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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, 2017
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
Commission file number 1-33332
WABCO Holdings Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
20-8481962
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Chaussée de la Hulpe 166
1170 Brussels, Belgium
 
 
 
 
2770 Research Drive,
Rochester Hills, MI
 
48309-3511
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code +32 2 663 98 00
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, 2017, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $6.8 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 9, 2018
 
53,741,272

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, 2017.



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WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-K
Year ended December 31, 2017
TABLE OF CONTENTS
 
 
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Item 1.

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Item 5.

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Item 7.

Item 7A.

Item 8.

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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;
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 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 and the risk that we may need to increase our provisional charge relating to the transition tax under U.S. tax law;
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.
 

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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, 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.

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. 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. 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.

WABCO’s AMT control technology 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 BRIC countries - Brazil, Russia, India and China - as OEMs and fleet operators seek to increase driver comfort and safety.

WABCO is the first supplier of advanced emergency braking systems (AEBS) homologated in Europe in accordance with

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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.

At the end of 2015, the European Union mandated lane departure warning systems (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.

In April 2017, WABCO and G7, a technology leader in China’s fleet logistics industry, formed a joint venture and launched Smart Trailer FMS, a trailer fleet management solution (FMS). It is integrated with WABCO’s Intelligent Trailer Program, which monitors and controls more than 40 onboard functions. G7 is dedicated to implementing telematics, artificial intelligence and big-data algorithms in the logistics industry. Smart Trailer FMS 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.

In July 2017, WABCO further expanded its global FMS platform by agreeing to acquire AssetTrackr, an innovative FMS provider based in Bangalore, India. AssetTrackr helps commercial fleets to track, analyze and optimize their transportation resources and assets in real time through cloud-based solutions.

In September 2017, WABCO completed the acquisition of R.H. Sheppard Co., Inc.. Based in Pennsylvania, U.S.A., Sheppard is a key supplier of steering technologies for commercial vehicles, offering a suite of power-steering gears that has set the standard for heavy-duty commercial and specialty vehicles. This acquisition combines Sheppard’s steering technologies with WABCO’s technologies in 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 braking, stability and suspension controls. In conjunction with the Sheppard acquisition, WABCO signed a long-term cooperation agreement with Nexteer Automotive, a global leader in intuitive motion control, headquartered in Michigan, U.S.A. WABCO and Nexteer will collaborate to develop and supply active steering systems for medium- and heavy-duty commercial vehicles using Nexteer MagnaSteer™ Actuation Technology, a breakthrough in advanced steering assistance. Both companies will integrate MagnaSteer’s proven technology with Sheppard’s suite of power-steering gears. This advancement will result in differentiating solutions for steering, braking and stability controls to benefit commercial vehicle makers and fleet operators across the globe.

In October 2017, WABCO completed the buyout of the Meritor WABCO joint venture in North America, purchasing Meritor, Inc.’s stake and taking full ownership of the enterprise. This acquisition enables WABCO to consolidate operations in North America and to unify our businesses with one team under one brand. It unlocks further value for OEMs and fleets by offering seamless access to the full spectrum of WABCO’s safety and efficiency technologies.

In December 2017, WABCO acquired the remaining 51% interest of our South African partnership with Sturrock and Robson Industries, Pty Ltd., creating wholly-owned WABCO South Africa. This acquisition will enable WABCO to introduce our extended global portfolio to the Sub-Saharan region through WABCO’s distribution center near Johannesburg and to further improve our proximity and connectivity to customers across the region.

In December 2017, WABCO announced a $10 million strategic investment in Nikola Motor Company, headquartered in Utah, U.S.A., a leader in design and manufacturing of hydrogen-electric vehicles, vehicle components, energy storage systems and electric vehicle drivetrains. This transaction further demonstrates WABCO’s commitment to advance development of electric and highly automated commercial vehicles in North America and around the globe. WABCO and Nikola also agreed to accelerate development of advanced safety technologies specifically designed for electric commercial vehicles, including electronic braking systems and traction and stability controls.



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Our key product groups and functions are described below.
 
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 also made investments in electrification, the most recent being the investment in Nikola Motor Company,

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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 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 2017, 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 3% per year.

Year to Year Change
 
2013
 
2014
 
2015
 
2016
 
2017
Sales to European T&B OEMs (at a constant FX rate)
 
13
%
 
(7
)%
 
8
%
 
8
%
 
6
%
European T&B Production
 
5
%
 
(9
)%
 
6
%
 
1
%
 
8
%

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 customer is Daimler, which accounted for approximately 11% of our sales in 2017 and 10% in 2016. Other key customers include Volvo, Ashok Leyland, BMW, China National Heavy Truck Corporation (CNHTC), Cummins, Fiat (Iveco), Hino, Hyundai, Krone, MAN Nutzfahrzeuge AG (MAN), Meritor, Paccar (DAF Trucks N.V. (DAF), Kenworth, Leyland and Peterbilt), First Automobile Works, Otto Sauer Achsenfabrik (SAF), Scania, Schmitz Cargobull AG, TATA Motors and ZF Friedrichshafen AG (ZF). Our top 10 customers accounted for approximately 44% of our sales for each of the the fiscal years ended December 31, 2017 and 2016.

The largest group of our customers, representing approximately 57% of sales (55% in 2016), 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.

The second largest group, representing approximately 24% of sales (25% in 2016), 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

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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 9% of sales (10% in 2016), 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 6% (6% in 2016) and 4% (4% in 2016) 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.

Europe represented approximately 52% of our sales in 2017 (54% in 2016), 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 an outstanding network of suppliers, manufacturing sites and engineering hubs.

WABCO SALES
By Geography
FY 2017 % of Sales
FY 2016 % of Sales
 
By Major End-Market
FY 2017 % of Sales
FY 2016 % of Sales
     Europe
52
%
54
%
 
     Truck & Bus Products (OEMs)
57
%
55
%
     Asia
26
%
24
%
 
     Aftermarket
24
%
25
%
     North America
18
%
14
%
 
     Trailer Products
9
%
10
%
     South America
3
%
3
%
 
     Car Products
6
%
6
%
     Other
1
%
5
%
 
     Off Highway Products
4
%
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 18 ("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.


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Growth Strategy

In 2017, 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 $147.0 million in 2017.

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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 2017 - among other major accomplishments - we completed three acquisitions, 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 R.H. 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 2017, WABCO continued to increase adoption of our breakthrough MAXX™ air disc brakes (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. As of 2017, four 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. In 2017, WABCO increased adoption of OptiDrive systems at original equipment makers in emerging economies such as India and China. OptiRide™ is an electronically controlled air suspension (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 2017, 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 is located in Rochester Hills, Michigan. 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 2017, we increased WABCO's ADB penetration and market share and expanded adoption of high-performance ADB in North America.

