President of its Vehicle Control Systems business, a position he had held since January 2004. Prior to holding that position, Mr. Esculier served in the capacity of Business Leader for the Trane Commercial Systems' Europe, Middle East, Africa, India & Asia Region from 2002 through January 2004. Prior to joining Trane in 2002, Mr. Esculier spent more than six years in leadership positions at AlliedSignal/Honeywell. He was Vice President and General Manager of Environmental Control and Power Systems Enterprise based in Los Angeles, and Vice President of Aftermarket Services-Asia Pacific based in Singapore. Mr. Esculier is a member of the Board of Directors of Pentair plc.

Roberto Fioroni joined WABCO in June 2018 as Chief Financial Officer. Prior to his appointment at WABCO, Mr. Fioroni served from March 2014 as Vice President, Finance, with The Goodyear Tire & Rubber Company’s Europe, Middle East and Africa (EMEA) business unit. Mr. Fioroni joined Goodyear in 2009 as Finance Director for the Eastern Europe, Middle East and Africa (EEMEA) region before being appointed Vice President, Global Internal Audit, in 2011. Prior to joining Goodyear, Mr. Fioroni was with General Electric for 13 years where he held a number of senior finance positions. He was latterly Chief Financial Officer (EMEA) for General Electric’s Security Division. Mr. Fioroni holds a degree in Business Administration from the Universita Commerciale Luigi Bocconi in Milan, Italy.
        
Mazen Mazraani has served as our Chief Human Resources Officer since September 2016, having served as our Interim Chief Human Resources Officer since October 2015. Prior to this, Mr. Mazraani served as our Compensation and Benefits Leader, a position he had held since November 2008, and as our Compensation & Benefits Manager from June 2007 when he joined WABCO. Before joining WABCO, Mr. Mazraani served as Head of Compensation & Benefits for Dexia, a Belgian-French Bank specialized in public financing. Before taking up his in-house roles, Mr. Mazraani worked for 7 years as a tax consultant at Coopers & Lybrand and Ernst & Young. Specializing in Journalism and Communication from Brussels University, he holds a Bachelor's degree in Business Administration and a Master's degree in Tax Management from Solvay Business School in Brussels.

Nicolas Bardot was appointed as our Chief Supply Chain Officer in September 2016. Prior to this, Mr. Bardot served as our Vice President, Sourcing and Purchasing, since September 2013. Prior to holding this position, Mr. Bardot was our Strategic Purchasing Leader. Prior to joining WABCO, Mr. Bardot worked in France, the Czech Republic and China, and was a business purchasing leader for Valeo Group, a global automotive supplier. Overall, he has gained more than 17 years of experience in positions of increasing responsibility within sourcing and business management. Mr. Bardot holds a Master’s degree in Purchasing and Supply Chain Management from ESSEC Business School and completed executive training in business administration and management at INSEAD, both located in Paris, France.

Lisa Brown has served as our Chief Legal Officer and Secretary since June 2016 after holding the role of Vice President, Legal and Secretary since April 2015. Prior to this, Ms. Brown served as our Senior Legal Counsel since February 2012. Prior to

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joining WABCO, Ms. Brown served as Legal Director and Company Secretary since March 2011 for the largest pet care retailer in the United Kingdom. From 2006 to 2011, she held various legal leadership roles for SSL International Plc, one the world’s leading providers of consumer healthcare products. Ms. Brown held the position of Group Head of Legal and Intellectual Property and was responsible for creating and driving legal strategy and risk management across the global operations, including research and development, manufacturing, and sales. Before taking up her in-house roles, Ms. Brown worked in private practice as an Intellectual Property Attorney specializing in brand and copyright protection. Ms. Brown is a registered trademark attorney. She holds a Bachelor of Laws degree, as well as a Diploma in Legal Practice from Nottingham Law School in Nottingham, United Kingdom.

Jorge Solis was appointed Senior V.P. Corporate Business Development in October 2018. Mr. Solis joined WABCO in August 2010 as Strategic Purchasing Leader. He was promoted in October 2011 to Vice President, Sourcing and Purchasing, a position he held through September 2013. At that time, Mr. Solis was appointed Vice President, Driveline and Suspension Controls Business Unit. In September 2015, Mr. Solis took on the role of Vice President, Vehicle Dynamics and Controls Business Unit and the role of President, Truck, Bus and Car OEMs Division in August 2016. Prior to joining WABCO, Mr. Solis worked in Mexico, the United States and France, and was a business purchasing leader for Valeo Group. Overall, he has gained more than 20 years of experience in positions of increasing responsibility within sourcing, quality, manufacturing, and business management. Mr. Solis holds a Master’s degree in engineering from Technical University in Monterrey (ITESM), Mexico. In addition, he completed educational programs in international marketing at ITESM, as well as executive training in business administration and management at INSEAD.

Nick Rens was appointed EMEA President in October 2018. Prior to this, Mr. Rens served as our President, Trailer Systems, Aftermarket & Off-Highway since July 2014 and our Vice President, Aftermarket since November 2008. This was in addition to his role as Vice President, Trailer Systems, a role which he had held since 2005. He also assumed the role of Vice President, Driveline Controls, from January 2013 to September 2013. Previously, Mr. Rens worked for three years as our regional trailer sales leader for southern and western Europe based in Claye Souilly, France. Since 1999, Mr. Rens has also been Managing Director of WABCO Belgium where he held several sales leadership roles both in the Aftermarket and Original Equipment sales organizations. Mr. Rens has worked at the Company for almost his entire career, having joined the Company in 1989 as a product line specialist.

Sean Deason has served as our Vice President Controller and Investor Relations since June 2015. Prior to joining WABCO, Mr. Deason spent four years with Evraz N.A. where he served as Vice President, Financial Planning & Analysis. Prior to Evraz, Mr. Deason spent twelve years with Lear Corporation where he served as Director, Finance, Corporate Business Planning & Analysis, Director, Finance, Asia Pacific Operations, Assistant Treasurer, and held various other positions of increasing responsibility from August 1999. Mr. Deason holds a Masters of International Management from Thunderbird School of Global Management and is a Certified Management Accountant.

Christian Brenneke was appointed as our Chief Technology Officer in February 2018, having served as our Vice President, Engineering, to lead WABCO’s technology innovation and new product developments since October 2015. Prior to holding this position, Dr. Brenneke was leading the Advanced Braking Systems business unit from September 2013, and took on the role of Vice President, Vehicle Dynamics and Controls, from April 2014. Prior to this, Dr. Brenneke held various management roles, including Global Project Management Leader and Team Leader for Software Development, since joining WABCO in 2008. Prior to joining WABCO, Dr. Brenneke spent several years in research, development and program management for driver assistance systems and autonomous driving at Volkswagen Group in Germany. Dr. Brenneke holds a graduate degree in electrical engineering specializing in mechatronics and a doctorate degree in engineering both from Leibniz University in Hanover, Germany. In addition, he earned an M.B.A. degree in general management from the University for Applied Sciences in Hamburg, Germany.



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PART II

ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on NYSE under the symbol “WBC”. Our Certificate of Incorporation, as amended, authorizes the Company to issue up to 400,000,000 shares of common stock, par value $.01 per share, and 4,000,000 shares of preferred stock, par value $.01 per share.

We estimate that there are approximately 315 holders of record of the Company's common stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals or entities are registered in the name of a nominee of The Depository Trust Company, a securities depository for banks and brokerage firms. As of February 4, 2019, there were 61,318 beneficial owners of our common stock.



ISSUER PURCHASES OF EQUITY SECURITIES

Our Board of Directors has approved open market stock repurchase programs consisting of the following stock repurchase program authorizations as also discussed in Note 7 of Notes to Consolidated Financial Statements.

On December 2, 2016, the Board of Directors authorized the repurchase of shares of up to $600.0 million of common stock. From January 1, 2017 to December 31, 2018, the Company purchased 3,511,454 shares for $420.0 million. This authorization for stock repurchases expired on December 31, 2018.

