EX-99.1 7 s002426x2_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1
GE Transportation
(A carve-out business of General Electric Company)
Audited Combined Financial Statements
As of December 31, 2017 and 2016
And for the years ended December 31, 2017, 2016 and 2015 (With Report of Independent Registered Public Accounting Firm Thereon)

GE Transportation
(A carve-out business of General Electric Company)
INDEX TO COMBINED FINANCIAL STATEMENTS

Contents | Pages
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1
COMBINED STATEMENT OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 | 2
COMBINED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 | 3
COMBINED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 | 4
COMBINED STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2017, 2016 AND 2015 | 5
COMBINED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 | 6
NOTES TO COMBINED FINANCIAL STATEMENTS | 7-36

Report of Independent Registered Public Accounting Firm
To the Board of Directors
General Electric Company:
Opinion on the Combined Financial Statements
We have audited the accompanying combined statement of financial position of GE Transportation (a carve-out business of General Electric Company) (the Company) as of December 31, 2017 and 2016, the related combined statements of earnings, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the combined financial statements). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2017.
Chicago, Illinois
June 4, 2018
KPMG LLP is a Delaware limited liability partnership and the U.S member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
1

GE Transportation
(A carve-out business of General Electric Company)
COMBINED STATEMENT OF EARNINGS

For the years ended December 31 (In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Revenues |  |  |  |  |  |  |  |  |
Sales of goods |  | $ | 2,546,637 |  |  | $ | 3,046,546 |  |  | $ | 3,998,100 |
Sales of services |  |  | 1,383,671 |  |  |  | 1,560,045 |  |  |  | 1,423,379 |
Total revenues (Note 3) |  |  | 3,930,308 |  |  |  | 4,606,591 |  |  |  | 5,421,479 |
Costs of revenues |  |  |  |  |  |  |  |  |  |  |  |
Cost of goods sold |  |  | 2,129,684 |  |  |  | 2,525,838 |  |  |  | 3,163,798 |
Cost of services sold |  |  | 877,390 |  |  |  | 909,116 |  |  |  | 931,745 |
Gross profit |  |  | 923,234 |  |  |  | 1,171,637 |  |  |  | 1,325,936 |
Selling, general and administrative expenses |  |  | 449,651 |  |  |  | 432,229 |  |  |  | 414,488 |
Impairment of goodwill |  |  | — |  |  |  | 2,027 |  |  |  | 85,421 |
Non-operating benefit costs |  |  | 16,877 |  |  |  | 18,455 |  |  |  | 16,249 |
Other (expense) income |  |  | (24,307 | ) |  |  | (11,409 | ) |  |  | 27,121 |
Earnings before income taxes |  |  | 432,399 |  |  |  | 707,517 |  |  |  | 836,899 |
Provision for income taxes (Note 13) |  |  | (44,303 | ) |  |  | (167,428 | ) |  |  | (349,275 | )
Net earnings |  |  | 388,096 |  |  |  | 540,089 |  |  |  | 487,624 |
Less net earnings attributable to noncontrolling interests |  |  | 14,311 |  |  |  | 6,144 |  |  |  | 7,547 |
Net earnings attributable to Parent |  | $ | 373,785 |  |  | $ | 533,945 |  |  | $ | 480,077 |

See Notes to the Combined Financial Statements
2

GE Transportation
(A carve-out business of General Electric Company)
COMBINED STATEMENT OF COMPREHENSIVE INCOME

For the years ended December 31 (In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Net earnings |  | $ | 388,096 |  |  | $ | 540,089 |  |  | $ | 487,624 |
Less net earnings attributable to noncontrolling interests |  |  | 14,311 |  |  |  | 6,144 |  |  |  | 7,547 |
Net earnings attributable to Parent |  |  | 373,785 |  |  |  | 533,945 |  |  |  | 480,077 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 15,568 |  |  |  | 22,970 |  |  |  | (42,755 | )
Benefit plans, net of taxes |  |  | 459 |  |  |  | (1,092 | ) |  |  | 120 |
Other comprehensive income (loss), net of taxes |  |  | 16,027 |  |  |  | 21,878 |  |  |  | (42,635 | )
Less other comprehensive income (loss) attributable to noncontrolling interests |  |  | 703 |  |  |  | (6,101 | ) |  |  | 3,194 |
Other comprehensive income (loss) attributable to Parent |  |  | 15,324 |  |  |  | 27,979 |  |  |  | (45,829 | )
Comprehensive income (loss) |  |  | 404,123 |  |  |  | 561,967 |  |  |  | 444,989 |
Less comprehensive income (loss) attributable to noncontrolling interests |  |  | 15,014 |  |  |  | 43 |  |  |  | 10,741 |
Comprehensive income attributable to Parent |  | $ | 389,109 |  |  | $ | 561,924 |  |  | $ | 434,248 |

See Notes to the Combined Financial Statements
3

GE Transportation
(A carve-out business of General Electric Company)
COMBINED STATEMENT OF CHANGES IN EQUITY

(In thousands) |  | Net Parent Investment |  |  | Accumulated Other Comprehensive Income / (Loss) |  |  | Equity Attributable to Noncontrolling Interests |  |  | Total Equity |
Balances as of January 1, 2015 |  | $ | 1,659,426 |  |  | $ | (53,066 | ) |  | $ | 11,831 |  |  | $ | 1,618,191 |
Net earnings |  |  | 480,077 |  |  |  | — |  |  |  | 7,547 |  |  |  | 487,624 |
Foreign currency translation adjustments |  |  | — |  |  |  | (45,959 | ) |  |  | 3,204 |  |  |  | (42,755 | )
Benefit plans, net of taxes |  |  | — |  |  |  | 130 |  |  |  | (10 | ) |  |  | 120 |
Transfers (to) Parent |  |  | (635,458 | ) |  |  | — |  |  |  | — |  |  |  | (635,458 | )
Changes in equity attributable to noncontrolling interests |  |  | — |  |  |  | — |  |  |  | (662 | ) |  |  | (662 | )
Total equity balance as of December 31, 2015 |  |  | 1,504,045 |  |  |  | (98,895 | ) |  |  | 21,910 |  |  |  | 1,427,060 |
Net earnings |  |  | 533,945 |  |  |  | — |  |  |  | 6,144 |  |  |  | 540,089 |
Foreign currency translation adjustments |  |  | — |  |  |  | 28,992 |  |  |  | (6,022 | ) |  |  | 22,970 |
Benefit plans, net of taxes |  |  | — |  |  |  | (1,013 | ) |  |  | (79 | ) |  |  | (1,092 | )
Transfers (to) Parent |  |  | (612,311 | ) |  |  | — |  |  |  | — |  |  |  | (612,311 | )
Changes in equity attributable to noncontrolling interests |  |  | — |  |  |  | — |  |  |  | 6,248 |  |  |  | 6,248 |
Total equity balance as of December 31, 2016 |  |  | 1,425,679 |  |  |  | (70,916 | ) |  |  | 28,201 |  |  |  | 1,382,964 |
Net earnings |  |  | 373,785 |  |  |  | — |  |  |  | 14,311 |  |  |  | 388,096 |
Foreign currency translation adjustments |  |  | — |  |  |  | 14,849 |  |  |  | 719 |  |  |  | 15,568 |
Benefit plans, net of taxes |  |  | — |  |  |  | 475 |  |  |  | (16 | ) |  |  | 459 |
Transfers (to) Parent |  |  | (112,313 | ) |  |  | — |  |  |  | — |  |  |  | (112,313 | )
Changes in equity attributable to noncontrolling interests |  |  | — |  |  |  | — |  |  |  | (1,551 | ) |  |  | (1,551 | )
Total equity balance as of December 31, 2017 |  | $ | 1,687,151 |  |  | $ | (55,592 | ) |  | $ | 41,664 |  |  | $ | 1,673,223 |

See Notes to the Combined Financial Statements
4

GE Transportation
(A carve-out business of General Electric Company)
COMBINED STATEMENT OF FINANCIAL POSITION

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Assets |  |  |  |  |  |
Cash and equivalents |  | $ | 105,338 |  |  | $ | 151,151 |
Current receivables, net (Note 5) |  |  | 172,386 |  |  |  | 162,536 |
Inventories (Note 6) |  |  | 560,443 |  |  |  | 740,958 |
Contract and other deferred assets (Note 3) |  |  | 535,442 |  |  |  | 465,532 |
Prepaid expenses and other current assets (Note 9) |  |  | 226,280 |  |  |  | 185,415 |
Total current assets |  |  | 1,599,889 |  |  |  | 1,705,592 |
Property, plant and equipment, net (Note 7) |  |  | 943,168 |  |  |  | 934,515 |
Goodwill and intangible assets (Note 8) |  |  | 537,526 |  |  |  | 547,420 |
Long-term contract and other deferred assets (Note 3) |  |  | 321,392 |  |  |  | 357,231 |
Deferred income taxes (Note 13) |  |  | 64,839 |  |  |  | 61,165 |
Other assets (Note 10) |  |  | 77,759 |  |  |  | 20,995 |
Total assets |  | $ | 3,544,573 |  |  | $ | 3,626,918 |
Liabilities and equity |  |  |  |  |  |  |  |
Short-term borrowings (Note 11) |  | $ | 45 |  |  | $ | 21,740 |
Accounts payable |  |  | 604,328 |  |  |  | 682,540 |
Progress collections and deferred income (Note 3) |  |  | 592,427 |  |  |  | 689,946 |
Other current liabilities (Note 14) |  |  | 282,723 |  |  |  | 241,301 |
Total current liabilities |  |  | 1,479,523 |  |  |  | 1,635,527 |
Long-term borrowings (Note 11) |  |  | 44,257 |  |  |  | 92,772 |
Long-term progress collections and other deferred income (Note 3) |  |  | 23,797 |  |  |  | 9,798 |
Deferred income taxes (Note 13) |  |  | 231,582 |  |  |  | 363,368 |
Other liabilities (Note 14) |  |  | 92,191 |  |  |  | 142,489 |
Total liabilities |  |  | 1,871,350 |  |  |  | 2,243,954 |
Net parent investment |  |  | 1,687,151 |  |  |  | 1,425,679 |
Accumulated other comprehensive loss |  |  | (55,592 | ) |  |  | (70,916 | )
Total equity attributable to Parent |  |  | 1,631,559 |  |  |  | 1,354,763 |
Equity attributable to noncontrolling interests |  |  | 41,664 |  |  |  | 28,201 |
Total equity |  |  | 1,673,223 |  |  |  | 1,382,964 |
Total liabilities and equity |  | $ | 3,544,573 |  |  | $ | 3,626,918 |

