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WABCO HOLDINGS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 24, 2014]

WABCO HOLDINGS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Executive Overview In the third quarter of 2014, the production of new trucks and buses greater than six tons declined an estimated 3.4% year over year while WABCO's sales in the same period increased by 4.5%, both on a reported basis and excluding foreign currency translation effects, compared to one year ago. Of this increase, 2.7% comes from the consolidated results in local currencies of Transics International, WABCO's newly acquired subsidiary.



WABCO's global aftermarket sales increased by 12.0% on both a reported and currency adjusted basis in the third quarter of 2014. This performance includes the benefits from the recently acquired Transics business and demonstrates the continued success of the Company's aftermarket strategies initiated several years ago.

During the third quarter of 2014, WABCO's Operating System continued to enable fast and flexible responses to major market changes, delivering $17.5 million of materials and conversion productivity, a continued solid performance for WABCO.


Gross materials productivity represented 5.0% of total materials cost, while an inflation in commodity prices resulted in net materials productivity of 4.8%.

Conversion productivity represented 6.3%, another robust result.

Results of Operations Approximately 85% 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. Quarter-over-quarter changes in sales, gross profit, expenses, pre-tax income and net income attributable to Company for 2014 compared with 2013 are presented both with and without the effects of foreign currency translation. Changes in sales, gross profit, expenses, pre-tax income and net income excluding foreign exchange effects are calculated using current year sales, gross profit, expenses, pre-tax income and net income translated at prior year exchange rates. Presenting changes in sales, gross profit, expenses, pre-tax income and net income excluding the effects of foreign currency translation is not in conformity with U.S. GAAP, but management analyzes the data in this manner 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, gross profit, expenses, pre-tax income and net income 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.

18-------------------------------------------------------------------------------- Table of Contents Third Quarter Results of Operations for 2014 Compared with 2013 Three Months Ended September 30, Excluding foreign exchange translation (a) 2014 % change adjusted % change (Amounts in millions) 2014 2013 reported amount adjusted Sales $ 707.3 $ 677.1 4.5 % $ 707.8 4.5 % Cost of sales 487.3 477.6 2.0 % 487.9 2.2 % Gross profit 220.0 199.5 10.3 % 219.9 10.2 % Operating expenses 132.3 112.6 17.5 % 132.0 17.2 % Operating income 87.7 86.9 0.9 % 87.9 1.2 % Equity income of unconsolidated joint ventures 6.3 4.7 34.0 % 6.3 34.0 % Other non-operating income/(expense), net 0.1 (0.9 ) * - * Interest expense, net (0.1 ) (0.2 ) (50.0 )% (0.1 ) (50.0 )% Income before income taxes 94.0 90.5 3.9 % 94.1 4.0 % Income tax expense 9.5 8.0 18.8 % 9.6 20.0 % Net income including noncontrolling interests 84.5 82.5 2.4 % 84.5 2.4 % Less: net income attributable to noncontrolling interests 2.5 2.5 - % 2.4 (4.0 )% Net income attributable to Company $ 82.0 $ 80.0 2.5 % $ 82.1 2.6 % * Percentage change not meaningful * Percentage change not meaningful (a) The 2014 amounts adjusted for foreign currency translation were calculated using average exchange rates for the three month period ending September 30, 2013.

Sales Our sales for the third quarter of 2014 were $707.3 million, an increase of 4.5% (4.5% excluding foreign currency translation effects) from $677.1 million in 2013. The increase, excluding foreign currency translation effects, includes 2.7% coming from the recently acquired Transics business and was also driven by increased WABCO content per vehicle and growth in our aftermarket sales, partially offset by an estimated 3.4% decline in the global production of new trucks and buses greater than six tons. Total sales in Europe, our largest market, decreased approximately 2.0% (1.6% excluding foreign currency translation effects) for the third quarter of 2014, primarily due to the decline in production of new trucks and buses greater than six tons, partially offset by the recently acquired Transics business and increased WABCO content per vehicle.