All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Exchange Act, and
certain repurchases were made pursuant to plans intending to comply with Rule 10b5-1 of the Exchange Act. The timing and amount of share repurchases depended on a variety of factors including, among other things, share price, market conditions and applicable legal and regulatory requirements.

A summary of the repurchase activity for the year ended December 31, 2018 follows.


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Period
 
Total Number of Shares Purchased
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, 2017
 
1,033,000

$116.13
1,033,000

$480,041,067
 
 
 
 
 
 
January 1 - January 31
 

-

 
February 1 - February 28
 

-

 
March 1 - March 31
 
221,000

$138.74
221,000

 
Total first quarter
 
221,000

$138.74
221,000

$449,378,909
 
 
 
 
 
 
April 1 - April 30
 
48,000

$130.30
48,000


May 1 - May 31
 
354,000

$128.58
354,000

 
June 1 - June 30
 
306,000

$122.26
306,000

 
Total second quarter
 
708,000

$125.96
708,000

$360,196,131
 
 
 
 
 
 
July 1 - July 31
 
72,000

$123.26
72,000


August 1 - August 31
 
398,400

$122.85
398,400


September 1 - September 30
 
270,090

$119.76
270,090


Total third quarter
 
740,490

$121.76
740,490

$270,034,351
 
 
 
 
 
 
October 1 - October 31
 
324,700

$109.61
324,700


November 1 - November 30
 
282,060

$115.42
282,060

 
December 1 - December 31
 
202,204

$108.07
202,204

 
Total fourth quarter
 
808,964

$111.25
808,964

$0
 
 
 
 
 
 
Total through December 31, 2018
 
3,511,454

$119.6
3,511,454

$0


(a) Relates to the approved share repurchase programs as discussed above.

On December 7, 2018, the Board of Directors authorized the repurchase of up to an additional $600 million of common stock from January 1, 2019 through December 31, 2020.




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PERFORMANCE GRAPH

The following graph and table compare the cumulative total shareholder's return on our common stock from December 31, 2013 through December 31, 2018, with the Standard & Poor's 500 Index and the Standard & Poor's Auto Parts & Equipment Index. The graph and table use data supplied by S&P Capital IQ.

The comparisons reflected in the graph and table are not intended to forecast the future performance of the common stock and may not be indicative of such future performance.
Total Shareholder Returns
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12715251&doc=40
 
12/31/2013
12/31/2014

12/31/2015

12/31/2016

12/31/2017

12/31/2018

WABCO Holdings Inc.
100
112.17

109.47

113.64

153.62

114.91

S&P 500 Index
100
113.69

115.26

129.05

157.22

150.33

S&P 500 Auto Parts & Equipment Index
100
103.68

97.82

95.66

141.11

101.70






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Table of Contents

ITEM 6.
SELECTED FINANCIAL DATA
 
(Amounts in millions, except share and per share data) 
 
Year Ended December 31,  
 
2018
 
2017
 
2016
 
2015
 
2014
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
3,831.0

 
$
3,304.2

 
$
2,810.0

 
$
2,627.5

 
$
2,851.0

Cost of sales
 
2,658.5

 
2,290.4

 
1,931.0

 
1,837.6

 
1,972.6

Gross profit
 
1,172.5

 
1,013.8

 
879.0

 
789.9

 
878.4

Costs and expenses:
 
 

 
 

 
 

 
 

 
 

Selling and administrative expenses
 
476.0

 
411.2

 
356.6

 
346.6

 
372.6

Research, development and engineering expenses
 
184.4

 
147.0

 
135.2

 
139.5

 
145.0

Other operating (income)/expense, net
 
(0.4
)
 
20.6

 
5.3

 
6.7

 
8.9

Operating income
 
512.5

 
435.0

 
381.9

 
297.1

 
351.9

Equity income of unconsolidated joint ventures
 
1.0

 
23.1

 
24.8

 
32.1

 
23.8

Gain on remeasurement of equity investments (1)
 

 
247.7

 

 

 

Other non-operating expense, net
 
(42.3
)
 
(37.2
)
 
(24.9
)
 
(24.6
)
 
(19.1
)
Interest (expense)/income, net
 
(7.5
)
 
(16.0
)
 
(12.7
)
 
(7.1
)
 
0.2

Income before income taxes
 
463.7

 
652.6

 
369.1

 
297.5

 
356.8

Income tax expense (2)
 
49.3

 
229.7

 
121.8

 
11.5

 
55.6

Net income including noncontrolling interests
 
414.4

 
422.9

 
247.3

 
286.0

 
301.2

Less: net income attributable to noncontrolling interests
 
20.3

 
16.8

 
24.3

 
10.8

 
9.7

Net income
 
$
394.1

 
$
406.1

 
$
223.0

 
$
275.2

 
$
291.5

Per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
7.46

 
$
7.53

 
$
4.00

 
$
4.76

 
$
4.87

Diluted
 
$
7.43

 
$
7.50

 
$
3.98

 
$
4.72

 
$
4.81

Average number of outstanding common shares:
 
 

 
 

 
 

 
 

 
 

Basic
 
52,846,962

 
53,903,938

 
55,695,738

 
57,768,018

 
59,907,763

Diluted
 
53,062,573

 
54,139,815

 
55,981,816

 
58,274,987

 
60,546,454

Balance Sheet Data (at end of period):
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
3,738.6

 
$
4,323.4

 
$
2,589.9

 
$
2,432.7

 
$
2,392.8

Total debt
 
$
845.2

 
$
1,409.8

 
$
503.7

 
$
315.2

 
$
87.1

Total shareholders' equity
 
$
1,176.8

 
$
1,121.4

 
$
786.7

 
$
841.6

 
$
1,152.8

Cash dividends per common share
 
$

 
$

 
$

 
$

 
$



(1) Gain on remeasurement of equity method investments includes gains resulting from the step up of equity method investments to their acquisition date fair values. See Note 22 of Notes to the Consolidated Financial Statements for additional information.

(2) Income tax expense for the year ended December 31, 2017 included incremental income tax expense mainly resulting from the Tax Cuts and Jobs Act. See Note 17 to the Consolidated Financial Statements for additional information.
     
For a comparative analysis of certain line items in the Income Statement Data section of this table, see Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” which follows.






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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting the results of operations and financial condition of WABCO during the years ended December 31, 2018, 2017 and 2016 and should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere herein. Certain information in this discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” above. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors”, “Information Concerning Forward-Looking Statements”, “Selected Financial Information”, “Liquidity and Capital Resources” and consolidated financial statements and related notes thereto included elsewhere herein.

Executive Overview

In 2018, the Company once again delivered strong top-line growth of 15.9% (13.9% excluding foreign currency translation effects) compared to 2017, of which 6.7% was related to acquisitions. This growth was achieved in an environment where the global production of trucks and buses greater than six tons increased only 2.5% compared to 2017. Our global aftermarket sales increased by 19.0% (17.5% excluding foreign currency translation effects), of which 11.7% was related to acquisitions.

WABCO continued to translate this strong sales growth into operating income which increased from $435.0 million in 2017 to $512.5 million in 2018. In spite of significant industry supply chain challenges in the first three quarters, WABCO's Operating System continued to provide fast and flexible responses to major market changes, delivering $74.9 million of materials and conversion productivity. Gross material productivity in 2018 represented 5.0% of material savings before the impact of commodity inflation, which had a negative impact of 1.5%, bringing net material productivity to 3.5%. Conversion productivity in our factories in 2018 represented 7.7%.

In 2018, among other accomplishments, we integrated two major acquisitions, formed new alliances and announced new technologies. We also continued to expand and enrich our portfolio of differentiated capabilities that improve the safety, efficiency, and connectivity of commercial vehicles.

As part of its change in organizational logic, WABCO decided to relocate its corporate headquarters to Bern, Switzerland, with the objective of creating a singular focus on fully globalizing WABCO’s advanced technology strategy. The current Brussels base will become the headquarters of its newly formed division covering Europe, Middle East and Africa.