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Responding to greater customer demand in North America, we ramped up ADB production at our state-of-the-art manufacturing facility in South Carolina, U.S.A., which opened in 2016. Total ADB units sold increased by 56% versus 2016. During 2017, WABCO’s AMT also continued its successful sales penetration to Daimler Trucks North America and Volvo. Lastly, WABCO acquired R. H. Sheppard, further expanding its North America footprint and adding important steering capability to our technological reservoir. WABCO also made a strategic investment in electric truck manufacturer, Nikola.

WABCO’s OnGuard is North America's leading collision mitigation system. More than 200 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 2017, 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 anti-lock braking systems (ABS) in China, WABCO is well positioned for growth driven by the continued local enforcement of existing regulations making ABS mandatory on trucks, buses and trailers, as well as additional future regulations to cover more classes of vehicles.

WABCO strengthened its traditional partnerships with leading OEMs (China National Heavy Truck Corporation (CNHTC), Yutong) and furthered support for additional growth potential OEMs like Dongfeng Liuzhou Motor Company (DFLQ) through a new agreement to strengthen its strategic partnership in 2017. WABCO also entered into a joint venture agreement 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 only 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. Also, WABCO signed a new multi-year agreement in 2016 to supply vacuum pumps for Geely, one of China’s largest car makers, thus further enlarging WABCO’s car business growth prospects in the region.

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 54-year track record of local market leadership in conventional braking products, advanced braking systems, air-assisted products, and automated manual transmission systems. In particular, all local commercial vehicle manufacturers in India relied on WABCO’s test track located in Chennai to homologate anti-lock braking systems (ABS) to comply with the new national ABS regulation that came into effect at the end of 2015 for trucks weighing more than 12 tons and buses above 5 tons. In 2017, WABCO INDIA and Tata Motors launched ESCsmart™ in India. Tata Motors is the first OEM to deploy ESCsmart locally, paving the way for wider adoption in this market. WABCO’s ESCsmart electronic stability control (ESC) for trucks and buses also marks the next level of global technology partnership with our customers. It is an active safety system that monitors directional stability of vehicles, helping to reduce accidents, particularly involving rollover, skidding and jack-knifing. Today, ESCsmart has been approved for use in the European Union and a further 20 countries.


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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, as well as a facility in Chennai for software engineering. In India, over 500 engineers also support the local 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 2017 to be recognized by numerous 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 broad access to full product and service support. To enhance connectivity, WABCO INDIA agreed to acquire AssetTrackr, an innovative FMS provider based in Bangalore, India. AssetTrackr helps commercial fleets to track, analyze and optimize their transportation resources and assets in real time through cloud-based solutions.

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 2017, 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 five regional sales offices, 25 dealers, over 170 authorized WABCO shops and more than 190 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. 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 75% 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.

As announced in 2015 within the framework of preserving WABCO competitiveness in conventional mechanical products, 2017 saw the end of manufacturing activities and the cessation of operations in Claye-Souilly (France) in the second half of 2017, with production being transferred to other facilities within WABCO’s globally integrated supply chain.

In 2017, we broke ground for our new Engineering Innovation Center in Hanover, Germany. This investment of nearly $30

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million will ensure WABCO’s global technology leadership continues through future generations of innovation.

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 49%.

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 2,663 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 220 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
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 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 14,631 employees. Approximately 44% of our employees are salaried and 56% are hourly. Approximately 45% of our workforce is in Europe, 46% is in Asia, and the remaining 9% is in the Americas.


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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. 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 generic brands like the WABCO brand as well as many of our product names.

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 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.

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, both 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 2017 to evaluate and remediate these sites were not material, and are also not expected to be material in 2018. 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

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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 2017, approximately 82% 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. It is unclear at present to what extent these initiatives will be implemented by the EU countries.


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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to 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%, a one-time transition tax on unrepatriated earnings of foreign subsidiaries at reduced tax rates regardless of whether the earnings are repatriated, new taxes on earnings of foreign subsidiaries, a minimum tax on payments to foreign related parties and the modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, and our operating results and financial condition could be adversely affected. In addition, it is uncertain if, and to what extent, various U.S. states will conform to the new tax law which could adversely affect our operating results and financial condition.

During 2017, the Company recognized provisional income tax expense of $67.6 million related to the Tax Act including $100.0 million for the one-time transition tax partially offset by a $32.4 million benefit for remeasurement of our U.S. net deferred tax liability. The charge taken for the transition tax is provisional because the Tax Act was enacted on December 22, 2017, and the Company was not able to complete its assessment of the income tax expense in time for the release of its 2017 audited financial statements with this Form 10-K. Pursuant to the Securities and Exchange Commission’s Staff Accounting Bulletin 118, the Company is making a reasonable estimate of the income tax expense for 2017, and the Company will continue to assess the accounting impacts of the Tax Act on its financial statements. The ultimate impact will be recorded in 2018 and may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. There is a risk that the final assessment of the 2017 income tax expense may exceed the provisional charge, which may require the Company to record an additional expense in the 2018 period in which the Company is able to complete its assessment.

Our annual cash tax rate will likely increase, perhaps significantly in future years, as a result of the European Commission’s decision on the Belgian excess profit ruling program which would negatively impact our results of operations.

Our overall effective tax rate is equal to our total tax 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 has operations and a taxable presence in countries outside the United States and all of these countries have a tax rate that is different than the rate in the U.S. The country that has a material impact on lowering our global effective tax rate is Belgium, the location of our global headquarters.

The Belgian Tax Code contains provisions to reduce the taxable base of companies, through rulings granted by the Belgian Government under the excess profit ruling (EPR) program. WABCO qualified for the EPR program in 2012. On January 11, 2016, the European Commission ruled that the EPR program permitted under Belgian law is illegal and incompatible with European State Aid law (hereinafter referred to as the "Decision"). As a result, the European Commission required Belgium to stop applying the EPR program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). The Company recorded an income tax provision of $69.3 million during 2016 with respect to the clawback of all the tax benefits obtained under the EPR program for tax years 2012 to 2014. This income tax provision did not have any cash impact because the Company had net operating losses (NOLs) available to deduct against the incremental taxable profit. The fact that the Belgium NOLs were utilized to offset the EPR clawback means they are no longer available to reduce our future cash tax rate and the amount of tax WABCO pays in Belgium is likely to increase significantly in future years which could have a material adverse effect on our results of operations.