Total sales increased 19.8% in North America due to increased WABCO content per vehicle and increased production of new trucks and buses. Total sales in Asia increased 18.4% (18.6% excluding foreign currency translation effects) driven by increases in WABCO content per vehicle in all key markets, as well as an increase in the production of new trucks and buses greater than six tons in Korea and India: sales in Japan increased 5.3% (10.6% excluding foreign currency translation effects), China increased 12.7% (13.4% excluding foreign currency translation effects), Korea increased 16.9% (10.8% excluding foreign currency translation effects) and India increased 50.2% (46.8% excluding foreign currency translation effects). Total sales in South America decreased 3.5% (4.0% excluding foreign currency translation effects), driven by an estimated 28% decline in the production of new trucks and buses in Brazil, largely offset by an increase in WABCO content per vehicle. WABCO's aftermarket sales, included in the geographic numbers provided above, increased by 12.0% (12.0% excluding foreign currency translation effects). This increase, which includes the benefits from the recently acquired Transics business, demonstrates the continued success of the Company's aftermarket strategies initiated several years ago.

Cost of Sales and Gross Profit Our cost of sales for the third quarter of 2014 was $487.3 million, an increase of $9.7 million ($10.3 million excluding foreign currency translation effects) from $477.6 million in 2013. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts.

Our continued focus on productivity generated 5.0% of material savings, before a 0.2% negative impact of commodity inflation, bringing net materials productivity to 4.8% for the quarter. This productivity achievement resulted in $10.8 million of material cost savings. Our second largest expense within the 19-------------------------------------------------------------------------------- Table of Contents cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor inflation and other cost escalations increased conversion costs by approximately $3.6 million, while our productivity efforts generated $6.7 million of savings, or 6.3% of the conversion costs. Warranty expenses excluding volume effects were higher compared to the third quarter of 2013 by $1.6 million due to a cost recovery from a supplier in 2013. Absorption of overhead and other costs were favorable by $1.2 million versus prior year. Volume and mix increased cost of sales by $25.5 million, but contributed $12.4 million to the improvement of gross profit.

Sales price reductions had a negative impact of $7.2 million on gross profit, or 1.0% of sales. Lower streamlining expenses decreased cost of sales by $0.6 million. Foreign currency translation effects decreased cost of sales by $0.6 million and combined with translation effects on sales they improved gross profit by $0.1 million. Foreign currency transaction impacts decreased cost of sales by $1.1 million and positively affected gross profit in the amount of $1.1 million. The net result of all these changes was an increase in gross profit of $20.5 million ($20.4 million excluding foreign currency translation effects).

Operating Expenses Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, increased by $19.7 million ($19.4 million excluding foreign currency translation effects). The increase excluding foreign currency translation effects comprised Transics operating costs of $9.8 million, amortization of acquired intangibles in Transics of $2.5 million, labor inflation of $3.4 million, streamlining and separation expenses of $2.6 million and a net increase in research and development investment, incentive compensation and other operating expenses of $1.1 million.

Equity Income of Unconsolidated Joint Ventures Equity in net income of unconsolidated joint ventures increased by $1.6 million to $6.3 million in 2014 as compared to $4.7 million in 2013, primarily driven by higher income from our North American joint venture.

Other Non-Operating Income, net Non-operating income was $0.1 million for the third quarter of 2014 compared to an expense of $0.9 million for the third quarter of 2013, mainly due to the effects of foreign currency movements resulting in a net foreign exchange gain compared to losses in prior year.

Income Taxes The income tax expense for the third quarter of 2014 was $9.5 million on pre-tax income of $94.0 million before adjusting for noncontrolling interest, compared with $8.0 million on pre-tax income of $90.5 million before adjusting for noncontrolling interest in the third quarter of 2013.

In the three months ended September 30, 2014 and September 30, 2013 the income tax provision was primarily the net result of taxes on the mix of earnings in multiple tax jurisdictions, the accrual of interest on uncertain tax positions, and certain foreign tax planning. In addition, during the third quarter of 2014, the Company recognized an additional tax benefit of $2.9 million primarily due to the filing of its 2013 U.S. Federal income tax return in September 2014 and changes in the Company's recorded tax liabilities with respect to undistributed foreign earnings. As disclosed in the 2013 Form 10-K, the Company released a valuation allowance related to management's determination that it is more likely than not that the Company will realize its deferred tax asset in a foreign jurisdiction. The release of this valuation allowance was recorded as an income tax benefit as of December 31, 2013 which significantly reduced our effective tax rate in the year of release. As expected our effective tax rate increased following this release of the valuation allowance. Our net income and effective tax rate will continue to be negatively affected in periods following this release. However, the valuation allowance release will not affect the amount of cash paid for income taxes.