Decoupling WABCO’s corporate headquarters from its four business regions will allow the Company to create a better structure to focus on the next wave of advanced technologies and scale their adoption globally. Switzerland is world-renowned for providing a highly favorable environment for breakthrough innovations and offers many distinct advantages for corporate headquarters.


Our Markets and Our Customers

Our sales are affected by changes in truck and bus (T&B) production. Europe is our largest geographic market and sales to T&B OEMs represent our largest customer group. The table below shows the relationship between our sales to European T&B OEMs, which account for approximately 40% of our global sales to T&B OEMs, and European T&B production for the last five years. Sales data is shown at a constant Euro to U.S. Dollar exchange rate for year to year comparability and to make comparisons to unit production meaningful. Over the past five years, our sales have outperformed the rate of European T&B production by an average of 2% per year.

Year to Year Change
 
2014
 
2015
 
2016
 
2017
 
2018
Sales to European T&B OEMs (at constant FX rates)
 
(7
)%
 
8
%
 
8
%
 
6
%
 
3
%
European T&B Production
 
(9
)%
 
6
%
 
1
%
 
8
%
 
2
%

In general, our sales track directionally with T&B builds. However, individual year to year sales changes are also influenced by other factors such as timing of orders and deliveries to T&B OEM customers, application content, new product introduction,

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price and introduction of new customer platforms. The level of truck build activity is influenced by general economic conditions, including interest rate levels and inflation.
     
Our aftermarket sales account for approximately 25% of total sales and are affected by a variety of factors: content on specific vehicles and breadth of our product range, number of commercial trucks in active operation, truck age, type of vehicles built, miles driven, demand for transported goods, overall economic activity and acquisitions. On average, our aftermarket sales (based on a constant exchange rate to the U.S. Dollar rate) have grown by 11% annually for the last five years as shown in the table below.
 
Year to Year Change 
2014
2015
2016
2017
2018
Average
Change 
Aftermarket Sales (at constant FX rates)
13
%
7
%
6
%
9
%
18
%
11
%

Distribution of WABCO's Sales by Major End-Markets, Product Types and Geography
 
 
2018
 
2017
 
2016
OE Manufacturers:
 
 
 
 
 
   Truck & Bus products
55
%
 
57
%
 
55
%
   Trailer products
10
%
 
9
%
 
10
%
   Car products
5
%
 
6
%
 
6
%
   Off highway
5
%
 
4
%
 
4
%
Aftermarket
25
%
 
24
%
 
25
%
 
100
%
 
100
%
 
100
%
Geography:
 

 
 

 
 

   Europe
49
%
 
52
%
 
54
%
   North America
23
%
 
18
%
 
14
%
   South America
3
%
 
3
%
 
3
%
   Asia
23
%
 
26
%
 
24
%
   Other
2
%
 
1
%
 
5
%
 
100
%
 
100
%
 
100
%

Our largest customers are Daimler and Volvo and account for approximately 14% and 11% of our sales, respectively. Other key customers include Ashok Leyland, TRATON, China National Heavy Truck Corporation (CNHTC), Cummins, Fiat (Iveco), Hino, Paccar and TATA Motors. For the fiscal years ended December 31, 2018, 2017 and 2016, our top 10 customers accounted for approximately 49%, 44% and 44% of our sales, respectively.


Results of Operations

Approximately 78% 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. Year-over-year changes in sales and expenses for 2018 compared with 2017 and 2017 compared with 2016 are presented both with and without the effects of foreign currency translation. Changes in sales and expenses excluding foreign exchange effects are calculated using current year sales and expenses translated at prior year exchange rates. Presenting changes in sales and expenses excluding the effects of foreign currency translation is not in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP), but we analyze this data 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 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. Management believes that presenting these non-U.S. GAAP financial measures is useful to shareholders because it enhances their understanding of how management assesses the operating performance of the Company's business.




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Results of Operations for 2018 Compared with 2017

The following table is a summary of sales, cost of sales, gross profit, operating expenses and other selected results of operations for the periods indicated.
  
 
Year ended
December 31,
 
 
 
Excluding Foreign
Exchange Translation **
(Amounts in millions)
2018
 
2017
 
% change
reported 
 
2018 adjusted
amount 
 
% change
adjusted 
Sales
$
3,831.0

 
$
3,304.2

 
15.9
 %
 
$
3,763.7

 
13.9
 %
Cost of sales
2,658.5

 
2,290.4

 
16.1
 %
 
2,622.7

 
14.5
 %
Gross profit
1,172.5

 
1,013.8

 
15.7
 %
 
1,141.0

 
12.5
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
660.0

 
578.8

 
14.0
 %
 
644.5

 
11.4
 %
Equity in net income of unconsolidated joint ventures
1.0

 
23.1

 
(95.7
)%
 
1.0

 
(95.7
)%
Gain on remeasurement of equity investments

 
247.7

 
*

 

 
*

Other non-operating expense, net
(42.3
)
 
(37.2
)
 
13.7
 %
 
(37.5
)
 
0.8
 %
Interest expense, net
(7.5
)
 
(16.0
)
 
(53.1
)%
 
(7.4
)
 
(53.8
)%
Income tax expense
49.3

 
229.7

 
(78.5
)%
 
48.9

 
(78.7
)%
Net income attributable to noncontrolling interests
20.3

 
16.8

 
20.8
 %
 
20.8

 
23.8
 %

* Percentage change not considered meaningful
** Amounts translated using 2017 average exchange rates for comparability

Sales

Our sales for 2018 were $3,831.0 million, an increase of 15.9% (13.9% excluding foreign currency translation effects) from $3,304.2 million in 2017.

Total sales in Europe, our largest market, increased 9.1% (4.7% excluding foreign currency translation effects) for the full year 2018, which was supported by strong truck and bus production of 2.4% and by a penetration increase of AMT. This was partially offset by the phase-out of a prior generation AMT at a major gearbox supplier.

Sales in North America increased 55.5% (54.6% excluding foreign currency translation effects). Our acquisition of R.H. Sheppard and the full consolidation of our former joint venture also contributed 38.5% to this growth as well as strong truck and bus production growth of 18.1%. Total sales in South America increased 16.5% (30.6% excluding foreign currency translation effects), driven primarily by truck and bus production growth of 27.1% combined with increased content per truck, partially offset by a lower growth in other customer groups.

Total sales in Asia increased 5.0% (4.8% excluding foreign currency translation effects) while the vehicle production decreased by 2.1%. Total sales in China decreased by 7.4% (9.7% excluding foreign currency translation effects) which was primarily driven by a 8.0% decrease in truck and bus production with a stronger negative impact on sales from the lower share of tractor trucks in the 2018 truck production as well as supply chain constraints. Total sales in India increased 29.1% (34.8% excluding foreign currency translation effects) due to the 23.5% increase in the production of new trucks and buses, ramping up volumes of steering sales at a major customer as well as continued sales growth from market share gains in automatic slack adjusters, air processing products and others. Total sales in Korea decreased 7.2% (9.6% excluding foreign currency translation effects), driven by a decrease in truck and bus production of 21.5%. Japan increased 2.6% (1.0% excluding foreign currency translation effects) despite a decrease in the truck and bus production of 3.8%, outperforming the market by the ramp up of recent product launches.

WABCO's global aftermarket sales, included in the geographic numbers provided above, increased 19.0% (17.5% excluding foreign currency translation effects). This increase, excluding foreign currency translation effects, was supported by acquisitions which contributed 11.7% as well as 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 5.0% of material savings including a $9.1 million supplier-related productivity

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settlement and before the impact of commodity inflation, which had a negative impact of 1.5%, bringing net material productivity to 3.5% for the year.