See Management’s Discussion & Analysis of Financial Condition and Results of Operations for a discussion of the Company’s appeal against the Decision and the impact on the Company's financial results in 2017.

Our annual effective tax rate may increase, perhaps significantly in future years, if the European Commission decides that the Belgian Patent Income Deduction (PID) program is incompatible with European State Aid rules.

In July 2016, WABCO received a ruling from the Belgium Government confirming that it may claim a PID tax relief from 2015. Under current Belgium law, WABCO should be able to qualify for the PID until July 2021. There can be no guarantee that the European Commission will not later decide that the PID program in Belgium, like the EPR program, constitutes illegal state aid. If we lose the benefit of the PID program, it would increase our effective tax rate which could have a material adverse effect on our results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Company’s ability to claim PID relief.

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

As of December 31, 2017, we had approximately $135.8 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

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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.

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.

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
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, 2017, our total debt balance was $1.4 billion compared to $959.1 million as of our prior fiscal year end. Our indebtedness could affect our business and financial condition in various ways, including:

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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 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 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, 2017, sales to our top ten customers accounted for approximately 44% 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;

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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. 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 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 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

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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. 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.
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 ratings 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.


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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 is 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:

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

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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 16, 2018, our manufacturing activities are located at 27 sites in 11 countries.

Site Location
  
Major Products Manufactured at Location
Campinas, Brazil
  
Vehicle control systems
Jinan, China
  
Braking systems and compressors
Qingdao, China
  
Braking systems
Taishan, China
 
Foundation brakes
Hanover, Germany
  
Vehicle control systems
Gronau, Germany
  
Compressors and hydraulics
Mannheim, Germany
  
Foundation brakes
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
Pyungtaek, Korea
  
Braking systems
Stanowice, Poland
  
Remanufactured products
Wroclaw, Poland (2 plants)
  
Vehicle control systems
Miass, Russia
 
Actuators and foundation brakes
Rayong, Thailand
 
Actuators and foundation brakes
Charleston, United States
  
Air compressors and braking system components
Rochester Hills, United States
 
Remanufactured products
North Mankato, United States
 
Braking systems
Wytheville, United States
 
Braking systems
Hebron, United States
 
Braking systems
Nogales, United States
 
Braking systems
Hanover, United States
 
Steering systems and foundry
Empalme, Mexico
 
Braking systems
Toronto, Canada
 
Aerodynamic products

We own all of the plants described above, except for Jinan, China; Taishan, China; Stanowice, Poland; Miass, Russia; Rayong, Thailand; Rochester Hills, U.S.; Charleston, U.S.; Nogales, U.S.; and Empalme, Mexico 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 2017, 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 Rochester Hills, Michigan, 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 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 15 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 16, 2018 with respect to each person who is an executive officer of the Company:
Name
Age
Position(s)
Jacques Esculier
58
Chairman of the Board of Directors and Chief Executive Officer
Alexander De Bock
41
Interim Chief Financial Officer
Mazen Mazraani
49
Chief Human Resources Officer
Nicolas Bardot
46
Chief Supply Chain Officer
Lisa Brown
39
Chief Legal Officer and Secretary
Jorge Solis
45
President, Truck, Bus & Car OEMs
Nick Rens
54
President, Trailer Systems, Aftermarket & Off-Highway
Sean Deason
46
Vice President Controller and Investor Relations
Christian Brenneke
43
Chief Technology Officer

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.

Alexander De Bock has served as our Interim Chief Financial Officer since October 2017. Mr. De Bock was previously Vice President Financial Planning and Analysis  as well as Vice President Investor Relations. He joined WABCO in January 2004, holding various positions in Finance. Prior to his current roles, he was CFO of the Compression and Braking Business Unit and Vehicle Dynamic Controls Business Unit and was previously Assistant Controller of the Company. A Belgian national, Mr. De Bock has a Master’s degree in Applied Economics from the University of Antwerp, Belgium.
        
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 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

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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 has served as our President, Truck, Bus & Car OEMs since September 2016, adding to his existing role as Vice President, Vehicle Dynamics and Controls, which he has held since September 2015. Previously, Mr. Solis served as Vice President, Driveline and Suspension Controls, from September 2013, and as Vice President, Sourcing and Purchasing, from October 2011. Prior to this, Mr. Solis served as our Strategic Purchasing Leader, a role he had held since joining WABCO in August 2010. 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 has served as our President, Trailer Systems, Aftermarket & Off-Highway since July 2014. Prior to this, Mr. Rens served as 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 348 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 6, 2018, there were 75,694 beneficial owners of our common stock.

Although we have not declared or paid any cash dividends since 2009, we continuously consider ways to return capital to our stockholders, including through our open market stock repurchase program.

Set forth below are the high and low sales prices for shares of our common stock for each quarterly period of 2017 and 2016. 

 
2017
 
2016
 
High  
 
Low  
 
High  
 
Low  
First quarter
$
118.50

 
$
102.39

 
$
108.78

 
$
81.66

Second quarter
128.32

 
111.68

 
115.15

 
85.16

Third quarter
152.61

 
126.70

 
113.85

 
84.48

Fourth quarter
156.08

 
139.71

 
114.16

 
96.10



ISSUER PURCHASES OF EQUITY SECURITIES

Our Board of Directors has approved an open market stock repurchase program consisting of the following stock repurchase program authorizations as also discussed in Note 6 of Notes to Consolidated Financial Statements.

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. During the year ended December 31, 2017, the Company has purchased 1,033,000 shares for $120.0 million. As of December 31, 2017, the Company had $480.0 million of availability remaining under this repurchase authorization.

All share repurchases are effected in accordance with the safe harbor provisions of Rule 10b-18 of the Exchange Act. The timing and amount of share repurchases, if any, depend on a variety of factors including, among other things, share price, market conditions and applicable regulatory requirements.

A summary of the repurchase activity for the year ended December 31, 2017 follows. The stock repurchase program was suspended during the second half of 2017.