20-------------------------------------------------------------------------------- Table of Contents Year to Date Results of Operations for 2014 Compared with 2013 Nine Months Ended September 30, Excluding foreign exchange translation (a) 2014 % change adjusted % change (Amounts in millions) 2014 2013 reported amount adjusted Sales $ 2,171.8 $ 2,000.1 8.6 % $ 2,152.4 7.6 % Cost of sales 1,504.3 1,396.3 7.7 % 1,493.7 7.0 % Gross profit 667.5 603.8 10.5 % 658.7 9.1 % Operating expenses 405.2 348.7 16.2 % 397.7 14.1 % Operating income 262.3 255.1 2.8 % 261.0 2.3 % Equity income of unconsolidated joint ventures 17.8 12.9 38.0 % 17.8 38.0 % Other non-operating (expense)/income, net (2.7 ) 2.8 * (2.6 ) * Interest income/(expense), net 0.1 (0.7 ) * 0.2 * Income before income taxes 277.5 270.1 2.7 % 276.4 2.3 % Income tax expense 43.3 25.8 67.8 % 44.3 71.7 % Net income including noncontrolling interests 234.2 244.3 (4.1 )% 232.1 (5.0 )% Less: net income attributable to noncontrolling interests 7.8 7.4 5.4 % 8.1 9.5 % Net income attributable to Company $ 226.4 $ 236.9 (4.4 )% $ 224.0 (5.4 )% * Percentage change not meaningful (a) The 2014 amounts adjusted for foreign currency translation were calculated using average exchange rates for the nine month period ending September 30, 2013.

Sales Our sales for the first nine months of 2014 were $2,171.8 million, an increase of 8.6% (7.6% excluding foreign currency translation effects) from $2,000.1 million in 2013. The increase, excluding foreign currency translation effects, was predominately driven by increased WABCO content per vehicle and growth in our aftermarket sales, offset by a decline of approximately 1% in the global production of new trucks and buses greater than six tons. Total sales in Europe, our largest market, increased approximately 4.7% (1.9% excluding foreign currency translation effects) for the first nine months of 2014, driven mainly by the recently acquired Transics business and increased WABCO content per vehicle, offset by a decline in production of new trucks and buses greater than six tons. Total sales increased 32.9% in North America due to increased WABCO content per vehicle and increased production of new trucks and buses. Total sales in Asia increased 16.3% (18.6% excluding foreign currency translation effects) driven primarily by increases in all key markets: Japan of 7.3% (14.1% excluding foreign currency translation effects), China of 23.6% (23.5% excluding foreign currency translation effects), Korea of 16.8% (11.0% excluding foreign currency translation effects) and India of 12.6% (20.2% excluding foreign currency translation effects). Total sales in South America decreased 9.2% (2.0% excluding foreign currency translation effects), driven by an estimated 22% decline in the production of new trucks and buses in Brazil, largely offset by an increase in WABCO content per vehicle. WABCO's aftermarket sales, included in the geographic numbers provided above, increased by 12.3% (11.2% excluding foreign currency translation effects). This increase, which includes the benefits from the recently acquired Transics business, demonstrates the continued success of the Company's aftermarket strategies initiated several years ago.

Cost of Sales and Gross Profit Our cost of sales for the first nine months of 2014 was $1,504.3 million, an increase of $108.0 million ($97.4 million excluding foreign currency translation effects) from $1,396.3 million in 2013. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.3% of material savings, before the 0.1% negative impact of commodity inflation, bringing net materials productivity to 5.2% for the quarter. This productivity achievement resulted in $37.6 million of material cost savings. Our second largest expense 21-------------------------------------------------------------------------------- Table of Contents within the cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor inflation and other cost escalations increased conversion costs by approximately $10.6 million, while our productivity efforts generated $20.4 million of savings, or 6.3% of the conversion costs. Warranty expenses excluding volume effects were higher compared to the first nine months of 2013 by $2.8 million in part due to a cost recovery from a supplier in 2013. Absorption of overhead and other costs were favorable by $0.4 million versus prior year. Volume and mix increased cost of sales by $133.6 million, but contributed $42.7 million to the improvement of gross profit. Sales price reductions had a negative impact of $25.0 million on gross profit, or 1.1% of sales. Higher streamlining expenses increased cost of sales by $1.2 million. Foreign currency translation effects increased cost of sales by $10.6 million but combined with translation effects on sales they improved gross profit by $8.8 million. Foreign currency transaction impacts increased cost of sales by $7.6 million and negatively affected gross profit in the amount of $6.6 million. The net result of all these changes was an increase in gross profit of $63.7 million ($54.9 million excluding foreign currency translation effects).