(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the year ended December 31, 2017
$
2,290.4

 
$
1,013.8

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(41.8
)
Sales price reductions as % of sales
 
 
(1.2
)%
Volume, mix and absorption
227.4

 
51.6

Material productivity (1)
(36.4
)
 
36.4

Conversion productivity
(38.5
)
 
38.5

U.S. acquisitions
145.1

 
77.1

Labor inflation
17.2

 
(17.2
)
Foreign exchange effects (2)
43.5

 
23.9

Other (3)
9.8

 
(9.8
)
Net increase
368.1

 
158.7

 
 
 
 
Cost of sales / gross profit for the year ended December 31, 2018
$
2,658.5

 
$
1,172.5


(1) Includes a supplier-related productivity settlement of $9.1 million.
(2) Foreign exchange effects include both translational and transactional effects.
(3) Includes inefficiencies due to supply chain constraints.


Operating Expenses

Operating expenses include selling and administrative expenses, product engineering expenses and other operating expenses.
(Amounts in millions)
 
Operating expenses for the year ended December 31, 2017
$
578.8

 
 
Increase/(decrease) due to:
 
Labor inflation
15.6

Incentive compensation
(5.3
)
Incremental costs from U.S. acquisitions (1)
37.8

Streamlining
7.0

Pension and post retirement benefit costs
3.3

Foreign exchange translation
15.5

Indemnification costs (2)
(14.9
)
Research and development investments, net
15.9

Other
6.3

Net increase
81.2

 
 
Operating expenses for the year ended December 31, 2018
$
660.0


(1) Includes costs incurred related to the R.H. Sheppard acquisition and the acquisition of Meritor's interest in Meritor WABCO for business and product integration, including engineering costs to develop and integrate active steering with WABCO products.

(2) The indemnification costs relate primarily to accruals recorded in 2017 in Brazil under an indemnification agreement with Trane (formerly American Standard). See Note 16 of Notes to the Consolidated Financial Statements for further discussion.

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Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased $22.1 million to $1.0 million in 2018 as compared to $23.1 million in 2017. This decrease was primarily driven by the acquisition and consolidation of previously unconsolidated joint ventures during the fourth quarter of 2017.

Gain on remeasurement of equity investments

The gain on remeasurement of equity method investments recorded in 2017 included gains resulting from the step up of equity method investments to their acquisition date fair values. See Note 22 of Notes to the Consolidated Financial Statements for additional information.

Other non-operating expense, net

The non-operating expense net increased by $5.1 million to $42.3 million in 2018 as compared to $37.2 million in 2017, primarily driven by the recognition of an impairment loss of $5.5 million on a non-marketable equity investment. See Note 9 of Notes to the Consolidated Financial Statements.

Interest Expense, net

The Company recorded net interest expense of $7.5 million in 2018 compared to $16.0 million in 2017. This decrease was primarily due to our prepayment of the Senior USD Notes in April 2018. See Note 15 of Notes to the Consolidated Financial Statements for further discussion.

Income Taxes

The income tax provision for 2018 was $49.3 million on $463.7 million of pre-tax income before adjusting for noncontrolling interest, compared with an income tax provision of $229.7 million on pre-tax income of $652.6 million before adjusting for noncontrolling interest in 2017. The 2018 decrease in income tax expense is primarily the result of the $33.3 million net benefit for changes to the uncertain tax position related to the Excess Profit Ruling (EPR) / Patent Income Deduction (PID) clawback and the $10.6 million benefit for change in valuation allowances, partially offset by higher pre-tax income, excluding a one-time item related to the 2017 remeasurement gain on equity investments of $247.7 million. The 2017 income tax provision included the one-time provisional estimate of U.S. transition tax of $100.0 million, a net $18.6 million benefit for remeasurement of deferred tax assets and liabilities resulting from U.S. and Belgian tax reforms and a $91.4 million deferred income tax expense related to the remeasurement gain on the Meritor WABCO equity investment.

Additional internal reorganization projects the Company is implementing or pursuing may also carry ancillary tax benefits that would improve the Company’s effective tax rate in 2019, including the Company’s decision to reorganize its treasury function and relocate it to the Company’s new Swiss corporate headquarters, as well as the Company’s plans to better manage its group unfunded pension liabilities (see Note 14 of Notes to the Consolidated Financial Statements) through the establishment of a regulated insurance company. Management is also currently evaluating the possible impact on its future effective tax rate of the judgment by the General Court of the European Union on February 14, 2019 relating to the Belgium EPR program. See Note 23 of Notes to the Consolidated Financial Statements.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests increased $3.5 million to $20.3 million in 2018 as compared to $16.8 million in 2017 primarily due better results in some consolidated affiliate companies.

Backlog

Backlog represents sales orders that have not yet been filled as of the end of the reporting period. This amounted to $1.4 billion at the end of 2018, an increase of 20.9% (23.0% excluding foreign currency translation effects) from the end of 2017 following the growth in our business. Backlog is not necessarily predictive of future business as it relates only to some of our products, and customers may still change orders and future delivery dates.



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Table of Contents

Results of Operations for 2017 Compared with 2016
  
The following table is a summary of sales, cost of sales, gross profit, operating expenses and other selected results of operations for the periods indicated.

 
Year ended
December 31,
 
 
 
Excluding Foreign
Exchange Translation **
(Amounts in millions)
2017
 
2016
 
% change
reported 
 
2017 adjusted
amount 
 
% change
adjusted 
Sales
$
3,304.2

 
$
2,810.0

 
17.6
 %
 
$
3,260.4

 
16.0
 %
Cost of sales
2,290.4

 
1,931.0

 
18.6
 %
 
2,260.1

 
17.0
 %
Gross profit
1,013.8

 
879.0

 
15.3
 %
 
1,000.3

 
13.8
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
578.8

 
497.1

 
16.4
 %
 
570.5

 
14.8
 %
Equity in net income of unconsolidated joint ventures
23.1

 
24.8

 
(6.9
)%
 
23.1

 
(6.9
)%
Gain on remeasurement of equity investments
247.7

 

 
*

 
247.2

 
*

Interest expense, net
(16.0
)
 
(12.7
)
 
26.0
 %
 
(16.2
)
 
27.6
 %
Income tax expense
229.7

 
121.8

 
88.6
 %
 
223.4

 
83.4
 %
Net income attributable to noncontrolling interests
16.8

 
24.3

 
(30.9
)%
 
16.5

 
(32.1
)%

* Percentage change not considered meaningful
** Amounts translated using 2016 average exchange rates for comparability

Sales

Our sales for 2017 were $3,304.2 million, an increase of 17.6% (16.0% excluding foreign currency translation effects) from $2,810.0 million in 2016. The increase, excluding foreign currency translation effects, was mainly driven by increased WABCO content per vehicle as well as market growth of 6.6%. Contribution from market growth was mainly driven by Europe and North America (with high content per vehicle) as well as China (with limited content per vehicle).
  
Total sales in Europe, our largest market, increased 9.3% (7.2% excluding foreign currency translation effects) for the full year 2017, which was supported by strong truck and bus production of 7.7% as well as by market share gains at a major OEM customer, partially offset by a phase out of AMT at a major gearbox supplier.

Sales in North America increased 40.7% (39.7% excluding foreign currency translation effects), primarily driven by the increased content per vehicle due to higher penetration of AMT, growth coming from the acquisitions (17%) as well as market growth of 9.1%. Total sales in South America increased 26.2% (17.4% excluding foreign currency translation effects) driven primarily by growth in truck and bus production.

Total sales in Asia increased 25.6% (25.5% excluding foreign currency translation effects) compared to an estimated 37% increased growth of the vehicles in the region. Further increase in production of new truck and buses in China strongly contributed to the sales growth of 42.0% (43.4% excluding foreign currency translation effects), which was additionally strengthened by increased WABCO content per vehicle as well as further benefits from the ABS mandate on light- and medium- duty trucks. India increased 14.0% (11.0% excluding foreign currency translation effects), despite a minor 0.9% increase in vehicle production driven by the enforcement of load restrictions as well as increase demand from construction and mining in the second half of 2017. Japan increased 7.1% (10.5% excluding foreign currency translation effects) with increased content per vehicle and South Korea increased 9.4% (7.7% excluding foreign currency translation effects) driven by higher vehicle production compared to 2016 which was negatively impacted by export slowdown.