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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)
 
 
 
 
 
 
 
 
 
 
 
 
January 1 - January 31
 
240,000

$106.74
240,000

 
February 1 - February 28
 
85,000

$112.74
85,000

 
March 1 - March 31
 
213,000

$115.24
213,000

 
Total first quarter
 
538,000

$111.05
538,000

$540,253,746
 
 
 
 
 
 
April 1 - April 30
 

-
-


May 1 - May 31
 
183,000

$118.73
183,000

 
June 1 - June 30
 
312,000

$123.35
312,000

 
Total second quarter
 
495,000

$121.64
495,000

$480,041,067
 
 
 
 
 
 
July 1 - July 31
 

-


August 1 - August 31
 

-


September 1 - September 30
 

-


Total third quarter
 

-

$480,041,067
 
 
 
 
 
 
October 1 - October 31
 

-
-


November 1 - November 30
 

-

 
December 1 - December 31
 

-

 
Total fourth quarter
 

-

$480,041,067
 
 
 
 
 
 
Total through December 31, 2017
 
1,033,000

$116.13
1,033,000

$480,041,067


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





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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, 2012 through December 31, 2017, 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=12065131&doc=34
 
12/31/2012
12/31/2013

12/31/2014

12/31/2015

12/31/2016

12/31/2017

WABCO Holdings Inc.
100
143.29

160.73

156.86

162.83

220.13

S&P 500 Index
100
132.39

150.51

152.59

170.84

208.14

S&P 500 Auto Parts & Equipment Index
100
164.76

170.82

161.17

157.61

232.50






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ITEM 6.
SELECTED FINANCIAL DATA
 
(Amounts in millions, except share and per share data) 
 
Year Ended December 31,  
 
2017
 
2016
 
2015
 
2014
 
2013
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
3,304.2

 
$
2,810.0

 
$
2,627.5

 
$
2,851.0

 
$
2,720.5

Cost of sales (1)
 
2,283.3

 
1,920.1

 
1,792.8

 
1,961.6

 
1,900.4

Streamlining expenses
 
7.1

 
10.9

 
44.8

 
11.0

 
5.2

Gross profit (1)
 
1,013.8

 
879.0

 
789.9

 
878.4

 
814.9

Costs and expenses:
 
 

 
 

 
 

 
 

 
 

Selling and administrative expenses (1)
 
406.3

 
351.1

 
322.9

 
356.6

 
331.3

Research, development and engineering expenses
 
147.0

 
135.2

 
139.5

 
145.0

 
119.4

Streamlining expenses
 
4.9

 
5.5

 
23.7

 
16.0

 
7.7

Other operating expense, net
 
20.6

 
5.3

 
6.7

 
8.9

 
5.0

Operating income (1)
 
435.0

 
381.9

 
297.1

 
351.9

 
351.5

European Commission fine reimbursement
 

 

 

 

 
279.5

Equity income of unconsolidated joint ventures
 
23.1

 
24.8

 
32.1

 
23.8

 
17.7

Gain on remeasurement of equity investments (2)
 
247.7

 

 

 

 

Other non-operating expense, net (1)
 
(37.2
)
 
(24.9
)
 
(24.6
)
 
(19.1
)
 
(12.7
)
Interest (expense)/income, net
 
(16.0
)
 
(12.7
)
 
(7.1
)
 
0.2

 
4.9

Income before income taxes
 
652.6

 
369.1

 
297.5

 
356.8

 
640.9

Income tax expense/(benefit) (3)
 
229.7

 
121.8

 
11.5

 
55.6

 
(21.0
)
Net income including noncontrolling interests
 
422.9

 
247.3

 
286.0

 
301.2

 
661.9

Less: net income attributable to noncontrolling interests
 
16.8

 
24.3

 
10.8

 
9.7

 
8.7

Net income
 
$
406.1

 
$
223.0

 
$
275.2

 
$
291.5

 
$
653.2

Per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
7.53

 
$
4.00

 
$
4.76

 
$
4.87

 
$
10.46

Diluted
 
$
7.50

 
$
3.98

 
$
4.72

 
$
4.81

 
$
10.31

Average number of outstanding common shares:
 
 

 
 

 
 

 
 

 
 

Basic
 
53,903,938

 
55,695,738

 
57,768,018

 
59,907,763

 
62,474,493

Diluted
 
54,139,815

 
55,981,816

 
58,274,987

 
60,546,454

 
63,382,564

Balance Sheet Data (at end of period):
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
4,323.4

 
$
3,056.0

 
$
2,589.9

 
$
2,432.7

 
$
2,392.8

Total debt
 
$
1,409.8

 
$
959.1

 
$
503.7

 
$
315.2

 
$
87.1

Total shareholders' equity
 
$
1,121.4

 
$
701.4

 
$
786.7

 
$
841.6

 
$
1,152.8

Cash dividends per common share
 
$

 
$

 
$

 
$

 
$


(1) Prior year amounts have been reclassified to reflect the adoption of ASU 2017-07, Compensation-Retirement Benefits, as further described in the Note 3 of Notes to the Consolidated Financial Statements.

(2) 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 20 of Notes to the Consolidated Financial Statements for additional information.

(3) Income tax expense for the year ended December 31, 2017 includes incremental income tax expense mainly resulting from the Tax Cuts and Jobs Act. See Note 16 of Notes 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, 2017, 2016 and 2015 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 2017, global production of trucks and buses greater than six tons increased by an estimated 19.1%, primarily driven by a 36.8% increase in China where, despite an increase in the available content-per-vehicle for our products, the content-per-vehicle remains the lowest across all regions. WABCO's sales during the full year 2017 increased by 17.6% (16.0% excluding foreign currency translation effects) compared with 2016, of which 2.6% was contributed by our acquisitions. Our global aftermarket sales increased by 11.8% (9.4% excluding foreign currency translation effects) over this same period, of which 4.2% was from acquisitions.

In 2017 - among other major accomplishments - we completed 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.

In September, we completed our acquisition of R.H. Sheppard, a key supplier of steering technologies for commercial vehicles. Cash consideration for this transaction was $158.8 million excluding cash acquired of $17.1 million, resulting in net cash paid of $141.7 million.

In October, we completed our acquisition of Meritor Inc.'s stake in the Meritor WABCO joint venture for a cash purchase
price of $250 million excluding cash acquired of $16.4 million, resulting in net cash paid of $233.6 million. We also entered into a new ten-year distribution agreement with a Meritor affiliate to serve as the exclusive distributor for a certain range of our aftermarket products in the U.S. and Canada and the non-exclusive distributor in Mexico. We have the option to reacquire the distribution rights, and Meritor has the option to put these distribution rights to us, 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. As part of our purchase accounting for this acquisition, we recorded a $243.5 million pre-tax gain related to the step-up of our equity investment in the joint venture.

In December, we acquired the remaining interest in our South African partnership to expand in growth markets across sub-Saharan Africa, for $7.4 million in cash consideration. This transaction was accounted for as a step-acquisition, resulting in a net gain on remeasurement of equity method investment of $4.2 million.