Operating Expenses Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, increased by $56.5 million ($49.0 million excluding foreign currency translation effects). The increase excluding foreign currency translation effects comprised increases in research and development investment of $8.7 million, Transics operating costs of $24.5 million, amortization of acquired intangibles in Transics of $6.3 million, labor inflation and other people-related costs of $13.3 million and an increase in other operating expenses of $2.6 million. These increases were partially offset by reductions in incentive compensation of $4.6 million and streamlining and separation expenses of $1.8 million.

Equity Income of Unconsolidated Joint Ventures Equity in net income of unconsolidated joint ventures increased by $4.9 million to $17.8 million in 2014 as compared to $12.9 million in 2013, primarily driven by higher income from our North American joint venture partially offset by a decrease in income from our South African joint venture.

Other Non-Operating Expense, net Non-operating expense was $2.7 million for the first nine months of 2014 compared to income of $2.8 million for 2013 primarily driven by the prior year release of tax indemnification liabilities due to the settlement of a foreign tax audit.

Income Taxes The income tax expense for the first nine months of 2014 was $43.3 million on pre-tax income of $277.5 million before adjusting for noncontrolling interest, compared with $25.8 million on pre-tax income of $270.1 million before adjusting for noncontrolling interest in the first nine months of 2013.

In the nine months ended September 30, 2014 and September 30, 2013 the income tax provision was primarily the net result of taxes on the mix of earnings in multiple tax jurisdictions, the accrual of interest on uncertain tax positions, and certain foreign tax planning. In addition, during the third quarter of 2014, the Company recognized an additional tax benefit of $2.9 million primarily due to the filing of its 2013 U.S. Federal income tax return in September 2014 and changes in the Company's recorded tax liabilities with respect to undistributed foreign earnings. As disclosed in the 2013 Form 10-K, the Company released a valuation allowance related to management's determination that it is more likely than not that the Company will realize its deferred tax asset in a foreign jurisdiction. The release of this valuation allowance was recorded as an income tax benefit as of December 31, 2013 which significantly reduced our effective tax rate in the year of release. As expected our effective tax rate increased following this release of the valuation allowance. Our net income and effective tax rate will continue to be negatively affected in periods following this release. However, the valuation allowance release will not affect the amount of cash paid for income taxes.

22-------------------------------------------------------------------------------- Table of Contents 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, the Revolving Credit Facility, the use of operating leases and the Accounts Receivable Securitization Program, which expired on September 26, 2014 as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements.

Cash Flows for the Nine Months Ended September 30, 2014 Net cash provided by operating activities was $210.8 million for the first nine months of 2014. This compared with net cash provided by operating activities of $248.1 million for the first nine months of 2013.

The Company recorded net income including noncontrolling interests of $234.2 million for the first nine months of 2014 compared with $244.3 million for the first nine months of 2013. Net income attributable to the Company for the first nine months of 2014 included noncash elements such as depreciation and amortization of $75.8 million. Our working capital increased $135.3 million for the nine months ended September 30, 2014 compared to an increase of $56.4 million for the nine months ended September 30, 2013. This increase was mainly due to the expiration of our Accounts Receivable Securitization Program whereupon we repurchased $111.7 million of accounts receivable.

Other accrued liabilities and taxes increased $11.0 million for the first nine months of 2014 compared to $16.3 million for the first nine months of 2013. The major drivers of this increase were accruals for payroll and tax related items, partially offset by payments made on our annual incentive compensation. Other current and long-term assets for the first nine months of 2014 decreased $9.3 million compared to an increase of $30.9 million for the first nine months of 2013. The decrease was primarily due to the release of $38.2 million of restricted cash upon expiration of our Accounts Receivable Securitization Program, partially offset by increases in notes receivable from our Chinese operations as well as tax-related items. Other long-term liabilities for the first nine months of 2014 increased $6.0 million compared to a decrease of $1.6 million for the first nine months of 2013, and the main driver of this change was the accrual for tax indemnification liabilities in the first quarter of 2014 related to a foreign tax audit.