See Notes to the Combined Financial Statements
5

GE Transportation
(A carve-out business of General Electric Company)
COMBINED STATEMENT OF CASH FLOWS

For the years ended December 31 (In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Cash flows - operating activities |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 388,096 |  |  | $ | 540,089 |  |  | $ | 487,624 |
Less net earnings attributable to noncontrolling interests |  |  | 14,311 |  |  |  | 6,144 |  |  |  | 7,547 |
Net earnings attributable to the Parent |  |  | 373,785 |  |  |  | 533,945 |  |  |  | 480,077 |
Adjustments to reconcile net earnings attributable to the Parent to cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Depreciation and amortization expenses |  |  | 184,012 |  |  |  | 219,628 |  |  |  | 208,899 |
Unrealized (gains) losses from derivative instruments |  |  | 2,535 |  |  |  | (362 | ) |  |  | (28,582 | )
Impairment of goodwill |  |  | — |  |  |  | 2,027 |  |  |  | 85,421 |
Share-based compensation expense |  |  | 7,375 |  |  |  | 10,587 |  |  |  | 13,825 |
Deferred income taxes |  |  | (135,461 | ) |  |  | 14,691 |  |  |  | 20,384 |
Losses (gains) from sale of property, plant and equipment |  |  | 100 |  |  |  | (14,157 | ) |  |  | (5,565 | )
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |  |  |  |
(Increase) decrease in current receivables |  |  | (10,148 | ) |  |  | 14,407 |  |  |  | 158,353 |
Decrease (increase) in inventories |  |  | 189,659 |  |  |  | 155,356 |  |  |  | (63,313 | )
(Increase) decrease in contract and other deferred assets |  |  | (56,228 | ) |  |  | (85,394 | ) |  |  | 26,514 |
(Decrease) in prepaid expenses and other assets |  |  | (46,401 | ) |  |  | (107,254 | ) |  |  | (15,361 | )
(Decrease) increase in accounts payable |  |  | (82,736 | ) |  |  | (70,253 | ) |  |  | 39,640 |
(Decrease) increase in progress collections and other deferred income |  |  | (83,519 | ) |  |  | 147,997 |  |  |  | (25,549 | )
(Increase) decrease in other liabilities |  |  | (19,510 | ) |  |  | 35,345 |  |  |  | (16,410 | )
All other operating activities |  |  | (1,459 | ) |  |  | (2,851 | ) |  |  | (3,099 | )
Cash provided by operating activities |  |  | 322,004 |  |  |  | 853,712 |  |  |  | 875,234 |
Cash flows - investing activities |  |  |  |  |  |  |  |  |  |  |  |
Additions to property, plant and equipment |  |  | (116,811 | ) |  |  | (116,389 | ) |  |  | (188,970 | )
Dispositions of property, plant and equipment |  |  | 25,550 |  |  |  | 63,430 |  |  |  | 15,587 |
Additions to internal-use software |  |  | (61,581 | ) |  |  | (66,372 | ) |  |  | (52,089 | )
Payments for principal businesses purchased |  |  | — |  |  |  | (63,439 | ) |  |  | — |
Investment in associated companies |  |  | (50,116 | ) |  |  | (444 | ) |  |  | — |
All other investing activities |  |  | 2,002 |  |  |  | 15,000 |  |  |  | (403 | )
Cash (used for) investing activities |  |  | (200,956 | ) |  |  | (168,214 | ) |  |  | (225,875 | )
Cash flows - financing activities |  |  |  |  |  |  |  |  |  |  |  |
Newly issued debt (maturities longer than 90 days) |  |  | 44,256 |  |  |  | — |  |  |  | 33,945 |
Repayments and other reductions (maturities longer than 90 days) |  |  | (114,466 | ) |  |  | (13,961 | ) |  |  | (16,651 | )
Transfers (to) Parent |  |  | (112,313 | ) |  |  | (612,311 | ) |  |  | (635,458 | )
All other financing activities |  |  | 11,461 |  |  |  | 686 |  |  |  | (4,606 | )
Cash (used for) financing activities |  |  | (171,062 | ) |  |  | (625,586 | ) |  |  | (622,770 | )
Effect of currency exchange rate changes on cash and equivalents |  |  | 4,201 |  |  |  | 4,133 |  |  |  | (7,784 | )
(Decrease) increase in cash and equivalents |  |  | (45,813 | ) |  |  | 64,045 |  |  |  | 18,805 |
Cash and equivalents at beginning of year |  |  | 151,151 |  |  |  | 87,106 |  |  |  | 68,301 |
Cash and equivalents at end of year |  | $ | 105,338 |  |  | $ | 151,151 |  |  | $ | 87,106 |
Supplemental disclosure of cash flow information |  |  |  |  |  |  |  |  |  |  |  |
Cash paid during the year for interest on borrowings |  | $ | (4,484 | ) |  | $ | (7,611 | ) |  | $ | (6,321 | )
Cash paid during the year for income taxes |  | $ | (200,482 | ) |  | $ | (313,672 | ) |  | $ | (296,776 | )

See Notes to the Combined Financial Statements
6

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1 | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

DESCRIPTION OF THE BUSINESS
GE Transportation (the “Business”, “GET”, “our” or “we”) is a carve-out business of General Electric Company (“GE” or “Parent”). We are a leading global provider of products and solutions to transportation, logistics and other industrial markets. We design, engineer and manufacture diesel-electric locomotives, supply associated aftermarket parts and services and provide digital solutions. Our culture of innovation and differentiated aftermarket solutions has allowed us to build a leading global installed base of diesel-electric locomotives, significant contracted services backlog and longstanding customer relationships. Our products and services are critical to our customers’ operating and financial success and enable them to operate with reliability and efficiency. Leveraging our heritage in diesel-electric locomotives, we have continued to innovate to expand our technologies into new products, end markets and logistics applications. Leveraging our core competencies in locomotive manufacturing, we produce electric motors and premium propulsion systems for mining, marine, stationary power and drilling applications. We have combined industry leadership with engineering and software capabilities to build a digital business that is leading the transformation of the transportation and mining industries. We employ approximately 9,000 employees and serve customers across approximately 60 countries.
The Business is comprised of three reportable segments, which reflect the way performance is assessed and resources are allocated.
EQUIPMENT
Our Equipment segment is a leading producer of diesel-electric locomotives serving freight and passenger railroads. We produce mission-critical products and solutions that help railroads reduce operating costs, decrease fuel use, minimize downtime and comply with stringent emissions standards. In addition to locomotives, we also produce a range of engines, electric motors and premium propulsion systems used in mining, marine, stationary power and drilling applications. This segment represents approximately 45%, 53% and 59% of annual revenues in the years ended December 31, 2017, 2016 and 2015, respectively.
SERVICES
Our Services segment is responsible for supporting railroads in the operation of their fleet of GE Transportation locomotives in an efficient manner throughout their entire lifecycle in terms of safety, availability, reliability and economic performance. We provide aftermarket parts and services to our global installed base, including predictive maintenance, regular maintenance, and unscheduled maintenance and overhaul services for locomotives. Our offerings include supply of parts, technical support and locomotive modernizations. Commercially, locomotive maintenance can be contracted on a fully transactional basis or through multi-year contracts (Contractual Service Agreements or “CSAs”), where we assume certain service activities, and the related performance risks, in return for fixed and variable payments based on underlying utilization of the asset(s) covered. This segment represents approximately 48%, 41% and 37% of annual revenues in the years ended December 31, 2017, 2016 and 2015, respectively.
DIGITAL
Our Digital segment combines decades of industrial leadership with cutting-edge data science and analytics acumen to create an efficient, productive and reliable digital-rail ecosystem – from shipper to receiver – from ports to intermodal terminals – main line locomotives and railcars – to train yards and operation centers. Digital includes transport logistics, transport intelligence, network optimization, train performance and digital mine. Our Digital segment develops and works with our customers to implement a comprehensive set of software-enabled solutions that deliver significant benefits across the transportation and mining landscape. Across global freight and mining industries, productivity and efficiency gains – and new business opportunities – will come largely from digital innovation. Digital tools will improve efficiency of existing assets, connect disparate processes, optimize key chokepoints and entire systems, and open up value across freight and mining. In industries
7

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
characterized by in-house and boutique solution providers, the breadth and market presence of our Digital solutions have positioned us as a key player for digital innovation. This segment represents approximately 7%, 6% and 4% of annual revenues in the years ended December 31, 2017, 2016 and 2015, respectively.
On May 21, 2018, GE and Westinghouse Air Brake Technologies (“Wabtec”) Corporation announced that they had entered into a definitive agreement whereby Wabtec acquired the Business (the “Proposed Transaction”).
Under the agreement, which has been approved by the Boards of Directors of Wabtec and GE, GE will receive $2.9 billion in cash at closing. GE shareholders will own approximately 40.2%, GE will own approximately 9.9%, and Wabtec shareholders will own approximately 49.9% of the combined company on a fully diluted basis. The transaction is expected to be tax free to the companies' respective shareholders.
BASIS OF PRESENTATION
These combined financial statements were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of GE. These combined financial statements as of December 31, 2017 and 2016 and for each of the years ended December 31, 2017, 2016 and 2015 are presented as carve-out financial statements and reflect the combined historical results of operations, comprehensive income, financial position and cash flows of the Business, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Refer below to Recent Accounting Pronouncements Reflected in These Combined Financial Statements for a summary of recent accounting pronouncements that were adopted and applied in these combined financial statements.
These combined financial statements consolidate all majority-owned subsidiaries. The noncontrolling interests have been shown in the Combined Statement of Financial Position as Equity attributable to noncontrolling interests.
All intercompany balances and transactions within the Business have been eliminated in these combined financial statements. As described in Note 4 Related Party Transactions, certain transactions between the Business and GE have been included in these combined financial statements.
The Combined Statement of Financial Position reflects, among other things, all of the assets and liabilities of GE and the Business that are specifically identifiable as being directly attributable to the Business, including Net parent investment as a component of equity. Net parent investment represents GE’s historical investment in the Business and includes accumulated net earnings attributable to GE, the net effect of transactions with GE and GE entities, and cost allocations from GE that were not historically allocated to the Business.
GE uses a centralized approach to cash management and financing of its operations. These arrangements are not reflective of the manner in which the Business would have financed its operations had it been a stand-alone business separate from GE during the periods presented. Cash pooling arrangements are excluded from the asset and liability balances in the Combined Statement of Financial Position. These amounts have instead been reported as Net parent investment as a component of equity.
GE and its affiliates provide a variety of services to the Business. The Business may also sell products in the ordinary course of business to GE and its affiliates. The Combined Statement of Earnings includes expense allocations for services and certain support functions (“GE Corporate Overhead”) that are provided on a centralized basis within GE such as legal, business development, human resources, corporate audit, treasury and various other GE corporate functions that are routinely allocated to the Business and reflected in the Combined Statement of Earnings in Selling, general and administrative expenses. In addition to GE Corporate Overhead allocations, Selling, general and administrative expenses that would have been incurred in the ordinary course of business if the Business operated as a stand-alone company, such as compensation and benefits for employees of the Business, were included based on either specific identification of direct expenses or an allocation using an approach related to the nature of the item (e.g., external revenue or headcount).
8