WABCO continued to deliver strong profitability throughout 2017. WABCO's Operating System continued to provide fast and flexible responses to major market changes, delivering a record $83.2 million of materials and conversion productivity. Gross materials productivity in 2017 represented 5.3% of total materials cost with the impact of commodity inflation decreasing net materials productivity to 4.3%. This commodity inflation covers the cost increase of U.S. Dollar denominated commodities, partially offset by the U.S. Dollar weakening versus most of the currencies that we purchase in. Conversion productivity in our factories in 2017 represented 8.1%, a new annual record for WABCO.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to 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%, a one-time transition tax on unrepatriated earnings of foreign subsidiaries at reduced tax rates regardless of whether the earnings are repatriated, new taxes on earnings of foreign subsidiaries, a minimum tax on payments to foreign related parties and the modification or repeal of many business deductions and credits. During 2017, the Company recognized provisional income tax expense of $67.6 million related to the Tax Act including $100.0 million for the one-time transition tax partially offset by a $32.4 million benefit for remeasurement of our U.S. net deferred tax liability.

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As previously disclosed, we and the Belgian Government have (separately) appealed the 2016 decision of the European Commission which invalidated the Belgian Excess Profit Ruling (EPR) program that was in place since 2004 and that we and many other companies participated in. We took part in the program for years 2012 to 2014 and the European Commission required Belgium to clawback all past tax benefits received under the program. We have sought and obtained an alternative tax relief for 2015 and future years under Belgium’s Patent Income Deduction (PID) program, which we continue to seek for the 2013 and 2014 tax years as well. If PID relief is authorized by the European Commission as an allowable offset to the EPR clawback for 2013 and 2014, the potential tax benefit impact could be in aggregate up to $33 million. To the extent PID relief is granted for 2013 and 2014, the benefit will be partially offset by an increase in the U.S. transition tax up to $9 million.

On December 25, 2017, Belgium enacted tax legislation including a reduction in the corporate tax rate, decreasing from 33.99% to 29.58% in 2018 and then to 25.00% beginning in 2020. During 2017, the Company recognized income tax expense of $13.8 million related to the legislation for the remeasurement of our net deferred tax assets in Belgium.

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 46% 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 3% per year.

Year to Year Change
 
2013
 
2014
 
2015
 
2016
 
2017
Sales to European T&B OEMs (at constant FX rates)
 
13
%
 
(7
)%
 
8
%
 
8
%
 
6
%
European T&B Production
 
5
%
 
(9
)%
 
6
%
 
1
%
 
8
%

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, 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 24% 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 and overall economic activity. On average, our aftermarket sales (based on a constant exchange rate to the U.S. Dollar rate) have grown by 8% annually for the last five years as shown in the table below.
 
Year to Year Change 
2013
2014
2015
2016
2017
Average
Change 
Aftermarket Sales (at constant FX rates)
7
%
13
%
7
%
6
%
9
%
8
%
Distribution of WABCO's Sales by Major End-Markets, Product Types and Geography
 

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2017
 
2016
 
2015
OE Manufacturers:
 
 
 
 
 
   Truck & Bus products
57
%
 
55
%
 
55
%
   Trailer products
9
%
 
10
%
 
11
%
   Car products
6
%
 
6
%
 
6
%
   Off highway
4
%
 
4
%
 
2
%
Aftermarket
24
%
 
25
%
 
26
%
 
100
%
 
100
%
 
100
%
Geography:
 

 
 

 
 

   Europe
52
%
 
54
%
 
56
%
   North America
18
%
 
14
%
 
17
%
   South America
3
%
 
3
%
 
3
%
   Asia
26
%
 
24
%
 
22
%
   Other
1
%
 
5
%
 
2
%
 
100
%
 
100
%
 
100
%

Our largest customer is Daimler, which accounts for approximately 11% of our sales. Other key customers include Volvo, Ashok Leyland, BMW, China National Heavy Truck Corporation (CNHTC), Cummins, Fiat (Iveco), Hino, Hyundai, Krone, MAN Nutzfahrzeuge AG (MAN), Meritor, Paccar (DAF Trucks N.V. (DAF), Kenworth, Leyland and Peterbilt), First Automobile Works, Otto Sauer Achsenfabrik (SAF), Scania, Schmitz Cargobull AG, TATA Motors and ZF Friedrichshafen AG (ZF). For the fiscal years ended December 31, 2017, 2016 and 2015, our top 10 customers accounted for approximately 44%, 44% and 48% of our sales, respectively.



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Table of Contents

Results of Operations

Approximately 82% 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 2017 compared with 2016 and 2016 compared with 2015 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.


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

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Table of Contents

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.

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 materials 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
)
Volume, mix and absorption
391.6

 
110.4

Material productivity
(46.9
)
 
46.9

Conversion productivity
(36.3
)
 
36.3

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

 
 
 
 
Sales price reductions as % of sales
 
 
1.6
%

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.

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Table of Contents

(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 acquisition
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

Investments net of savings
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 15 of Notes to the Consolidated Financial Statements for further discussion.

As previously disclosed in our 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 14 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.




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Table of Contents

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.


Results of Operations for 2016 Compared with 2015
  
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)
2016
 
2015
 
% change
reported 
 
2016 adjusted
amount 
 
% change
adjusted 
Sales
$
2,810.0

 
$
2,627.5

 
6.9
 %
 
$
2,855.7

 
8.7
 %
Cost of sales
1,931.0

 
1,837.6

 
5.1
 %
 
1,962.9

 
6.8
 %
Gross profit
879.0

 
789.9

 
11.3
 %
 
892.8

 
13.0
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
497.1

 
492.8

 
0.9
 %
 
503.8

 
2.2
 %
Equity in net income of unconsolidated joint ventures
24.8

 
32.1

 
(22.7
)%
 
24.8

 
(22.7
)%
Interest expense, net
(12.7
)
 
(7.1
)
 
78.9
 %
 
(12.5
)
 
76.1
 %
Income tax expense
121.8

 
11.5

 
*
 
118.2

 
*
Net income attributable to noncontrolling interests
24.3

 
10.8

 
125.0
 %
 
24.6

 
127.8
 %

* Percentage change not considered meaningful
** Amounts translated using 2015 average exchange rates for comparability

Sales

Our sales for 2016 were $2,810.0 million, an increase of 6.9% (8.7% excluding foreign currency translation effects) from $2,627.5 million in 2015. The increase, excluding foreign currency translation effects, was mainly driven by increased WABCO content per vehicle. Contribution from market growth was limited since there was a strong growth in markets with limited content per vehicle and a severe drop in the U.S. which is a market with high content per vehicle.
  
