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EX-32.2 - CERTIFICATION OF THE CFO SECTION 906 - WABCO Holdings Inc.wbcexhibit322_12312016.htm
EX-32.1 - CERTIFICATION OF THE CEO SECTION 906 - WABCO Holdings Inc.wbcexhibit321_12312016.htm
EX-31.2 - CERTIFICATION OF THE CFO SECTION 302 - WABCO Holdings Inc.wbcexhibit312_12312016.htm
EX-31.1 - CERTIFICATION OF THE CEO SECTION 302 - WABCO Holdings Inc.wbcexhibit311_12312016.htm
EX-24.1 - POWERS OF ATTORNEY - WABCO Holdings Inc.powerofattorneybod2016.htm
EX-23.1 - CONSENT OF ERNST & YOUNG - WABCO Holdings Inc.consentofey2016.htm
EX-21.1 - SUBSIDIARIES OF THE COMPANY - WABCO Holdings Inc.exhibit211subsidiariesofth.htm

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, 2016
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
Commission file number 1-33332
WABCO Holdings Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-8481962
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Chaussee 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



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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one). 
Large Accelerated Filer
 
x
  
Accelerated Filer
 
o
 
 
 
 
Non-Accelerated Filer
 
o
  
Smaller Reporting Company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
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, 2016, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $5.1 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, 2017
 
54,522,122

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, 2016.




WABCO HOLDINGS INC. AND SUBSIDIARIES
FORM 10-K
Year ended December 31, 2016
TABLE OF CONTENTS
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
 

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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;
risks inherent in operating in foreign countries, including exposure to local economic conditions, government regulation, currency restrictions and other restraints, changes in tax laws and rulings, expropriation, political instability and diminished ability to legally enforce our contractual rights.
 
We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

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PART I

ITEM 1.    BUSINESS

Overview

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

WABCO is a leading global supplier of electronic, mechanical, electro-mechanical and aerodynamic products for the world's major manufacturers of commercial trucks, buses and trailers, as well as passenger cars. We engineer, develop, manufacture and sell integrated systems controlling advanced braking, stability, suspension, 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 and 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.

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. 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 is the first supplier of advanced emergency braking systems (AEBS) homologated in Europe in accordance with European Union regulations. WABCO's OnGuardACTIVE™ AEBS for trucks and buses complies with European Union regulations that came into effect at the tail end of 2015. It detects moving, stopping and stationary vehicles ahead. It alerts the driver via acoustic, visual and haptic signals. OnGuardACTIVE autonomously applies the brakes and can bring the vehicle to a complete stop, helping to prevent or mitigate rear-end collisions.

Starting at the end of 2015, the European Union also mandated lane departure warning systems (LDWS) on new commercial vehicles. This new regulation is addressed by WABCO’s OnLane™, our 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 2016, WABCO acquired MICO, Inc. (MICO), a global market leader in hydraulic components, controls and brake systems for heavy-duty, off-highway vehicles in agriculture, construction, mining and similar industries. WABCO is expanding its product offerings through the acquisition to become the first and only supplier with a portfolio of complete pneumatic and hydraulic braking and control systems for off-highway vehicles worldwide.


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In 2016, WABCO acquired Laydon Composites Ltd. (LCL), a manufacturer of aerodynamic devices for heavy-duty trucks and trailers. Through the acquisition, WABCO is the only supplier that provides a full range of aerodynamic devices for commercial vehicles worldwide. Aerodynamic products reduce 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 to improve their operational efficiency and environmental performance

In 2016, WABCO demonstrated the proof of concept of a breakthrough collision avoidance technology for commercial vehicles. Jointly developed with ZF, the Evasive Maneuver Assist (EMA) combines WABCO's world-class braking, stability and vehicle dynamics control systems on trucks and trailers with ZF's top active steering technology - an industry first. EMA leverages the capabilities of WABCO's industry-leading OnGuardACTIVE and marks a critical step toward enabling autonomous driving in the commercial vehicle industry. EMA engages to help the driver to safely steer around an obstructing vehicle and to bring truck and trailer to a complete and safe stop.

In 2016, WABCO reported that it has signed a Memorandum of Understanding (MoU) with a global tier-one automotive industry supplier headquartered in Asia to bring active steering and other technologies to the commercial industry through a new joint venture (JV). The MoU sets a framework to establish a JV agreement for a new business that will develop, manufacture and sell electronically controlled active steering systems for the global truck and bus market. The JV will leverage WABCO's industry-leading braking, vehicle control and advanced driver assistance systems expertise with its partner's world-class steering system technology and capabilities. This integration will result in significant innovation for advanced safety-enabling solutions that support automated driving through intelligent control of both the longitudinal and lateral movements of vehicles. 

In 2016, WABCO also announced that it has entered into a long-term cooperation framework agreement with Mobileye N.V. to develop solutions for commercial vehicles that leverage advanced emergency braking ADAS functionalities and Mobileye's Road Experience Management (REM) technology that provides real-time data for precise localization and high-definition lane data. The solutions will combine Mobileye's leading vision system and mapping technology with the control and actuation technologies from WABCO's industry-leading portfolio of electronic braking, stability and emergency braking systems in combination with capability for active steering control. The WABCO-Mobileye solution will benefit commercial vehicle manufacturers and operators through more advanced safety capability to help reduce the risk of accidents.

In 2016, WABCO announced that it is working with Peloton Technology to advance an innovative solution for truck platooning, integrating commercial vehicle-to-vehicle communication and other automation technologies that further improve safety and fuel efficiency. By electronically linking two or more tractor-trailers to form virtual road-trains on highways, platooning increases fuel economy by more than 7%, namely up to 4.5% for the lead truck and up to 10% for following trucks due to improved aerodynamics, according to independent evaluation by the North American Council on Freight Efficiency and further validation by the U.S. Department of Energy and U.S. Department of Transportation. WABCO will contribute to this work with its industry-leading portfolio of braking, advanced stability and emergency braking systems, including predictive cruise control. Peloton will bring its proprietary platooning technologies, which are currently under testing on U.S. highways.

In 2016, WABCO also announced its OnCity™ Urban Turning Assist system concept, the Company's breakthrough technology to help protect pedestrians and cyclists in city traffic. OnCity, a unique and convenient single-sensor solution invented by WABCO, is the commercial vehicle industry's first collision avoidance system that uses LiDAR technology for the purpose of object detection. Innovatively engineered for trucks, buses and tractor-trailers, WABCO's OnCity advanced driver assistance system also delivers the industry's widest field-of-view - up to 180 degrees - using a single sensor for safety monitoring to help protect vulnerable road users located on the vehicle's blindside. OnCity detects and distinguishes moving and stationary objects, including pedestrians and cyclists.

Our key product groups and functions are described below.
 

5


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

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 this 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, brake performance warning, vehicle diagnostics, driver assistance systems as well as engine braking and engine speed controls, among others. Our industry-leading 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 through 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 improve fuel efficiency by more than 18%. These include advanced transmission automation systems, innovative aerodynamic solutions, sophisticated electronic driver assistance systems, electronic control of air suspension and breakthrough air compression technologies, among others. We reduce vehicle weight and recuperate energy through industry-leading engineering and lighter materials, resulting in higher fuel efficiency and reduction in emissions.

Customers value how WABCO has been laying the foundation for autonomous driving of commercial vehicles as well as WABCO's extensive track record for mobilizing vehicle intelligence, making WABCO a leading partner of choice globally for

6


the development and systems integration of sensor, control and actuation technology alongside its expertise in local product application.

WABCO is also privileged to increasingly contribute to the sustained success of commercial and government-owned fleets worldwide. WABCO empowers fleets through its differentiated and expanding portfolio of leading fleet management solutions, its industry award-winning Intelligent Trailer Program offering more than 40 different 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 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 each vehicle. During the five year period through 2016, 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 4% per year.

Year to Year Change
 
2012
 
2013
 
2014
 
2015
 
2016
Sales to European T&B OEMs (at a constant FX rate)
 
(10
)%
 
13
%
 
(7
)%
 
8
%
 
8
%
European T&B Production
 
(9
)%
 
5
%
 
(9
)%
 
6
%
 
1
%

Customers

We sell our products primarily to four 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, and
Major car manufacturers.