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
Where allocations of amounts were necessary, the Business believes the allocation of these amounts were determined on a reasonable basis, reflecting all of the costs of GE Transportation and consistently applied in the periods presented. These allocated amounts, however, are not necessarily indicative of the actual amounts that might have been incurred or realized had the Business operated as a separate stand-alone entity during the periods presented. Consequently, these combined financial statements do not necessarily represent the results the Business would have achieved if the Business had operated as a separate stand-alone entity from GE during the periods presented.

NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) | ESTIMATES AND ASSUMPTIONS

The preparation of combined financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of any contingent assets or liabilities at the date of these combined financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While the Business believes that the estimates and assumptions used in the preparation of these combined financial statements are appropriate, actual results could differ from those estimates.
Estimates are used for, but are not limited to, determining the following: estimates of variable revenues and/or costs on long-term revenue generating contracts, recoverability of long-lived assets and inventory, valuation of goodwill, useful lives used in depreciation and amortization, income taxes and related valuation allowances, accruals for contingencies including warranties, actuarial assumptions used to determine costs on employee benefit plans, valuation assumptions for long term stock-based compensation expense, valuation and recoverability of receivables, valuation of derivatives and the fair value of assets acquired and liabilities assumed in acquisitions.
Our revenue recognition on long-term CSAs requires estimates of both customer payments expected to be received over the contract term as well as the costs expected to be incurred to perform required maintenance services. We routinely review estimates under CSAs and regularly revise them to adjust for changes in outlook, however these estimates may materially vary from actual payments and costs incurred over the life of the contracts.

(B) | FOREIGN CURRENCY

Certain of our international operations have determined that the local currency is the functional currency whereas others have determined the U.S. dollar is their functional currency. When the functional currency is not the US dollar, the Business translates assets and liabilities to their U.S. dollar equivalents using rates that approximate the exchange rates in effect at the Combined Statement of Financial Position date, and the Business translates functional currency income and expense amounts to their U.S. dollar equivalents using rates that approximate average exchange rates for the period. The U.S. dollar effects that arise from changing translation rates from functional currencies are recorded in Accumulated other comprehensive loss in the Combined Statement of Financial Position.
Gains and losses from foreign currency transactions, such as those resulting from the settlement of monetary items in the non-functional currency and those resulting from remeasurements of monetary items, are included in Costs of revenues and Selling, general and administrative expenses. Gains (losses) of $26,177 thousand, $(18,735) thousand and $27,076 thousand were incurred in the years ended December 31, 2017, 2016 and 2015, respectively.

(C) | EQUITY-ACCOUNTED INVESTMENTS

Associated companies are entities in which we do not have a controlling financial interest, but over which we have significant influence, most often because we hold a voting interest of 20% to 50%. Associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line
9

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
basis. Investments in, and advances to, associated companies are presented in the caption Other assets in our Combined Statement of Financial Position. See Note 10 Other Assets. Income earned on these investments are presented in Other (expense) income in our Combined Statement of Earnings.

(D) | ACQUISITIONS

Our combined financial statements include the operations of acquired businesses from the date of acquisition. The Business accounts for acquired businesses using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When the Business acquires net assets that do not constitute a “business” as defined in U.S. GAAP, no goodwill is recognized.
Amounts recorded for acquisitions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 2(A) Estimates and Assumptions.
There were no significant acquisitions that were completed during the years ended December 31, 2017, 2016 and 2015 that affected our combined financial statements. See Note 8 for information on changes in goodwill and intangible assets as a result of acquisitions.

(E) | CASH AND EQUIVALENTS

Marketable securities with original maturities of three months or less are included in Cash and equivalents. Cash held in commingled accounts with our Parent, or its affiliates, are presented within Net parent investment.
As of December 31, 2017, $80,228 thousand of Cash and equivalents were held in bank accounts and cannot be released, transferred or otherwise converted into a currency that is regularly transacted internationally, due to lack of market liquidity, capital controls or similar monetary or exchange limitations limiting the flow of capital out of the jurisdiction.

(F) | CURRENT RECEIVABLES, NET

Current receivables, net are recorded at the invoiced amount, less an allowance for doubtful accounts, and do not bear interest. The Business maintains an allowance for doubtful accounts for estimated losses inherent in our accounts receivable portfolio. We establish an allowance for doubtful accounts based on various factors including the payment history and financial condition of our debtors and the economic environment. In addition, we consider current receivables aging, unless a specific reserve is established when customers are in bankruptcy or involved in legal disputes about amounts owed. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. See Note 5 Current Receivables, net.

(G) | CONCENTRATION OF CREDIT RISK

For the year ended December 31, 2017, one customer accounted for more than 10% of our combined revenues. For the years ended December 31, 2016 and 2015, three customers each accounted for more than 10% of our combined revenues Additionally, two customers accounted for approximately 14% and 13%, respectively, of gross customer receivables as of December 31, 2017 and one customer accounted for approximately 24% of gross customer receivables as of December 31, 2016. Although this concentration affects our overall exposure to credit risk, our customer receivables are spread over a diverse group of customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our customers’ financial conditions, including monitoring our customers’ payment history and current credit worthiness to manage this risk. We do not generally require collateral in support of our customer receivables, but we may require payment in advance or security in the form of a letter of credit or a bank guarantee. Our customer receivables do not represent a significant concentration of credit risk as of December 31, 2017 and 2016 due to the wide variety of customers and markets into which our equipment and services are sold and their dispersion across geographic regions. See Note 5 Current Receivables, net.
10

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
See Note 19 Segment Information and Major Customers for further details.

(H) | CURRENT RECEIVABLES FACTORING PROGRAM

Some of the Business's accounts receivables are legally transferred through current receivables factoring programs established for GE and various GE subsidiaries administered by an operation of GE Capital called Working Capital Solutions (“WCS”). GE Transportation participates in three different WCS Accounts Receivable factoring programs: GE Accounts Receivable (“GEAR”), On Book, and Emerging Market Debtor Pool (“EMDP”). GE Transportation also utilizes external syndication, which is facilitated either internally or by WCS.
Under the factoring programs, WCS performs a risk analysis and allocates a nonrecourse credit limit for each customer. If the customer exceeds this credit limit, then the remaining amount is either factored with recourse or is not factored as certain jurisdictions do not allow factoring with recourse.
All transfers of receivables qualify as true sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 860, Transfers and Servicing and are therefore derecognized from our Combined Statement of Financial Position. These factoring arrangements are for goods and services sold by GET to third parties in the ordinary course of business, and cash inflows received as part of the transaction are recorded as an operating cash inflow. See Note 4 Related Party Transactions.
The Business does not have any material off-balance-sheet credit exposure related to our customers. See Note 11 Borrowings.

(I) | INVENTORIES

Inventories are stated at the lower of cost and net realizable values. Generally, production inventory including raw materials and work in process and finished goods inventory is valued at cost using a first-in, first-out (“FIFO”) basis.
As necessary, we record provisions and write-downs for excess, slow moving and obsolete inventory. To determine these amounts, we regularly review inventory quantities on hand and compare them to estimates of historical utilization, future product demand, market conditions, production requirements and technological developments.
Effective January 1, 2018, we voluntarily changed the cost flow assumption of the U.S. inventories that were previously measured on a last-in, first-out (“LIFO”) basis to FIFO basis. We believe the FIFO method is a preferable measure for our inventories as it is expected to better reflect the current value of inventory reported in the Combined Statement of Financial Position, improve the matching of cost of goods sold with related revenue and provide for greater consistency and uniformity across our operations with respect to the method of inventory valuation. The Business applied this change in accounting principle retrospectively to all prior periods presented herein in accordance with FASB ASC Topic 250, Accounting Changes and Error Corrections.
See Note 6 Inventories.

(J) | RESTRUCTURING COSTS

Costs of restructuring are accounted for in accordance with FASB ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation - Nonretirement Postemployment Benefits and other related pronouncements. ASC 420 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. ASC 712 requires employers to recognize the obligation to provide postemployment benefits if all of the following conditions are met: (a) if the obligation is attributable to employees' services already rendered, (b) employees' rights to those benefits accumulate or vest, (c) payment of the benefits is probable, and (d) the amount of the benefits can be reasonably estimated. If those four conditions are not met, the employer should account for postemployment benefits when it is probable that a liability has been incurred and the amount can be reasonably estimated. See Note 18 Restructuring and Other Activities for additional discussion.
11

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

(K) | SEGMENT REPORTING

We conduct our operations through three operating and reportable segments, which are generally organized based on product lines. Operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. The chief operating decision maker uses a variety of measures to assess the performance of the Business as a whole, depending on the nature of the activity. Operating activities are managed through three reportable segments: Equipment, Services and Digital. The performance of these three segments is principally measured based on revenues and operating profit. See Note 19 Segment Information and Major Customers.