Total sales in Europe, our largest market, increased 6.3% (6.3% excluding foreign currency translation effects) for the full year 2016, where the vehicle production of European OEMs above six tons was up 1% in year on year comparison. The sales growth was primarily driven by increased content per vehicle from further ramp-up of air disc brakes (ADB) at a key customer as well as from the advanced emergency braking systems (AEBS) mandate and an increase of our market share of automated manual transmission (AMT).

Sales in North America decreased 6.2% (3.7% excluding foreign currency translation effects), primarily driven by the estimated 18% decrease in production of new trucks and buses greater than six tons, partially offset by our acquired companies MICO and LCL. Total sales in South America decreased 1.3% (increased 5.3% excluding foreign currency translation effects). While the estimated production of new trucks and buses decreased 15%, the impact from the declining markets was more than offset by strong aftermarket sales and increased value per vehicle.

Total sales in Asia increased 18.9% (21.6% excluding foreign currency translation effects) and outperformed the market, driven primarily by increases in WABCO content per vehicle in all key markets alongside the ABS mandate for light and medium duty trucks in China and the ABS mandate in India. The strongest contributor to vehicle production growth was China with an estimated 27% increase in truck and bus production, followed by India. This was partially offset by downward trends in Japan and South Korea in production of new trucks and buses greater than six tons. Sales in China increased 23.9% (31.5% excluding foreign currency translation effects), India increased 23.6% (29.6% excluding foreign currency translation effects), Japan decreased 14.7% (3.0% excluding foreign currency translation effects), and South Korea decreased 9.0% (6.6% excluding foreign currency translation effects).

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Table of Contents


WABCO's global aftermarket sales, included in the geographic numbers provided above, increased 4.9% (6.3% excluding foreign currency translation effects). This increase, excluding foreign currency translation effects, demonstrates the continued success of the Company's aftermarket strategies

Cost of Sales and Gross Profit

Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.5% of material savings before the impact of commodity deflation, which had a positive impact of 0.4%, bringing net materials productivity to 5.9% for the year.

(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the year ended December 31, 2015
$
1,837.6

 
$
789.9

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(46.6
)
Volume, mix and absorption
230.3

 
44.5

Material productivity
(55.0
)
 
55.0

Conversion productivity
(28.0
)
 
28.0

Labor inflation
14.1

 
(14.1
)
Foreign exchange effects
(41.6
)
 
(4.1
)
Other
(26.4
)
 
26.4

Net increase
93.4

 
89.1

 
 
 
 
Cost of sales / gross profit for the year ended December 31, 2016
$
1,931.0

 
$
879.0

 
 
 
 
Sales price reductions as % of sales
 
 
1.6
%

Foreign exchange impacts include both translational and transactional effects. Cost variances included in "Other" above consisted mainly of lower streamlining charges of $33.2 million primarily due to costs recorded in 2015 related to the planned closure of the Meppel and Claye-Souilly manufacturing facilities.

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, 2015
$
492.8

 
 
Increase/(decrease) due to:
 
Labor inflation
13.6

Incentive compensation
(0.3
)
Incremental costs from acquisition
14.0

Streamlining expenses
(20.0
)
Employee-related costs
0.7

Foreign exchange translation
(6.7
)
Other
3.0

Net increase
4.3

 
 
Operating expenses for the year ended December 31, 2016
$
497.1





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Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased $7.3 million to $24.8 million in 2016 as compared to $32.1 million in 2015. This decrease was primarily driven by lower income from our North American joint venture.

Interest Expense, net

The Company recorded net interest expense of $12.7 million in 2016 compared to $7.1 million in 2015. This was primarily due to a full year of interest expense incurred on our 2015 issuance of $500 million of Senior Notes, as well as interest expense on our 2016 issuance of €440 million Senior EUR Notes. See Note 14 of Notes to the Consolidated Financial Statements for further discussion.

Income Taxes

The income tax provision for 2016 was $121.8 million on $369.1 million of pre-tax income before adjusting for noncontrolling interest, compared with an income tax provision of $11.5 million on pre-tax income of $297.5 million before adjusting for noncontrolling interest in 2015. The 2016 increase in income tax expense is primarily the result of higher pre-tax income, the claw-back of Belgian EPR tax relief for 2012-2014, changes in uncertain tax positions and the effect of U.S. and foreign deferred taxes on unremitted foreign earnings, which was partially offset by a change in the valuation allowance and by a PID claimed in Belgium.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests increased $13.5 million to $24.3 million in 2016 as compared to $10.8 million in 2015 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 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 $1.3 billion at the end of 2016, a slight decrease of 2.1% (1.9% excluding foreign currency translation effects) from the end of 2015, driven by a change in the mix of regional growth leading to a shorter average order lead time. 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 2019 and 2022 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 2018, we expect an increase of approximately 6% in our capital spending primarily due to our recent acquisitions. As of December 31, 2017 the outstanding balance on our revolving credit facilities amounted to $386.1 million and were classified as short term debt on the consolidated balance sheet as the Company intends to repay this balance within the next twelve months primarily through available cash balances.

Outside of our capital expenditures, cash flows related to our senior unsecured notes, the first installment 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 2017 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 financing needs in 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. 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, $519.9 million of cash and

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cash equivalents was held by foreign subsidiaries for which earnings are no longer permanently reinvested outside the United States.

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 $91.8 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 of $247.3 million, increased by $241.3 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 $83.2 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 net 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 20 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. The Company intends to repay the balance of the revolving credit facilities within the next twelve months, primarily through available cash balances.

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 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 intends to restart its share repurchase program in the course of 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.


Cash Flows for 2016 Compared with 2015

Operating activities - Net cash provided by operating activities was $405.4 million and $400.3 million for the years ended December 31, 2016 and 2015, respectively. Cash flow from operating activities consisted primarily of net income including

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noncontrolling interests of $247.3 million, increased by $241.3 million for non-cash charges including depreciation, amortization, interest expense and debt issuance cost 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. This was partially offset by $83.2 million related to changes in operating assets and liabilities as well as pension contributions. Cash flow from operating activities for 2015 consisted primarily of net income including noncontrolling interests of $286.0 million, increased by $147.9 million for non-cash charges including depreciation, amortization, stock compensation, deferred tax benefits and pension and post-retirement benefit expenses. These increases were partially offset by $33.6 million related to changes in operating assets and liabilities as well as pension contributions.