Our largest customer is Daimler, which accounted for approximately 10% of our sales in both 2016 and 2015. 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, Meritor WABCO (a joint venture), 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, 2016 and 2015, our top 10 customers accounted for approximately 44% and 48% of our sales, respectively.

The largest group of our customers, representing approximately 59% of sales (57% in 2015), consists of truck and bus OEMs who are large, increasingly global and few in numbers 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 25% of sales (26% in 2015), consists of the aftermarket distributor network that provides commercial vehicle operators with replacement parts as well as a range of services. This distributor network is a fragmented and diverse group of customers, covering a broad spectrum from large OEM-affiliated or OEM-owned distributors to small independent local distributors. The increasing number of trucks, buses and trailers on the road worldwide that are equipped with our products continuously increases market demand for replacement parts and services, which 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.


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The next largest group, representing approximately 10% of sales (11% in 2015), consists of trailer manufacturers, a particularly fragmented group of local or 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 applications of such technologies.

The smallest group, representing approximately 6% of sales (6% in 2015), consists of passenger car and SUV manufacturers that purchase 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; as a result, WABCO's vacuum pumps have above-average growth rates due to increasing diesel and GDI applications in Europe, Asia and North America. These customers are typically large, global and sophisticated; they demand high quality in products and services.

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

Europe represented approximately 54% of our sales in 2016 (56% in 2015), 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 2016 % of Sales
FY 2015 % of Sales
 
By Major End-Market
FY 2016 % of Sales
FY 2015 % of Sales
     Europe
54
%
56
%
 
     Truck & Bus Products (OEMs)
59
%
57
%
     Asia
24
%
22
%
 
     Aftermarket
25
%
26
%
     North America
14
%
17
%
 
     Trailer Products
10
%
11
%
     South America
3
%
3
%
 
     Car Products
6
%
6
%
     Other
5
%
2
%
 
 
 
 

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

Backlog

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

Seasonality

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


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Growth Strategy

In 2016, WABCO continued its three-pillar strategy - technology innovation, geographic expansion, and excellence in execution - which further differentiates WABCO within the global commercial vehicle industry. Key drivers of excellence in execution are discussed in “Manufacturing and Operations” below.

Technology

WABCO remains focused on global technology trends that are relevant 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 that cuts across 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 industry-leading expertise in developing electronic systems that control braking, stability, 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 stability control (ESC) system for heavy-duty 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
Breakthrough collision avoidance technology for commercial vehicles jointly developed with ZF, the Evasive Maneuver Assist (EMA) combines WABCO's world-class braking, stability and vehicle dynamics control systems on trucks and trailers with ZF's top active steering technology - an industry first
Breakthrough OnCity™ Urban Turning Assist system, the Company's technology engineered for trucks, buses and tractor-trailers to help protect pedestrians and cyclists in city traffic

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 expended approximately $135.2 million in 2016 for product engineering, including research activities and product development.

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 as well as accident mitigation and prevention. In 2016 - among other major accomplishments - we completed acquisitions, formed new alliances, announced

9


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 converge toward intelligent vehicles and autonomous driving, WABCO is firmly positioned in the sweet spot for the future of our industry - mobilizing vehicle intelligence. This means leveraging WABCO’s breadth and depth of capabilities to further enable the continued success of OEMs and fleet operators in every region of the world.

In 2016, we further strengthened our market leadership in collision mitigation and advanced emergency braking through OnGuard™ and OnGuardACTIVE™ systems respectively. 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 2016, 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 expanded ADB market penetration for trucks in North America, Europe and China where major customers value industry-leading 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 2016, 3.5 million WABCO AMT systems have been sold, including our industry award-winning OptiDrive™ system - our modular automated manual transmission technology - which increases fuel economy up to 5% through optimized gear shifting. In 2016, 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. As of 2016, OptiRide remains the global industry’s best-selling solution for electronic control of air suspension. In 2016, we complemented our OptiFlow™ product range offering efficiency to trailer builders and major fleets through aerodynamic devices with the acquisition of LCL. 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 CO2 emissions.

Geographic Expansion

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. We participate in this market through a dual approach. Our North American joint venture, Meritor WABCO, is focused on the application and delivery of WABCO’s braking and active safety systems, electronic suspension control and air management products. At the same time, WABCO North America, which in 2016 marked its fourth full year, provides further focus on business expansion and enhancement of WABCO’s positioning in the market. For example, in 2016, we increased WABCO's ADB penetration and market share at both Daimler and Hendrickson. A major commercial fleet also expanded adoption of high-performance ADB in North America. All in, ADB units sold increased by 56% versus 2015. WABCO also invested $17 million into WABCO ADB localization in North America by building a new state-of-the-art factory in Charleston, South Carolina where we will continue local manufacturing of air compressors and braking system components in response to increased demand for our advanced ADBs by major original equipment manufacturers and fleets in North America. During 2016, WABCO’s AMT also continued its successful penetration through sales to Daimler Trucks North America and Volvo. WABCO also signed a new long-term agreement with Cummins to manufacture and supply high-performance (and energy efficient) air-compressor technology for trucks, buses and industrial equipment, significantly expanding the volume and variety of demand for WABCO’s air-compression technologies. Lastly, WABCO acquired MICO and LCL, further expanding its North America footprint.

WABCO marked a major milestone of more than 120,000 OnGuard collision mitigation systems sold in North America through Meritor WABCO. Used extensively in heavy-duty trucks since 2007, WABCO’s OnGuard is North America's leading

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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 up to 87% reduction in accidents 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 continued in 2016 as market leader for ABS and a range of our other technologies. WABCO has more than 30 years of ABS experience in Brazil and a leading position to help vehicle manufacturers comply with Brazilian legislation that now mandates ABS on all new trucks, buses and trailers. In 2016, new business launches for Tristop products and Air Processing units significantly supported a double digit outperformance in a declining market. 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 2016, WABCO continued to outperform the China market double digit. This was due to 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. For instance, WABCO anticipated the light and medium duty ABS regulation enforcement and upgrade trend in China and successfully won new business with Foton. WABCO strengthened its traditional partnership with leading OEMs (CNHTC, Yutong) but furthered with additional growth potential OEMs like Dongfeng Liuzhou Motor Company (DFLQ) and FAST to lay solid foundation for future growth. In 2016 WABCO signed a long term agreement with FAST strengthening WABCO’s leading position of OptiDrive™ 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 China National Heavy Truck Corporation (CNHTC), DFLQ and Shaanqi - continue to increase adoption of OptiRide electronically controlled air suspension (ECAS) in series production. Also, WABCO signed in 2016 a new multi-year agreement to supply industry-leading vacuum pumps for Geely, one of China’s largest car makers, thus further enlarging WABCO’s car business growth prospects in the region.

Customers value WABCO’s local capabilities for product application development and engineering as our strategy is to “design for China,” which also 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

India 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. We participate in this market through our subsidiary WABCO INDIA, which has a 53-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. WABCO strengthened its market leadership position in 2016 by expanding its product portfolio through Hydraulic ABS, Wiring Harness, Pole Wheel, Telematics for the aftermarket and extension of products to car OEMs and independent luxury bus manufacturers.

WABCO INDIA connects with global OEMs based both in India and in 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 2016 to be recognized by multiple major 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 nationally, to provide fleet customers with broad access to full product and services support. To enhance connectivity,

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WABCO INDIA launched in 2016 its indigenous Fleet Management Solutions and has been able to connect more than 3,000 units in the aftermarket channel.

Eastern Europe

Eastern Europe is another long-term growth market for WABCO. Truck and bus production there is mainly in the Commonwealth of Independent States (CIS), which includes Russia as its major market. 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 2016, WABCO delivered 100% of 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 manufacture. WABCO was also able to secure ABS, EBS, ESC and ECAS business for new heavy-duty platforms to be introduced by one of Russia’s largest heavy-duty commercial vehicle manufacturers.

