NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)
|
|
NOTE 1.
|
Basis of Financial Statement Presentation
|
WABCO Holdings Inc. and its subsidiaries (collectively "WABCO," "Company," "we," or "our") engineer, develop, manufacture and sell integrated systems controlling advanced braking, stability, suspension and transmission automation as well as air compression and processing primarily for commercial vehicles. WABCO’s largest selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), electronic stability control (ESC), automated manual transmission systems, air disc brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for medium- and heavy-duty trucks, buses and trailers. In addition, we supply commercial vehicle aftermarket distributors and service partners as well as fleet operators with replacement parts, fleet management solutions, diagnostic tools, training and other expert services. WABCO sells its products primarily to two groups of customers around the world: original equipment manufacturers (OEMs) including truck and bus, trailer, car and off-highway, and commercial vehicle aftermarket distributors of replacement parts and services and commercial vehicle fleet operators for management solutions and services. We also provide remanufacturing services globally.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, including normal recurring items, considered necessary for a fair presentation of financial data have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended
December 31, 2017
, included in the Company’s Annual Report on Form 10-K.
Based on the organizational structure, as well as the nature of financial information available and reviewed by the Company’s chief operating decision maker to assess performance and make decisions about resource allocations, the Company has concluded that WABCO has one reportable segment. All majority-owned subsidiaries of WABCO are included in the condensed consolidated financial statements and intercompany transactions are eliminated upon consolidation. WABCO’s investments in unconsolidated joint ventures are included at cost plus its equity in undistributed earnings less dividends and changes in foreign currency in accordance with the equity method of accounting and reflected as investments in unconsolidated joint ventures in the condensed consolidated balance sheets. Prior period amounts in the condensed consolidated statement of cash flows have been reclassified to present the foreign currency effects on changes in monetary assets and liabilities and the revaluation of foreign currency forward contracts as non-cash adjustments to reconcile net income to net cash provided by operating activities.
The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The Company has updated its accounting policy for revenue recognition as of January 1, 2018 for the adoption of ASC 606,
Revenue from Contracts with Customers
. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 15 to the Consolidated Financial Statements for the year ended
December 31, 2017
, in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in the preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first
six
months of
2018
.
|
|
NOTE 2.
|
Recently Issued Accounting Standards
|
Recently Adopted Accounting Standards
In May 2017, the FASB issued Accounting Standards Update 2017-09 (ASU 2017-09)
Compensation-Stock Compensation
, which provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for the interim and annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2017-09 as of January 1, 2018. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.
In March 2017, the FASB issued ASU 2017-07
Compensation-Retirement Benefits
, in order to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the statements of operations. Under ASU 2017-07, the service cost component of the net periodic benefit cost is disclosed in the same income statement line item as other employee compensation costs arising from services rendered during the period, and the other components are reported separately from the line item that includes the service cost and outside of any subtotal of operating income. ASU 2017-07 is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. As previously disclosed in the Company’s
2017
Annual Report on Form 10-K, the provisions of ASU 2017-07 were adopted as of January 1, 2017 and changes were applied retrospectively in the Company's condensed consolidated statements of operations.
In November 2016, the FASB issued ASU 2016-18
Restricted Cash
, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method to each period presented. The Company adopted the provisions of ASU 2016-18 as of January 1, 2018. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.
In October 2016, the FASB issued ASU 2016-16
Intra-entity Transfer of Assets Other than Inventory
, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2016-16 as of January 1, 2018, resulting in an adjustment of the deferred tax assets to retained earnings of
$5.3 million
.
In August 2016, the FASB issued ASU 2016-15
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on the presentation of certain cash receipts and cash payments in the statement of cash flows in order to reduce diversity in existing practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2016-15 as of January 1, 2018. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, as amended by ASU 2018-03,
Financial Instruments-Overall: Technical Corrections and Improvements
, issued in February 2018
,
which among other changes in accounting and disclosure requirements, replaces the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes, and also eliminates the available-for-sale classification for marketable equity securities. Under the new guidance, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are to be recognized in earnings. The Company adopted the provisions of ASU 2016-01 and ASU 2018-03 as of January 1, 2018 resulting in a cumulative effect adjustment to retained earnings of
$0.1 million
related to the unrealized gain on marketable equity securities.
In May 2014, the FASB issued ASU 2014-09
Revenue from Contracts with Customers,
which requires revenue to be recognized when a customer obtains control of promised goods and services at an amount that reflects the consideration the Company expects to receive in exchange for those goods and services. In addition, ASU 2014-09 requires certain additional disclosures around the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers.
The Company adopted ASU 2014-09 and related amendments (collectively known as ASC 606) as of January 1, 2018 using the modified retrospective method. The vast majority of sales continue to be recognized at a point in time as customer contracts did not meet the criteria in ASC 606 for over time revenue recognition, specifically the over-time revenue recognition criteria of creating an asset with no alternative use and having an enforceable right to payment for progress towards completion. The complexity of certain contracts requires the Company to assess the criteria for over time revenue recognition by jurisdiction. The adoption of ASC 606 did not impact the Company’s accounting for reimbursements received from customers related to non-recurring product engineering activities. These activities will continue to be out-of-scope of ASC 606. Overall, the adoption of ASC 606 did not have a material impact on the Company’s condensed consolidated balance sheet, statement of operations and
statement of cash flows for the
three
and
six
month periods ended
June 30, 2018
. See Note 3 for disclosures required by ASC 606 and the updated accounting policy for revenue recognition.
Pending Adoption of Recently Issued Accounting Standards
In June 2018, the FASB issued ASU 2018-07
Compensation-Stock Compensation (Topic 718),
to simplify the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted but no earlier than a company's adoption of ASC 606. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The standard provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income (AOCI) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU 2018-02 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12
Targeted Improvements to Accounting for Hedging Activities
, which aims at improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements, by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year for fiscal. Early application is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.
The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard is effective for the Company beginning January 1, 2020 and will be applied to any annual or interim goodwill impairment assessment after that date. Early adoption is permitted for interim and annual impairment testing after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02
Leases
. ASU 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. ASU 2016-02 will be effective retrospectively for the Company for the year ending December 31, 2019, with early adoption permitted. The Company anticipates that this standard will result in the recognition of operating leases as right-of-use assets and leasing liabilities on its condensed consolidated balance sheets, however it is still evaluating the impact the adoption will have on its condensed consolidated financial statements. The Company regularly enters into operating leases for which current guidance does not require recognition on the condensed consolidated balance sheets.
The Company intends to apply the modified retrospective transition method and elect the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company will recognize the cumulative effect transition adjustment as of the effective date, and does not expect to provide any new lease disclosures for periods before the effective date. In connection with the adoption of ASU 2016-02, the Company has assembled a cross-functional team supported by external consultants to evaluate the lease portfolio, systems, processes and policy change requirements. A review of the lease population has commenced and the Company has selected a third-party software program to track and store its leases.
We do not expect the pending adoption of other recently issued accounting standards to have an impact on the condensed consolidated financial statements.
|
|
NOTE 3.
|
Revenue from Contracts with Customers
|
The Company adopted ASC 606 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606.
Revenue is recognized when control over a product or service is transferred to a customer. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods or services to the customer and excludes any amounts collected on behalf of third parties. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. The Company enters into contracts that may include both products and services, which are generally capable of being distinct and accounted for as separate performance obligations.