(L) | PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment (“P&E”) is stated at cost and is depreciated over its estimated economic life. Subsequently, property, plant and equipment is measured at cost less accumulated depreciation and impairment losses.
P&E includes rotable assets used to support sales in our Services segment and are presented in the line item Machinery and equipment within P&E. These assets represent already-repaired equipment exchanged for equipment to be serviced, which in turn is repaired and kept for another exchange. Repair costs on rotable assets are expensed as incurred.
The Business incurs maintenance costs on our major equipment. Repair and maintenance costs are expensed as incurred. See Note 7 Property, Plant and Equipment, net.

(M) | GOODWILL

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is assigned to specific reporting units, and the Business tests goodwill for impairment at the reporting unit level at least annually or more frequently when facts or circumstances indicate an impairment may have occurred. A reporting unit is an operating segment, or one level below that operating segment (the component level), if discrete financial information is prepared and regularly reviewed by segment management. The Business also tests goodwill for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Business uses quantitative assessment or qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Business chooses to perform a qualitative assessment and concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a further quantitative fair value test is performed. The Business recognizes an impairment charge if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill based on the results of our quantitative tests. The market and income approach are used for estimating the fair values for our reporting units. See Note 8 Goodwill and Intangible Assets.

(N) | INTANGIBLE ASSETS, NET

All intangible assets of the Business other than goodwill are subject to amortization. The cost of intangible assets is amortized on a straight-line basis over their estimated useful lives. See Note 8 Goodwill and Intangible Assets.
INTERNAL USE SOFTWARE
Internal use software is software that is internally developed, purchased or modified to meet internal needs and for which no substantive plan exists to sell, lease or otherwise market the software externally. Software projects which meet this scope include internal software we use in running our business and software products developed to support certain revenue streams in our Digital segment (e.g., SaaS offerings). All costs associated with project tasks classified in the preliminary project development or post-implementation/operation stage are expensed as incurred. Capitalization of application development stage costs begin after both of the following occur:
12

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
(a) preliminary project development stage is completed, and (b) management authorizes and commits to funding the software project, and it is probable that the project will be completed and the software will be used for the purpose for which it was intended. Capitalization ceases when the project is substantially complete. Capitalized amounts are generally amortized using the straight-line method over the asset’s estimated economic life, which in most cases is five years, but does not exceed ten years.
EXTERNAL USE SOFTWARE
External use software is software that is (a) intended to be sold, licensed or marketed to our customers, or is (b) embedded and integral to our tangible products for which research and development has been completed. Costs that are related to the conceptual formulation and design of software are expensed as incurred. Costs that are incurred after technological feasibility has been established are capitalized as an intangible asset. Capitalized costs for software to be sold, leased, or otherwise marketed are amortized on an individual product basis. The annual amortization is the greater of the amount computed using (a) the ratio of current year gross revenues for a product to the total of current year and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated life of the product including the current year.
The Business performs reviews to ensure that unamortized capitalized software program costs remain recoverable from future revenue. See Note 8 Goodwill and Intangible Assets.

(O) | TRADE PAYABLES ACCELERATED PAYMENT PROGRAM

The Business’s North American operations, and certain of its suppliers, participate in accounts payable programs with GE Capital. Supplier invoices may be settled early by GE Capital to obtain early pay cash discounts. The Business settles its obligations by reimbursing GE Capital on the invoice’s contractual due date. As the payables in the Trade Payables Services (“TPS”) program relate to operating activities incurred in the ordinary course of business and retain the principal characteristics of a trade payable, the results of this program are included within operating activities in our Combined Statement of Cash Flows. See Note 4 Related Party Transactions.

(P) | RESEARCH AND DEVELOPMENT COSTS (“R&D”)

The Business conducts R&D activities to continually enhance our existing products and services, develop new products and services to meet our customer’s changing needs and requirements and address new market opportunities. R&D costs are expensed as incurred and amounted to $113,087 thousand, $175,020 thousand and $214,267 thousand for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in Costs of revenues. This includes direct R&D expenses as well as expenses incurred with the use of services from GE Global Research. See Note 4 Related Party Transactions.

(Q) | PENSION AND POSTRETIREMENT BENEFITS

Certain employees and retirees of the Business participate in pension and postretirement benefit plans sponsored by GE. These plans are accounted for in accordance with ASC Sub topic 715-80, Compensation – Retirement Benefits: Multiemployer Plans and Subtopic 715-20, Compensation – Retirement Benefits: Defined Benefit Plans respectively. See Note 17 Pension and Postretirement Benefit Plans.
13

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

(R) | FAIR VALUE MEASUREMENTS

The following sections describe the valuation methodologies the Business uses to measure financial and non-financial instruments accounted for at fair value in accordance with the fair value hierarchy as set forth in ASC 820, Fair Value Measurement and Disclosures.
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Business would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

| Level 1 - | Quoted prices for identical instruments in active markets.
| Level 2 - | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
| Level 3 - | Significant inputs to the valuation model are unobservable.

We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, the Business performs reviews to assess the reasonableness of the valuations. This detailed review may include the use of a third-party valuation firm.

(S) | RECURRING FAIR VALUE MEASUREMENTS

The following sections describe the valuation methodologies used to measure different financial instruments at fair value on a recurring basis.
FINANCIAL INSTRUMENTS – GENERAL
Our financial instruments include trade receivables, trade payables, short and long-term debt and derivative financial instruments. The estimated fair value of our financial instruments as of December 31, 2017 and 2016 approximates their carrying value as reflected in our combined financial statements. See Note 5 Current Receivables, net, Note 9 Prepaid Expenses and Other Current Assets, Note 10 Other Assets, Note 11 Borrowings and Note 14 Other Current Liabilities and Other Liabilities.
DERIVATIVES
The Business uses closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets. The majority of our derivatives are valued using internal models and are included in Level 2. Derivative assets and liabilities included in Level 2 are currency exchange contracts, foreign currency forward contracts, and commodity swap contracts.
All derivatives held as of December 31, 2017 and 2016 were valued using Level 2 inputs. See Note 2(W) Derivative Instruments and Hedging Activities.
There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016.

(T) | NON-RECURRING FAIR VALUE MEASUREMENTS

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, and equity method investments
14

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
and long-lived assets that are written down to fair value when they are impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs. The following sections describe the valuation methodologies the Business uses to measure those assets not measured on an ongoing fair value basis.
The following sections describe the valuation methodologies the Business uses to measure those assets not measured on an ongoing fair value basis.
EQUITY METHOD INVESTMENTS
Equity method investments are valued using market observable data such as quoted prices when available. When market observable data is unavailable, investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate and other third-party pricing sources. These investments are included in Level 3.
LONG-LIVED ASSETS
Long-lived assets, such as property, plant and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset's residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. The required undiscounted cash flow estimates are derived from our historical experience and our internal business plans. To determine fair value, the Business uses quoted market prices when available, our internal cash flow estimates discounted at an appropriate discount rate, or independent appraisals, as appropriate. Fair values of long-lived assets are primarily derived internally and are based on observed sales transactions for similar assets. These assets are generally included in Level 3. See Note 18 Restructuring and Other activities for impairments recognized related to long-lived assets.

(U) | INCOME TAXES

The Business is included in the consolidated U.S. federal, foreign and state income tax returns of GE, where applicable. The Business determines its current and deferred taxes based on the separate return method (i.e., as if the Business were a taxpayer separate from GE). All income taxes due to or due from the Business’s Parent that have not been settled or recovered by the end of the period are reflected in Note 13 Income Taxes as such balances will be maintained and settled. Any differences between actual amounts paid or received by the Business and taxes accrued under the separate return method have been reflected in Net parent investment.
The Business accounts for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities as well as from net operating losses and tax credit carryforwards, based on enacted tax rates expected to be in effect when taxes are actually paid or recovered and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. The Business currently intends to indefinitely reinvest earnings of our foreign subsidiaries with operations outside the U.S. and, accordingly, has not provided U.S. income tax on such earnings. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes it is not more likely than not to be realized.
Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. The Business operates in approximately 60 countries and our tax filings are subject to audit by the tax authorities in the jurisdictions where business is conducted. These audits may result in assessments of additional taxes that are resolved with the tax authorities or through the courts. The Business has
15

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
provided for the amounts believed that will ultimately result from these proceedings. The Business recognizes uncertain tax positions that are “more likely than not” to be sustained if the relevant tax authority were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, the Business measures the amount of tax benefit based on the largest amount of tax benefit that the Business has a greater than 50% chance of realizing in a final settlement with the relevant authority. The Business classifies interest and penalties associated with uncertain tax positions as interest expense and provision for income taxes, respectively, on the Combined Statement of Earnings. The effects of tax adjustments and settlements from taxing authorities are presented in these combined financial statements in the period they are recorded.
Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax, but may incur other taxes, such as withholding or state taxes. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Business. Most of these earnings have been reinvested in active non-U.S. business operations. At December 31, 2017, we have not changed our indefinite reinvestment decision as a result of U.S. tax reform, but will reassess this during the course of 2018; accordingly, we have not provided income tax on such earnings. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
Additionally, as part of U.S. tax reform, the U.S. has enacted a tax on “base eroding” payments from the U.S. and a minimum tax on foreign earnings (global intangible low-taxed income). Because aspects of the new minimum tax and the effect on our operations is uncertain and because aspects of the accounting rules associated with this provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.

(V) | COMMITMENTS AND CONTINGENCIES

Liabilities for loss contingencies arising from product warranties, claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 15 Commitments and Contingencies.

(W) | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Our business activities are conducted in diverse markets around the world. As a result, the Business is exposed to the impact of foreign currency exchange. See Note 4 Related Party Transactions. We use derivatives to manage a variety of risks, including risks related to commodity prices. The Business designates our derivative instruments as economic hedges and does not have any derivatives qualifying as hedges of fair value or cash flows. As the hedged item and the hedging derivative may not fully offset, there may be a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. See Note 12 Derivatives and Hedging.