WABCO is further differentiated in Russia, among other reasons, because 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, reputation for quality and reliability, and the growing joint collaboration between OEMs and suppliers to drive new product development, the space in which we mostly 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 72% 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 which products taking into account such factors 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 at industry-leading levels 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, 2016 saw the end of manufacturing activities and shutdown of operations in Meppel (Netherlands). Following the completion of the formal regulatory approval process in France, production at our Claye-Souilly (France) plant will cease in the second half of 2017, with production also being transferred to other facilities within WABCO’s globally integrated supply chain.

WABCO also invested $17 million to build a new state-of-the-art factory in Charleston, South Carolina where we will continue local manufacturing of air compressors and braking system components in response to increased demand for our advanced Air Disc Brakes by major original equipment manufacturers and fleets in North America.

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

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Europe, and Asia. To support WABCO's continuing shift of manufacturing to best cost countries, we also continue to migrate more of our sourcing to best cost regions. Under the leadership of the global sourcing organization, which is organized 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 46%.

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 2,382 employees - of which approximately 54% is 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 228 software engineers in India who support the local design of new products and systems for emerging markets and contributes 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 drawings, 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 important joint ventures are:

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 Guangdong FUWA Heavy Industry Co., 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 Wurth Group (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 partnership in North America with Meritor, Inc. (Meritor WABCO) that markets ABS and other vehicle control products.
A 49% owned partnership in South Africa with Sturrock & Robson Ltd (WABCO Automotive South Africa), a distributor of braking systems products.
 

Employees

We have 12,860 employees. Approximately 46% of our employees are salaried and 54% are hourly. Approximately 49% of our workforce is in Europe, 44% is in Asia, and the remaining 7% is in the Americas. As discussed above in "Manufacturing and Operations", in 2015, we announced restructuring proposals to cease manufacturing at two of our production facilities, which would result in a total reduction in workforce of approximately 320 employees.

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.


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Intellectual Property

Patents and other proprietary 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 proprietary rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary 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 and defense, 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 of our manufacturing sites have Environmental Management Systems (EMS), which have been certified as ISO 14001 compliant. In addition, both our test tracks as well as our largest distribution center (DC) have also been certified as ISO 14001 compliant. These sites are those located in:
Campinas, Brazil
Gronau, Germany
Pantnagar, India
Jinan, China (2 plants)
Mannheim, Germany
Stanowice, Poland
Qingdao, China
Jeverson, Germany (test track)
Wroclaw, Poland (2 plants)
Taishan, China
Ambattur, India
Charleston, United States
Claye-Souilly, France
Jamshedpur, India
Rochester Hills, United States
Meppel, Netherlands
Mahindra World City, India
North Mankato, United States
Hanover, Germany
Lucknow, India
Pyungtaek, Korea
Langehagen, Germany (DC)
Chennai, India (test track)
 

A number of our facilities are undertaking responsive actions to address groundwater and soil issues. Expenditures in 2016 to evaluate and remediate these sites were not material, and are also not expected to be material in 2017. Additional sites may be identified for environmental remediation in the future, including properties previously transferred and with respect to which the Company may have contractual indemnification obligations.

Available Information

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

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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 2016, approximately 86% 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.

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. A substantial majority of our profits are earned in jurisdictions with a lower rate than the U.S. statutory rate. 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

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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 2016.

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 for both 2015 and 2016. The benefit for 2016 remains within our 2016 provision and the benefit for 2015 was recognized for the first time in Q3 2016 upon filing the Belgium tax return. 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, 2016, we had approximately $70.0 million in net deferred tax assets. These deferred tax assets include post-retirement and other employee benefits and net operating loss carryovers that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is insufficient evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to record or further adjust a valuation allowance to revalue our deferred tax assets. Such a revaluation could result in material non-cash expense in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations.

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, including Belgium, 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 if all or any of these initiatives will be implemented by the EU countries. Comprehensive U.S. tax reform has been stated to be a priority by President Trump and the U.S. Congress. Changes in U.S. tax laws or their interpretation, if adopted, could significantly increase our consolidated effective tax rate and adversely affect our financial results particularly if the proposed border tax denying corporate tax relief on imports is introduced.

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. Although the Company believes its tax estimates are reasonable, the final determination of tax audits and any related litigation in the jurisdictions where the Company is subject to taxation could be materially different from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on the Company’s consolidated financial statements in the period or periods in which the determination is made.

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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, 2016, our total debt balance was $959.1 million compared to $503.7 million as of our prior fiscal year end. Of this amount, $460.1 million related to our issuance of senior unsecured notes during the fourth quarter of 2016. Our indebtedness could affect our business and financial condition in various ways, including:

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

While we believe we will have the ability to service our debt, respect all of the covenants contained in the 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

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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, 2016, 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;
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.


19


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. A 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 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;

20


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.

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


21


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.

Our shareholder rights plan and provisions in our amended and restated certificate of incorporation and amended and restated by-laws, and 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 inadequate takeover bids by making such practices or bids unacceptably expensive to the raider 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.

On July 13, 2007, our Board adopted a shareholder rights plan, which provides, among other things, that when specified events occur, our shareholders will be entitled to purchase from us a newly created series of junior preferred stock. The preferred stock purchase rights are triggered by the earlier to occur of (i) ten business days (or a later date determined by our Board of Directors before the rights are separated from our common stock) after the public announcement that a person or group has become an “acquiring person” by acquiring beneficial ownership of 15% or more of our outstanding common stock or (ii) ten business days (or a later date determined by our Board before the rights are separated from our common stock) after a person or group begins a tender or exchange offer that, if completed, would result in that person or group becoming an acquiring person. The issuance of preferred stock pursuant to the shareholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The shareholder rights plan expires on July 16, 2017.

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.


22


ITEM 2.    PROPERTIES
    
As of February 17, 2017, our manufacturing activities are located at 27 sites in 13 countries.

Site Location
  
Major Products Manufactured at Location
Campinas, Brazil
  
Vehicle control systems
Jinan, China (2 plants)
  
Braking systems and compressors
Qingdao, China
  
Braking systems
Taishan, China
 
Foundation brakes
Claye-Souilly, France
  
Vehicle control systems
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
Nogales, United States
 
Braking systems
Pershore, United Kingdom
 
Braking systems
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 2016, 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.



23


ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information as of February 17, 2017 with respect to each person who is an executive officer of the Company:
Name
Age
Position(s)
Jacques Esculier
57
Chairman of the Board of Directors and Chief Executive Officer
Prashanth Mahendra-Rajah
47
Chief Financial Officer
Mazen Mazraani
48
Chief Human Resources Officer
Nicolas Bardot
45
Chief Supply Chain Officer
Lisa Brown
38
Chief Legal Officer and Secretary
Jorge Solis
44
President, Truck, Bus & Car OEMs
Nick Rens
52
President, Trailer Systems, Aftermarket & Off-Highway
Sean Deason
45
Vice President, Controller and Assistant Secretary

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.

Prashanth Mahendra-Rajah has served as our Chief Financial Officer since June 2014. Prior to joining WABCO, Mr. Mahendra-Rajah served as Corporate Vice President and Segment CFO for the Silicon Systems Group, a division of Applied Materials, from April 2012. Prior to this, Mr. Mahendra-Rajah served as Vice President Finance, Head of Global Planning & Reporting for Visa for two years. Before then, Mr. Mahendra-Rajah spent 12 years at United Technologies where he served as Vice President, Finance, Planning and Analysis, UTC Fire and Security and Vice President and Chief Financial Officer, Building Systems and Services, Carrier Corporation.
        
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. Graduated in Journalism and Communication from Brussels University, he holds a Bachelors degree in Business Administration and a Master 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 since joining WABCO in November 2011. 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 and development, manufacturing, and sales. Before taking up her in-house roles, Ms. Brown worked in private practice as an

24


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 Assistant Secretary since June 2015. Prior to joining WABCO, Mr. Deason spent 4 years with Evraz N.A. where he served as Vice President, Financial Planning & Analysis. Prior to Evraz, Mr. Deason spent 12 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 is a Certified Management Accountant.



