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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2019
OR
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.)
1 Giacomettistrasse
Bern
Switzerland
 
3000-31
1220 Pacific Drive
Auburn Hills
Michigan
 
48326-1589
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code +41 315 813-300
Securities registered pursuant to Section 12(b) of the Act:
    
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
WBC
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
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).      Yes    x  No


Table of Contents

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Common stock, $.01 par value, outstanding at
 
 
July 10, 2019
 
51,244,236

WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter ended June 30, 2019
Contents
 
 
 
 
 
 
Item 1.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.


Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in millions, except share and per share data)
2019
 
2018
 
2019
 
2018
Sales
$
912.8

 
$
1,001.2

 
$
1,845.6

 
$
2,004.6

Cost of sales
644.0

 
690.9

 
1,304.0

 
1,385.3

Gross profit
268.8

 
310.3

 
541.6

 
619.3

Operating expenses:
 
 
 
 
 
 
 
Selling and administrative expenses
120.6

 
119.0

 
241.0

 
232.5

Research, development and engineering expenses
45.4

 
47.5

 
93.8

 
98.2

Other operating expense/(income), net
0.5

 
(2.7
)
 
(0.6
)
 
(4.9
)
Operating income
102.3

 
146.5

 
207.4

 
293.5

Equity income of unconsolidated joint ventures, net
0.5

 
0.4

 
1.0

 
0.8

Other non-operating expense, net
(7.4
)
 
(11.0
)
 
(13.3
)
 
(22.3
)
Interest income/(expense), net
0.2

 
(3.1
)
 
0.3

 
(6.2
)
Income before income taxes
95.6

 
132.8

 
195.4

 
265.8

Income tax expense
20.9

 
23.5

 
33.0

 
49.9

Net income including noncontrolling interests
74.7

 
109.3

 
162.4

 
215.9

Less: net income attributable to noncontrolling interests
4.1

 
4.9

 
7.9

 
10.9

Net income attributable to Company
$
70.6

 
$
104.4

 
$
154.5

 
$
205.0

Net income attributable to Company per common share
 
 
 
 
 
 
 
Basic
$
1.38

 
$
1.96

 
$
3.02

 
$
3.83

Diluted
$
1.38

 
$
1.95

 
$
3.01

 
$
3.82

Cash dividends per share of common stock
$

 
$

 
$

 
$

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
51,234,648

 
53,335,218

 
51,233,899

 
53,536,855

Diluted
51,340,058

 
53,470,051

 
51,350,848

 
53,695,384

    
See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 (Amounts in millions)
2019
 
2018
 
2019
 
2018
Net income including noncontrolling interests
$
74.7

 
$
109.3

 
$
162.4

 
$
215.9

Other comprehensive income:
 
 
 
 
 
 
 
     Currency translation adjustments
(6.9
)
 
(69.6
)
 
8.2

 
(45.8
)
     Pension and post-retirement benefit plan adjustments, net
2.7

 
20.3

 
10.4

 
17.0

     Unrealized gains on hedges, net

 
0.8

 

 
0.8

Total other comprehensive income
(4.2
)
 
(48.5
)
 
18.6

 
(28.0
)
Comprehensive income
70.5

 
60.8

 
181.0

 
187.9

     Less: comprehensive income attributable to noncontrolling interests
4.4

 
1.1

 
8.9

 
6.2

Comprehensive income attributable to Company
$
66.1

 
$
59.7

 
$
172.1

 
$
181.7



See Notes to Condensed Consolidated Financial Statements.
    