The Company generates revenue through serial production of parts in the OEM end-market and through the delivery of parts, spare parts and fleet management solutions (FMS) in the Aftermarket. Truck and bus contracts generally include Long Term Supply Agreements (LTSA) and Purchase Orders (PO) whereby the LTSA stipulates the pricing and delivery terms and is evaluated together with a PO, which identifies the quantity, timing, and the type of product to be transferred. Certain customer contracts do not always have an LTSA, in which case, the contracts are governed by the PO from the customer.
Payments from customers are typically due within 60 days of invoicing. The Company does not have significant financing components or significant payment terms. In most jurisdictions where the Company operates, sales are subject to Value Added Tax (VAT). Sales are presented net of VAT in the condensed consolidated statements of operations. Amounts billed to customers for shipping and handling costs are included in sales. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
OEM
The sale of serial production parts to OEMs or independent distributors that do not require customization, such as most trailer parts or trailer production parts, are satisfied at a point in time as the parts are deemed to have alternative use to the Company. Revenue is recognized when the control of the parts transfers to the customer, which is based on shipping terms. The transaction price for these parts is equal to the contracted part price of each unit and represents the standalone selling price for the part and there is no expectation of material variable consideration in the transaction price. Management does not exercise significant judgment when accounting for the sale of serial production parts that are relatively homogeneous and produced to industry standards.
Certain serial production parts may require specific customization. The Company performs these customization services in order to obtain the LTSA. In some instances, the Company receives reimbursement for a portion of the pre-production cost incurred from the OEM. These reimbursements are not within the scope of ASC 606 and are accounted for under the guidance in ASC 340-10,
Other Assets and Deferred Costs,
and are offset against capitalized costs or research and development expenses depending on the terms of the contract. Revenue for serial production contracts requiring customization is recognized at a point in time as most customized serial production parts have alternative use in that they may be sold in the aftermarket. Serial production contracts also generally do not provide for an enforceable right for full recovery under the LTSA that would be necessary for over time revenue recognition. Revenue for serial production contracts is recognized when the control of the parts transfers to the customer based on the shipping terms. If sales were to meet the overtime recognition criteria, the Company will recognize revenue as it produces the specified units, using a “cost-to-cost” method, which is an appropriate method under ASC 606-10-50-18 to measure progress towards completion of the performance obligation to deliver the parts to the customer. The Company believes that this method better reflects its efforts to satisfy its performance obligation as the cost incurred (resources consumed, labor hours expended, time elapsed and machine hours used) is proportionate to its progress in satisfying the performance obligation.
Most serial production contracts include provisions for volume discounts. In certain markets, the Company has historically provided customers with discounts not stated in the contract. These practices create a valid expectation for the customer to receive discounts on purchases. The Company considers these adjustments to the contract price as variable considerations, which it estimates based on the most likely amount approach. Volume discounts offered to serial production part customers provide for a limited number of outcomes and are typically binary in nature when determining the amount of the customer discount. Variable consideration is not constrained. Revenue recognized is limited to the amount the Company expects to receive. Amounts billed but ultimately expected to be refunded to the customer are included within promotion and customer incentives on the condensed consolidated balance sheet. Management has exercised significant judgment as it relates to revenue recognition for serial parts
production in such areas as scoping, contract identification, determining performance obligations, variable consideration, and the timing of revenue recognition.
Aftermarket
The Company generates revenue through the delivery of aftermarket parts and spare parts to OEMs and independent distributors, and the delivery of FMS to truck, driver, trailer and cargo management providers. Aftermarket parts production contracts have one type of performance obligation which is the delivery of aftermarket parts and spare parts. Aftermarket products are deemed to have alternative use since they can be sold to multiple customers. Revenue for aftermarket part production contracts is recognized at a point in time and revenue is recognized when the control of the parts transfers to the customer which is based on shipping terms.
Aftermarket contracts may include variable consideration related to discounts, bonuses, and product returns. Variable consideration for aftermarket parts is not constrained. The Company grants its customers cash discounts and various performance bonuses and incentives. The customer usually has the right to return products to the Company in the event of defective products or excess quantity. The Company estimates the volume discounts based on the most likely amount. Discounts and incentives offered to aftermarket customers provide for a limited number of outcomes and are typically binary in nature when determining the amount of the customer discount. Amounts billed and ultimately expected to be refunded to the customer are included within customer and promotion incentives on the condensed consolidated balance sheets. The transaction price for each individual aftermarket part or spare part is identified on the aftermarket contract and represents the standalone selling price for the part.
FMS contracts generally include hardware and software and are bundled with a term-based service contract. The FMS revenue stream has multiple performance obligations that include products, services, or a combination of products and services. WABCO receives a fixed payment for the equipment and certain services and receives a variable payment for the Software-as-a-Service (SaaS) performance obligation based on the number of activated devices. Variable consideration is constrained until the amount of activated devices is known. WABCO allocates the total transaction price to the performance obligations based on the stand alone selling price (SSP) for each obligation. When the SSP does not exist, the Company estimates the SSP based on the adjusted market approach. Revenue is recognized when control of the goods or services transfers to the customer, at a point in time (based on shipping terms) for hardware and over time as the services are provided for the remaining performance obligations. Management has exercised significant judgment as it relates to the revenue recognition for fleet management services in such areas as determining performance obligations, variable consideration, allocation of transaction price and the timing of revenue recognition.
Disaggregation of Revenue
The following table presents product sales disaggregated by end-market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amount in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
OEM
(1)
|
|
$
|
768.4
|
|
|
$
|
611.2
|
|
|
$
|
1,534.8
|
|
|
$
|
1,181.3
|
|
Aftermarket
|
|
232.8
|
|
|
183.8
|
|
|
469.8
|
|
|
361.0
|
|
Total sales
|
|
$
|
1,001.2
|
|
|
$
|
795.0
|
|
|
$
|
2,004.6
|
|
|
$
|
1,542.3
|
|
|
|
(1)
|
Sales for the
three
and
six
-month periods ended
June 30, 2017
include sales made to our Meritor WABCO joint venture which was subsequently acquired and consolidated in the fourth quarter of 2017.
|
The following table presents product sales disaggregated by geography, based on the billing addresses of customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amount in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
United States
|
|
$
|
219.6
|
|
|
$
|
129.4
|
|
|
$
|
425.6
|
|
|
$
|
234.1
|
|
Europe
|
|
490.4
|
|
|
417.7
|
|
|
991.9
|
|
|
825.4
|
|
Other
(1)
|
|
291.2
|
|
|
247.9
|
|
|
587.1
|
|
|
482.8
|
|
Total sales
|
|
$
|
1,001.2
|
|
|
$
|
795.0
|
|
|
$
|
2,004.6
|
|
|
$
|
1,542.3
|
|
|
|
(1)
|
Sales to other regions includes revenues primarily from Japan, China, Brazil and India.
|
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to performance obligations to be satisfied in the future. Contract assets and contract liabilities were not material as of
June 30, 2018
.