25



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, all of which have been designated by our Board of Directors as a series of Junior Participating Cumulative Preferred Stock. We also have a rights agreement. Pursuant to the rights agreement, when triggered in certain takeover situations, one preferred stock purchase right will be issued for each outstanding share of our common stock.

We estimate that there are approximately 379 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, 2017, there were 51,213 beneficial owners of our common stock.

We have not declared or paid any cash dividends in 2016 or 2015. Our last cash dividend was paid ($0.07 per share) in the first quarter of 2009. We continuously consider ways to return capital to our stockholders, either through our open market repurchase program and/or through the payment of cash dividends.

Set forth below are the high and low sales prices for shares of our common stock for each quarterly period of 2016 and 2015. 

 
2016
 
2015
 
High  
 
Low  
 
High  
 
Low  
First quarter
$
108.78

 
$
81.66

 
$
122.53

 
$
92.86

Second quarter
115.15

 
85.16

 
133.31

 
118.73

Third quarter
113.85

 
84.48

 
126.39

 
100.34

Fourth quarter
114.16

 
96.10

 
115.80

 
95.60



ISSUER PURCHASES OF EQUITY SECURITIES

Our Board of Directors has approved an open market stock repurchase program consisting of the following share repurchase program authorizations as also discussed in Note 6 of Notes to Consolidated Financial Statements:
(Amounts in millions)
 
 
 
 
 
 
Date of authorization
 
Authorized amount
 
Date of commencement
 
Date of expiration
May 26, 2011
 
$
400.0

 
June 1, 2011
 
May 31, 2013
October 26, 2012
 
400.0

 
October 26, 2012
 
December 31, 2014
October 29, 2013
 
200.0

 
October 29, 2013
 
December 31, 2014
December 5, 2014
 
500.0

 
December 5, 2014
 
December 31, 2016
December 2, 2016
 
600.0

 
January 1, 2017
 
December 31, 2018

A summary of the repurchase activity for 2016 is as follows:

26


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

 
$
77.36

15,783,712

 
$
250,810,529

 
 
 
 
 
 
 
 
January 1 - January 31
 
280,000

 
 
280,000

 
 
February 1 - February 29
 
225,000

 
 
225,000

 
 
March 1 - March 31
 
177,000

 
 
177,000

 
 
Total first quarter
 
682,000

 
$
91.64

682,000

 
$
188,308,930

 
 
 
 
 
 
 
 
April 1 - April 30
 
10,800

 
 
10,800

 
 
May 1 - May 31
 
269,900

 
 
269,900

 
 
June 1 - June 30
 
345,500

 
 
345,500

 
 
Total second quarter
 
626,200

 
$
102.63

626,200

 
$
124,040,499

 
 
 
 
 
 
 
 
July 1 - July 31
 
111,000

 
 
111,000

 
 
August 1 - August 31
 
299,000

 
 
299,000

 
 
September 1 - September 30
 
185,000

 
 
185,000

 
 
Total third quarter
 
595,000

 
$
102.07

595,000

 
$
63,308,241

 
 
 
 
 
 
 
 
October 1 - October 31
 
51,000

 
 
51,000

 
 
November 1 - November 30
 
359,000

 
 
359,000

 
 
December 1 - December 31
 
199,000

 
 
199,000

 
 
Total fourth quarter
 
609,000

 
$
102.60

609,000

 
$

 
 
 
 
 
 
 
 
Total through December 31, 2016
 
18,295,912

 
$
80.40

18,295,912

 
$


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

All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Exchange Act.



27


PERFORMANCE GRAPH

The following graph and table compare the cumulative total shareholder's return on our common stock from December 31, 2011 through December 31, 2016, 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
stockperformancegraph2016a02.jpg

 
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
WABCO Holdings Inc.
100
150.21
215.23
241.43
235.62
244.59
S&P 500 Index
100
116.00
153.57
174.60
177.01
198.18
S&P 500 Auto Parts & Equipment Index
100
104.45
172.09
178.41
168.33
164.62





28


ITEM 6.
SELECTED FINANCIAL DATA
 
(Amounts in millions, except share and per share data) 
 
Year Ended December 31,  
 
2016
 
2015
 
2014
 
2013
 
2012
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
2,810.0

 
$
2,627.5

 
$
2,851.0

 
$
2,720.5

 
$
2,477.4

Cost of sales
 
1,925.0

 
1,797.2

 
1,968.3

 
1,906.2

 
1,732.0

Streamlining expenses
 
10.9

 
44.8

 
11.0

 
5.2

 
5.2

Gross profit
 
874.1

 
785.5

 
871.7

 
809.1

 
740.2

Costs and expenses:
 
 

 
 

 
 

 
 

 
 

Selling and administrative expenses
 
372.2

 
344.7

 
370.8

 
345.1

 
300.5

Product engineering expenses
 
135.2

 
139.5

 
145.0

 
119.4

 
104.3

Streamlining expenses
 
5.5

 
23.7

 
16.0

 
7.7

 
7.7

Other operating expense, net
 
5.3

 
6.7

 
8.9

 
5.0

 
3.2

Operating income
 
355.9

 
270.9

 
331.0

 
331.9

 
324.5

European Commission fine reimbursement
 

 

 

 
279.5

 

Equity income of unconsolidated joint ventures
 
24.8

 
32.1

 
23.8

 
17.7

 
18.1

Other non-operating income/(expense), net
 
1.1

 
1.6

 
1.8

 
6.9

 
(5.0
)
Interest (expense)/income, net
 
(12.7
)
 
(7.1
)
 
0.2

 
4.9

 
(1.5
)
Income before income taxes
 
369.1

 
297.5

 
356.8

 
640.9

 
336.1

Income tax expense/(benefit)
 
121.8

 
11.5

 
55.6

 
(21.0
)
 
23.6

Net income including noncontrolling interests
 
247.3

 
286.0

 
301.2

 
661.9

 
312.5

Less: net income attributable to noncontrolling interests
 
24.3

 
10.8

 
9.7

 
8.7

 
10.5

Net income
 
$
223.0

 
$
275.2

 
$
291.5

 
$
653.2

 
$
302.0

Per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
4.00

 
$
4.76

 
$
4.87

 
$
10.46

 
$
4.73

Diluted
 
$
3.98

 
$
4.72

 
$
4.81

 
$
10.31

 
$
4.62

Average number of outstanding common shares:
 
 

 
 

 
 

 
 

 
 

Basic
 
55,695,738

 
57,768,018

 
59,907,763

 
62,474,493

 
63,906,992

Diluted
 
55,981,816

 
58,274,987

 
60,546,454

 
63,382,564

 
65,323,389

Balance Sheet Data (at end of period):
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
3,056.0

 
$
2,589.9

 
$
2,432.7

 
$
2,392.8

 
$
1,747.0

Total debt
 
$
959.1

 
$
503.7

 
$
315.2

 
$
87.1

 
$
76.2

Total shareholders' equity
 
$
701.4

 
$
786.7

 
$
841.6

 
$
1,152.8

 
$
676.4

Cash dividends per common share
 
$

 
$

 
$

 
$

 
$



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.

29



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, 2016, 2015 and 2014 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 2016, WABCO continued to strongly outperform the global market. During this year, global production of trucks and buses greater than six tons increased by an estimated 6% globally, primarily driven by a 27% increase in China where, unfortunately, the available content-per-vehicle for our products is still the lowest across all regions. WABCO's sales during the full year 2016 increased by 6.9% (8.7% excluding foreign currency translation effects) compared with 2015, of which 1.9% was contributed by our acquisitions both on a reported basis and excluding foreign currency translation effects. Our global aftermarket sales increased by 4.9% (6.3% excluding foreign currency translation effects) over this same period.

WABCO is the first supplier of advanced emergency braking systems (AEBS) homologated in Europe in accordance with European Union regulations. WABCO's OnGuardACTIVE™ AEBS for trucks and buses complies with European Union regulations that went into effect in 2016. 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.

The European Union also enforced during 2016 a mandated lane departure warning systems (LDWS) on new commercial vehicles. This new regulation is addressed by WABCO’s OnLane™, our 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.