4

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except share data)
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
712.2

 
$
503.8

Short-term investments
68.6

 
135.8

Accounts receivable, less allowance for doubtful accounts of $12.1 in 2019 and $10.7 in 2018
691.4

 
611.5

Inventories, net
316.5

 
319.1

Guaranteed notes receivable
40.2

 
44.1

Investments in repurchase agreements

 
85.8

Other current assets
114.4

 
96.8

Total current assets
1,943.3

 
1,796.9

Property, plant and equipment, net
562.7

 
553.6

Operating lease right–of–use assets
111.3

 

Goodwill
808.1

 
809.4

Deferred tax assets
243.4

 
236.7

Investments in unconsolidated joint ventures
11.9

 
10.4

Intangible assets, net
237.6

 
246.6

Other assets
94.6

 
85.0

TOTAL ASSETS
$
4,012.9

 
$
3,738.6

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Loans payable to banks
$
18.6

 
$

Accounts payable
224.7

 
232.5

Accrued payroll
115.2

 
111.2

Current portion of warranties
24.5

 
23.3

VAT payable
19.8

 
15.7

Accrued expenses
75.4

 
73.8

Promotion and customer incentives
25.5

 
26.6

Accrued income tax
43.1

 
28.2

Other accrued liabilities
106.0

 
84.7

Total current liabilities
652.8

 
596.0

Long-term debt
839.6

 
845.2

Operating lease liabilities
83.6

 

Pension and post-retirement benefits
718.6

 
716.0

Deferred tax liabilities
71.4

 
75.4

Long-term income tax liabilities
148.8

 
156.8

Other liabilities
79.1

 
84.0

TOTAL LIABILITIES
2,593.9

 
2,473.4

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

 

Common stock, $.01 par value, 400,000,000 shares authorized; shares issued: 79,132,946 in 2019; 79,018,266 in 2018; and shares outstanding: 51,242,263 in 2019; 51,364,925 in 2018
0.8

 
0.8

Capital surplus
900.9

 
898.5

Treasury stock, at cost: 27,890,683 shares in 2019; 27,653,341 shares in 2018
(2,187.2
)
 
(2,159.3
)
Retained earnings
3,121.5

 
2,960.8

Accumulated other comprehensive loss
(514.8
)
 
(524.0
)
Total shareholders’ equity
1,321.2

 
1,176.8

Noncontrolling interests
97.8

 
88.4

Total equity
1,419.0

 
1,265.2

TOTAL LIABILITIES AND EQUITY
$
4,012.9

 
$
3,738.6


See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
(Amounts in millions)
2019
 
2018
Operating activities:
 
 
 
Net income including noncontrolling interests
$
162.4

 
$
215.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
50.8

 
47.9

Amortization of intangibles
13.7

 
14.2

Equity in earnings of unconsolidated joint ventures, net of dividends received
(1.0
)
 
(0.8
)
Non-cash stock compensation
8.1

 
11.2

Non-cash interest expense and debt issuance cost amortization
5.0

 
9.1

Deferred income tax benefit
(16.6
)
 
(2.6
)
Pension and post-retirement benefit expense
32.9

 
32.1

Foreign currency effects on changes in monetary assets/liabilities
0.6

 
(0.3
)
Unrealized (gain)/loss on revaluation of foreign currency forward contracts
(0.6
)
 
3.1

Loss on debt extinguishment

 
2.3

Other
(0.9
)
 
1.2

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(80.0
)
 
(39.6
)
Inventories, net
2.2

 
(27.2
)
Accounts payable
0.5

 
(3.2
)
Other accrued liabilities and taxes
12.9

 
(35.8
)
Other current and long-term assets
(22.2
)
 
(35.5
)
Other long-term liabilities
(12.9
)
 
(11.9
)
Pension and post-retirement benefit contributions
(13.1
)
 
(13.9
)
Net cash provided by operating activities
141.8

 
166.2

Investing activities:
 
 
 
Purchases of property, plant and equipment
(67.9
)
 
(49.6
)
Investments in capitalized software
(4.3
)
 
(5.7
)
Purchases of short-term investments and repurchase agreements
(424.3
)
 
(269.8
)
Sales and maturities of short-term investments and repurchase agreements
573.5

 
151.1

Investments in unconsolidated joint ventures

(0.7
)
 
(2.2
)
Acquisition of businesses

 
(8.6
)
Net cash provided/(used) by investing activities
76.3

 
(184.8
)
Financing activities:
 
 
 
Borrowings of long-term debt

 
368.5

Repayments of long-term debt

 
(500.0
)
Net borrowings/(repayments) of short-term debt
19.3

 
(195.1
)
Purchases of treasury stock
(30.6
)
 