(X) | RECENT ACCOUNTING PRONOUNCEMENTS REFLECTED IN THESE COMBINED FINANCIAL STATEMENTS

As our combined financial statements will be distributed to users of our financial statements on a carve-out basis for the first time in 2018, we have applied the following new guidance for these combined financial statements.
REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the FASB issued a new comprehensive set of revenue recognition principles (ASU No. 2014-09, Revenue from Contracts with Customers) that supersedes most existing U.S. GAAP revenue recognition guidance (including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts). The new standard became effective for annual reporting periods beginning after December 15, 2017. We have adopted the standard and applied it retrospectively to all periods presented. Refer to Note 3 Revenue Related to Contracts with Customers for more details.
16

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
CLASSIFICATION OF CERTAIN CASH RECEIPTS AND CASH PAYMENTS
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The standard addresses the classification and presentation of eight specific cash flow items that currently result in diverse practices including the requirement to present cash receipts from a transferor’s beneficial interest in securitized trade receivables to be classified as cash inflows from investing activities. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 and is applied on a retrospective basis. The Business has adopted the new guidance and applied it retrospectively to all periods presented in the Combined Statement of Cash Flows. The impact of adopting this standard did not have an effect on the Combined Statement of Cash Flows.
IMPROVEMENTS TO EMPLOYEE SHARE-BASED PAYMENT ACCOUNTING
On September 30, 2016, the Business adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which was intended to simplify several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the Combined Statement of Cash Flows. The Business adopted the standard on a prospective basis with the effect of adoption reflected for the interim periods after the year beginning January 1, 2016 as required by the standard. The primary effects of adoption were the recognition of excess tax benefits in our provision for income taxes rather than net parent investment and the reclassification of cash flows related to excess tax benefits from a financing activity to an operating activity for the periods beginning January 1, 2016. The Business will continue to estimate the number of awards that are expected to vest in our determination of the related periodic compensation cost. The impact of adopting this standard did not have a material effect on the provision for income taxes or the classification within the Combined Statement of Cash Flows.
IMPROVING THE PRESENTATION OF NET PERIODIC PENSION COST AND NET PERIODIC POSTRETIREMENT BENEFIT COST
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, with other cost components presented separately from the service cost component and outside of income from operations. Additionally, only the service cost component of net periodic pension benefit cost is eligible for capitalization when applicable. Provisions related to presentation of components of pension costs are to be applied retrospectively, while provisions related to cost capitalization must be applied prospectively. The provisions of this ASU are effective for annual periods beginning after December 15, 2017. The Business has adopted the new guidance and applied it retrospectively to all periods.
SIMPLIFYING OF THE MEASUREMENT OF INVENTORY
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), Simplifying of the Measurement of Inventory, which requires inventory not measured using the (LIFO) or retail inventory method, to change the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Currently, inventory measured using these methods is required to be subsequently measured at the lower of cost or market with market defined as replacement cost, net realizable value or net realizable value less a normal profit margin. This ASU eliminates the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. This pronouncement is effective for annual reporting periods beginning after December 15, 2016 and is applied on a retrospective basis. The Business has adopted the new guidance and applied it retrospectively to all periods presented in the Combined Statement of Financial Position. The impact of adopting this standard did not have a material effect on the Combined Statement of Financial Position.
17

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
SIMPLIFYING THE ACCOUNTING FOR MEASUREMENT-PERIOD ADJUSTMENTS
On January 1, 2016, we adopted ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminated the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The Business will recognize measurement-period adjustments when amounts are determined.
BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES
In November 2015, the FASB issued 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. In order to simplify the presentation of deferred income taxes, this ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment. This ASU is effective for annual and interim reporting periods beginning after December 15, 2016 and is applied on a retrospective basis. The Business has adopted the new guidance and applied it retrospectively to all periods presented in the Combined Statement of Financial Position.

(Y) | OTHER RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02), creating ASC Subtopic 842, Leases. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and for the interim and annual reporting periods thereafter, with early adoption permitted. The Business is currently evaluating the impact of the adoption of ASU 2016-02 on our financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU provides a new framework that will assist in the evaluation of whether business combination transactions should be accounted as acquisition of a business or a group of assets, as well as specifying the minimum required inputs and processes necessary to be a business. The provisions of this ASU are effective for years beginning after December 15, 2017. Any future acquisitions and disposals will be accounted for under these provisions.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill. This ASU simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation, and will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The new guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2019 and early adoption is permitted. The Business is currently evaluating the impact of the adoption of ASU 2017-04 on our financial position, results of operations and cash flows.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which amends existing guidance on income taxes to require the accounting for the income tax effects of intercompany sales and transfers of assets other than inventory when the transfer occurs. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The pronouncement is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted at the beginning of an annual period for which no financial statements have already been issued. This amendment is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Business will apply it on a modified retrospective basis.
18

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables and is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of the standard on our combined financial statements.

NOTE 3 | REVENUE RELATED TO CONTRACTS WITH CUSTOMERS

ADOPTION OF TOPIC 606 REVENUE FROM CONTRACTS WITH CUSTOMERS
All periods presented in the combined financial statements are presented under the FASB’s new accounting standard codification Topic 606 Revenue from Contracts with Customers as we elected the full retrospective method of adoption. Changes in accounting on a retrospective basis requires entities to restate their financial information as if the new accounting was always followed unless it is impracticable to do so. Certain of our CSA terms exceed 20 years making it impractical to restate this selection of contracts since their inception due to data limitations. As a result, contract balances prior to January 1, 2010 for these contracts were unadjusted for the impacts of the new revenue standard. We adjusted these balances prospectively from January 1, 2010 following our new accounting policies and procedures under the new revenue standard.
For the purposes of the financial statement display of Revenues and Costs of revenues in our Combined Statement of Earnings, “goods” include all sales of tangible products, and “services” include all other sales, including other services activities.
PERFORMANCE OBLIGATION IDENTIFICATION
The Business recognizes revenue as it satisfies its performance obligations to our customers. A single contract may have multiple performance obligations comprising multiple promises to our customers. We determine our performance obligations based on our customer’s intended use of our products and services including considering whether we are providing a significant integration service on our customer’s behalf. Non-complex products principally result in each completed product being a separate performance obligation recognized at a point in time. Complex products or services principally result in a single performance obligation as our customer is either procuring a bundled offering that is managed or utilized on a combined basis (e.g., software development solutions in our digital business) or there are multiple complex goods or services in the contract, which are substantially the same and recognized over time (e.g., CSAs or certain highly customized locomotives). When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price.
DETERMINATION OF WHEN REVENUE SHOULD BE RECOGNIZED
Revenue for each performance obligation is recognized when our customers obtain control of the underlying goods and services allowing them the ability to direct the use of and substantially obtain all of the remaining benefits. This may occur at a point in time or over time. Non-complex equipment sales manufactured for a broad market, such as platform locomotives, spare parts and other high volume transactional orders are principally recognized at a point in time, which is generally when title transfers to the customer. Services and complex equipment manufactured to a customer’s specification are principally recognized over time including CSAs, certain highly customized locomotives, premium propulsion systems, digital implementation projects and digital service offerings.
MANNER IN WHICH REVENUE IS RECOGNIZED FOR OVER TIME CONTRACTS
For those performance obligations recognized over time, we generally recognize revenue either using a straight-line or cost-to-cost measure. A cost-to-cost method is used when costs incurred directly correlates to the fulfillment of our performance obligation to our customers. Under this method of progress, we recognize revenue
19

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
based upon costs incurred at the estimated margin rate of the related performance obligation. Contract costs are generally accumulated in inventory, and therefore excluded from our measure of progress until the inventory practically or contractually cannot be utilized to fulfill another customer’s contract. Contract costs include direct labor, materials and subcontractors’ costs, as well as a reasonable allocation of indirect costs related to the service provided or good produced. Certain costs, such as non-recurring engineering, may also be specifically related to the contract, however, do not directly contribute to the transfer of control of the tangible product being created. These types of costs are accounted for as fulfillment costs and amortized proportionally to cost of sales rather than included in our measure of progress.
ESTIMATION PROCESS FOR CONTRACTS RECOGNIZED USING THE COST-TO-COST METHOD
The Business utilizes historical customer data, prior product performance data, statistical analysis, third party data, and internal management estimates to calculate contract-specific margins as our complex products require estimation of costs and certain of our arrangements, including CSAs, have variable billing terms based on customer utilization of the covered assets. While we believe our estimates and estimation processes are reasonable, there can be no assurances that changes in estimates will not occur in the future and such changes may be material. Changes in estimates are recorded in the current period based on a cumulative catch up approach, which recognizes the cumulative effect of the changes on current and prior periods based on the revised percentage of completion and estimated contract margin. The changes in estimates, principally within our CSA portfolio in Services, impacted revenue and operating income by approximately $38,019 thousand, $83,464 thousand and $15,452 thousand for fiscal years ended 2017, 2016 and 2015, respectively. If our estimation process anticipates a loss on the performance obligation, we reserve for the loss that we expect to incur when it is evident.
MANNER IN WHICH CONTRACT MODIFICATIONS ARE TREATED
Contract modifications are routine in the performance of our complex equipment and CSAs. Modifications that do not change the scope or price of the contract are commonly accounted for as a change in estimate to our existing performance obligation. Contract modifications that significantly change the scope and/or price of our contracts, most commonly in our CSAs, are accounted for prospectively.
DISAGGREGATION OF REVENUES
GEOGRAPHIC MARKETS

(In thousands) |  |  | Equipment |  |  | Services |  |  | Digital |  |  | Total |
U.S. | 2017 |  | $ | 775,008 |  |  | $ | 1,205,801 |  |  | $ | 200,556 |  |  | $ | 2,181,365 |
2016 |  |  | 1,317,493 |  |  |  | 1,296,111 |  |  |  | 224,155 |  |  |  | 2,837,759 |
2015 |  |  | 2,218,226 |  |  |  | 1,366,143 |  |  |  | 153,640 |  |  |  | 3,738,009 |
Europe | 2017 |  |  | 60,341 |  |  |  | 6,028 |  |  |  | 3,087 |  |  |  | 69,456 |
2016 |  |  | 22,462 |  |  |  | 7,154 |  |  |  | 826 |  |  |  | 30,442 |
2015 |  |  | 45,517 |  |  |  | 6,425 |  |  |  | 31,011 |  |  |  | 82,953 |
Asia | 2017 |  |  | 190,484 |  |  |  | 199,383 |  |  |  | 4,093 |  |  |  | 393,960 |
2016 |  |  | 174,085 |  |  |  | 180,959 |  |  |  | 3,996 |  |  |  | 359,040 |
2015 |  |  | 127,272 |  |  |  | 211,206 |  |  |  | 12,124 |  |  |  | 350,602 |
Other | 2017 |  |  | 742,135 |  |  |  | 475,743 |  |  |  | 67,649 |  |  |  | 1,285,527 |
2016 |  |  | 930,200 |  |  |  | 407,316 |  |  |  | 41,834 |  |  |  | 1,379,350 |
2015 |  |  | 789,927 |  |  |  | 415,966 |  |  |  | 44,022 |  |  |  | 1,249,915 |
Total revenue | 2017 |  | $ | 1,767,968 |  |  | $ | 1,886,955 |  |  | $ | 275,385 |  |  | $ | 3,930,308 |
2016 |  |  | 2,444,240 |  |  |  | 1,891,540 |  |  |  | 270,811 |  |  |  | 4,606,591 |
2015 |  |  | 3,180,942 |  |  |  | 1,999,740 |  |  |  | 240,797 |  |  |  | 5,421,479 |