Also, all 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 was implemented in Q4 2015 for trucks weighing more than 12 tons and buses above 5 tons. This regulation, combined with our strong market leader position, contributed to outperformance in the first three quarters of 2016.

In 2016 - among other major accomplishments - we completed acquisitions, formed new alliances and announced breakthrough technologies. We also continued to expand and enrich our portfolio of differentiated capabilities that improve the safety, efficiency and connectivity of commercial vehicles.

Also in 2016, we announced our OnCity™ Urban Turning Assist system concept, the Company's breakthrough technology to help protect pedestrians and cyclists in city traffic. OnCity, a unique and convenient single-sensor solution invented by WABCO, is the commercial vehicle industry's first collision avoidance system that uses LiDAR technology for the purpose of object detection. Innovatively engineered for trucks, buses and tractor-trailers, it also delivers the industry's widest field-of-view - up to 180 degrees - using a single sensor for safety monitoring to help protect vulnerable road users located on the vehicle's blindside.

WABCO continued to deliver strong profitability throughout 2016. WABCO's Operating System continued to provide fast and flexible responses to major market changes, delivering $83.0 million of materials and conversion productivity. Gross materials productivity in 2016 represented 5.5% of total materials cost with the impact of commodity deflation increasing net materials productivity to 5.9%. This commodity deflation covers the cost reduction of U.S. Dollar denominated commodities, more than offset by the increase of the U.S. Dollar versus most of the currencies that we purchase in. Conversion productivity in our factories in 2016 represented 7.0%, a new annual record for WABCO.

The corporate tax environment globally has been subject to review and discussion over recent years, including at both the U.S. and European level and by international bodies such as the Organization for Economic Co-operation and Development (OECD). Against this background, the European Commission has launched several investigations into tax laws and arrangements

30


within several European countries. The European Commission has used its powers under State Aid control to address fiscal laws in some European countries, Belgium being one of them.

The Belgian Tax Code contains provisions to reduce the taxable base of companies, through rulings granted by the Belgian Government under the excess profit ruling (EPR) program. The EPR program has been part of Belgian law since 2004. We understand approximately 35 companies of varying size, activities and geographical operations participate in the EPR program.

On January 11, 2016, the European Commission ruled that the 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 requires Belgium to stop applying the EPR program and to recover all past tax benefits received by applicable companies under the program (i.e. a “clawback”). The Company recorded an income tax provision of $69.3 million during 2016 with respect to the clawback of 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 available to deduct against the incremental taxable profit.

The Belgium Government has announced that it has submitted an appeal of the Decision to the General Court of the European Union (General Court). During Q3 2016 the Company submitted a separate appeal, since it is directly affected by the Decision. The European Commission responded rejecting the arguments in the Company’s Appeal in December 2016. The Company provided its Reply in January 2017. If the appeal is successful, the EPR tax reserve of $69.3 million may be entirely or partly reversed. The income tax provision of $69.3 million provision consists of $86.4 million established during Q1 2016 which was reduced by $17.1 million during Q3 2016 as a result of filing the 2015 Belgian tax return without claiming the EPR benefit.

The Company is actively considering ways to mitigate the impact of the Decision including whether it would be eligible to claim a Patent Income Deduction (PID) tax relief.

After several months of discussions with the Belgian government, on July 12, 2016, WABCO received a ruling from the Belgium Government confirming that it may claim a PID tax relief for both 2015 and 2016. The benefit for 2016 remains within our 2016 provision and the benefit for 2015 was recognized for the first time in Q3 2016 upon filing the Belgium tax return. We are currently exploring whether a PID would be available in 2013 and 2014. We will only recognize the PID benefits related to prior years when it is probable that they can be claimed and amended tax returns have been submitted to the Belgium tax authorities.

The PID program has been available in Belgium for many years to provide an incentive to carry out research and development activities in Belgium. It is available to all corporate tax payers and has been recently amended in order to give effect to the OECD's Base Erosion and Profit Shifting (BEPS) initiatives and to other parallel discussions. It has been announced that the existing PID program will expire at the end of June 2021. WABCO should be able to qualify for the PID until this date. A replacement patent income program has been introduced in Belgium with effect from July 2016 that WABCO could potentially qualify for after July 2021. Our current assessment is that the requirements of the new patent income program could materially reduce the amount of tax relief we are able to claim in Belgium from July 2021.

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 include aftermarket parts and account for approximately 52% 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 4% per year.

Year to Year Change
 
2012
 
2013
 
2014
 
2015
 
2016
Sales to European T&B OEMs (at constant FX rates)
 
(10
)%
 
13
%
 
(7
)%
 
8
%
 
8
%
European T&B Production
 
(9
)%
 
5
%
 
(9
)%
 
6
%
 
1
%

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.
     

31


Our aftermarket sales account for approximately 25% of total sales and are affected by a variety of factors: content on specific vehicles and breadth of our product range, number of commercial trucks in active operation, truck age, type of vehicles built, miles driven, demand for transported goods and overall economic activity. On average, our aftermarket sales (based on a constant exchange rate to the U.S. Dollar rate) have grown by 7% annually for the last five years as shown in the table below.
 
Year to Year Change 
2012
2013
2014
2015
2016
Average
Change 
Aftermarket Sales (at constant FX rates)
8
%
5
%
5
%
13
%
6
%
7
%
Distribution of WABCO's Sales by Major End-Markets, Product Types and Geography
 
 
2016
 
2015
 
2014
Major End-Markets
 
 
 
 
 
 
 
 
 
 
 
OE Manufacturers:
 
 
 
 
 
   Truck & Bus products
59
%
 
57
%
 
60
%
   Trailer products
10
%
 
11
%
 
10
%
   Car products
6
%
 
6
%
 
4
%
Aftermarket
25
%
 
26
%
 
26
%
 
100
%
 
100
%
 
100
%
Geography:
 

 
 

 
 

   Europe
54
%
 
56
%
 
59
%
   North America
14
%
 
17
%
 
13
%
   South America
3
%
 
3
%
 
6
%
   Asia
24
%
 
22
%
 
19
%
   Other
5
%
 
2
%
 
3
%
 
100
%
 
100
%
 
100
%

Our largest customer is Daimler, which accounts for approximately 10% 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, Meritor WABCO (a joint venture), 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, 2016, 2015 and 2014, our top 10 customers accounted for approximately 44%, 48% and 54% of our sales, respectively.



32


Results of Operations

Approximately 86% of our sales are outside the United States and therefore, changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in U.S. Dollars. Year-over-year changes in sales and expenses for 2016 compared with 2015 and 2015 compared with 2014 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 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
1,935.9

 
1,842.0

 
5.1
 %
 
1,967.8

 
6.8
 %
Gross profit
874.1

 
785.5

 
11.3
 %
 
887.9

 
13.0
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
518.2

 
514.6

 
0.7
 %
 
524.9

 
2.0
 %
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

33


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).

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
$
1,842.0

 
$
785.5

 
 
 
 
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
(25.9
)
 
25.9

Net increase
93.9

 
88.6

 
 
 
 
Cost of sales / gross profit for the year ended December 31, 2016
$
1,935.9

 
$
874.1

 
 
 
 
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.

34


(Amounts in millions)
 
Operating expenses for the year ended December 31, 2015
$
514.6

 
 
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
2.3

Net increase
3.6

 
 
Operating expenses for the year ended December 31, 2016
$
518.2


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.

See “Executive Overview” above for a discussion of the European Commission’s recent decision to invalidate the Belgian EPR program that the Company has participated in since 2012, the impact of such decision on our effective tax rate and our deferred tax assets and the actions we are considering to potentially mitigate the impact of such decision on our effective tax rate and deferred tax assets.

A valuation allowance against deferred tax assets has been recorded for $12.6 million and $13.5 million in 2016 and 2015, respectively. Management has determined that it is more likely than not that it will not realize its deferred tax assets in other foreign jurisdictions since evidence such as historical operating profits resulted in a cumulative loss position during the most recent three-year period and lack of projected earnings provided sufficient negative evidence to record a valuation allowance against such deferred tax assets.

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. See Note 2 of Notes to the Consolidated Financial Statements for further discussion.