(119.9
)
Taxes withheld and paid on employee stock award vestings
(4.8
)
 
(4.7
)
Dividends to noncontrolling interest holders
(2.3
)
 
(3.0
)
Proceeds from noncontrolling interest holders
3.9

 

Proceeds from exercise of stock options
0.6

 
0.5

Net cash used by financing activities
(13.9
)
 
(453.7
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
4.4

 
(13.8
)
Net increase/(decrease) in cash, cash equivalents and restricted cash
208.6

 
(486.1
)
Cash, cash equivalents and restricted cash at beginning of period
504.2

 
1,141.5

Cash, cash equivalents and restricted cash at end of period
$
712.8

 
$
655.4

 
 
 
 
 
 
 
 

6

Table of Contents

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
(Amounts in millions)
2019
 
2018
Supplemental cash flow disclosures
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
5.8

 
$
16.1

Income taxes
$
43.3

 
$
56.5

Non cash activity:
 
 
 
Increase in capital expenditures included in accounts payable and other accrued liabilities
$
10.3

 
$
9.0

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:
       Cash and cash equivalents
$
712.2

 
$
654.9

Restricted cash, included in other assets
0.6

 
0.5

Cash, cash equivalents and restricted cash at end of period
$
712.8

 
$
655.4


See Notes to Condensed Consolidated Financial Statements.

7

Table of Contents


WABCO HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in millions)
2019
 
2018
 
2019

2018
Total equity, beginning balance
$
1,344.3

 
$
1,301.8

 
$
1,265.2

 
$
1,201.1

 
 
 
 
 
 
 
 
Common stock and capital surplus
 
 
 
 
 
 
 
     Balance, beginning of period
897.6

 
884.0

 
899.3

 
884.0

          Stock options exercised

 

 
0.2

 
0.1

          Tax withheld on stock award vestings

 

 
(4.7
)
 
(4.5
)
          Share-based compensation
4.1

 
6.7

 
8.1

 
11.1

          Changes in ownership of noncontrolling interests

 

 
(1.2
)
 

     Balance, end of period
901.7

 
890.7

 
901.7

 
890.7

Treasury stock
 
 
 
 
 
 
 
     Balance, beginning of period
(2,187.2
)
 
(1,890.3
)
 
(2,159.3
)
 
(1,861.3
)
          Treasury shares purchased

 
(89.2
)
 
(30.6
)
 
(119.8
)
          Treasury shares reissued

 
0.3

 
2.7

 
1.9

     Balance, end of period
(2,187.2
)
 
(1,979.2
)
 
(2,187.2
)
 
(1,979.2
)
Retained earnings
 
 
 
 
 
 
 
     Balance, beginning of period
3,050.9

 
2,667.8

 
2,960.8

 
2,563.2

          Adoption of ASU 2018-02 (Note 2) and ASU 2016-16

 

 
8.4

 
5.3

          Net income attributable to Company
70.6

 
104.4

 
154.5

 
205.0

          Treasury shares reissued

 
(0.2
)
 
(2.2
)
 
(1.5
)
     Balance, end of period
3,121.5

 
2,772.0

 
3,121.5

 
2,772.0

Accumulated other comprehensive loss
 
 
 
 
 
 
 
     Balance, beginning of period
(510.3
)
 
(443.1
)
 
(524.0
)
 
(464.5
)
          Other comprehensive (loss)/income
(4.5
)
 
(44.8
)
 
17.6

 
(23.4
)
          Adoption of ASU 2018-02 (Note 2)

 

 
(8.4
)
 

     Balance, end of period
(514.8
)
 
(487.9
)
 
(514.8
)
 
(487.9
)
Noncontrolling interests
 
 
 
 
 
 
 
     Balance, beginning of period
93.4

 
83.4

 
88.4

 
79.7

          Net income attributable to noncontrolling interests
4.1

 
4.9

 
7.9

 
10.9

          Dividends paid

 
(1.8
)
 
(2.3
)
 
(3.0
)
          Contribution from noncontrolling interests

 

 
3.9

 

          Changes in ownership of noncontrolling interests

 

 
(1.0
)
 

          Other comprehensive income/(loss)
0.3

 
(3.8
)
 
0.9

 
(4.9
)
     Balance, end of period
97.8

 
82.7

 
97.8

 
82.7

Total equity, ending balance
$
1,419.0

 
$
1,278.3

 
$
1,419.0

 
$
1,278.3


See Notes to Condensed Consolidated Financial Statements.