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of
June 30, 2018
was not material. The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
NOTE 4. Accumulated Other Comprehensive Loss
The table below presents the changes in accumulated other comprehensive loss for the
three
and
six
month periods ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amount in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Foreign currency translation adjustments
:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(152.8
|
)
|
|
$
|
(294.9
|
)
|
|
$
|
(177.6
|
)
|
|
$
|
(328.7
|
)
|
Adjustment for the period
|
(65.5
|
)
|
|
61.7
|
|
|
(40.7
|
)
|
|
95.5
|
|
Balance at end of period
(1)
|
(218.3
|
)
|
|
(233.2
|
)
|
|
(218.3
|
)
|
|
(233.2
|
)
|
|
|
|
|
|
|
|
|
Losses on intra-entity transactions:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(11.9
|
)
|
|
(11.4
|
)
|
|
(11.8
|
)
|
|
(11.4
|
)
|
Adjustment for the period
(2)
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
Balance at end of period
|
(12.2
|
)
|
|
(11.7
|
)
|
|
(12.2
|
)
|
|
(11.7
|
)
|
|
|
|
|
|
|
|
|
Unrealized gains on investments:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
—
|
|
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
Adjustment for the period
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Balance at end of period
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Unrealized losses on hedges:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(0.8
|
)
|
|
(1.0
|
)
|
|
(0.8
|
)
|
|
(1.0
|
)
|
Adjustment for the period
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Amounts reclassified to earnings, net
(3)
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Balance at end of period
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
Pension and post-retirement plans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(277.6
|
)
|
|
(234.5
|
)
|
|
(274.4
|
)
|
|
(236.4
|
)
|
Other comprehensive loss before reclassifications
|
14.4
|
|
|
(16.3
|
)
|
|
4.7
|
|
|
(18.3
|
)
|
Amounts reclassified to earnings, net
(4)
|
5.8
|
|
|
4.5
|
|
|
12.3
|
|
|
8.4
|
|
Balance at end of period
|
$
|
(257.4
|
)
|
|
$
|
(246.3
|
)
|
|
$
|
(257.4
|
)
|
|
$
|
(246.3
|
)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of period
|
$
|
(487.9
|
)
|
|
$
|
(491.9
|
)
|
|
$
|
(487.9
|
)
|
|
$
|
(491.9
|
)
|
(1)
Includes an accumulated loss of
$18.5 million
, net of taxes of
$12.9 million
as of
June 30, 2018
and an accumulated loss of
$10.1 million
, net of taxes of
$6.4 million
, as of
June 30, 2017
related to foreign currency gains and losses on Euro-denominated debt and foreign currency contracts designated and qualifying as partial hedges of a net investment.
|
|
(2)
|
Relates to intra-entity foreign currency transactions that are of a long term investment nature, when the entities to the transaction are consolidated, combined or accounted for by the equity method in the Company's financial statements.
|
(3)
The prepayment of the Senior USD Notes resulted in a reclassification of unrealized losses on hedges into other non-operating expense of
$0.8 million
, net of taxes of
$0.3 million
.
|
|
(4)
|
Consists of amortization of prior service cost and actuarial losses that are included as a component of pension and post-retirement expense within other non-operating expenses. The amounts reclassified to earnings are recorded net of tax of
$1.7 million
and
$1.9 million
for three month periods ended
June 30, 2018
and
2017
, respectively, and
$3.6 million
for both the
six
month periods ended
June 30, 2018
and
2017
.
|
NOTE 5. Inventory
The components of inventories, which are carried on a last-in, first-out (LIFO) basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
As of June 30, 2018
|
|
As of December 31, 2017
|
Finished products
|
$
|
212.5
|
|
|
$
|
196.6
|
|
Products in process
|
50.5
|
|
|
42.5
|
|
Raw materials
|
97.1
|
|
|
102.3
|
|
Inventories, gross
|
360.1
|
|
|
341.4
|
|
Less: Inventory allowances
|
(22.3
|
)
|
|
(20.0
|
)
|
Inventories, net
|
$
|
337.8
|
|
|
$
|
321.4
|
|
Inventory costs are primarily comprised of direct material and labor costs, as well as material overhead such as inbound freight and custom and excise duties.
NOTE 6. Guaranteed Notes Receivable
The Company holds guaranteed notes receivable from reputable state owned and public enterprises in China that are settled through bankers acceptance drafts, which are registered and endorsed to the Company. These notes receivable are fully guaranteed by banks and generally have contractual maturities of six months or less, but the ultimate recourse remains against the trade debtor. These guaranteed drafts are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first
six
months of
2018
and
2017
were $
149.7 million
and
$125.8 million
, respectively. For the
three
months ended
June 30, 2018
and
2017
, expenses related to discounting were
$0.7 million
, and
$1.1 million
, respectively. For the
six
months ended
June 30, 2018
and
2017
, expenses related to discounting were
$1.3 million
and
$1.2 million
, respectively. These charges are included in other non-operating expense, net. The fair value of these guaranteed notes receivable is determined based on Level 2 inputs including credit ratings and other criteria observable in the market and was equal to their carrying amounts of $
55.5 million
and
$39.7 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
The Company monitors the credit quality of both the drawers of the drafts and guarantors on a monthly basis by reviewing various factors such as payment history, level of state involvement in the institution, size, national importance as well as current economic conditions in China. Since the Company has not experienced any historical losses nor is expecting future credit losses based on a review of the various credit quality indicators described above, we have not established a loss provision against these receivables as of
June 30, 2018
or
December 31, 2017
.
NOTE 7. Net Income Attributable to Company per Share
Basic net income attributable to Company per share has been computed using the weighted average number of common shares outstanding. The average number of outstanding shares of common stock used in computing diluted net income attributable to Company per share includes weighted average incremental shares when the impact is not anti-dilutive. The weighted average incremental shares represent the net amount of shares the Company would issue upon the assumed exercise of in-the-money stock options and vesting of restricted stock units (RSUs) and deferred stock units (DSUs) after assuming that the Company would use the proceeds from the exercise of options to repurchase stock. The weighted average incremental shares also includes the net amount of shares issuable for performance stock units (PSUs) at the end of the reporting period, if any, based on the number of shares issuable if the end of the period were the end of the vesting period.
Anti-dilutive shares, if applicable, are excluded and represent those options, RSUs, DSUs and PSUs whose assumed proceeds were greater than the average price of the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average incremental shares included
|
134,833
|
|
|
192,213
|
|
|
158,529
|
|
|
204,629
|
|
Shares excluded due to anti-dilutive effect
|
54,649
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NOTE 8. Capital Stock
The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the
six
month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
Total Shares
|
|
Treasury Stock
|
|
Net Shares
Outstanding
|
|
Total Shares
|
|
Treasury Stock
|
|
Net Shares
Outstanding
|
Balance at beginning of period
|
78,937,828
|
|
|
(25,202,342
|
)
|
|
53,735,486
|
|
|
78,701,273
|
|
|
(24,209,355
|
)
|
|
54,491,918
|
|
Shares issued upon exercise of stock options
|
9,465
|
|
|
11,459
|
|
|
20,924
|
|
|
67,995
|
|
|
18,262
|
|
|
86,257
|
|
Shares issued upon vesting of RSUs
|
32,948
|
|
|
8,326
|
|
|
41,274
|
|
|
37,729
|
|
|
2,696
|
|
|
40,425
|
|
Shares issued for DSUs
|
7,833
|
|
|
—
|
|
|
7,833
|
|
|
5,924
|
|
|
—
|
|
|
5,924
|
|
Shares issued upon vesting of PSUs
|
20,632
|
|
|
6,009
|
|
|
26,641
|
|
|
24,525
|
|
|
7,175
|
|
|
31,700
|
|
Shares purchased for treasury
|
—
|
|
|
(929,000
|
)
|
|
(929,000
|
)
|
|
—
|
|
|
(1,033,000
|
)
|
|
(1,033,000
|
)
|
Balance at end of period
|
79,008,706
|
|
|
(26,105,548
|
)
|
|
52,903,158
|
|
|
78,837,446
|
|
|
(25,214,222
|
)
|
|
53,623,224
|
|
The Company accounts for purchases of treasury stock under the cost method with the costs of such share purchases reflected in treasury stock in the accompanying condensed consolidated balance sheets. Upon the exercise or vesting of an equity incentive award, the Company may reissue shares from treasury stock or may elect to issue new shares. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired since the inception of the share buy back programs, net of shares previously reissued. Gains on the reissuance of treasury shares are recorded as capital surplus. Losses on the reissuance of treasury shares are charged to capital surplus to the extent of previous gains recorded, and to retained earnings for any losses in excess. As of
June 30, 2018
, the Company has reissued a total of
109,170
treasury shares related to certain employee vestings under its equity incentive program.