WABCO's global aftermarket sales, included in the geographic numbers provided above, increased 11.8% (9.4% excluding foreign currency translation effects). This increase, excluding foreign currency translation effects, demonstrates the continued success of the Company's aftermarket strategies.






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Table of Contents

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 5.3% of material savings before the impact of commodity inflation, which had a negative impact of 1.0%, bringing net material productivity to 4.3% for the year.

(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the year ended December 31, 2016
$
1,931.0

 
$
879.0

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(51.6
)
Sales price reductions as % of sales
 
 
(1.6
)%
Volume, mix and absorption
391.6

 
110.4

Material productivity
(46.9
)
 
46.9

Conversion productivity
(36.3
)
 
36.3

U.S. acquisitions
(24.8
)
 
24.8

Labor inflation
14.5

 
(14.5
)
Foreign exchange effects
45.7

 
(1.9
)
Other
15.6

 
(15.6
)
Net increase
359.4

 
134.8

 
 
 
 
Cost of sales / gross profit for the year ended December 31, 2017
$
2,290.4

 
$
1,013.8


Foreign exchange impacts include both translational and transactional effects. Cost variances included in "Other" above consisted mainly of inflation on energy, travel and freight ($3.5 million) and liquidation of a step-up in inventory related to the Meritor WABCO acquisition ($7.5 million).

Operating Expenses

Operating expenses include selling and administrative expenses, product engineering expenses and other operating expenses.
(Amounts in millions)
 
Operating expenses for the year ended December 31, 2016
$
497.1

 
 
Increase/(decrease) due to:
 
Labor inflation
13.6

Incentive compensation
10.3

Incremental costs from U.S. acquisitions
13.4

Indemnification charges
15.5

Pension and post retirement benefit costs
3.9

Foreign exchange translation
8.3

Extraordinary sell-side M&A activity
4.5

Research and development investments, net
3.2

Other
9.0

Net increase
81.7

 
 
Operating expenses for the year ended December 31, 2017
$
578.8


The indemnification costs of $15.5 million relate primarily to accruals recorded in Brazil under an indemnification agreement with Trane (formerly American Standard). See Note 16 of Notes to the Consolidated Financial Statements for further discussion.


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Table of Contents

As previously disclosed in our 2017 second quarter Form 10-Q, the $4.5 million costs of extraordinary sell-side M&A activity pertain to professional fees incurred in connection with an acquisition proposal received by the Company.

Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased $1.7 million to $23.1 million in 2017 as compared to $24.8 million in 2016. This decrease was primarily driven by the acquisition and consolidation of previously unconsolidated joint ventures during the fourth quarter of 2017, which was partially offset by higher income from our North American joint venture due to increased content per vehicle of WABCO products during the first three quarters of 2017.

Interest Expense, net

The Company recorded net interest expense of $16.0 million in 2017 compared to $12.7 million in 2016. This increase was primarily due to a full year of interest expense incurred on our 2016 issuance of the Senior EUR Notes as well as incremental interest expense incurred on borrowings under revolving credit facilities which were used to fund our share repurchase program as well as our acquisitions. See Note 15 of Notes to the Consolidated Financial Statements for further discussion.

Income Taxes

The income tax provision for 2017 was $229.7 million on $652.6 million of pre-tax income before adjusting for noncontrolling interest, compared with an income tax provision of $121.8 million on pre-tax income of $369.1 million before adjusting for noncontrolling interest in 2016. The 2017 increase in income tax expense is primarily the result of higher pre-tax income and the tax expense related to tax law changes in the U.S. and Belgium. The 2017 income tax provision includes the one-time provisional estimate of U.S. transition tax of $100.0 million, a net $18.6 million benefit for remeasurement of deferred tax assets and liabilities resulting from U.S. and Belgian tax reforms and a $91.4 million deferred income tax expense related to the remeasurement gain on the Meritor WABCO equity investment. The 2016 income tax provision included a $69.3 million charge for the claw-back of Belgian EPR tax relief for 2012-2014.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests decreased $7.5 million to $16.8 million in 2017 as compared to $24.3 million in 2016 primarily due to a $12.3 million out-of-period, non-cash adjustment recorded for a correction in our noncontrolling interest attributable to one of our consolidated affiliates in 2016 as previously disclosed in our 2016 Form 10-K.

Backlog

Backlog represents sales orders that have not yet been filled as of the end of the reporting period. This amounted to $1.5 billion at the end of 2017, an increase of 22.8% (increase of 9.6% excluding foreign currency translation effects) from the end of 2016 following the growth in our business. Backlog is not necessarily predictive of future business as it relates only to some of our products, and customers may still change orders and future delivery dates.


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 and revolving credit facilities.

We believe the combination of expected cash flows, the funding received from our senior unsecured notes and the revolving credit facilities being committed until 2023 will provide us with adequate liquidity to support the Company's operations. The Company also has the ability to access a wide range of additional external financing instruments.

Specifically for 2019, we expect our capital spending to remain consistent with prior year. As of December 31, 2018, there were no outstanding borrowings on the revolving credit facility.

Outside of our capital expenditures, cash flows related to our senior unsecured notes, subsequent installments of the transition tax payable, acquisitions and short term debt repayments, our overall cash flow is expected to be in line with the Company's 2018 cash flow profile. The U.S. Tax reform will provide a higher flexibility regarding the use of our foreign cash in the United States which may reduce the overall financing needs of the Company.

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Table of Contents


As of December 31, 2018, $491.0 million of the $503.8 million of cash and cash equivalents on the consolidated balance sheets was held by foreign subsidiaries. The Company considers the earnings of substantially all of its subsidiaries outside of Europe and Brazil to be permanently reinvested outside the United States. As of December 31, 2017, $776.5 million of the $1,141.5 million of cash and cash equivalents on the consolidated balance sheets was held by foreign subsidiaries for which earnings are no longer permanently reinvested outside the United States.

Cash Flows for 2018 Compared with 2017

Operating activities - Net cash provided by operating activities was $468.5 million and $421.5 million for the years ended December 31, 2018 and 2017, respectively. Cash flow from operating activities consisted primarily of net income including noncontrolling interests of $414.4 million, increased by non-cash elements of $208.5 million comprising depreciation, pension and post-retirement benefit expenses, amortization, stock compensation, and deferred tax benefits. This was partially offset by $154.4 million related to changes in operating assets and liabilities, including $32.3 million of payments made related to U.S. transition taxes. Cash flow from operating activities for 2017 consisted primarily of net income including noncontrolling interests of $422.9 million, decreased by non-cash elements of $98.9 million comprising depreciation, amortization, stock compensation, deferred tax benefits, pension and post-retirement benefit expenses, as well as a $247.7 million for a non-cash gain recognized on the remeasurement of our equity investments. This was offset by an accrual of $196.4 million for U.S. transition taxes payable, as well as $106.0 million related to changes in operating assets and liabilities as well as pension contributions.

Investing activities - Net cash used in investing activities amounted to $246.5 million for the year 2018 compared to $488.2 million in 2017. Aside from net capital expenditures in tooling, equipment and software of $132.1 million and $110.5 million in 2018 and 2017, respectively, we had investing cash flows related to our investments and redemptions in repurchase agreements and short-term investments as follow:
 
December 31, 2018
 
December 31, 2017
(Amounts in millions)
Repurchase Agreements
 
Short-term Investments
 
Total
 
Repurchase Agreements
 
Short-term Investments
 
Total
Investments
$
161.2

 
$
526.0

 
$
687.2

 
$
312.2

 
$
223.0

 
$
535.2

Sales and redemptions
210.3

 
374.9

 
585.2

 
318.4

 
230.0

 
548.4

Net cash received/(invested)
$
49.1

 
$
(151.1
)
 
$
(102.0
)
 
$
6.2

 
$
7.0

 
$
13.2


We also paid $6.4 million in 2018 as additional cash payment related to the 2017 acquisition of R.H. Sheppard, as well as $2.2 million to acquire Asset Trackr, as discussed in Note 22 of Notes to Consolidated Financial Statements, and we invested $3.8 million in unconsolidated joint ventures. This is in comparison to 2017 when we paid $382.7 million net of cash acquired for the acquisition of Sheppard, Meritor WABCO and WABCO Automotive South Africa.