8

Table of Contents


WABCO HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

NOTE 1.
Basis of Financial Statement Presentation

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

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, including normal recurring items, considered necessary for a fair presentation of financial data have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K.

As previously announced, on March 28, 2019, WABCO entered into an Agreement and Plan of Merger (the Merger Agreement) with ZF Friedrichshafen AG (ZF), a stock corporation organized and existing under the laws of the Federal Republic of Germany, and Verona Merger Sub Corp., a Delaware corporation and indirect wholly owned subsidiary of ZF, pursuant to which ZF will acquire 100% of the issued and outstanding shares of WABCO common stock (the Merger). The Merger Agreement was adopted by WABCO’s shareholders at the June 27, 2019 special meeting of shareholders. Consummation of the Merger is subject to customary closing conditions and regulatory approvals and is expected to close in early 2020. Due to the pending Merger, the Company has suspended previously announced changes to its internal reporting. The Company will maintain its current internal reporting to the chief operating decision maker and continue to operate as one reportable segment.

All majority-owned subsidiaries of WABCO are included in the condensed consolidated financial statements and intercompany transactions are eliminated upon consolidation. WABCO’s investments in unconsolidated joint ventures are included at cost plus its equity in undistributed earnings less dividends and changes in foreign currency in accordance with the equity method of accounting and reflected as investments in unconsolidated joint ventures in the condensed consolidated balance sheets. Certain amounts in the prior year’s condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation.

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 16 to the Consolidated Financial Statements for the year ended December 31, 2018, in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in the preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first six months of 2019.

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Table of Contents

NOTE 2.
Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In June 2018, the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718), to simplify the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the guidance as of January 1, 2019. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.

In February 2018, the FASB issued ASU 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows for certain stranded tax effects within Accumulated Other Comprehensive Income (AOCI), resulting from the U.S. Tax Cuts and Jobs Act, to be reclassified to retained earnings. ASU 2018-02 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the provisions of ASU 2018–02 as of January 1, 2019. There was a one–time reclassification of $8.4 million from AOCI to retained earnings related to the remeasurement of deferred taxes recorded in other comprehensive income based on the newly enacted corporate tax rate. Refer to Note 13 for additional detail regarding the components of the reclassification.

In August 2017, the FASB issued ASU 2017-12 Targeted Improvements to Accounting for Hedging Activities, which aims at improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements, by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the provisions of ASU 2017–12 as of January 1, 2019. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02 and subsequent amendments, collectively known as ASC 842 Leases. ASC 842 requires recognition of operating leases as lease assets and liabilities on the balance sheet and also requires the disclosure of key information about leasing arrangements. The Company has elected to adopt ASC 842 by applying the modified transition method and has elected to use the effective date of January 1, 2019 as the initial date of application. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the Company will continue to account for existing leases in accordance with previous accounting guidance throughout the entire lease term including periods after the effective date. The remeasurement or modification of a lease after the effective date requires application of the new guidance. The Company has also elected the practical expedient under ASU 2018-01 Land Easement and will apply previous judgments under previous guidance as to the recognition of land easements as a lease.
The adoption of ASC 842 resulted in the recognition of operating lease right-of-use (ROU) assets of $110.1 million and operating lease liabilities of $111.2 million on the effective date. The new guidance did not have a material impact on the condensed consolidated statement of operations or statement of cash flow. The accounting for finance leases under ASC 842 remained substantially unchanged from previous accounting guidance and are not material. See Note 11 for the disclosures required by ASC 842 and accounting policy information for leases.

Pending Adoption of Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. The ASU requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and

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losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact on its disclosures.