Geographic market is defined as the “ship to” location.
20

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
CONTRACT AND OTHER DEFERRED ASSETS AND PROGRESS COLLECTIONS AND OTHER DEFERRED INCOME
Contract assets reflect revenues earned in excess of billings on our long-term contracts related to our equipment and CSAs. Contract liabilities reflects billings in excess of revenue recognized on similar agreements. Other deferred assets are fulfillment costs that principally relate to contractually required non-recurring engineering incurred during the initial design phase of a contract, which is recoverable over revenues generated as part of our production efforts. Recoverable costs are capitalized and amortized to Costs of revenues based on their expected pattern of benefit of the customers’ order. Amortization of fulfillment costs was approximately $23,828 thousand, $25,519 thousand and $23,329 thousand for fiscal periods ended 2017, 2016 and 2015, respectively.
Revenue recognized that was included in the contract liability at the beginning of the period was $570,651 thousand and $425,347 thousand for fiscal years ended 2017 and 2016, respectively.
CONTRACT AND OTHER DEFERRED ASSETS, NET
Contract and other deferred assets and progress collections, considering current and non-current classification, as of December 31, 2017 and 2016, are as follows:

|  | At December 31, |
(in thousands) |  | 2017 |  |  | 2016 |
Contractual service agreements(a) |  | $ | 416,199 |  |  | $ | 368,321 |
Equipment contract revenue(b) |  |  | 79,588 |  |  |  | 73,102 |
Deferred inventory costs(c) |  |  | 39,655 |  |  |  | 24,199 |
Total contract and other deferred assets |  | $ | 535,442 |  |  | $ | 465,532 |
Long-term contractual service agreements(a) |  | $ | 193,389 |  |  | $ | 227,610 |
Long-term equipment contract revenue(b) |  |  | 33,484 |  |  |  | 14,549 |
Long-term non-recurring engineering costs(d) |  |  | 86,868 |  |  |  | 84,539 |
Other |  |  | 7,651 |  |  |  | 30,533 |
Total long-term contract and other deferred assets |  | $ | 321,392 |  |  | $ | 357,231 |
Progress collections(e) |  | $ | 564,971 |  |  | $ | 660,036 |
Deferred income |  |  | 27,456 |  |  |  | 29,910 |
Total progress collections and deferred income |  | $ | 592,427 |  |  | $ | 689,946 |
Long-term progress collections(e) |  | $ | 20,740 |  |  | $ | 6,743 |
Long-term deferred income |  |  | 3,057 |  |  |  | 3,055 |
Total long-term progress collections and other deferred income |  | $ | 23,797 |  |  | $ | 9,798 |
Total contract and other deferred assets, net |  | $ | 240,610 |  |  | $ | 123,019 |

(a) | Reflects revenues earned in excess of billings on our CSAs in our Services segment.
(b) | Reflects revenues earned in excess of billings primarily on our long-term contracts to construct equipment principally in our Equipment and Digital segments.
(c) | Represents cost deferral for shipped goods and other costs for which the criteria for revenue recognition has not yet been met.
(d) | Includes fulfillment costs incurred prior to production (e.g., engineering costs specific to an individual customer’s contract) for long-term equipment production contracts, primarily within our Equipment segment, which are allocated proportionately over the life of the contract.
(e) | Includes billings in excess of revenue on our long-term equipment and CSAs.

The Contract assets and other deferred assets, net, increased by $122,690 thousand from December 31, 2016, which was due to revenue recognized for work performed exceeding billings, principally in our long-term equipment and CSAs. The increase included $38,019 thousand related to changes in contract estimates, principally in our CSAs.
21

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
REMAINING PERFORMANCE OBLIGATIONS
As of December 31, 2017, the aggregate amount of the transaction price allocated to the unsatisfied (or partially unsatisfied) performance obligations was $15,519,353 thousand. This amount excludes highly probable but uncommitted purchases from our customers that are not legally enforceable. We expect to recognize revenue as we satisfy the remaining performance obligations as follows:

| • | Equipment - total remaining performance obligations of $4,688,665 thousand of which 71% is expected to be satisfied within 5 year(s) and the remaining thereafter.
| • | Services - total remaining performance obligations of $10,263,026 thousand of which 52% is expected to be satisfied within 5 year(s), 80% within 10 year(s) and the remaining thereafter.
| • | Digital - total remaining performance obligations of $567,662 thousand of which 79% is expected to be satisfied within 5 year(s) and the remaining thereafter.

NOTE 4 | RELATED PARTY TRANSACTIONS

As discussed in Note 1 Description of Business and Basis of Presentation, GE provides the Business with a number of services. Some of these services are provided directly by GE, and others are managed by GE through third-party service providers. The cost of certain of these services is either (a) recognized through our allocated portion of GE’s Corporate Overhead, or (b) billed directly to the Business (such as most of our employee benefit costs). The cost of other services is included within the service itself, and the incremental cost for GE to provide the service is not discernible (such as payroll processing services included within the cost of payroll). In addition, we and our affiliates obtain a variety of goods (such as supplies and equipment) and services (such as GE Global Research Center) under various master purchasing and service agreements to which GE (and not the Business) is a party. We are billed directly for services we procure under these arrangements.
We receive an allocated share of GE’s Corporate Overhead for certain services that GE provides to the Business, but which are not specifically billed to the Business, such as public relations, investor relations, treasury, and corporate internal audit services. Costs of $27,163 thousand, $28,249 thousand and $32,599 thousand for the years ended December 31, 2017, 2016 and 2015, respectively, were recorded in our Combined Statement of Earnings for our allocated share of GE’s Corporate Overhead. The Business has related party revenues of $817 thousand, $279 thousand and $2,145 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. The majority of these sales were made by the Equipment segment to other GE industrial business units.
These combined financial statements include additional related party transactions with GE and GE entities that include the following:

| • | Amounts for due to / due from affiliates are recorded in Accounts payable and Current receivables, and are settled in cash. The Business has accounts payable resulting from amounts due to affiliates of $48,057 thousand and $70,008 thousand as of December 31, 2017 and 2016, respectively. The Business has current receivables resulting from amounts due from affiliates of $21,259 thousand and $9,295 thousand as of December 31, 2017 and 2016, respectively.
| • | The Business factors U.S. and non-U.S. receivables through WCS on a recourse and nonrecourse basis pursuant to various factoring and servicing agreements. The Business had factored receivables of $146,221 thousand and $216,967 thousand without recourse as of December 31, 2017 and 2016, respectively. The Business had factored receivables of $3,989 thousand and $4,509 thousand with recourse as of December 31, 2017 and 2016, respectively. For agreements with recourse, the Business establishes a bad debt reserve based on the aging policy discussed in Note 2(F) Current Receivables. Historically, the Business has outsourced our servicing responsibilities to Global Operations AR CoE for a market-based fee and therefore no servicing asset or liability has been recorded on the Combined

22

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
Statement of Financial Position as of December 31, 2017 and 2016. Under the programs, the Business incurred interest expense and finance charges of $19,943 thousand, $12,866 thousand and $6,355 thousand for the years ended December 31, 2017, 2016 and 2015, respectively, which are included in Other (expense) income.

| • | The Business’s North American operations participate in accounts payable programs with TPS. The Business’s liability associated with the funded participation in the accounts payable programs, which is presented as accounts payable within the Combined Statement of Financial Position, was $332,584 thousand and $364,655 thousand as of December 31, 2017 and 2016, respectively.
| • | The Business participates in GE Treasury centralized hedging and offsetting programs. See Note 12 Derivatives and Hedging.
| • | Employees of the Business participate in pensions and benefit plans that are sponsored by GE. See Note 17 Pension and Postretirement Benefit Plans.
| • | GE grants stock options, restricted stock units and performance share units to its group employees, including those of GE Transportation, under the GE Long-Term Incentive Plan. Compensation expense associated with this plan was $4,794 thousand, $6,881 thousand and $8,986 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
| • | Lease agreements are based on market terms. The Business incurs rent expense resulting from related party leases with GE or GE entities as lessor. See Note 16 Leases.
| • | All adjustments relating to certain transactions among the Business, GE and GE entities, which include the transfer of the balance of cash and equivalents to GE, transfer of the balance of cash held in cash pooling arrangements to GE, settlement of intercompany debt between the Business and GE or other GE entities and pushdown of all costs of doing business that were paid on behalf of the Business by GE or GE entities, are classified as Net parent investment.

NOTE 5 | CURRENT RECEIVABLES, NET

Current receivables, net, as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Customer receivables |  | $ | 86,882 |  |  | $ | 77,782 |
Due from GE |  |  | 21,259 |  |  |  | 9,295 |
Sundry receivables |  |  | 69,127 |  |  |  | 82,881 |
|  |  | 177,268 |  |  |  | 169,958 |
Less allowance for doubtful accounts |  |  | (4,882 | ) |  |  | (7,422 | )
Current receivables, net |  | $ | 172,386 |  |  | $ | 162,536 |

Sundry receivables primarily consist of value added tax receivables.