On December 2, 2016, the Board of Directors authorized the repurchase of shares of common stock for an amount of
$600.0 million
through December 31, 2018. As of
June 30, 2018
the Company has purchased
1,962,000
shares for
$239.8 million
and has
$360.2 million
of availability remaining under this repurchase authorization.
NOTE 9. Stock-Based Compensation
The Company records stock-based compensation based on the estimated fair value of the award at the grant date and is recognized as an expense in the condensed consolidated statements of operations over the requisite service period. The estimated fair value of the award is based on the closing market price of the Company’s common stock on the date of grant.
As part of its equity incentive program, the Company grants PSUs, the vesting of which would occur, if at all, and at levels that depend upon the achievement of three-year cumulative goals tied to earnings per share. The Company assesses the expected achievement levels at the end of each reporting period. The grant date fair value of the number of awards expected to vest based on the Company’s best estimate of ultimate performance against the respective targets is recognized as compensation expense on a straight-line basis over the requisite vesting period of the awards. As of
June 30, 2018
, the Company believes it is probable that the performance conditions will be met and has recognized compensation expense accordingly.
The Company also grants DSUs to its non-management directors as part of the equity portion of their annual retainer and are fully vested at grant. Each DSU provides the right to the issuance of a share of our common stock, within ten days after the earlier of the director’s death or disability, the 13-month anniversary of the grant date or the director’s separation from service. Each director may also elect within a month after the grant date to defer the receipt of shares for five or more years. No election can be made to accelerate the issuance of stock from a DSU.
Total stock-based compensation cost recognized during the
three
and
six
month periods ended
June 30, 2018
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amount in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Stock-based compensation
|
$
|
6.8
|
|
|
$
|
6.2
|
|
|
$
|
11.2
|
|
|
$
|
9.7
|
|
The total number and type of awards granted during the periods presented and the related weighted-average grant-date fair values were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, 2018
|
|
Six Months
Ended June 30, 2017
|
|
Underlying
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Underlying
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
RSUs Granted
|
62,113
|
|
|
$
|
139.23
|
|
|
72,022
|
|
|
$
|
114.88
|
|
PSUs Granted
|
54,544
|
|
|
$
|
140.71
|
|
|
69,034
|
|
|
$
|
116.41
|
|
DSUs Granted
|
7,208
|
|
|
$
|
127.77
|
|
|
7,752
|
|
|
$
|
118.75
|
|
Total Awards
|
123,865
|
|
|
|
|
148,808
|
|
|
|
The RSUs granted during the periods presented above have vesting terms as follow:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Vest in equal annual installments over three years
|
60,022
|
|
|
69,253
|
|
Vest after three years
|
2,091
|
|
|
2,769
|
|
Total RSUs granted
|
62,113
|
|
|
72,022
|
|
NOTE 10. Debt
Schuldschein Loans
On March 22, 2018, the Company entered through a European subsidiary 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
|
|
|
|
|
The Company paid approximately
€1.1 million
of debt issuance costs in connection with the Schuldschein Loans, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest under the fixed rate tranches will be paid annually on March 31 of each year, commencing March 31, 2019. Interest under the floating rate tranches will be paid semi-annually on March 31 and September 30 of each year, commencing September 30, 2018.
As of
June 30, 2018
, the outstanding debt balance net of unamortized debt issuance costs was
€298.9 million
(
$346.1 million
at
June 30, 2018
exchange rates). The proceeds from the Schuldschein Loans will be utilized to meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or any part of the Schuldschein Loans in an amount equal to the higher of the outstanding nominal amount of such loans (or the part of it) and the discounted value.
The Schuldschein Loans contain customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio of not more than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months. The Company was in compliance with all of the covenants as of
June 30, 2018
.
Senior EUR Notes
On
November 15, 2016
, the Company issued an aggregate amount of
€440 million
of senior unsecured notes (collectively, the Senior EUR Notes) as follows:
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
Face value
|
|
Coupon
|
|
Maturity date
|
Series D Notes
|
€
|
190.0
|
|
|
0.84
|
%
|
|
November 15, 2023
|
Series E Notes
|
80.0
|
|
|
1.20
|
%
|
|
November 15, 2026
|
Series F Notes
|
170.0
|
|
|
1.36
|
%
|
|
November 15, 2028
|
|
€
|
440.0
|
|
|
|
|
|
The Company paid approximately
$1.4 million
of debt issuance costs in connection with the Senior EUR Notes, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest on the Senior EUR Notes is payable semi-annually on January 1 and July 1 of each year, and commenced on July 1, 2017. As of
June 30, 2018
, the outstanding debt balance net of unamortized debt issuance costs was
€439.0 million
(
$508.3 million
at
June 30, 2018
exchange rates). This debt balance included a revaluation loss of
$21.1 million
, net of taxes of
$16.6 million
, that has been recognized in cumulative translation adjustment within accumulated other comprehensive income. See Note 15 for further discussion.
The proceeds from the Senior EUR Notes were utilized to repay outstanding balances on our revolving credit facilities, fund our share repurchase program, finance acquisitions and meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or part of the Senior EUR Notes plus any accrued and unpaid interest to the date of prepayment and certain penalties as defined in the note purchase agreement (the EUR Note Purchase Agreement). The Company may also be required, subject to certain events and conditions, to make an offer to prepay all of the Senior EUR Notes including any accrued and unpaid interest to the date of prepayment. Each holder has the option to accept or reject such offer to prepay.
The EUR Note Purchase Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA ratio of not more than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months. The EUR Note Purchase Agreement also provides for customary events of default, the occurrence of which could result in an acceleration of the Company's obligations under the EUR Note Purchase Agreement. The Company was in compliance with all of the covenants as of
June 30, 2018
.
The Company also agreed to indemnify the note purchasers holding Senior EUR Notes that are subject to a swap agreement for certain potential losses associated with swap breakage resulting from a prepayment of the Senior EUR Notes or from an acceleration of the Senior EUR Notes as a result of an event of default.
Senior USD Notes
On June 25, 2015, the Company issued an aggregate amount of
$500.0 million
of senior unsecured notes (collectively, the Senior USD Notes) as follows:
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
Face value
|
|
Coupon
|
|
Maturity date
|
Series A Notes
|
$
|
150.0
|
|
|
2.83
|
%
|
|
June 25, 2022
|
Series B Notes
|
200.0
|
|
|
3.08
|
%
|
|
June 25, 2025
|
Series C Notes
|
150.0
|
|
|
3.18
|
%
|
|
June 25, 2027
|
|
$
|
500.0
|
|
|
|
|
|
The proceeds from the Senior Notes were used to repay loans outstanding loans under revolving credit facilities, fund share repurchases and acquisitions, refinance existing indebtedness and meet general financing requirements. The Company paid approximately
$2.1 million
of debt issuance costs in connection with the Senior USD Notes, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability.