In January 2017, the FASB issued ASU 2017-04 Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard is effective for the Company beginning January 1, 2020 and will be applied to any annual or interim goodwill impairment assessment after that date. Early adoption is permitted for interim and annual impairment testing after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016–13 Financial Instruments–Credit Losses to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. For trade and other receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements.

We do not expect the pending adoption of other recently issued accounting standards to have an impact on the condensed consolidated financial statements.

NOTE 3.
Revenue from Contracts with Customers

The Company follows the guidance under ASC 606 effective January 1, 2018. Revenue under ASC 606 is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer, which is typically at a point in time. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.

Disaggregation of Revenue

The following table presents product sales disaggregated by end-market:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amount in millions)
 
2019

2018
 
2019
 
2018
OEM 
 
$
692.8

 
$
761.4

 
$
1,396.4

 
$
1,522.3

Aftermarket
 
220.0

 
239.8

 
449.2

 
482.3

Total sales
 
$
912.8

 
$
1,001.2

 
$
1,845.6

 
$
2,004.6


The following table presents product sales disaggregated by geography, based on the billing addresses of customers:

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Three Months Ended June 30,
 
Six Months Ended June 30,
(Amount in millions)
 
2019
 
2018
 
2019
 
2018
United States
 
$
219.1

 
$
224.3

 
$
434.6

 
$
430.3

Europe
 
434.3

 
489.4

 
896.2

 
990.8

Other (1)
 
259.4

 
287.5

 
514.8

 
583.5

Total sales
 
$
912.8

 
$
1,001.2

 
$
1,845.6

 
$
2,004.6


(1) 
Sales to other regions includes revenues primarily from Japan, China, Brazil and India.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to performance obligations to be satisfied in the future. Contract assets and contract liabilities were not material as of June 30, 2019 and December 31, 2018.

Transaction Price Allocated to the Remaining Performance Obligations

The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2019 and 2018 were not material. The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

NOTE 4. Accumulated Other Comprehensive Loss
    
The table below presents the changes in accumulated other comprehensive loss for the three and six month periods ended June 30, 2019 and 2018.

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Three Months Ended June 30,
 
Six Months Ended June 30,
(Amount in millions)
2019
 
2018
 
2019
 
2018
Foreign currency translation adjustments :
 
 
 
 
 
 
 
   Balance at beginning of period
$
(235.7
)
 
$
(152.8
)
 
$
(243.0
)
 
$
(177.6
)
   Adoption of ASU 2018-02 (Note 2)

 

 
(7.1
)
 

   Adjustment for the period
(7.2
)
 
(65.5
)
 
7.2

 
(40.7
)
   Balance at end of period (1)
(242.9
)
 
(218.3
)
 
(242.9
)
 
(218.3
)
 
 
 
 
 
 
 
 
Losses on intra-entity transactions:
 
 
 
 
 
 
 
   Balance at beginning of period
(11.9
)
 
(11.9
)
 
(11.9
)
 
(11.8
)
   Adjustment for the period

 
(0.3
)
 

 
(0.4
)
   Balance at end of period (2)
(11.9
)
 
(12.2
)
 
(11.9
)
 
(12.2
)
 
 
 
 
 
 
 
 
Unrealized gains on investments:
 
 
 
 
 
 
 
   Balance at beginning of period

 

 

 
0.1

   Adjustment for the period

 

 

 
(0.1
)
   Balance at end of period

 

 

 

 
 
 
 
 
 
 
 
Unrealized losses on hedges:
 
 
 
 
 
 
 
   Balance at beginning of period

 
(0.8
)
 

 
(0.8
)
   Adjustment for the period

 

 

 

   Amounts reclassified to earnings, net

 
0.8

 

 
0.8

   Balance at end of period

 

 

 

 
 
 
 
 
 
 
 
Pension and post-retirement plans:
 
 
 
 
 
 
 
   Balance at beginning of period
(262.7
)
 
(277.6
)
 
(269.1
)
 
(274.4
)
   Adoption of ASU 2018-02 (Note 2)

 

 
(1.3
)
 

   Other comprehensive loss/(income) before reclassifications
(1.8
)
 
14.4

 
1.3

 
4.7

   Amounts reclassified to earnings, net (3)
4.5

 
5.8

 
9.1

 
12.3

   Balance at end of period
(260.0
)
 