Financing activities - Net cash used by financing activities amounted to $827.1 million for 2018 compared to net cash provided of $260.6 million for 2017. The main driver of this lower net cash flow from financing activities is the $500.0 million
prepayment of the Senior USD Notes and net repayments under the revolving credit facilities of $385.4 million, partially offset by proceeds received from the Schuldschein Loans of approximately $368.5 million.We also repurchased shares for a total of $300.0 million in 2018 compared to $120.0 million in 2017. Certain of these shares were repurchased under a 10b5-1 stock repurchase plan during the period between August 20, 2018 and December 20, 2018.

We received $0.6 million of stock option proceeds and withheld $5.1 million of shares related to employee tax payments made for equity award vestings in 2018 compared to $9.5 million and $4.9 million in 2017, respectively. Dividends paid to noncontrolling interests amounted to $5.7 million and $7.1 million in 2018 and 2017, respectively.

Cash Flows for 2017 Compared with 2016

Operating activities - Net cash provided by operating activities was $421.5 million and $405.4 million for the years ended December 31, 2017 and 2016, respectively. Cash flow from operating activities consisted primarily of net income including noncontrolling interests of $422.9 million, decreased by non-cash elements of $98.9 million comprising depreciation, amortization, stock compensation, deferred tax benefits, pension and post-retirement benefit expenses, as well as a $247.7 million for a non-cash gain recognized on the remeasurement of our equity investments. This was offset by an accrual of $196.4 million for U.S. transition taxes payable, as well as $106.0 million related to changes in operating assets and liabilities as well as pension contributions. Cash flow from operating activities for 2016 consisted primarily of net income including noncontrolling interests

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Table of Contents

of $247.3 million, increased by $241.6 million for non-cash charges including depreciation, amortization, stock compensation, pension and post-retirement benefit expenses as well as a non-cash tax expense of $86.4 million related to the Belgian EPR program that was recorded in the first quarter of 2016. These increases were partially offset by $83.5 million related to changes in operating assets and liabilities as well as pension contributions.
 
Investing activities - Net cash used in investing activities amounted to $488.2 million for the year 2017 compared to $251.8 million in 2016. Aside from capital expenditures in tooling, equipment and software of $110.5 million and $107.0 million in 2017 and 2016, respectively, we had investing cash flows related to our investments and redemptions in repurchase agreements and short-term investments as follow:
 
December 31, 2017
 
December 31, 2016
(Amounts in millions)
Repurchase Agreements
 
Short-term Investments
 
Total
 
Repurchase Agreements
 
Short-term Investments
 
Total
Investments
$
312.2

 
$
223.0

 
$
535.2

 
$
324.6

 
$

 
$
324.6

Sales and redemptions
318.4

 
230.0

 
548.4

 
228.8

 
44.2

 
273.0

Net cash received/(invested)
$
6.2

 
$
7.0

 
$
13.2

 
$
(95.8
)
 
$
44.2

 
$
(51.6
)

In 2017 we paid $382.7 million net of cash acquired for the acquisition of Sheppard, Meritor WABCO and WABCO Automotive South Africa as discussed in Note 22 of Notes to the Consolidated Financial Statements. This is in comparison to 2016 when we paid $92.3 million for the acquisitions of MICO, LCL and Trans-Safety LOCKS.

Financing activities - Net cash provided by financing activities amounted to $260.6 million for 2017 compared to $220.6 million for 2016. The main driver of this higher net cash flow from financing activities is related to lower expenditures for share repurchases, where we repurchased shares for a total of $120.0 million in 2017 compared to $250.0 million in 2016. This was partially offset by lower net borrowings as our total third-party debt increased by $382.8 million in 2017 compared to an increase of $464.2 million in 2016. We also paid $0.3 million in 2017 for the settlement of a forward contract in comparison to cash received of $15.2 million in 2016 for such settlements.

We also repurchased shares in 2017 and 2016 for a total amount of $120.0 million and $250.0 million. As previously disclosed, the Company's share repurchase program was suspended as a result of an acquisition proposal received by the Company in the second quarter of 2017. The Company did not restart its repurchase program as a result of two strategic acquisitions closed in the second half of the year. The Company restarted its share repurchase program in 2018.

We received $9.5 million of stock option proceeds and withheld $4.9 million of shares related to employee tax payments made for equity award vestings in 2017 compared to $3.9 million and $6.0 million in 2016, respectively. Dividends paid to noncontrolling interests amounted to $7.1 million and $6.7 million in 2017 and 2016, respectively. In 2017, we also received $0.6 million from a noncontrolling interest shareholder related to their share of capital increase in one of our consolidated joint ventures.
 
Senior Unsecured Notes
Schuldschein Loans

On March 22, 2018 the Company, through a European subsidiary, entered into a series of six individual senior unsecured loan agreements with an aggregate principal amount of €300.0 million (collectively, the Schuldschein Loans), as follows:
(Amounts in millions)
Face value
 
Coupon
Maturity date
Fixed rate term loan - Series A
10.0

 
0.85%
March 31, 2021
Fixed rate term loan - Series B
60.0

 
1.15%
March 31, 2022
Fixed rate term loan - Series C
80.0

 
1.43%
March 31, 2023
Floating rate term loan - Series A
50.0

 
6-month EURIBOR plus 80 bps
March 31, 2021
Floating rate term loan - Series B
60.0

 
6-month EURIBOR plus 90 bps
March 31, 2022
Floating rate term loan - Series C
40.0

 
6-month EURIBOR plus 100 bps
March 31, 2023
 
300.0

 
 
 


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Table of Contents

Senior Notes (EUR and USD)

On November 15, 2016, the Company issued €440.0 million in aggregate principal amount of senior unsecured notes, comprised of €190.0 million of 0.84% senior unsecured notes due 2023, €80.0 million of 1.20% senior unsecured notes due 2026 and €170.0 million of 1.36% senior unsecured notes due 2028. The Company paid $1.4 million of debt issuance costs in connection with these senior unsecured notes. Interest on these notes is payable semi-annually on January 1 and July 1 of each year, and commenced on July 1, 2017.

On June 25, 2015, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes, comprised of $150 million of 2.83% senior unsecured notes due 2022, $200 million of 3.08% senior unsecured notes due 2025 and $150 million of 3.18% senior unsecured notes due 2027. The Company paid $2.1 million of debt issuance costs in connection with these senior unsecured notes. Interest on these notes is payable semi-annually on January 1 and July 1 of each year, and commenced on January 1, 2016.

The proceeds from the Senior USD Notes were utilized to repay outstanding balances on the revolving credit facilities, fund the Company's share repurchase program, finance acquisitions and meet general financing requirements.

On April 30, 2018, the Company prepaid the outstanding principal amount of $500.0 million on the Senior USD Notes, and recognized a loss on debt extinguishment of $2.3 million net of taxes, of which the pretax amount, $2.6 million, was recorded in other non-operating expenses in the consolidated statement of operations.

Credit Facilities

Effective June 28, 2018, the Company amended its existing multi–currency unsecured revolving credit facility, increasing the maximum principal amount of borrowings under the facility from $400 million (the 2015 Facility) to $600 million (the 2018 Facility), with an option to increase up to additional $250.0 million. The 2018 Facility also extended the previously scheduled maturity date of September 30, 2022 for the 2015 Facility to June 28, 2023, subject to two one–year extension options. Concurrent with entering into the 2018 Facility, the Company also terminated the $100 million multi-currency five-year unsecured revolving credit facility (the 2014 Facility) that was due to expire on December 17, 2019.