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
that was included in other non-operating expenses in the condensed consolidated statement of operations.
Revolving 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 effective date of the 2018 Facility, the Company repaid the outstanding balance of
€104.0 million
and
€52.0 million
under the 2015 Facility and 2014 Facility, respectively, and borrowed
€168.0 million
under the 2018 Facility. These transactions were executed on a net basis, and the proceeds received amounted to
€12.0 million
. There were no additional borrowings under the 2018 Facility and the outstanding principal was
€168.0 million
at
June 30, 2018
(
$194.5 million
at
June 30, 2018
exchange rates).
Under the 2018 Facility, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of
$600 million
. The proceeds from borrowings under the 2018 Facility will be made available to fund the share repurchase program, finance acquisitions, provide working capital and for other general corporate purposes. Up to
$50 million
under the 2018 Facility may be used for issuing letters of credit, which was fully unused as of
June 30, 2018
, and up to
$50 million
is available in the form of swing line loans, all
$50 million
of which was available for use as of
June 30, 2018
.
The following table summarizes the balance of outstanding borrowings on these facilities:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
As of June 30, 2018
|
|
As of December 31, 2017
|
2014 Facility
|
$
|
—
|
|
|
$
|
82.5
|
|
2015 Facility
|
—
|
|
|
303.6
|
|
2018 Facility
|
194.5
|
|
|
—
|
|
|
$
|
194.5
|
|
|
$
|
386.1
|
|
|
|
|
|
Incremental ability to borrow
|
$
|
405.5
|
|
|
$
|
113.9
|
|
Interest on loans under the 2018 Facility will be calculated at a rate per annum equal to an applicable margin which 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).
The 2018 Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Financial covenants include a leverage test (consolidated net indebtedness not to exceed three times adjusted four quarter trailing consolidated EBITDA) and a maximum subsidiary indebtedness test. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of the Company's subsidiaries, excluding indebtedness under the 2018 Facility, to 20 percent of consolidated total assets as at the end of the most recently ended financial year, of which not more than
$150 million
may be secured, provided however that the Company may incur additional subsidiary indebtedness subject to, inter alia, providing additional corporate guarantees. Other undertakings and covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, the Employee Retirement Income Security Act (ERISA) and U.S. regulations, the Foreign Account Tax Compliance Act (FATCA), sanctions-related obligations, negative pledge, limitations on mergers and sales of assets, change of business and use of proceeds. We were in compliance with all of the covenants as of
June 30, 2018
.
Other Debt
As of
June 30, 2018
, the Company's various subsidiaries had additional borrowings from banks totaling
$0.6 million
, of which
$0.5 million
was classified as long-term debt. The remaining $
0.1 million
supports local working capital requirements. This is in comparison to
$0.7 million
as of
December 31, 2017
of which
$0.3 million
was classified as long-term debt.
The following table summarizes the maturities of long-term debt outstanding as of
June 30, 2018
.
|
|
|
|
|
(Amounts in millions)
|
|
2018
|
$
|
—
|
|
2019
|
0.3
|
|
2020
|
0.2
|
|
2021
|
69.5
|
|
2022
|
138.9
|
|
Thereafter
|
648.4
|
|
Less: unamortized debt issuance fees
|
(2.4
|
)
|
Total long-term debt
|
$
|
854.9
|
|
NOTE 11. Warranties, Guarantees, Commitments and Contingencies
Warranties
Products sold by the Company 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. Recoveries from suppliers are recognized when an arrangement with the supplier exists and collectibility is assured. Amounts recognized as recoveries do not exceed related warranty costs accrued. To the extent the Company experiences changes in warranty claim activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly. Warranty accrual estimates and the allocation of warranty between short and long term are updated based upon the most current warranty claims information available.
The following is a summary of changes in the Company’s product warranty liability for the
three
and
six
month periods ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amount in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Balance of warranty costs accrued, beginning of period
|
$
|
53.8
|
|
|
$
|
48.9
|
|
|
$
|
50.9
|
|
|
$
|
49.3
|
|
Warranty costs accrued
|
9.7
|
|
|
7.5
|
|
|
20.9
|
|
|
11.9
|
|
Warranty claims settled
|
(6.9
|
)
|
|
(10.8
|
)
|
|
(16.5
|
)
|
|
(16.3
|
)
|
Foreign exchange translation effects
|
(2.7
|
)
|
|
2.4
|
|
|
(1.4
|
)
|
|
3.1
|
|
Balance of warranty costs accrued, end of period
|
$
|
53.9
|
|
|
$
|
48.0
|
|
|
$
|
53.9
|
|
|
$
|
48.0
|
|
Current liability, included in current portion of warranties
|
$
|
33.4
|
|
|
$
|
29.1
|
|
|
$
|
33.4
|
|
|
$
|
29.1
|
|
Long-term liability, included in other liabilities
|
$
|
20.5
|
|
|
$
|
18.9
|
|
|
$
|
20.5
|
|
|
$
|
18.9
|
|
|
|
|
|
|
|
|
|
Warranty costs accrued
|
$
|
9.7
|
|
|
$
|
7.5
|
|
|
$
|
20.9
|
|
|
$
|
11.9
|
|
Less: received and anticipated recoveries from suppliers
|
(0.1
|
)
|
|
(1.3
|
)
|
|
(0.3
|
)
|
|
(1.6
|
)
|
Warranty costs net of received and anticipated recoveries
|
$
|
9.6
|
|
|
$
|
6.2
|
|
|
$
|
20.6
|
|
|
$
|
10.3
|
|
Guarantees and Commitments
The Company has uncollateralized bank guarantees for $
36.4 million
, of which $
25.9 million
is related to statutorily-required guarantees for tax and other litigation, $
2.2 million
is related to letters of credit, and $
8.3 million
is related to other individually immaterial items.
Right of Recourse
As discussed in Note 6, the Company may receive bankers acceptance drafts from customers in China in payment of outstanding accounts receivable in the ordinary course of business. These banker's acceptance drafts are non-interest bearing obligations of the issuing bank and
generally have contractual maturities of six months or less. The Company may use these bankers acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Bankers acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date. As of
June 30, 2018
and
December 31, 2017
, the Company had approximately
$39.3 million
and
$39.5 million
, respectively, of bankers acceptance drafts subject to customary right of recourse provisions, which were transferred to vendors and had not reached their scheduled maturity date. Historically, the bankers acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Contingencies
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.
Under an indemnification agreement, WABCO Brazil is responsible for certain claims related to Trane's (formerly called American Standard) business for periods prior to the Company's spin-off from Trane in 2007. In particular, there are tax claims pending in various stages of the Brazilian legal process related to income, social contribution and/or value added taxes for which a contingency exists and which may or may not ultimately be incurred by the Company.
As previously disclosed, this includes one particular case for which an accrual of BRL
38.6 million
including interest (
$10.0 million
based on
June 30, 2018
exchange rates) was recorded based on management's assessment after considering advice of external legal counsel with respect to the likelihood of loss in this case. A corresponding deposit was made in the first quarter of 2017 into an escrow account with the Brazilian government, representing substantially all of the potential liability for the case. In March 2018, our appeal to have this case heard at the Brazilian Superior Court of Justice (the Court) was accepted. The Court subsequently heard the case and rejected our position ultimately ruling in favor of the tax authorities. There will be no further appeals. Accordingly, management expects this case to be closed by the Brazilian authorities within the next twelve months and has classified the accrual and deposit within other current liabilities and other current assets, respectively, as of
June 30, 2018
.