(257.4
)
 
(260.0
)
 
(257.4
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss at end of period
$
(514.8
)
 
$
(487.9
)
 
$
(514.8
)
 
$
(487.9
)

(1) Includes an accumulated loss of $14.8 million, net of taxes of $2.7 million as of June 30, 2019 and an accumulated loss of $18.5 million, net of taxes of $12.9 million, as of June 30, 2018 related to foreign currency gains and losses on Euro-denominated debt and foreign currency contracts designated and qualifying as partial hedges of a net investment. This includes the one-time adjustment of currency translation related to the adoption of ASU 2018-02 of $7.1 million disclosed above.

(2)
Relates to intra-entity foreign currency transactions that are of a long term investment nature, when the entities to the transaction are consolidated, combined or accounted for by the equity method in the Company's financial statements.

(3)  
Consists of amortization of prior service cost and actuarial losses that are included as a component of pension and post-retirement expense within other non-operating expenses. The amounts reclassified to earnings are recorded net of tax of $1.9 million and $1.7 million for the three month periods ended June 30, 2019 and 2018, respectively, and $3.6 million for both the six month periods ended June 30, 2019 and 2018.

NOTE 5. Inventories, net

The components of inventories are as follows:


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Table of Contents

(Amounts in millions)
 
As of June 30, 2019
 
As of December 31, 2018
Finished products
$
162.9

 
$
185.2

Products in process
13.9

 
15.3

Raw materials
158.2

 
137.1

    Inventories, gross
335.0

 
337.6

Less: inventory allowances
(18.5
)
 
(18.5
)
    Inventories, net
$
316.5

 
$
319.1



Inventory costs are primarily comprised of direct material and labor costs, as well as material overhead such as inbound freight and custom and excise duties.

NOTE 6. Guaranteed Notes Receivable

The Company holds guaranteed notes receivable from reputable state owned and public enterprises in China that are settled through bankers acceptance drafts, which are registered and endorsed to the Company. These notes receivable are fully guaranteed by banks and generally have contractual maturities of six months or less, but the ultimate recourse remains against the trade debtor. These guaranteed drafts are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first six months of 2019 and 2018 were $122.6 million and $149.7 million, respectively. The expenses related to discounting were immaterial for the three and six months ended June 30, 2019 and 2018. The fair value of these guaranteed notes receivable is determined based on Level 2 inputs including credit ratings and other criteria observable in the market and was equal to their carrying amounts of $40.2 million and $44.1 million as of June 30, 2019 and December 31, 2018, respectively.

The Company monitors the credit quality of both the drawers of the drafts and guarantors on a monthly basis by reviewing various factors such as payment history, level of state involvement in the institution, size, national importance as well as current economic conditions in China. Since the Company has not experienced any historical losses nor is expecting future credit losses based on a review of the various credit quality indicators described above, we have not established a loss provision against these receivables as of June 30, 2019 or December 31, 2018.
    

NOTE 7. Net Income Attributable to Company per Share

Basic net income attributable to Company per share has been computed using the weighted average number of common shares outstanding. The average number of outstanding shares of common stock used in computing diluted net income attributable to Company per share includes weighted average incremental shares when the impact is not anti-dilutive. The weighted average incremental shares represent the net amount of shares the Company would issue upon the assumed exercise of in-the-money stock options and vesting of restricted stock units (RSUs) and deferred stock units (DSUs) after assuming that the Company would use the proceeds from the exercise of options to repurchase stock. The weighted average incremental shares also includes the net amount of shares issuable for performance stock units (PSUs) at the end of the reporting period, if any, based on the number of shares issuable if the end of the period were the end of the vesting period.