NOTE 6 | INVENTORIES

Inventories as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Raw materials and work in process |  | $ | 268,261 |  |  | $ | 405,154 |
Finished goods |  |  | 292,182 |  |  |  | 335,804 |
Total inventories |  | $ | 560,443 |  |  | $ | 740,958 |

23

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 7 | PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net as of December 31, 2017 and 2016 consist of the following:

|  | Depreciable Life (in years) |  |  | Original Cost |  |  | Net Carrying Value |
As of December 31 (In thousands) |  |  |  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Land and improvements |  | 8(a) |  |  | $ | 19,857 |  |  | $ | 23,230 |  |  | $ | 16,781 |  |  | $ | 18,467 |
Buildings, structures and related equipment |  | 8-40 |  |  |  | 565,076 |  |  |  | 518,375 |  |  |  | 337,978 |  |  |  | 336,369 |
Machinery and equipment(b) |  | 4-20 |  |  |  | 1,305,883 |  |  |  | 1,474,625 |  |  |  | 476,407 |  |  |  | 484,414 |
Leasehold costs and manufacturing plant under construction |  | 3-10 |  |  |  | 100,597 |  |  |  | 97,709 |  |  |  | 112,002 |  |  |  | 95,265 |
Total property, plant and equipment, net |  |  |  |  | $ | 1,991,413 |  |  | $ | 2,113,939 |  |  | $ | 943,168 |  |  | $ | 934,515 |
ELTO (net) |  |  |  |  | $ | 30,075 |  |  | $ | 220,011 |  |  | $ | 12,135 |  |  | $ | 23,586 |

(a) | Depreciable lives exclude land.
(b) | Equipment leased to others (“ELTO”) is presented in the line item Machinery and equipment. This is equipment we own that is available to lease to customers and is stated at cost less accumulated depreciation.

In 2017, GE Transportation had an asset disposition as part of a sale to a customer with a carrying value of $25,297 thousand and recognized a gain on the sale of $203 thousand. The gain on sale is reflected in the Combined Statement of Earnings in Other (expense) income. This asset was included in our Services reportable segment. Based on estimated cash flows from the potential sale of the asset, an impairment loss of $2,203 thousand was recorded during the year ended December 31, 2017. The impairment loss was recorded on the Combined Statement of Earnings in Selling, general and administrative expenses.
In 2016, GE Transportation sold locomotives categorized as ELTO with a carrying value of $14,090 thousand and recognized a gain on the sale of $11,476 thousand. The gain on sale is included in the Combined Statement of Earnings in Other (expense) income.
Total depreciation expense was $112,283 thousand, $171,776 thousand and $172,454 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. In addition, restructuring activities in the Business related to underground mining actions, structural cost actions in our Erie manufacturing plant, the exit of a legacy manufacturing facility for a discontinued product line, and the shutdown of our mining leasing business impacted the decline in original cost from 2016 to 2017. Refer to Note 18 Restructuring and other activities for additional details.

NOTE 8 | GOODWILL AND INTANGIBLE ASSETS

GOODWILL
After initial recognition, goodwill is measured net of any accumulated impairment losses. Changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016, by reportable segment, are as follows:

(In thousands) |  | Equipment |  |  | Services |  |  | Digital |  |  | Total |
Balance at December 31, 2015(a) |  | $ | 2,027 |  |  | $ | 112,483 |  |  | $ | 135,594 |  |  | $ | 250,104 |
Acquisitions and purchase accounting adjustments |  |  | — |  |  |  | — |  |  |  | 41,433 |  |  |  | 41,433 |
Impairments, currency translation, and other |  |  | (2,027 | ) |  |  | — |  |  |  | — |  |  |  | (2,027 | )
Balance at December 31, 2016 |  | $ | — |  |  | $ | 112,483 |  |  | $ | 177,027 |  |  | $ | 289,510 |
Acquisitions and purchase accounting adjustments |  |  | — |  |  |  | — |  |  |  | (6,886 | ) |  |  | (6,886 | )
Impairments, currency translation, and other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance at December 31, 2017 |  | $ | — |  |  | $ | 112,483 |  |  | $ | 170,141 |  |  | $ | 282,624 |

(a) | Goodwill is reported net of $286,388 thousand of accumulated impairments at December 31, 2015, all of which occurred in the Equipment segment.

24

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
In performing the annual goodwill impairment test during 2017, we determined that the fair value of the reporting units was more than their carrying amounts. Therefore, no further impairment testing was required and no goodwill impairment was recognized during the fiscal year. As of December 31, 2017, we believe that goodwill is recoverable for all of the reporting units; however, there can be no assurance that the goodwill will not be impaired in future periods.
In 2016 and 2015, we recorded a $2,027 thousand and $85,421 thousand impairment charge, respectively, to a reporting unit within the Equipment reportable segment. The impairment charge was a direct result of a multi-year suppressed global commodities market and the related effect on the global mining investment environment that caused us to revise the expected cash flows of the reporting units. The impairment losses were recorded on the Combined Statement of Earnings in Impairment of goodwill and represented a complete impairment of goodwill in the Equipment reportable segment.
OTHER INTANGIBLE ASSETS
Intangible assets and accumulated amortization as of December 31, 2017 and 2016 consist of the following:

|  |  |  |  | 2017 |  |  | 2016 |
As of December 31 (In thousands) |  | Useful Life (in years) |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net |
Customer-related |  |  | 11-20 |  |  | $ | 21,860 |  |  | $ | (7,636 | ) |  | $ | 14,224 |  |  | $ | 40,876 |  |  | $ | (12,172 | ) |  | $ | 28,704 |
Patents & technology |  |  | 7-11 |  |  |  | 56,866 |  |  |  | (21,419 | ) |  |  | 35,447 |  |  |  | 87,449 |  |  |  | (49,747 | ) |  |  | 37,702 |
Capitalized software - internal-use |  |  | 5 |  |  |  | 211,209 |  |  |  | (116,151 | ) |  |  | 95,058 |  |  |  | 208,467 |  |  |  | (93,348 | ) |  |  | 115,119 |
Capitalized software - external |  |  | 5-10 |  |  |  | 130,245 |  |  |  | (20,358 | ) |  |  | 109,887 |  |  |  | 88,325 |  |  |  | (16,087 | ) |  |  | 72,238 |
Trademarks & other |  |  | 18-30 |  |  |  | 286 |  |  |  | (0 | ) |  |  | 286 |  |  |  | 6,887 |  |  |  | (2,740 | ) |  |  | 4,147 |
Total |  |  |  |  |  | $ | 420,466 |  |  | $ | (165,564 | ) |  | $ | 254,902 |  |  | $ | 432,004 |  |  | $ | (174,094 | ) |  | $ | 257,910 |

During 2017 and 2016, we recorded additions to intangible assets subject to amortization of $61,882 thousand and $72,400 thousand, respectively, primarily driven by capitalized software.
Amortization expense related to intangible assets subject to amortization was $71,728 thousand, $47,852 thousand and $36,445 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
Estimated annual amortization for intangible assets over the next five calendar years consists of the following:

(In thousands) |  | 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022 |
Estimated annual amortization expense |  | $ | 54,526 |  | $ | 54,745 |  | $ | 43,535 |  | $ | 37,036 |  | $ | 32,689 |

NOTE 9 | PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Derivative assets |  | $ | 3,303 |  |  | $ | 9,172 |
Miscellaneous deferred charges |  |  | 36,807 |  |  |  | 31,179 |
Prepaid insurance and other |  |  | 6,080 |  |  |  | 10,494 |
Income tax receivable |  |  | 179,394 |  |  |  | 115,937 |
Other |  |  | 696 |  |  |  | 18,633 |
Prepaid expenses and other current assets |  | $ | 226,280 |  |  | $ | 185,415 |

25

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 10 | OTHER ASSETS

Other assets as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Associated companies |  | $ | 56,428 |  |  | $ | 6,859 |
Other assets(a) |  |  | 21,331 |  |  |  | 14,136 |
Total other assets |  | $ | 77,759 |  |  | $ | 20,995 |

(a) | Other assets consists of long-term prepaid expenses, advances to suppliers and non-current value added tax receivables.

NOTE 11 | BORROWINGS

SHORT-TERM BORROWINGS
Beginning in September 2014, the Business entered into a series of unsecured loans with BNDES, a Brazilian Development Bank. The Business receives financing using local resources from this bank. The amounts outstanding under these loans as of December 31, 2017 and 2016 classified as short-term borrowings is $0 and $21,195 thousand, respectively. As of December 31, 2017, all of the BNDES loans had been paid in full and terminated. The weighted-average interest rate as of December 31, 2016 was 8.36%. Interest expense recognized for these loans was $1,824 thousand, $5,183 thousand and $2,336 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense is included within Other (expense) income in the Combined Statement of Earnings.
LONG-TERM BORROWINGS
In November 2012, the Business entered into two unsecured term loans with General Electric Europe Holdings C.V. for a total of $131,545 thousand. The debt was related to the acquisition of Industrea Limited, a move that expanded the Business’s product offering to the underground mining space. The estimated fair value approximates the carrying value. The debt carried a 5.07% interest rate, paid annually for the first year, with the interest rate resetting on the anniversary of the loan to the mid-rate of the one year swap rate plus a credit spread of 200 basis points. In November 2015, the Business extended both agreements by five years from the day of signing to a maturity date in November 2020 and amended the interest rate to the mid-rate of the one year swap rate plus a credit spread of 175 basis points. In May and November 2017, the Business terminated both loans early utilizing cash pool resources. Interest included in interest expense for long-term borrowings, including the current portion, is $2,377 thousand, $5,950 thousand and $8,043 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense is included within Other (expense) income in the Combined Statement of Earnings.
In September 2017, the Business entered into an unsecured loan facility agreement with Wipro GE Healthcare Private Limited to fund various ongoing projects and operational requirements. The loan has a total value of $68,703 thousand, disbursed in three tranches. As of December 31, 2017 the first two tranches had been disbursed with a total value of $44,256 thousand. The final tranche will be disbursed in January 2018. The loan carries an 8% annual interest rate, paid quarterly until the maturity of the loan in January 2020. Interest included in interest expense for long-term borrowings, including the current portion, is $588 thousand, $0 thousand and $0 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense is included within Other (expense) income in the Combined Statement of Earnings.
Due to the nature and terms of the debt, the Business carries the debt at face value and did not recognize a discount or premium at issuance. The current portion of long-term debt is included in Short-term borrowings, and the non-current portion of the debt is included in Long-term borrowings. The amounts outstanding under the long-term borrowings as of December 31, 2017 and 2016 are reflected in the table below.
26

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
LETTERS OF CREDIT
As of December 31, 2017 and 2016, the Business has off-balance sheet credit exposure for unused letters of credit, bank guarantees, bid bonds, and surety bonds of approximately $532,196 thousand and $453,750 thousand, respectively.
Borrowings as of December 31, 2017 and 2016 consist of the following:
Short-term borrowings

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Current portion of long-term borrowings |  | $ | 45 |  |  | $ | 120 |
Bank borrowings and other |  |  | — |  |  |  | 21,620 |
Total short-term borrowings |  | $ | 45 |  |  | $ | 21,740 |

Long-term borrowings

As of December 31 (In thousands) |  |  |  |  | 2017 |  |  | 2016 |
|  | Maturities |  |  |  |  |  |  |
Long-term portion of borrowings |  |  | 2019-2020 |  |  | $ | 44,257 |  |  | $ | 92,772 |
Total long-term borrowings |  |  |  |  |  | $ | 44,257 |  |  | $ | 92,772 |

Total interest expense and other finance charges were $21,805 thousand, $20,002 thousand and $14,712 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense includes expense related to current receivable factoring programs. See Note 4 Related Party Transactions.