The estimated total amount of other remaining contingencies for tax claims under the indemnification agreement as of
June 30, 2018
was $
20.7 million
including interest. However, based on management’s assessment following advice of our external legal counsel, the Company believes that it has valid arguments in all of these cases and thus no accrual is required at this time.
NOTE 12. Income Taxes
Income tax expense is the net result of taxes on the mix of earnings in multiple tax jurisdictions, foreign tax credits and rulings, the assessment and accrual of uncertain tax positions resulting from tax authority audits or changes in the interpretation of the law. For interim income tax reporting we estimate our annual effective tax rate and apply it to our year-to-date ordinary income (loss). Tax jurisdictions with a projected or year-to-date loss for which a tax benefit cannot be realized are excluded. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings for certain foreign subsidiaries and creates new taxes on certain foreign sourced earnings. We are applying the guidance in SAB 118 when accounting for the enactment date effects of the Act. As of June 30, 2018, we have not completed our accounting for all the tax effects of the Tax Act and have made reasonable estimates during 2017. We will continue to refine our estimates as additional guidance and information is available. Our estimates could also be affected as we gain a more thorough understanding of the Tax Act. These changes could be material to income tax expense. Changes to the provisional estimate of the tax effect of the Tax Act will be recorded as a discrete item in the interim period the amounts are considered complete. As of
June 30, 2018
, the remaining transition tax payable based on our provisional estimate is
$172.8 million
.
The Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Taxed Income (GILTI) earned by foreign subsidiaries. The Company has not determined its accounting policy with respect to GILTI and has therefore included the 2018 estimate of current year GILTI as a period cost and included as part of the estimated annual effective tax rate. The 2018 estimated annual effective tax rate also includes the 2018 impact of all other U.S. tax reform provisions that were effective on January 1, 2018.
The income tax expense was
$23.5 million
and
$49.9 million
on pretax income of
$132.8 million
and
$265.8 million
before adjusting for noncontrolling interest for the
three
and
six
months ended
June 30, 2018
, and
$14.0 million
and
$29.3 million
on pretax income of
$105.5 million
and
$205.1 million
before adjusting for noncontrolling interest for the
three
and
six
months ended
June 30, 2017
. The increase in income tax expense is primarily the result of higher pre-tax income, mix between tax jurisdictions and the impact of U.S. tax reform measures effective beginning in 2018, which is not significant.
Unrecognized tax benefits at
June 30, 2018
amounted to
$71.2 million
, of which
$68.0 million
have been offset against deferred tax assets. The remaining unrecognized tax benefits of
$3.2 million
were classified as a long-term liability. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.
In February 2018, the Company received a final tax and interest assessment in India for the 2013 tax year related to a capital gain on an intercompany transfer of an Indian subsidiary. The assessment was for INR
3.5 billion
(
$51.5 million
at
June 30, 2018
exchange rates). In addition, a penalty assessment was issued in March for INR
2.1 billion
(
$31.2 million
at
June 30, 2018
exchange rates). The Company believes that no tax is due under the relevant double tax treaty between the Netherlands and India and therefore no amount has been accrued. The Company appealed both the tax and penalty assessments during March 2018. In May 2018, the Commissioner of Income Tax granted a partial stay of demand requiring the Company to pay 15% of the assessment (INR
543.4 million
, equivalent to
$7.9 million
at
June 30, 2018
exchange rates) during the next twelve months. The assessed penalty has been held in abeyance pending the appeal. As of
June 30, 2018
, the Company has deposited installments totaling INR
100.0 million
(
$1.5 million
at
June 30, 2018
exchange rates).
NOTE 13. Streamlining Expenses
The Company accounts for employee-related streamlining charges as either a one-time benefit arrangement or an ongoing benefit arrangement as appropriate. From time to time the Company also has streamlining charges that are not related to employees, such as facility exit costs.
In the third quarter of 2015, the Company announced proposals to cease manufacturing at
two
production facilities to preserve the Company's global competitiveness for certain mechanical products. These proposals resulted in a workforce reduction of 316 positions and includes a smaller program initiated in the fourth quarter of 2014 (the 2014/2015 Program). As of
June 30, 2018
, production at both facilities has been transferred to other facilities within the Company's globally integrated supply chain. The cumulative costs incurred as of
June 30, 2018
related to the 2014/2015 Program was
$63.2 million
, which approximates the total expected costs to be incurred under this program.
Based on the Company’s efforts to maintain our global footprint, the Company has periodically entered into other streamlining programs as deemed necessary which may include workforce reductions, site closures and rotation of manufacturing footprint to low cost regions (Other Programs).
The following is a summary of changes in the Company’s streamlining program liabilities for the
three
and
six
month periods ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amounts in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
2014 / 2015 Program
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
12.0
|
|
|
$
|
25.1
|
|
|
$
|
16.8
|
|
|
$
|
27.8
|
|
Charges
|
0.6
|
|
|
0.6
|
|
|
0.3
|
|
|
0.2
|
|
Payments
|
(3.6
|
)
|
|
(3.5
|
)
|
|
(8.5
|
)
|
|
(6.3
|
)
|
Foreign exchange effects
|
(0.5
|
)
|
|
1.6
|
|
|
(0.1
|
)
|
|
2.1
|
|
Balance at end of period
|
$
|
8.5
|
|
|
$
|
23.8
|
|
|
$
|
8.5
|
|
|
$
|
23.8
|
|
Other Programs
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
24.8
|
|
|
$
|
21.4
|
|
|
$
|
26.9
|
|
|
$
|
23.4
|
|
Charges
|
—
|
|
|
0.9
|
|
|
—
|
|
|
1.2
|
|
Payments
|
(2.3
|
)
|
|
(2.1
|
)
|
|
(5.2
|
)
|
|
(4.9
|
)
|
Foreign exchange effects
|
(1.4
|
)
|
|
1.5
|
|
|
(0.6
|
)
|
|
2.0
|
|
Balance at end of period
|
$
|
21.1
|
|
|
$
|
21.7
|
|
|
$
|
21.1
|
|
|
$
|
21.7
|
|
Total streamlining liability
|
$
|
29.6
|
|
|
$
|
45.5
|
|
|
$
|
29.6
|
|
|
$
|
45.5
|
|
A balance of $
16.9 million
has been included in other liabilities (non-current) and $
12.7 million
has been included in other accrued liabilities (current) as of
June 30, 2018
.
A summary of the streamlining costs related to the above programs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2017
|
(Amounts in millions)
|
2014/2015 Program
|
|
Other
Programs
|
|
2014/2015 Program
|
|
Other
Programs
|
Employee-related charges – cost of sales
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
0.4
|
|
Employee-related charges – selling and administrative
|
0.6
|
|
|
—
|
|
|
(1.0
|
)
|
|
0.2
|
|
Other streamlining charges
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.3
|
|
Total program costs
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
(Amounts in millions)
|
2014/2015 Program
|
|
Other
Programs
|
|
2014/2015 Program
|
|
Other
Programs
|
Employee-related charges – cost of sales
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(1.9
|
)
|
|
$
|
0.6
|
|
Employee-related charges – selling and administrative
|
0.2
|
|
|
—
|
|
|
1.9
|
|
|
0.2
|
|
Other streamlining charges
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
0.4
|
|
Total program costs
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
1.2
|
|
For the
three
and
six
month periods ended
June 30, 2017
, the streamlining costs incurred for Other Programs related to charges for headcount reductions.