The net cash used in investing activities amounted to $164.5 million in the first nine months of 2014 compared to net cash used in investing activities of $67.7 million in the first nine months of 2013. This included $125.9 million of net cash paid during 2014 related to the acquisition of Tavares as discussed in Note 15 of Notes to Condensed Consolidated Financial Statements. The net cash usage for 2014 also includes capital expenditures of $33.2 million of investments in tooling, $46.8 million in plant and equipment and $9.3 million in software to support the Company's long-term growth strategies, including the construction of a new plant in Poland. This compared with $29.8 million of investments in tooling, $28.5 million in plant and equipment and $9.4 million in software during the first nine months of 2013. We also received proceeds from the sale of $50.7 million of short-term investments during 2014.

The net cash used by financing activities during the first nine months of 2014 amounted to $104.7 million compared to net cash used by financing activities of $166.2 million during the first nine months of 2013.

Our total third-party debt increased $192.7 million for the first nine months of 2014 compared to a decrease of $52.9 million for the first nine months of 2013.

This increase was primarily driven by additional borrowings on our revolving credit facility, a large portion of which funds our share repurchase program.

We received $12.1 million of stock option proceeds during 2014 compared with $44.4 million in 2013. The number of stock options exercised in the first nine months of 2014 and 2013 was 319,168 and 1,457,037, respectively.

We paid $5.7 million during the second quarter of 2014 for the acquisition of the remaining ownership interest in Transics as discussed in Note 15 of Notes to Condensed Consolidated Financial Statements. We also paid $4.6 million during the third quarter of 2013 to acquire the remaining ownership interest in our Chinese joint venture, SWAP.

During the first nine months of 2014, the Company repurchased shares for a total amount of $301.4 million of which $1.9 million was not settled until after September 30, 2014. As of September 30, 2014, the Company had repurchased shares for a total amount of $921.7 million under the authorized repurchase programs as discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, and had the authority to make an additional $78.3 million of share repurchases.

Credit Facility On July 8, 2011, the Company entered into a $400 million multi-currency five-year senior unsecured revolving credit facility (the Facility) with the lenders and agent banks party thereto, including Banc of America Securities Limited as agent, 23-------------------------------------------------------------------------------- Table of Contents issuing bank and swingline lender, and Banc of America Securities Limited, Citigroup Global Markets Limited, Fortis Bank S.A./N.V., ING Belgium SA/NV, Société Générale Corporate & Investment Banking, The Bank of Tokyo-Mitsubishi UFJ, Ltd and The Royal Bank of Scotland NV, (Belgium) Branch, as mandated lead arrangers and bookrunners and Credit Lyonnais and Unicredit Bank AG as lead arrangers. On August 23, 2013 the Company entered into an amendment agreement which extended the expiry of the Facility from September 1, 2016 to September 1, 2018. No other material terms were amended.

As of September 30, 2014, the Facility is our principal bank credit facility, and it will expire on September 1, 2018. Under the Facility, the Company may borrow, on a revolving basis, loans in an aggregate principal amount at any one time outstanding not in excess of $400 million. Up to $50 million under the Facility may be used for issuing letters of credit, of which $49.0 million was unused as of September 30, 2014, and up to $50 million is available in the form of swingline loans, of which $50.0 million was unused as of September 30, 2014.

The outstanding balance on the Facility as of September 30, 2014 was $276.0 million and the balance of letters of credit issued was $1.0 million.

A large portion of the proceeds of the borrowings under the Facility funds our share repurchase program. However, the proceeds will also be available to finance acquisitions, refinance existing indebtedness and meet general financing requirements.

Interest on loans under the Facility will be calculated at a rate per annum equal to an applicable margin, which can vary from 0.80% to 1.55% based on the Company's leverage ratio, plus LIBOR for loans denominated in U.S. Dollars, EURIBOR for loans denominated in Euros, HIBOR for loans denominated in Hong Kong Dollars and SIBOR for loans denominated in Singapore Dollars, plus mandatory costs, if any.

The Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Our primary financial covenant is a leverage test which requires net indebtedness not to exceed three times adjusted four quarter trailing EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items). Additional financial covenants include an interest coverage test and a maximum subsidiary indebtedness test. The interest coverage test requires three times interest expense not to exceed adjusted four quarter trailing EBITDA. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of WABCO's subsidiaries, excluding indebtedness under the Facility, to $400 million, of which not more than $150 million may be secured. As of September 30, 2014, the Company had the ability to borrow an incremental $123.0 million under our principal credit facility and was in compliance with all the covenants.

Financial covenants are not subject to any future changes in U.S. GAAP accounting standards and all cash on the balance sheet can be deducted for net indebtedness purposes. In addition, expenses and payments related to any streamlining of WABCO's operations are excluded when calculating the four quarter trailing adjusted EBITDA. Other covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, ERISA and U.S. regulations, limitations on liens, mergers and sales of assets and change of business.