35


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.


Results of Operations for 2015 Compared with 2014
  
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)
2015
 
2014
 
% change
reported 
 
2015 adjusted
amount 
 
% change
adjusted 
Sales
$
2,627.5

 
$
2,851.0

 
(7.8
)%
 
$
3,039.9

 
6.6
 %
Cost of sales
1,842.0

 
1,979.3

 
(6.9
)%
 
2,125.7

 
7.4
 %
Gross profit
785.5

 
871.7

 
(9.9
)%
 
914.2

 
4.9
 %
 
 
 
 
 
 
 
 
 
 
Operating expenses
514.6

 
540.7

 
(4.8
)%
 
600.8

 
11.1
 %
Equity in net income of unconsolidated joint ventures
32.1

 
23.8

 
34.9
 %
 
32.3

 
35.7
 %
Interest (expense)/income, net
(7.1
)
 
0.2

 
*
 
(6.8
)
 
*
Income tax expense
11.5

 
55.6

 
(79.3
)%
 
14.6

 
(73.7
)%

* Percentage change not considered meaningful
** Amounts translated using 2014 average exchange rates for comparability

Sales

Our sales for 2015 were $2,627.5 million, a decrease of 7.8% (increase of 6.6% excluding foreign currency translation effects) from $2,851.0 million in 2014. The increase, excluding foreign currency translation effects, was mainly driven by increased WABCO content per vehicle partially offset by an estimated 7% decline in the global production of new trucks and buses greater than six tons.

Total sales in Europe, our largest market, decreased 11.2% (increased 6.6% excluding foreign currency translation effects) for the full year 2015, driven mainly by aftermarket growth and increased WABCO content per vehicle, partially offset by increased dual sourcing on some EURO VI platforms. Sales in North America increased 8.5% (18.1% excluding foreign currency translation effects) due primarily to increased production of new trucks and buses. Total sales in South America decreased 48.5% (29.3% excluding foreign currency translation effects) driven by an estimated 44% decline in the production of new trucks and buses in Brazil, partially offset by growth in aftermarket sales.

Total sales in Asia increased 4.8% (11.8% excluding foreign currency translation effects) and outperformed the market, driven primarily by increases in WABCO content per vehicle in all key markets except Korea. We also saw an increase in the production of new trucks and buses greater than six tons in India, partially offset by lower vehicle production in Japan, China and Korea: sales in India increased 32.9% (40.1% excluding foreign currency translation effects), Japan decreased 10.9% (increased 2.2% excluding foreign currency translation effects), China increased 5.7% (7.8% excluding foreign currency translation effects) and South Korea decreased 25.2% (18.1% excluding foreign currency translation effects).

WABCO's global aftermarket sales, included in the geographic numbers provided above, decreased 9.8% (increased 6.8% excluding foreign currency translation effects). This increase, excluding foreign currency translation effects, demonstrates the continued success of the Company's aftermarket strategies.





36


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 inflation, which had a negative impact of 0.8%, bringing net materials productivity to 4.7% for the year.
(Amounts in millions)
Cost of Sales
 
Gross Profit
Cost of sales / gross profit for the year ended December 31, 2014
$
1,979.3

 
$
871.7

 
 
 
 
Increase/(decrease) due to:
 
 
 
Sales price reductions

 
(44.0
)
Volume, mix and absorption
175.9

 
57.0

Material productivity
(44.8
)
 
44.8

Conversion productivity
(27.7
)
 
27.7

Labor inflation
16.7

 
(16.7
)
Foreign exchange effects
(302.2
)
 
(110.2
)
Other
44.8

 
(44.8
)
Net decrease
(137.3
)
 
(86.2
)
 
 
 
 
Cost of sales / gross profit for the year ended December 31, 2015
$
1,842.0

 
$
785.5

 
 
 
 
Sales price reductions as % of sales
 
 
1.4
%

Foreign exchange impacts include both translational and transactional effects. Cost variances included in "Other" above consisted mainly of higher streamlining charges of $41.1 million primarily related to the Company's streamlining proposals announced in 2015 which are expected to result in the 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, 2014
$
540.7

 
 
Increase/(decrease) due to:
 
Labor inflation
15.4

Pension expense
15.6

Incentive compensation
5.3

Streamlining expenses
11.4

Research and development investments, net
9.9

Foreign exchange translation
(86.2
)
Other
2.5

Net decrease
(26.1
)
 
 
Operating expenses for the year ended December 31, 2015
$
514.6


Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures increased $8.3 million to $32.1 million in 2015 as compared to $23.8 million in 2014. This increase was primarily driven by higher income from our North American joint venture, partially offset by a decrease in income from our South African joint venture.




37


Interest Expense/Income, net

The Company recorded net interest expense of $7.1 million in 2015 compared to net interest income of $0.2 million in 2014. This was primarily due to interest expense incurred on $500 million of Senior Notes issued in 2015. See Note 14 of Notes to the Consolidated Financial Statements for further discussion.

Income Taxes

The income tax provision for 2015 was $11.5 million on $297.5 million of pre-tax income before adjusting for noncontrolling interest, compared with an income tax provision of $55.6 million on pre-tax income of $356.8 million before adjusting for noncontrolling interest in 2014. The 2015 decrease in income tax expense is primarily the result of lower pre-tax income, changes in uncertain tax positions, and the effect of U.S. and foreign deferred taxes on unremitted foreign earnings.

A valuation allowance against deferred tax assets has been recorded for $13.5 million and $9.0 million in 2015 and 2014, respectively, Management has determined that it is more likely than not that it will not realize its deferred tax assets in other foreign jurisdictions since evidence such as historical operating profits resulted in a cumulative loss position during the most recent three-year period and lack of projected earnings provided sufficient negative evidence to record a valuation allowance against such deferred tax assets.

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 2015, a decrease of 2.4% (increase of 7.3% excluding foreign currency translation effects) from the end of 2014. 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.


38



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 2021 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 2017, we expect an increase of up to 10% in our capital spending primarily due to the planned completion of the construction of a new product engineering facility in Germany. In addition, approximately $11.7 million was paid into an escrow account in January 2017 with the Brazilian government due to legislative changes requiring a cash deposit in lieu of a bank guarantee for outstanding litigation.

Outside of our capital expenditures, cash flows related to our senior unsecured notes and acquisitions and, as previously discussed, relating to the European Commission's decision and the payment made to the Brazilian government, our overall cash flow is expected to be in line with the Company's 2016 cash flow profile, and there are no known trends or uncertainties that are reasonably expected to have a material effect on the separate sources and uses of cash.

As of December 31, 2016, $698.2 million of the $862.5 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 foreign subsidiaries to be permanently reinvested outside the United States and as such no additional U.S. tax cost has been provided. The Company has provided for tax at the U.S. tax rate for its Brazilian affiliate's current year earnings in 2016. The Company continues to assert permanent reinvestment outside the U.S. with respect to the remainder of its foreign earnings and at this time, does not have any plans or needs to repatriate additional earnings from its foreign subsidiaries except for Brazil. In addition, a tax provision was also provided on unremitted foreign earnings of $300 million in a Belgian affiliate for which the Company does not assert permanent reinvestment outside the United States. This assertion is resulting from the Company recognizing earnings in the fourth quarter of 2013 from the receipt of an exceptional refund including interest from the European Commission related to the Company’s appeal of a fine previously assessed by the European Commission as discussed in our 2013 Form 10-K. The Company estimates the amount of its unremitted foreign earnings permanently reinvested outside the U.S. to be approximately $1.1 billion as of December 31, 2016; however, it is not practicable to estimate the tax liability that would arise if the earnings that are considered permanently reinvested were remitted to the U.S.