NOTE 14. Pension and Post-retirement Benefits
Post-retirement pension, health and life insurance costs had the following components for the
three
and
six
month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2017
|
(Amounts in millions)
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
Service cost-benefits earned during period
|
$
|
6.3
|
|
|
$
|
0.2
|
|
|
$
|
5.0
|
|
|
$
|
0.1
|
|
Interest cost on the projected benefit obligation
|
4.1
|
|
|
0.1
|
|
|
3.7
|
|
|
0.1
|
|
Less: expected return on plan assets
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
Amortization of net loss
|
6.2
|
|
|
0.1
|
|
|
5.6
|
|
|
0.2
|
|
Pension and post-retirement benefit plan cost
|
$
|
15.3
|
|
|
$
|
0.4
|
|
|
$
|
13.0
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
(Amounts in millions)
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
Service cost-benefits earned during period
|
$
|
13.1
|
|
|
$
|
0.4
|
|
|
$
|
9.9
|
|
|
$
|
0.3
|
|
Interest cost on the projected benefit obligation
|
8.3
|
|
|
0.2
|
|
|
7.0
|
|
|
0.2
|
|
Less: expected return on plan assets
|
(2.6
|
)
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
Amortization of net loss
|
12.5
|
|
|
0.2
|
|
|
14.1
|
|
|
0.3
|
|
Pension and post-retirement benefit plan cost
|
$
|
31.3
|
|
|
$
|
0.8
|
|
|
$
|
28.5
|
|
|
$
|
0.8
|
|
The weighted-average expected rates of return on plan assets used to determine the pension and post-retirement benefit plan cost for the
three
and
six
month periods ended
June 30, 2018
and
2017
were based on the rates determined as of the beginning of each of the fiscal years of
2.75%
and
4.54%
, respectively.
The Company makes contributions to funded pension plans that, at a minimum, meet all statutory funding requirements. Contributions in
2018
, as well as payments of benefits incurred by unfunded plans, were in line with the expectations for
2018
and also in line with the contributions made during
2017
.
Pension and post-retirement benefit plan cost is included in cost of sales, selling and administrative expenses and non-operating expenses on the condensed consolidated statements of operations.
NOTE 15. Derivative Instruments and Hedging Activities
ASC 815,
Derivatives and Hedging
, requires a company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies and has been designated as a hedge for accounting purpose. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The Company recognizes all derivative financial instruments in the condensed consolidated balance sheet at fair value using Level 2 inputs and these are classified as “other current assets,” “other assets,” “other accrued liabilities” or “other liabilities” on the condensed consolidated balance sheets. The impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the condensed consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income (AOCI) for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.
Net Investment Hedges
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
June 30, 2018
and
December 31, 2017
, the Company designated Euro-denominated loans of
€608.0 million
(approximately
$703.9 million
at
June 30, 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
three
-month periods ended
June 30, 2018
and
2017
, the Company recorded a gain of
$31.5 million
, net of taxes of
$8.9 million
, and a loss of
$20.8 million
, net of taxes of
$13.0 million
, respectively, in cumulative translation adjustment within AOCI. For the
six
-month periods ended
June 30, 2018
and
2017
, the Company recorded a gain of
$9.1 million
, net of taxes of
$2.5 million
, and a loss of
$25.7 million
, net of taxes of
$16.1 million
, respectively, in cumulative translation adjustment within AOCI.
Derivatives Not Designated as Hedges
Foreign exchange contracts are also used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of
June 30, 2018
and
December 31, 2017
, the Company had the following outstanding notional amounts related to foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
As of June 30, 2018
|
|
As of December 31, 2017
|
Foreign Currency
|
|
Unit of Measure
|
|
Hedged against
|
|
Quantity Hedged
|
|
Notional Amount (USD Equivalent)
|
|
Quantity Hedged
|
|
Notional Amount (USD Equivalent)
|
Chinese Yuan
|
|
CNY
|
|
EUR
|
|
568.0
|
|
|
$
|
85.7
|
|
|
550.0
|
|
|
$
|
84.2
|
|
Hong Kong Dollar
|
|
HKD
|
|
EUR
|
|
285.0
|
|
|
36.3
|
|
|
250.0
|
|
|
32.0
|
|
Polish Zloty
|
|
PLN
|
|
EUR
|
|
100.5
|
|
|
26.7
|
|
|
64.0
|
|
|
18.3
|
|
British Pound
|
|
GBP
|
|
EUR
|
|
11.6
|
|
|
15.2
|
|
|
9.5
|
|
|
12.8
|
|
US Dollar
|
|
USD
|
|
EUR
|
|
*
|
|
|
*
|
|
|
294.2
|
|
|
294.2
|
|
* No significant outstanding foreign currency forward contracts
The Company had additional foreign currency forward contracts with notional amounts that individually amounted to less than
$10 million
. As of
June 30, 2018
and
December 31, 2017
, forward contracts for an aggregate notional amount of €
152.5 million
($
176.5 million
at
June 30, 2018
exchange rates) and
€416.4 million
(
$497.7 million
at
December 31, 2017
exchange rates), respectively, were outstanding with average durations of less than
one
month. The majority of these exchange contracts were entered into on
June 28, 2018
and
December 29, 2017
, respectively. These foreign exchange contracts have offset the revaluation of assets and liabilities. The Company recognized a non-operating gain of
$0.9 million
and
$1.9 million
for the
six
months ended
June 30, 2018
and
2017
, respectively. The fair value of these derivatives was
$1.2 million
at
June 30, 2018
and
$2.0 million
at
December 31, 2017
.
NOTE 16. Business Combinations
Acquisition of WABCO Automotive South Africa
On December 1, 2017, the Company acquired the remaining
51%
interest in its South African partnership with Sturrock and Robson Industries Pty Ltd. for total consideration of
$7.9 million
, of which
$7.4 million
was paid in cash and
$0.5 million
related to non-cash consideration for payables from the partnership assumed in acquisition accounting. This acquisition extends the Company's global product portfolio, including its recently acquired product lines, to the Sub-Saharan region and further improves the Company's proximity to customers in this region.
The acquisition of the remaining interests was accounted for as a step-acquisition, resulting in a net gain on remeasurement of equity method investment of
$4.2 million
. This included a
$6.0 million
gain related to the remeasurement of the Company's existing equity method investment to the acquisition date fair value of
$7.1 million
, offset by the release of foreign currency translation of
$1.8 million
associated with the equity method investment prior to the acquisition. As part of the transaction, the consolidated interest in the South African partnership was integrated into the newly formed WABCO South Africa Pty Ltd. (WABCO South Africa).