Also, various subsidiaries had borrowings from banks totaling $5.6 million, of which $1.6 million was classified as long-term debt. The remaining $4.0 million supports local working capital requirements.

Accounts Receivable Securitization Program As previously discussed, our Accounts Receivable Securitization Program expired on September 26, 2014 and was not renewed.

During the nine months ended September 30, 2014 and prior to the expiration of the Accounts Receivable Securitization Program, the Company sold all of its eligible receivables into the Accounts Receivable Securitization Program. The receivables were removed from the balance sheet in accordance with the guidance under ASC 860, Transfers and Servicing. The total amount of receivables sold under the Accounts Receivable Securitization Program during the nine months ended September 30, 2014 was €545.7 million ($739.9 million at average exchange rates for the nine months ended September 30, 2014).

In connection with the expiration of the Accounts Receivable Securitization Program, the Company entered into a separate agreement with Société Générale to repurchase accounts receivable amounting to €88.1 million ($111.7 million at September 30, 2014 exchange rates). A subordinated deposit of $38.2 million was also released to the Company, resulting in a net decrease in cash and cash equivalents of $73.5 million.

24-------------------------------------------------------------------------------- Table of Contents The fair value of the receivables sold equaled the carrying cost at time of sale, and no gain or loss was recorded as a result of the sale. The Company estimated the fair value of sold receivables using Level 3 inputs and based the estimate on historical and anticipated performance of similar receivables, including historical and anticipated credit losses (if any). As part and through the expiration of the Accounts Receivable Securitization Program, the Company continued to service the receivables. The Company sold the receivables at face value, but received actual funding net of the subordinated deposit account until collections were received from customers for the receivables sold. The Company was exposed to the credit losses of sold receivables up to the amount of its subordinated deposit account at each settlement date. Credit losses for receivables sold and past due amounts outstanding at September 30, 2014 were both immaterial. Servicing fees for the program were $0.6 million for the nine months ended September 30, 2014.

Derivative Instruments and Hedging Activities The Company recognizes all derivative financial instruments in the consolidated balance sheet at fair value using Level 2 inputs and these are classified as "other current assets," "other assets," "other accrued liabilities" or "other liabilities" on the consolidated balance sheet. Level 2 inputs used by the Company in valuing its derivative instruments include model-based valuation techniques for which all significant assumptions are observable in the market.

The earnings impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in accumulated other comprehensive income for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.

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 September 30, 2014, forward contracts for an aggregate notional amount of €113.2 million ($143.6 million at September 30, 2014 exchange rates) were outstanding with an average duration of one month.

These foreign exchange contracts have offset the revaluation of assets and liabilities and resulted in a net non-operating gain of $0.2 million for the nine months ended September 30, 2014. The majority of these exchange contracts were entered into on September 29, 2014. The fair value of the derivatives was zero as of September 30, 2014.

Off-Balance Sheet Arrangements Please see the disclosure above in "Accounts Receivable Securitization Program." Aggregate Contractual Obligations The Company has contractual obligations for debt, operating leases, tax indemnifications, purchase obligations, unfunded pension and post-retirement benefit plans and tax liabilities that were summarized in a table of aggregate contractual obligations for the year ended December 31, 2013 disclosed in the Annual Report on Form 10-K. There have been no other material changes to those obligations since December 31, 2013.

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 expression 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 1A. Risk Factors", and "Item 2. 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; 25-------------------------------------------------------------------------------- Table of Contents • periodic changes to contingent liabilities, including those associated with litigation matters and government investigations; • 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 oursuppliers or to obtain them at reasonable price levels due to fluctuations in the costs of the underlying raw materials; • out ability to access credit markets or capital markets on a favorable basis or at all; • changes in the environmental regulations that affect ourcurrent 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 or to realize benefits from completed acquisitions; • our inability to implement our growth plan; • 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; • labor relations; and • risks inherent in operating in foreign countries, including exposure to local economic conditions, government regulation, currency restrictions and other restraints, changes in tax laws, 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.

Critical Accounting Policies and Estimates Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.

Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and Notes 2 and 14 to the Consolidated Financial Statements for the year ended December 31, 2013 in the Company's Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management's estimates. There have been no significant changes in the Company's assumptions regarding critical accounting estimates during the first nine months of 2014.

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