Investing activities - Net cash used in investing activities amounted to $251.8 million for the year 2016 compared to $202.2 million in 2015. Aside from capital expenditures in tooling, equipment and software of $107.0 million and $100.6 million in 2016 and 2015, respectively, we had investing cash flows related to our investments and redemptions in repurchase agreements and short-term investments as follow:
 
December 31, 2016
 
December 31, 2015
(Amounts in millions)
Repurchase Agreements
 
Short-term Investments
 
Total
 
Repurchase Agreements
 
Short-term Investments
 
Total
Investments
$
324.6

 
$

 
$
324.6

 
$
77.6

 
$
43.8

 
$
121.4

Sales and redemptions
228.8

 
44.2

 
273.0

 
39.8

 

 
39.8

Net cash received/(invested)
$
(95.8
)
 
$
44.2

 
$
(51.6
)
 
$
(37.8
)
 
$
(43.8
)
 
$
(81.6
)

For 2016, the net cash usage includes capital expenditures of $39.9 million of investments in tooling, $64.1 million on plant and equipment including the construction of a new research and development center in Germany and $10.0 million in software to support the Company's long-term growth strategies. This is in comparison with $40.3 million of investments in tooling, $50.0 million on plant and equipment and $10.9 million in software in 2015. We also received $7.0 million in proceeds from the disposal of property, plant and equipment in 2016 primarily for the sale of assets from our site closure in Meppel as well as by our acquired company MICO. Proceeds from disposal of property, plant and equipment in 2015 were immaterial.

We increased our minority stake in SmartDrive Systems, a video-based analytics company headquartered in the U.S. by $0.9 million in 2016 from our original investment of $20.0 million made in 2015. We also paid $92.3 million net of cash acquired in 2016 related to our acquisitions of MICO, LCL and Trans-Safety LOCKS.

Financing activities - Net cash provided by financing activities amounted to $220.6 million for 2016 compared to a net cash usage of $54.0 million for 2015. Our total third-party debt increased $464.2 million for 2016 compared to $189.3 million for 2015, driven primarily by the 2016 issuance of our Euro-denominated unsecured senior notes. Cash proceeds of $15.2 million were also received in 2016 for the settlement of a forward contract entered into in relation to these unsecured senior notes.

We repurchased shares for a total amount of $250.0 million and $249.2 million in 2016 and 2015, respectively. We also received $3.9 million of stock option proceeds and withheld $6.0 million of shares related to employee tax payments made for equity award vestings in 2016 compared to $17.3 million and $5.0 million in 2015, respectively.

Dividends paid to noncontrolling interests amounted to $6.7 million and $6.4 million in 2016 and 2015, respectively.

Senior Unsecured Notes

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 commencing 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 commencing January 1, 2016.


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The proceeds from the above issuances of senior unsecured notes were partially utilized to repay the outstanding balance on our revolving credit facilities, with the remaining proceeds intended to fund our share repurchase program, finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Credit Facilities

On July 8, 2011, the Company entered into a $400 million multi-currency five-year senior unsecured revolving credit facility which was amended and restated on September 30, 2015 (the 2015 Facility) to, among other things, extend the original expiry date (subject to two 1-year extension options which the Company has exercised) and amend the applicable margins on the original revolving credit facility. The 2015 Facility is scheduled to expire on September 30, 2022.

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

Under the revolving credit facilities, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $500 million. As of December 31, 2017, the outstanding borrowings on these facilities amounted to $386.1 million and the Company had the ability to borrow an incremental $113.9 million and was in compliance with all the covenants. The proceeds from the revolving credit facilities are available to finance acquisitions, refinance existing indebtedness and meet general financing requirements.

As of December 31, 2017, various subsidiaries also had borrowings from banks totaling $0.7 million, of which $0.3 million was classified as long-term debt. The remaining $0.4 million supports local working requirements.

Derivative Instruments and Hedging Activities

Foreign exchange contracts are used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of December 31, 2017, forward contracts for an aggregate notional amount of €416.4 million ($497.7 million at December 31, 2017 exchange rates) were outstanding with an average duration of one month. These foreign exchange contracts have offset the revaluation of assets and liabilities and resulted in net non-operating losses for year ended December 31, 2017 and 2016 of $6.0 million and $1.6 million, respectively. The majority of these exchange contracts were entered into on December 28, 2017. The fair value of these derivatives was $2.0 million as of December 31, 2017 and was immaterial as of December 31, 2016.

In the fourth quarter of 2017, the Company entered into forward contracts with an aggregate notional amount of €308.0 million and that were designated as partial hedges of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. All of these contracts had matured as of December 31, 2017. Due to the the high degree of effectiveness between the hedging instrument and the exposure being hedged, a loss of $0.2 million, net of taxes of $0.1 million, related to these contracts has been recognized in cumulative translation adjustment within accumulated other comprehensive income (AOCI) for the year ended December 31, 2017.

In December 2017, the Company borrowed an aggregate amount of €323.0 million on its revolving credit facilities as discussed in Note 14 of Notes to the Consolidated Financial Statements that were also designated as partial hedges of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. As of December 31, 2017, there was no hedge ineffectiveness and a loss of $2.8 million, net of taxes of $0.9 million, related to these notes has been recognized in cumulative translation adjustment within AOCI.

During 2016 the Company entered into various forward contracts with an aggregate notional amounts of €440.0 million and that were designated as partial hedges of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. All of these contracts had matured as of December 31, 2016. Due to the the high degree of effectiveness between the hedging instrument and the exposure being hedged, a gain of $9.3 million, net of taxes of $5.8 million, related to these contracts has been recognized in cumulative translation adjustment within AOCI for the year ended December 31, 2017.

On November 15, 2016, the Company issued EUR Senior Notes of an aggregate amount of €440.0 million as discussed in Note 14 of Notes to the Consolidated Financial Statements, that were also designated as partial hedges of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. As of December 31, 2017, there was no hedge ineffectiveness and a loss of $33.9 million, net of taxes of $20.2 million, related to these notes has been recognized in cumulative translation adjustment within AOCI.


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Off-Balance Sheet Arrangements

We did not engage in any off-balance sheet financial arrangements as of December 31, 2017.