The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date remains preliminary as of
June 30, 2018
, pending a final valuation of deferred taxes and intangible assets. The following table summarizes the preliminary allocation of the net purchase consideration:
|
|
|
|
|
(Amounts in millions)
|
|
Accounts receivable
|
$
|
1.8
|
|
Inventory
|
1.4
|
|
Other current assets
|
0.3
|
|
Property, plant & equipment
|
1.1
|
|
Intangible assets
|
7.3
|
|
Total liabilities assumed
|
(1.4
|
)
|
Identifiable net assets
|
$
|
10.5
|
|
Goodwill
|
4.5
|
|
Total estimated fair value of net assets
|
$
|
15.0
|
|
Less: fair value of equity method investment
|
(7.1
|
)
|
Net purchase consideration
|
$
|
7.9
|
|
The intangible assets include amounts recognized for the fair value of distribution rights. The fair value of intangible assets was determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately
10
years. The goodwill generated is primarily attributable to expected synergies and is not deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Acquisition of Meritor WABCO Vehicle Control Systems (now known as WABCO USA)
On October 1, 2017, the Company acquired the remaining interest in its Meritor WABCO joint venture from Meritor Inc. for
$250.0 million
, less cash acquired of
$16.4 million
, resulting in net cash consideration of
$233.6 million
. A final closing partnership distribution was received by Meritor immediately prior to acquisition, which effectively reduced their ownership interest from
50%
to
49.21%
. This acquisition of the remaining
49.21%
interest in Meritor WABCO unifies the Company's operations in North America and allows customers to access an integrated WABCO product portfolio and benefit from an integrated supply chain.
In connection with the acquisition, the Company entered into a new ten-year distribution agreement with a Meritor affiliate to serve as the exclusive distributor for a certain range of WABCO’s Aftermarket products in the U.S. and Canada and its non-exclusive distributor in Mexico. The Company has the option to reacquire the distribution rights, and Meritor has the option to put these distribution rights to the Company, at certain points in the next three and half years for an exercise price between
$225 million
and
$265 million
, based on the earnings of the distribution business.
The acquisition of Meritor WABCO was accounted for as a step-acquisition. The equity investment held by the Company immediately prior to acquisition was remeasured to an acquisition-date fair value of
$258.0 million
based on the pro rata value of
the new equity interest acquired given that prior to the final closing partnership distribution, both partners had equal proportions of equity interest in the prior joint venture with the same rights and preferences, and that the acquired equity interest was consummated on an arm’s length basis by knowledgeable, unrelated parties. This valuation was corroborated by applying an income approach that utilized discounted future estimated cash flows based on projections of revenues and expenses and our weighted-average cost of capital. The resulting gain on remeasurement of equity method investment amounted to
$243.5 million
.
During the
three
and
six
month periods ended
June 30, 2018
, adjustments to the purchase price allocation were not material. The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date remains preliminary as of
June 30, 2018
, pending finalization of the valuation of intangible assets and certain liabilities. The following table summarizes the preliminary allocation of the net purchase consideration:
|
|
|
|
|
(Amounts in millions)
|
|
Cash & cash equivalents
|
$
|
16.4
|
|
Accounts receivable
|
38.6
|
|
Inventory
|
43.5
|
|
Other current assets
|
0.3
|
|
Property, plant & equipment
|
2.1
|
|
Intangible assets
|
165.0
|
|
Accounts payable assumed
|
(56.2
|
)
|
Accrued liabilities assumed
|
(17.4
|
)
|
Identifiable net assets acquired
|
$
|
192.3
|
|
Goodwill
|
321.0
|
|
Total fair value of net assets
|
513.3
|
|
Less: fair value of equity method investment
|
$
|
(258.0
|
)
|
Less: elimination of unrealized profits on inventory
|
(5.3
|
)
|
Net purchase consideration
|
$
|
250.0
|
|
The intangible assets include amounts recognized for the fair value of trade name and customer-based assets. The fair value of intangible assets was determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately
42
years. The goodwill generated is primarily attributable to expected synergies and its portion relating to the step-acquisition is deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses.The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Acquisition of R.H. Sheppard Co., Inc.
On
September 18, 2017
, the Company acquired R.H. Sheppard Co., Inc. (Sheppard) for cash consideration of
$158.8 million
, excluding cash acquired of
$17.1 million
, resulting in net cash paid of
$141.7 million
. During the first quarter of 2018, the purchase price was adjusted under the purchase agreement for an additional cash payment of
$6.4 million
, bringing the total purchase price to
$165.2 million
. Sheppard is a supplier of steering technologies, precision-engineered engine pumps and remanufacturing services for commercial vehicles.
The allocation of the purchase consideration to the assets acquired and liabilities assumed as of the acquisition date is provisional as of
June 30, 2018
, pending finalization of the valuation of certain liabilities. The following table summarizes the allocation of the net purchase consideration:
|
|
|
|
|
(Amounts in millions)
|
|
Cash and cash equivalents
|
$
|
17.1
|
|
Trade receivables
|
17.5
|
|
Inventories
|
24.7
|
|
Other current assets
|
1.1
|
|
Property, plant and equipment
|
66.4
|
|
Intangible assets
|
27.7
|
|
Other assets acquired
|
4.8
|
|
Deferred tax liabilities
|
(25.8
|
)
|
Other liabilities assumed
|
(9.6
|
)
|
Identifiable net assets acquired
|
$
|
123.9
|
|
Goodwill
|
41.3
|
|
Net purchase consideration
|
$
|
165.2
|
|
The intangible assets include amounts recognized for the fair value customer-based assets and developed technology. The fair value of intangible assets was determined based on an income and cost approach. The intangible assets are being amortized over a weighted-average useful life of approximately
19
years. The goodwill generated is primarily attributable to expected synergies and is not deductible for tax purposes. The transaction-related costs were expensed as incurred and were recorded within operating expenses. The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented and as a result, no pro forma financial statements have been presented.
Other Acquisitions
On
June 6, 2018
, the Company acquired Asset Trackr Private Limited
(
Asset Trackr) for total purchase consideration of
$2.9 million
, primarily for goodwill and intangible assets. Of the total purchase consideration,
$2.2 million
has been paid and the remaining cash consideration is expected to be paid in the next 18 months, in accordance with the terms of the acquisition agreement. Asset Trackr is an India-based start-up company that helps commercial vehicle fleets track, analyze and optimize their transportation resources and assets in real time.
NOTE 17. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of
June 30, 2018
and
December 31, 2017
were as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
(Amounts in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term and other investments
(a)
|
$
|
—
|
|
|
$
|
176.6
|
|
|
$
|
—
|
|
|
$
|
176.6
|
|
Foreign currency derivative assets
(b)
|
|
|
1.2
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(Amounts in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term and other investments
(a)
|
$
|
—
|
|
|
$
|
83.0
|
|
|
$
|
—
|
|
9.0
|
|
$
|
83.0
|
|
Foreign currency derivative assets
(b)
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
(a) Short-term and other investments consist of mutual funds or deposit funds holding primarily term deposits, certificates of deposit and short-term bonds.The Company considers highly liquid investments with maturities of three months or less when purchased to be cash and cash equivalents. The fair value of short-term and other investments is determined based on pricing sources for identical instruments in less active markets. The unrealized loss on short–term and other investments still held at the reporting date was immaterial for the
three
and
six
-month periods ended
June 30, 2018
.
(b) Fair value of derivative instruments determined based on Level 2 inputs including credit ratings and other criteria observable
in the market.
Other Fair Value Disclosures
As of
June 30, 2018
and
December 31, 2017
, the carrying amount of the Company's investments in repurchase agreements, guaranteed notes receivable and long-term debt were determined to approximate their fair values based on Level 2 inputs. The Company also had non-marketable equity securities that do not have readily determinable fair values, the carrying amount of which amounted to
$30.9 million
as of
June 30, 2018
and
December 31, 2017
.