On the effective date of the 2018 Facility, the Company repaid the outstanding balance of €104 million and €52 million under the 2015 Facility and 2014 Facility, respectively, and commenced borrowing under the 2018 Facility. As of December 31, 2018, there were no outstanding borrowings on the revolving credit facilities.

Derivative Instruments and Hedging Activities

The Company designated borrowings under its revolving credit facilities and Senior EUR Notes to partially hedge the foreign currency exposure of its net investment in certain Euro-denominated wholly-owned subsidiaries. As of December 31, 2018 and 2017, the Company designated Euro-denominated loans of €440.0 million (approximately $503.6 million at December 31, 2018 exchange rate) and €763.0 million (approximately $912.0 million at December 31, 2017 exchange rate) as hedges of its net investment in these subsidiaries. For the twelve-month periods ended December 31, 2018 and 2017, the Company recorded a gain of $16.8 million, net of taxes of $4.7 million, and a loss of $43.2 million, net of taxes of $25.1 million, respectively, in cumulative translation adjustment within accumulated other comprehensive income.

From July 2017, WABCO entered into a number of International Swaps and Derivatives Association (ISDA) Master Agreements with multiple derivative counterparties. An ISDA Master Agreement is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter derivative contracts. The ISDA Master Agreement contains a Schedule to the Master Agreement and a Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event of a default and/or a termination event). Under an ISDA Master Agreement, the Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty.

Off-Balance Sheet Arrangements

We did not engage in any off-balance sheet financial arrangements as of December 31, 2018.




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Table of Contents

Contractual Obligations

We had $26.4 million of streamlining liabilities as of December 31, 2018. While we expect approximately $14.8 million of payments to be made in 2019, we are unable to estimate the timing of all future payments. See Note 6 of Notes to the Consolidated Financial Statements for further discussion.

The following table summarizes our expected cash outflows resulting from our contractual obligations as of December 31, 2018. Some of the figures are based on our estimates and assumptions about these obligations. The obligations we will actually pay in future periods may vary from those reflected in the table.

 
 
 
Payments due by period
(Amounts in millions)
 
Total 
 
2019
 
2020 and 2021
 
2022 and 2023
 
Beyond 2023
Debt obligations (1)
 
$
901.3

 
$
8.2

 
$
84.8

 
$
459.9

 
$
348.4

Lease obligations (2)
 
121.1

 
30.1

 
43.3

 
24.5

 
23.2

Purchase obligations (3)
 
270.0

 
270.0

 

 

 

Pension and post-retirement contributions (4)
 
295.8

 
26.5

 
55.5

 
57.5

 
156.3

Transition tax payable (5)
 
169.9

 
16.2

 
32.4

 
70.7

 
50.6

Total
 
$
1,758.1

 
$
351.0

 
$
216.0

 
$
612.6

 
$
578.5


(1) 
Includes principal and interest payments due on our senior unsecured notes. For floating rate debt, interest payments were calculated based on the applicable interest rates as of December 31, 2018. Payment obligations denominated in a foreign currency were calculated using the local currency foreign exchange rates in effect at December 31, 2018. See Note 15 to of Notes to the Consolidated Financial Statements for additional information.

(2) 
Includes future rental commitments under all non-cancelable operating leases in effect at December 31, 2018.

(3) 
In the normal course of business we expect to purchase approximately $2.5 billion in 2019 of materials and services, and estimate that on average no more than approximately $270.0 million is outstanding at any one time in the form of legally binding commitments. We spent approximately $2.3 billion, $2.0 billion and $1.7 billion on materials and services in 2018, 2017 and 2016, respectively.

(4) 
Amounts represent undiscounted projected benefit payments over the next ten years and represent our best estimate of future contributions to our pension and post-retirement benefit plans. The expected benefit payments have been estimated based on the same assumptions that were used to measure our accumulated benefit obligation as of December 31, 2018 and include benefits attributable to estimated future service of current employees.

(5) 
Includes a one-time repatriation tax resulting from the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act permits the Company to pay the tax liability interest free over a period of up to eight years.

Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and invest in our facilities to create capacity for new product development. Specifically for 2019, we expect our capital spending to remain at levels consistent with prior year as previously discussed.

Pending Adoptions of Recently Issued Accounting Standards

Refer to Note 3 of Notes to the Consolidated Financial Statements for a complete description of recent accounting standards which we have not yet been required to implement and which may be applicable to our operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with those accounting principles requires us to make judgments and estimates that affect the amounts reported in the consolidated

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financial statements and accompanying notes. Those judgments and estimates have a significant effect on the consolidated financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. We frequently reevaluate our judgments and estimates that are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

We believe that of our significant accounting policies, the ones that may involve a higher degree of uncertainty, judgment and complexity pertain to revenue recognition, goodwill, recoverability of other long-lived assets, pension and post-retirement benefits, warranties, business combinations, income taxes and contingencies. See Note 2 of Notes to the Consolidated Financial Statements for additional discussion of our accounting policies.

Revenue Recognition - Revenue under ASC 606 Revenue from Contracts with Customers, is recognized when control of a product or service is transferred to a customer. The majority of our sales are derived from OEM customers. Revenue from the sale of serial production parts that is produced to industry standards for OEM customers is recognized at a point-in-time when control of the parts transfers to customers based on the shipping terms as these parts typically have an alternative use or the underlying contracts do not contain an enforceable right to payment prior to shipment depending on jurisdiction. In instances where customization services are performed for the OEM, and if the sales meet the over-time revenue recognition criteria, we will use the cost-to-cost method to recognize revenue. Under this method, progress is measured based in the ratio of actual costs incurred relative to the total estimated costs. Most OEM serial production contracts include a provision for volume discounts, and in certain markets, we provide customers with discounts not stated in the contract. In those instances where there is a valid expectation for the customers to receive a discount, the amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.

The sale of aftermarket parts and spare parts are relatively homogeneous and revenue is recognized at a point-in-time when control transfers to the customer based on shipping terms. Aftermarket contracts include variable consideration related to discounts, bonuses and product returns. Revenue recognition for aftermarket parts and spare parts is not subject to the variable consideration constraint.

FMS sales include contracts for products, services, or a combination of products and services. The payment for products and certain services is fixed, with consideration being variable for the Software-as-a-Service (SAAS) performance obligation until the number of activated devices is known. Allocation of the transaction price to each performance obligation using stand alone selling price (SSP). When SSP does not exist, the company estimates the SSP based on the adjusted market approach. Revenue for hardware is recognized at a point-in-time and over-time for services as they are provided under the contract. Management exercises significant judgments as it relates to the FMS revenue recognition in such areas as determining performance obligations, variable consideration, allocation of the transaction price and timing of revenue recognition.

Prior to the adoption of ASC 606, revenue was allocated to multiple element arrangements based upon the relative selling prices of each deliverable. In applying the relative selling price method, the Company determined the selling price for each deliverable using vendor specific objective evidence (VSOE), if it existed, or third-party evidence (TPE) of selling price. If neither VSOE nor TPE of selling price existed for a deliverable, the best estimate of selling price (BESP) was used for that element. BESP represented the price at which the Company would transact a sale if the element were sold on a standalone basis. The Company determined BESP for an element by considering multiple factors including, but not limited to, the Company's go-to-market strategy, pricing practices, internal costs, gross margin, market conditions and geographies. Revenue allocated to each element was then recognized when the other revenue recognition criteria are met for that element.

Goodwill - The Company has a significant amount of goodwill on its balance sheet that is not amortized, but subject to impairment tests each fiscal year on October 1 or more often when events or circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company's impairment tests utilize the two-step approach. The first step of the goodwill impairment test compares fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The recoverability of goodwill is performed at the entity level as the Company operates as one reportable segment and one reporting unit. The plants, engineering, technical support, distribution centers and other support functions are shared among various product families and serve all distribution channels with many customers. In order to approximate the fair value of the

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reporting unit for purposes of testing recoverability, the Company uses the total market capitalization of the Company, a market approach, which is then compared to the total book value of the Company. In the event the Company's fair value has fallen below book value, the Company will compare the estimated fair value of goodwill to its book value. If the book value of goodwill exceeds the estimated fair value of goodwill, the Company will recognize the difference as an impairment loss in operating income. There has been no impairment of goodwill during 2018, and the Company's goodwill was not at risk for failing the first step of its impairment test.