Cash Flows for 2016 Compared with 2015

Operating activities - Net cash provided by operating activities was $405.4 million for 2016. This is in comparison with net cash provided by operating activities of $400.3 million for 2015. We recorded net income including noncontrolling interests of $247.3 million for 2016 compared with net income including noncontrolling interests of $286.0 million for 2015. Net income for 2016 included noncash elements such as depreciation and amortization of $98.0 million and pension and post-retirement benefit expense of $44.2 million. We paid $21.6 million in 2016 towards our pension and post-retirement benefit obligations compared with $22.8 million in 2015, the lower level of payments driven primarily by a stronger U.S. Dollar. Interest expense including the amortization of debt issuance costs amounted to $17.7 million in 2016 compared to $7.8 million in 2015, driven by a full year outstanding on our Senior Notes as well as the fourth quarter issuance of our Senior EUR Notes as discussed in Note 14 of Notes to the Consolidated Financial Statements. We also recorded $1.4 million of impairment charges on fixed assets in 2016, part of which related to our expected production site closures.

Our working capital increased by $43.7 million, due primarily to a higher level of accounts receivables from increased business, partially offset by a higher level of accounts payable. Other accrued liabilities and taxes increased $63.9 million for 2016 compared to $23.1 million for 2015. The major drivers of this increase were accruals for tax-related items, customer bonuses as well as an increase in the current portion of our warranty reserve. Other current and long-term assets for 2016 decreased $40.7 million compared to $18.4 million for 2015, driven mainly by tax-related items. The change in other long-term liabilities for 2016 was a decrease of $45.8 million compared to an increase of $13.5 million for 2015, primarily for lower accruals related to the long-term portion of our streamlining liabilities as well as tax-related items.

Investing activities - The net cash used in investing activities amounted to $251.8 million in 2016 compared to $202.2 million in 2015. 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

39


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.

In 2016, we invested a total of $159.8 million in repurchase agreements, of which $31.1 million have matured during the year. The repurchase agreements are classified within other current assets on the consolidated balance sheets. We also received proceeds of $108.2 million from the sale of our short-term investments and the redemption of our repurchase agreements that were outstanding in 2015. This is in comparison to $120.1 million of investments made and $38.5 million of proceeds received in 2015 related to short-term investments and repurchase agreements.

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 in 2016 related to our acquisitions of MICO, LCL and Trans-Safety LOCKS as discussed in Note 21 of Notes to the Consolidated Financial Statements.

Financing activities - The net cash proceeds from financing activities during 2016 amounted to $220.6 million compared to a net cash usage of $54.0 million during 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.

Cash Flows for 2015 Compared with 2014

Operating activities - Net cash provided by operating activities was $400.3 million for 2015. This is in comparison with net cash provided by operating activities of $314.4 million for 2014. We recorded net income including noncontrolling interests of $286.0 million for 2015 compared with net income including noncontrolling interests of $301.2 million for 2014. Net income for 2015 included noncash elements such as depreciation and amortization of $96.7 million and post-retirement benefit expense of $43.1 million. We paid $22.8 million in 2015 towards our post-retirement benefit obligations compared with $33.0 million in 2014, the lower level of payments driven primarily by a stronger U.S. Dollar combined with reduced funding requirements on our funded plans. The issuance of our senior unsecured notes in the second quarter of 2015 gave rise to interest expense and amortization of debt issuance costs of $7.8 million, with the interest payable in the first quarter of 2016. We also recorded $7.7 million of impairment charges on fixed assets relating to our expected production site closures.

Our working capital increased by $32.4 million, due primarily to a higher level of accounts receivables and inventory resulting from increased business, partially offset by a higher level of accounts payable. Other accrued liabilities and taxes increased $23.1 million for 2015 compared to $15.2 million for 2014. The major drivers of this increase were accruals for streamlining and tax-related items, partially offset by lower payroll-related accruals. Other current and long-term assets for 2015 increased $18.4 million compared to a decrease of $27.5 million for 2014, driven mainly by tax-related items. The change in other long-term liabilities for 2015 was an increase of $13.5 million compared to a decrease of $8.0 million for 2014, primarily for accruals related to long-term streamlining liabilities on our expected production site closures.

Investing activities - The net cash used in investing activities amounted to $202.2 million in 2015 compared to $211.1 million in 2014. The net cash usage for 2015 includes capital expenditures of $40.3 million of investments in tooling, $50.0 million on plant and equipment and $10.9 million in software to support the Company's long-term growth strategies. This compared with $45.0 million of investments in tooling, $78.8 million on plant and equipment including construction of a new plant in Poland and $12.1 million in software in 2014.

In 2015, we invested a total of $120.1 million in short-term investments and repurchase agreements. The repurchase agreements are classified within other assets on the consolidated balance sheets. We also received proceeds of $38.5 million from the redemption of a repurchase agreement which matured during the year as compared to $50.7 million of proceeds received in 2014 from the sale of our short-term investments.


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We acquired a $20.0 million minority stake in 2015 in SmartDrive Systems, a video-based analytics company headquartered in the U.S. We also paid $125.9 million in 2014 related to the acquisition of Tavares as discussed in our 2015 Form 10-K.

Financing activities - The net cash used by financing activities during 2015 amounted to $54.0 million compared to $121.4 million during 2014. Our total third-party debt increased $189.3 million for 2015 compared to $226.4 million for 2014. This increase was primarily driven by our issuance of $500 million of senior unsecured notes, net of $2.1 million of debt issuance costs, of which a portion of the proceeds were used to repay the outstanding balance on our revolving credit facilities.

We repurchased shares for a total amount of $249.2 million and $351.5 million in 2015 and 2014, respectively. We also received $17.3 million of stock option proceeds in 2015 compared to $15.0 million in 2014. Dividends paid to noncontrolling interests amounted to $6.4 million and $5.6 million in 2015 and 2014, respectively. We also paid $5.7 million during 2014 for the acquisition of the remaining ownership interest in Transics as discussed in our 2015 Form 10-K.

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.

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 to September 30, 2021 subject to two 1-year extension options and amend the applicable margins on the original revolving credit facility.

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

Under the revolving credit facilities, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $500 million. As of December 31, 2016, the Company had the ability to borrow an incremental $500.0 million under the revolving credit facilities 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, 2016, various subsidiaries also had borrowings from banks totaling $0.8 million, of which $0.6 million was classified as long-term debt. The remaining $0.2 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, 2016, forward contracts for an aggregate notional amount of €146.9 million ($154.1 million at December 31, 2016 exchange rates) were outstanding with an average duration of one month. The majority of these exchange contracts were entered into on December 29, 2016.


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During the first quarter of 2015, the Company also entered into and settled treasury rate lock agreements which were designated as cash flow hedges. As of December 31, 2016, a loss related to these cash flow hedges of $1.0 million, net of taxes, has been recognized in accumulated other comprehensive income.

During the third and fourth quarters of 2016, the Company also entered into various forward contracts with an aggregate notional amount of €440.0 million 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 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 was recognized in cumulative translation adjustment within other comprehensive income for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

We did not engage in any off-balance sheet financial arrangements as of December 31, 2016.

Contractual Obligations

The following table summarizes our expected cash outflows resulting from financial contracts and commitments as of December 31, 2016.

The amounts below exclude liabilities for uncertain tax positions of $2.9 million as of December 31, 2016. The table below also excludes probable indemnification liabilities of $0.1 million as of December 31, 2016, that the Company is responsible for under a Tax Sharing Agreement between Trane and WABCO. Both these amounts are classified as long-term, and we are unable to estimate the timing of future payments relating to these obligations. See Note 16 and Note 17 of Notes to the Consolidated Financial Statements for further discussion.

We also had $51.2 million of streamlining liabilities as of December 31, 2016. While we expect the majority of payments to be made by 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.

Aggregate Contractual Obligations
As of December 31, 2016
(in millions)
 
Payments due by period (1) 
Contractual Obligation 
 
Total 
 
2017
 
2018 and 2019
 
2020 and 2021
 
Beyond 2021
Debt obligations (excluding interest)
 
$
959.1

 
$
0.2

 
$
0.4

 
$
0.2

 
$
958.3

Lease obligations (2)
 
74.7

 
16.3

 
26.6

 
22.1

 
9.7

Purchase obligations (3)
 
200.0

 
200.0

 

 

 

Pension and post-retirement benefits (4)
 
260.9

 
25.8

 
49.2

 
51.3

 
134.6

Total
 
$
1,494.7

 
$
242.3

 
$
76.2

 
$
73.6

 
$
1,102.6


(1)
The amounts and timing of such obligations, as shown in the table may vary substantially from amounts that will actually be paid in future years. For example, the actual amount to be paid under debt obligations will depend on the amount of debt drawn under our revolving credit facilities in each year.