Anti-dilutive shares, if applicable, are excluded and represent those options, RSUs, DSUs and PSUs whose assumed proceeds were greater than the average price of the Company’s common stock.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Weighted average incremental shares included
105,410

 
134,833

 
116,949

 
158,529

Shares excluded due to anti-dilutive effect

 
54,649

 
33,181

 



NOTE 8. Capital Stock
The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the six month periods ended June 30, 2019 and 2018

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Six Months Ended June 30,
 
2019
 
2018
 
Total Shares
 
Treasury Stock
 
Net Shares
Outstanding
 
Total Shares
 
Treasury  Stock
 
Net Shares
Outstanding
Balance at beginning of period
79,018,266

 
(27,653,341
)
 
51,364,925

 
78,937,828

 
(25,202,342
)
 
53,735,486

Shares issued upon exercise of stock options
10,689

 
16,609

 
27,298

 
9,465

 
11,459

 
20,924

Shares issued upon vesting of RSUs
41,163

 
6,226

 
47,389

 
32,948

 
8,326

 
41,274

Shares issued for DSUs
6,307

 

 
6,307

 
7,833

 

 
7,833

Shares issued upon vesting of PSUs
56,521

 
11,823

 
68,344

 
20,632

 
6,009

 
26,641

Shares purchased for treasury

 
(272,000
)
 
(272,000
)
 

 
(929,000
)
 
(929,000
)
Balance at end of period
79,132,946

 
(27,890,683
)
 
51,242,263

 
79,008,706

 
(26,105,548
)
 
52,903,158



The Company accounts for purchases of treasury stock under the cost method with the costs of such share purchases reflected in treasury stock in the accompanying condensed consolidated balance sheets. Upon the exercise or vesting of an equity incentive award, the Company may reissue shares from treasury stock or may elect to issue new shares. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired since the inception of the share buy back programs, net of shares previously reissued. Gains on the reissuance of treasury shares are recorded as capital surplus. Losses on the reissuance of treasury shares are charged to capital surplus to the extent of previous gains recorded, and to retained earnings for any losses in excess. The Company has reissued, on a cumulative basis, a total of 145,489 treasury shares related to certain employee vestings under its equity incentive program through June 30, 2019.

On December 7, 2018, the Board of Directors authorized the repurchase of shares of common stock for an amount of $600.0 million through December 31, 2020. As of June 30, 2019 the Company has purchased 272,000 shares for $30.6 million and has $569.4 million remaining under this repurchase authorization. The Company suspended its share repurchase program due to the pending Merger.

NOTE 9. Stock-Based Compensation

The Company records stock-based compensation expense in the condensed consolidated statements of operations for stock options and RSUs based on the grant date fair value, determined by the closing market price of the Company’s common stock on the date of grant. RSUs vest in equal annual installments over three years. As of June 30, 2019, the stock option awards are fully vested.

As part of its equity incentive program, the Company grants PSUs, the vesting of which would occur, if at all, and at levels that depend upon the achievement of three-year cumulative goals tied to earnings per share. The Company assesses the expected achievement levels at the end of each reporting period. The grant date fair value of the number of awards expected to vest based on the Company’s best estimate of ultimate performance against the respective targets is recognized as compensation expense on a straight-line basis over the requisite vesting period of the awards. As of June 30, 2019, the Company believes it is probable that the performance conditions will be met and has recognized compensation expense accordingly.

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

Total stock-based compensation cost recognized during the three and six month periods ended June 30, 2019 and 2018 was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amount in millions)
2019
 
2018
 
2019
 
2018
Stock-based compensation
$
4.1

 
$
6.8

 
$
8.1

 
$
11.2




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Table of Contents

The total number and type of awards granted during the periods presented and the related weighted-average grant-date fair values were as follows:
 
Six Months Ended June 30,
 
2019
 
2018
 
Underlying
Shares
Weighted
Average
Grant Date
Fair Value
 
Underlying
Shares
Weighted
Average
Grant Date
Fair Value
RSUs Granted
67,119

$
117.54

 
62,113

$
139.23

PSUs Granted
67,119

$
117.59

 
54,544

$
140.71

DSUs Granted
6,174

$
130.50

 
7,208

$
127.77

Total Awards
140,412


 
123,865

 


The RSUs granted during the periods presented above have vesting terms as follow:
 
Six Months Ended June 30,
 
2019
 
2018
Vest in equal annual installments over three years
67,119

 
60,022

Vest after three years

 
2,091

Total RSUs granted
67,119