The Company expects the announced change to an organizational structure managed by business regions in 2019 to impact its determination of its operating segments and reporting units, and will also require the Company to evaluate its goodwill for impairment immediately before and after the implementation of the new organizational structure. There is no indication that a change in the operating segments or reporting units of the Company will have a material effect on the consolidated financial statements.

Recoverability of Other Long-lived Assets - The Company makes judgments about the recoverability of long-lived assets, including fixed assets and finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. If circumstances indicate an impairment may exist, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. Long-lived assets will be evaluated for impairment either individually or in asset groups where their cash flows are largely independent of cash flows generated from other long-lived assets. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying amount of the assets over the fair value of such assets, with the fair value generally determined based on an analysis of discounted cash flows.
Pension and Post-Retirement Benefits - The Company has significant pension and post-retirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, merit and promotion increases and the health care cost trend rate. The Company is required to consider current market conditions, including changes in interest rates and health care costs, in making its assumptions. Changes in the related pension and post-retirement benefit costs or liabilities may occur in the future due to changes in the assumptions. The assumptions as to the expected long-term rates of return on plan assets are based upon the composition of plan assets, historical long-term rates of return on similar assets and current and expected market conditions. The discount rate used for U.S. plans reflects the market rate for high-quality fixed-income investments on the Company's annual measurement date (December 31) and is subject to change each year. The discount rate was determined by matching, on an approximate basis, the coupons and maturities for a portfolio of corporate bonds (rated AA or better) to the expected plan benefit payments defined by the projected benefit obligation. The discount rates used for plans outside the United States are based on a combination of relevant indices regarding corporate and government securities, the duration of the liability and appropriate judgment. See the disclosures about pension and post-retirement obligations, the composition of plan assets, assumptions and other matters in Note 14 of Notes to the Consolidated Financial Statements.

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, less costs recoverable from suppliers related to warranty claims. To the extent we experience changes in warranty claim activity or costs associated with servicing those claims, our warranty accrual is adjusted accordingly. Warranty accrual estimates are updated based upon the most current warranty claims information available. The Company's warranty costs net of recoveries as a percentage of sales totaled 0.8% in 2018, 0.9% in 2017 and 0.8% in 2016. We do not expect this percentage to change materially in the near future. See Note 16 of Notes to the Consolidated Financial Statements for a three-year summary of warranty costs.

Business Combinations - We allocate the fair value of purchase consideration to the assets acquired, liabilities assumed, and non-controlling interests in the acquiree generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and non-controlling interests in the acquiree is recorded as goodwill. When determining the fair values of assets acquired, liabilities assumed, and non-controlling interests in the acquiree, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period,

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which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

Income Taxes - Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The impact of mix of U.S. versus foreign earnings may have a material impact on the effective tax rate given that tax rates in certain foreign jurisdictions (primarily Belgium, China, Germany, India, the Netherlands and Poland) vary from the U.S. statutory tax rate. See Note 17 of Notes to the Consolidated Financial Statements for Reconciliation of Effective Income Tax Rate.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740, Income Taxes states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available

Contingencies - 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. It is reasonably possible that the Company could incur losses in excess of the amounts accrued. Although this amount cannot be estimated, we believe that any additional losses would not have a material adverse impact on the consolidated financial statements.

Seasonality

Our operations are directly related to the commercial vehicle industry. We may experience seasonal variations in the demand for our products to the extent that OEM vehicle production fluctuates, such as during July, August and December when North American and European OEM plants may close for summer shutdowns and holiday periods. Shut-down periods in the rest of the world may vary by country.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial risk resulting from volatility in foreign currency exchange rates, interest rates and commodity prices. All of those risks are closely monitored.

Foreign Currency Exchange Rates

We conduct operations through controlled subsidiaries in most of the major countries of Western and Eastern Europe, Brazil, China, South Korea, India, Thailand and Japan as well as the United States. In addition, we conduct business in many countries through cross border sales and purchases, affiliated companies and partnerships in which we own 50% or less of the stock or partnership interest. As our financial statements are presented in U.S. Dollars, fluctuations in currency exchange rates can have a significant impact on the reported results of our operations, especially for the countries and currencies referred to above. Applying a Value-At-Risk (VAR) methodology to our foreign currency exchange rate exposure, across the translational and transactional exposures for the year 2018, the potential maximum loss in earnings is estimated to be $19 million which is based on a one-year horizon and a 95% confidence level. The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that could be incurred by us, nor does it consider the potential effect of favorable changes in market factors or our ability to pass on foreign exchange effects to commercial counterparties. See also Note 20 of Notes to the Consolidated Financial Statements.

Interest Rate Sensitivity

We are exposed to market rate risk resulting from fluctuations in variable interest rate borrowings included in our debt portfolio. Our debt portfolio includes long-term fixed and floating rate term borrowings under the €300.0 million Schuldschein Loans, long-term fixed rate term borrowings under the €440.0 million Senior EUR Notes, and short-term variable rate borrowings, if any, under our multi-currency credit facility that has a borrowing capacity up to $600.0 million. See Note 15 of Notes to the Consolidated Financial Statements for further discussion of our debt.

At December 31, 2018, we had an aggregate outstanding debt balance of $845.2 million of which $171.7 million was related to floating rate debt under our Schuldschein Loans. The floating rate component of the Schuldschein loans is based on the Euro Interbank Offered Rate (Euribor) plus 0.80% to 1.00%. There were no outstanding borrowings under the multi-currency revolving credit facility at December 31, 2018, which may incur interest based on an applicable margin that can vary from 0.30% to 0.85% based on the Company’s leverage ratio plus LIBOR for loans denominated in U.S. Dollars and EURIBOR for loans denominated in Euros (SIBOR for loans denominated in Singapore Dollars and HIBOR for loans denominated in Hong Kong Dollars). As of December 31, 2018, a 1% increase in interest rates within the variable portion of our debt portfolio would have the effect of increasing annualized interest expense by approximately $1.3 million. As of December 31, 2018, a 1% decrease in interest rates would have no effect due to the interest rate floor on our variable rate debt.

As of December 31, 2018, we also had $639.6 million of cash, cash equivalents and short-term investments on hand. These balances are predominantly invested in interest bearing short-term instruments. As of December 31, 2018, a 1% change of the interest rates would have the effect of increasing or decreasing net interest income by approximately $7.0 million.

Commodity Exposures

We are also exposed to fluctuations in commodity prices through the purchase of base metals and steel, mainly through contractual agreements with component suppliers. As we do not purchase these commodities directly, changes in their prices could affect our financial results with a time lag of up to 6 months.

Applying a VAR methodology to our 2018 commodity exposure, the potential maximum loss in earnings is estimated to be $23.1 million which is based on a one-year horizon and a 95% confidence level. The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that could be incurred by us, nor does it consider the potential effect of favorable changes in market factors or our ability to pass on effects to commercial counterparties.



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Item 8.
Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors of WABCO Holdings Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WABCO Holdings Inc. and subsidiaries (“the Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income; shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 15, 2019 expressed an unqualified opinion thereon.

Basis for opinion

These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


Ernst & Young Bedrijfsrevisoren BCVBA/Réviseurs d’Entreprises SCCRL

We have served as the Company’s auditor since 2007.

Diegem, Belgium
February 15, 2019




    

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WABCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Year Ended December 31,
(Amounts in millions, except share and per share data)
2018
 
2017
 
2016
Sales
$
3,831.0

 
$
3,304.2

 
$
2,810.0

Cost of sales
2,658.5

 
2,290.4

 
1,931.0

Gross profit
1,172.5

 
1,013.8

 
879.0