(2)
Amounts include future rental commitments under all non-cancelable operating leases in effect at December 31, 2016.

(3)
In the normal course of business we expect to purchase approximately $1.8 billion in 2017 of materials and services, and estimate that on average no more than approximately $200 million is outstanding at any one time in the form of legally binding commitments. We spent approximately $1.7 billion, $1.5 billion and $1.7 billion on materials and services in 2016, 2015 and 2014, respectively.

(4)
Amounts represent undiscounted projected benefit payments over the next ten years. The expected benefit payments are estimated based on the same assumptions used to measure our accumulated benefit obligation at the end of 2016 and include benefits attributable to estimated future service of current employees.



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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 2017, we expect an increase of up to 10% 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.

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 re-evaluate 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 for multiple-element arrangements, inventory reserves, goodwill, 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.

Inventory Reserves - On a quarterly basis, the Company tests its inventory for slow moving and obsolete stock by considering both the historical and expected sales and the Company will record a provision, if needed. Historically, this policy has given a close approximation of the Company's experience with slow moving and obsolete inventory. From time to time unusual buying patterns or shifts in demand may cause large movements in the reserve.
    
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

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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 measured based on one reporting unit for the total Company. WABCO's plants, engineering, technical support, distribution centers and other support functions are shared among various product families and serve all distribution channels with many customers. Based on the organizational structure, as well as the nature of financial information available and reviewed by the Company's chief operating decision maker to assess performance and make decisions about resource allocations, the Company has concluded that its total WABCO operations represent one reportable unit. In order to approximate the fair value of the reporting unit for purposes of testing recoverability, we use 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 2016, and the Company's goodwill was not at risk for failing the first step of its impairment test.

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 by Moody's Investor Services) 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 as a percentage of net sales totaled 0.8% in 2016, 1.0% in 2015 and 0.9% in 2014. 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

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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 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 2016. The Company's equity method investments were not at risk of impairment. The Company's fair value calculation of the cost method investment exceeded its carrying value of $20.9 million by approximately 6% as of December 31, 2016. The fair value calculation is dependent on sales and cost forecasts being met and includes numerous assumptions.
 
Income Taxes - We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to decrease the net deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to increase the net deferred tax assets would increase income in the period such determination was made. We calculate a valuation allowance in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. In determining net deferred tax assets and valuation allowances, management is required to make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating loss carry-forwards, applicable tax rates and tax planning strategies. We review the valuation allowance quarterly and maintain it until sufficient positive evidence exists to support a reversal. Also, our plans for the permanent reinvestment or eventual repatriation of the accumulated earnings of certain of our non-U.S. operations could change. Such changes could have a material effect on tax expense in future years.

We also estimate our effective income tax rate quarterly, considering all known factors and the estimated effects of future events or tax planning strategies that can cause that rate to vary from the statutory rate. Estimating the outcome of future events is inherently uncertain and final resolution of those events can cause the effective tax rate to vary significantly. In addition, changes in U.S. or foreign tax laws or rulings may have a significant impact on our effective tax rate.

A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. Tax positions are not permitted to be recognized, derecognized, or remeasured due to changes subsequent to the balance sheet date, but prior to the issuance of the financial statements. Rather, these changes are recorded in the period the change occurs with appropriate disclosure of such subsequent events, if significant. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense.

In situations where the Company has tax deductions that would otherwise increase a deferred tax asset related to net operating losses, a tax deduction which is treated as an uncertain tax position is recorded as a reduction of the deferred tax asset on the balance sheet. In this regard, although the uncertain tax position is not reflected as an unrecognized tax benefit in the balance sheet as a recorded liability, it is disclosed in the tabular rollforward for unrecognized tax benefits in Note 16 of Notes to the Consolidated Financial Statements.


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The Company has operations and a taxable presence in 28 countries outside the United States and all of these countries have a tax rate that is lower than the rate in the U.S. The countries in which the Company has a material presence include Belgium, China, Germany, India, the Netherlands and Poland. Belgium has historically had the largest impact on the Company’s effective tax rate primarily because of the Company’s participation in the Belgian Excess Profit Ruling and Patent Income Deduction programs. The Company has also benefited from notional interest deductions in Belgium although this tax incentive has reduced significantly in recent years due to lower interest rates. In addition, the Company benefits from various tax rulings and incentives the most significant of which are China’s granting of High and New Technology Enterprise status that reduces China’s corporate tax rate on local manufacturing profits by 10% and a hybrid Dutch/U.S. intra group financing structure. The impact of how these foreign tax rulings and benefits impact our tax rates is set out in detail in Note 16 of the Notes to the Consolidated Financial Statements.

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.

In conjunction with the Tax Sharing Agreement, as further discussed in Note 17 of Notes to the Consolidated Financial Statements, WABCO is responsible for certain tax and indemnification liabilities. These liabilities include indemnification liabilities to Trane of $0.1 million.

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 2016, the potential maximum loss in earnings is estimated to be $20 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, 2016, we had an aggregate outstanding debt balance of $959.1 million related primarily to our issuance of fixed-rate senior unsecured notes which are not exposed to any interest rate fluctuations. We had no outstanding floating rate debt under our revolving credit facilities.

We had $862.5 million of cash, cash equivalents and short-term investments on hand as of December 31, 2016. 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 interest income by approximately $10 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 2016 commodity exposure, the potential maximum loss in earnings is estimated to be $29 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.



47


Item 8.
Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of WABCO Holdings Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of WABCO Holdings Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2016.  Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WABCO Holdings Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), WABCO Holdings Inc. and subsidiaries' internal control over financial reporting as of December 31, 2016, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 17, 2017 expressed an unqualified opinion thereon.
 

Ernst & Young Bedrijfsrevisoren BCVBA/Reviseurs d'Entreprises SCCRL

 

Represented by:
/s/ Wim Van Gasse, Partner *
Brussels, Belgium
February 17, 2017

* Acting on behalf of a BVBA/SPRL


48


WABCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Year Ended December 31,
(Amounts in millions, except share and per share data)
2016
 
2015
 
2014
Sales
$
2,810.0

 
$
2,627.5

 
$
2,851.0

Cost of sales
1,935.9

 
1,842.0

 
1,979.3

Gross Profit
874.1

 
785.5

 
871.7

Costs and expenses:
 
 
 
 
 
Selling and administrative expenses
377.7

 
368.4

 
386.8

Research, development and engineering expenses
135.2

 
139.5

 
145.0

Other operating expense, net
5.3

 
6.7

 
8.9

Operating income
355.9

 
270.9

 
331.0

Equity income of unconsolidated joint ventures, net
24.8

 
32.1

 
23.8

Other non-operating income, net
1.1

 
1.6

 
1.8

Interest (expense)/income, net
(12.7
)
 
(7.1
)
 
0.2

Income before income taxes
369.1

 
297.5

 
356.8

Income tax expense
121.8

 
11.5

 
55.6

Net income including noncontrolling interests
247.3

 
286.0

 
301.2

Less: net income attributable to noncontrolling interests
24.3

 
10.8

 
9.7

Net income attributable to Company
$
223.0

 
$
275.2

 
$
291.5

Net income attributable to Company per common share
 
 
 
 
 
Basic
$
4.00

 
$
4.76

 
$
4.87

Diluted
$
3.98

 
$
4.72

 
$
4.81

Cash dividends per share of common stock
$

 
$

 
$

Weighted average common shares outstanding
 
 
 
 
 
Basic
55,695,738

 
57,768,018

 
59,907,763

Diluted
55,981,816

 
58,274,987

 
60,546,454

See Notes to the Consolidated Financial Statements.



49




WABCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Year Ended December 31,
 (Amounts in millions)
2016
 
2015
 
2014
Net income including noncontrolling interests
$
247.3

 
$
286.0

 
$
301.2

Currency translation adjustments
(55.0
)