Contractual Obligations

We had $43.7 million of streamlining liabilities as of December 31, 2017. While we expect approximately $24.2 million of payments to be made in 2018, we are unable to estimate the timing of all future payments. See Note 5 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, 2017. 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 
 
2018
 
2019 and 2020
 
2021 and 2022
 
Beyond 2022
Debt obligations (1)
 
$
1,432.7

 
$
407.1

 
$
42.3

 
$
42.0

 
$
941.3

Lease obligations (2)
 
84.3

 
19.0

 
30.8

 
22.8

 
11.7

Purchase obligations (3)
 
230.0

 
230.0

 

 

 

Pension and post-retirement contributions (4)
 
297.0

 
27.2

 
56.2

 
57.9

 
155.7

Transition tax payable (5)
 
196.4

 
31.4

 
31.4

 
45.2

 
88.4

Total
 
$
2,044.0

 
$
683.3

 
$
129.3

 
$
122.7

 
$
1,108.7


(1) 
Includes principal and interest payments due on our senior unsecured notes and our revolving credit facilities. For fixed rate debt, interest payments were calculated based on the applicable interest rates and maturity dates of the debt. Payment obligations denominated in a foreign currency were calculated using the local currency foreign exchange rates in effect at December 31, 2017. See Note 14 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, 2017.

(3) 
In the normal course of business we expect to purchase approximately $2.3 billion in 2018 of materials and services, and estimate that on average no more than approximately $230 million is outstanding at any one time in the form of legally binding commitments. We spent approximately $2.0 billion, $1.7 billion and $1.5 billion on materials and services in 2017, 2016 and 2015, 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, 2017 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 2018, we expect an increase of approximately 6% in our capital spending 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.


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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 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 long-lived assets, stock-based compensation, post-retirement benefits, warranties, business combinations, valuation of equity and cost method investments, income taxes, and contingencies. See Note 2 of Notes to the Consolidated Financial Statements for additional discussion of our accounting policies.

Revenue Recognition - The Company recognizes revenue when title and risk of loss have transferred, persuasive evidence of arrangement exists, the sales price is fixed or determinable and collectibility is reasonably assured. Certain of the Company's product offerings contain multiple deliverables including hardware with embedded firmware, back office hosting services, unspecified software upgrades and enhancements related to the software embedded in these products through service contracts, which are considered separate units of accounting. For products under these arrangements, the software and non-software components function together to deliver the tangible product’s essential functionality.

The Company allocates revenue to each element in these multiple-element arrangements based upon the relative selling prices of each deliverable. In applying the relative selling price method, the Company determines the selling price for each deliverable using vendor specific objective evidence (VSOE), if it exists, or third-party evidence (TPE) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the best estimate of selling price (BESP) is then used for that element. BESP represents the price at which the Company would transact a sale if the element were sold on a standalone basis. The Company determines 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 is 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 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 2017, and the Company's goodwill was not at risk for failing the first step of its impairment test.

Recoverability of Long-lived Assets, Excluding Goodwill - 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

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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.
Stock-Based Compensation - The Company measures and recognizes in its consolidated statements of operations the expense associated with all share-based payment awards made to employees and directors including stock options, restricted stock units, performance stock units and restricted stock grants based on estimated fair values.

The vesting of the Company's performance stock units (PSUs) occurs at levels ranging from none to 200% of the number of granted PSUs depending upon the achievement of three-year cumulative earnings per share goals approved by the Compensation, Nominating and Governance Committee of the Board of Directors. The Company assesses the expected achievement levels at the end of each reporting period and accrues for the associated compensation expense where the Company believes it is probable that the performance conditions will be met.

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. The impact of Health Care Reform legislation in the United States is immaterial to the Company. See the disclosures about pension and post-retirement obligations, the composition of plan assets, assumptions and other matters in Note 13 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 0.9% in 2017, 0.8% in 2016 and 1.0% in 2015. We do not expect this percentage to change materially in the near future. See Note 15 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, 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.

Valuation of Equity and Cost Method Investments - We monitor our equity and cost method investments for impairment indicators on an ongoing basis based on projections of anticipated future cash flows, including future profitability assessments when events and circumstances warrant such a review. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the investment to the related carrying value. If the carrying value of the investment exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An

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impairment loss is measured as the difference between the carrying value and the estimated fair value of the investment. We estimate cash flows and fair value using internal budgets, cash flows and profitability forecasts as well as other market information including valuations of similar companies, where available. Any differences in actual results from the estimates could result in fair values different from the estimated fair values, which could materially impact our future results of operations and financial condition. We believe that the projections of anticipated future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect our valuations. There has been no impairment of equity or cost method investments during 2017. The Company's equity method investments were not at risk of impairment. The Company's fair value calculation of its cost method investments exceeded its carrying value of $30.9 million by approximately $1.8 million as of December 31, 2017. The fair value calculation is dependent on sales and cost forecasts being met and includes numerous assumptions.
 
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.

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 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 2017, the potential maximum loss in earnings is estimated to be $13 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 19 of Notes to the Consolidated Financial Statements.

Interest Rate Sensitivity

As of December 31, 2017, we had an aggregate outstanding debt balance of $1.4 billion comprised of short-term variable rate debt of $386.1 million, issued primarily under our revolving credit facilities, and of long-term fixed rate debt of $1,023.0 million, primarily related to our Senior EUR Notes and Senior Notes, as discussed in Note 14 of Notes to the Consolidated Financial Statements.

As of December 31, 2017 we also had $1.1 billion of cash, cash equivalents and short-term investments on hand. These balances are predominantly invested in interest bearing short-term instruments. Due to increased volatility in interest rates, a 1% change of the interest rates would have the effect of increasing or decreasing net interest income by approximately $13 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 2017 commodity exposure, the potential maximum loss in earnings is estimated to be $18 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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 16, 2018 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.

Brussels, Belgium
February 16, 2018






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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)
2017
 
2016
 
2015
Sales
$
3,304.2

 
$
2,810.0

 
$
2,627.5

Cost of sales
2,290.4

 
1,931.0

 
1,837.6

Gross profit
1,013.8

 
879.0

 
789.9

Costs and expenses:
 
 
 
 
 
Selling and administrative expenses
411.2

 
356.6

 
346.6

Research, development and engineering expenses
147.0

 
135.2

 
139.5

Other operating expense, net
20.6

 
5.3

 
6.7

Operating income
435.0

 
381.9

 
297.1

Equity income of unconsolidated joint ventures, net
23.1

 
24.8

 
32.1

Gain on remeasurement of equity investments
247.7

 

 

Other non-operating expense, net
(37.2
)
 
(24.9
)
 
(24.6
)
Interest expense, net
(16.0
)
 
(12.7
)
 
(7.1
)
Income before income taxes
652.6

 
369.1

 
297.5

Income tax expense
229.7

 
121.8

 
11.5

Net income including noncontrolling interests
422.9

 
247.3

 
286.0

Less: net income attributable to noncontrolling interests