NOTE 12 | DERIVATIVES AND HEDGING

Economic hedges are not designated as hedged from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship), but otherwise serve the same economic purpose as other hedging arrangements. We use economic hedges when we have exposures to currency exchange risk for which we are unable to meet the requirements for hedge accounting or when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative-making hedge accounting unnecessary. Even though the derivative is an effective economic hedge, there may be a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. Notional amounts outstanding are approximately $332,821 thousand and $240,589 thousand as of December 31, 2017 and 2016, respectively.
The following table provides information about the fair value of our derivatives, by contract type and the accounts in the Combined Statement of Financial Position in which the balances are presented:

| At December 31, |
| 2017 |  | 2016 |
(In thousands) |  | Prepaid expenses and other current assets |  | Other current liabilities |  | Prepaid expenses and other current assets |  | Other current liabilities |
| Fair Value |
Currency exchange and commodity contracts |  | $ | 3,303 |  |  | $ | 6,372 |  |  | $ | 9,172 |  |  | $ | 8,056 |

Derivative instruments are principally administered by GE and the (losses) gains are $(9,210) thousand, $(25,804) thousand and $32,414 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. These (losses) gains are included in Other (expense) income.
27

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 13 | INCOME TAXES

The tax provisions have been prepared on a separate return basis as if the Business was a separate group of companies under common ownership. The operations have been combined as if the Business was filing on a consolidated basis for U.S. Federal, U.S. state and non-U.S. income tax purposes, where allowable by law. The Business is subject to regulation under a wide variety of U.S. federal, U.S. state and non-U.S. tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations.
COMBINED EARNINGS (LOSS) BEFORE INCOME TAXES

(In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
U.S. |  | $ | 280,346 |  |  | $ | 619,667 |  |  | $ | 839,500 |
Non-U.S. |  |  | 152,053 |  |  |  | 87,850 |  |  |  | (2,601 | )
Total earnings |  | $ | 432,399 |  |  | $ | 707,517 |  |  | $ | 836,899 |

COMBINED EXPENSE (BENEFIT) PROVISION FOR INCOME TAXES

(In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Current |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | 70,879 |  |  | $ | 61,949 |  |  | $ | 248,238 |
U.S. State and Local |  |  | 20,202 |  |  |  | 33,362 |  |  |  | 43,290 |
Non-U.S. |  |  | 92,028 |  |  |  | 55,838 |  |  |  | 48,411 |
Deferred |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | (118,361 | ) |  |  | 7,305 |  |  |  | (14,775 | )
U.S. State and Local |  |  | (1,564 | ) |  |  | 5,088 |  |  |  | (1,151 | )
Non-U.S. |  |  | (18,881 | ) |  |  | 3,886 |  |  |  | 25,262 |
Total |  | $ | 44,303 |  |  | $ | 167,428 |  |  | $ | 349,275 |

RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX RATE

(In thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Income before taxes |  | $ | 432,399 |  |  | $ | 707,517 |  |  | $ | 836,899 |
Tax expected at 35% |  |  | 151,340 |  |  |  | 247,631 |  |  |  | 292,915 |
Foreign operations and Foreign Tax Credits |  |  | 843 |  |  |  | (119,780 | ) |  |  | (675 | )
State taxes |  |  | 12,115 |  |  |  | 24,992 |  |  |  | 27,662 |
U.S. Tax Reform |  |  | (108,714 | ) |  |  | — |  |  |  | — |
Domestic manufacturing deduction benefits |  |  | (2,610 | ) |  |  | (16,214 | ) |  |  | (19,843 | )
Research & Development benefits |  |  | (4,147 | ) |  |  | (1,601 | ) |  |  | (3,223 | )
Valuation allowance |  |  | 6,459 |  |  |  | 25,794 |  |  |  | 50,441 |
Other |  |  | (10,983 | ) |  |  | 6,606 |  |  |  | 1,998 |
Total income tax |  | $ | 44,303 |  |  | $ | 167,428 |  |  | $ | 349,275 |
Actual Income tax rate |  |  | 10 | % |  |  | 24 | % |  |  | 42 | %

UNRECOGNIZED TAX POSITIONS
The Business is under continuous examination by the Internal Revenue Service (IRS), various U.S. state taxing authorities, and non-U.S. taxing authorities as part of the audit of GE’s tax returns. The IRS is currently auditing GE's consolidated U.S. income tax returns for 2012-2013 and has begun the audit for 2014-2015. During 2015,
28

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
the IRS completed the audit of GE's consolidated U.S. income tax returns for 2010-2011, except for certain issues that were completed in 2016. We believe that there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to the results of operations, financial position or cash flows. We further believe that we have made adequate provisions for all income tax uncertainties.
The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were as follows:
UNRECOGNIZED TAX BENEFITS

Liability (In thousands) |  | 2017 |  |  | 2016 |
Unrecognized tax benefits |  | $ | (5,717 | ) |  | $ | (4,802 | )
Accrued interest on unrecognized tax benefits |  |  | (2,222 | ) |  |  | (2,565 | )
Accrued penalties on unrecognized tax benefits |  |  | (1,446 | ) |  |  | (1,629 | )
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months |  |  | — |  |  |  | — |
Portion that, if recognized, would reduce tax expense and effective tax rate |  |  | (5,717 | ) |  |  | (4,802 | )

UNRECOGNIZED TAX BENEFITS RECONCILIATION

(In thousands) |  | 2017 |  |  | 2016 |
Balance at January 1 |  | $ | (4,802 | ) |  | $ | (4,465 | )
Additions for tax positions of the current year |  |  | — |  |  |  | — |
Additions for tax positions of prior years |  |  | (1,320 | ) |  |  | (561 | )
Reductions for tax positions of prior years |  |  | 405 |  |  |  | 224 |
Settlements with tax authorities |  |  | — |  |  |  | — |
Expiration of the statute of limitations |  |  | — |  |  |  | — |
Balance at December 31 |  | $ | (5,717 | ) |  | $ | (4,802 | )

At December 31, 2017, we had $5,717 thousand of unrecognized tax benefits. In addition, we have accrued interest and penalties of $2,222 thousand and $1,446 thousand, respectively. The amount of unrecognized tax benefits that would impact the effective tax rate would be $5,717 thousand. Additionally, none of the amount of unrecognized tax benefits are expected to change in the next twelve months. We classify interest on tax deficiencies as interest expense; we classify income tax penalties as a provision for income taxes.
DEFERRED INCOME TAXES
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. GE Transportation did not operate as a stand-alone entity in the past and, accordingly, tax losses, receivables and other deferred tax assets included in the combined carve-out financial statements on a separate return basis may not be available upon separation of the Business from GE.
We regularly evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce the deferred tax assets to an amount that is more likely than not to be realized (a likelihood of more than 50 percent). Significant judgment is required to determine whether a valuation allowance is necessary and the amount of such valuation allowance. In assessing the recoverability of our deferred tax assets at December 31, 2017, we considered all available evidence, including the nature of financial statement losses and reversing taxable temporary differences and future operating profits.
29

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
Aggregated deferred income tax amounts are summarized below.
DEFERRED INCOME TAX AMOUNTS

(In thousands) |  | 2017 |  |  | 2016 |
Assets |  | $ | 6,770 |  |  | $ | 1,322 |
Liabilities |  |  | (173,513 | ) |  |  | (303,526 | )
Net deferred income tax (liability) |  | $ | (166,743 | ) |  | $ | (302,204 | )

COMPONENTS OF THE NET DEFERRED INCOME TAX ASSET LIABILITY

(In thousands) |  | 2017 |  |  | 2016 |
Deferred tax assets |  |  |  |  |  |
Goodwill & other intangibles |  | $ | 88,232 |  |  | $ | 72,246 |
Operating loss carryforwards |  |  | 56,783 |  |  |  | 54,098 |
Employee benefits |  |  | 12,373 |  |  |  | 16,230 |
Other |  |  | — |  |  |  | 319 |
Total deferred income tax asset |  |  | 157,388 |  |  |  | 142,893 |
Valuation allowances |  |  | (150,618 | ) |  |  | (141,571 | )
Total deferred income tax asset after valuation allowance |  | $ | 6,770 |  |  | $ | 1,322 |
Deferred tax liabilities |  |  |  |  |  |  |  |
Goodwill and other intangibles |  | $ | (21,888 | ) |  | $ | (32,185 | )
Property |  |  | (80,075 | ) |  |  | (162,055 | )
Receivables |  |  | (41,374 | ) |  |  | (73,755 | )
Inventory |  |  | (3,433 | ) |  |  | (25,468 | )
Other accrued expenses |  |  | (15,059 | ) |  |  | (10,063 | )
Other |  |  | (11,684 | ) |  |  | — |
Total deferred income tax liability |  | $ | (173,513 | ) |  | $ | (303,526 | )
Net deferred income tax liability |  | $ | (166,743 | ) |  | $ | (302,204 | )

NET OPERATING LOSSES
At December 31, 2017 and 2016, the Business had net operating loss carryforwards of approximately $191,063 thousand and $181,672 thousand, respectively. The net operating loss carryforwards result in a deferred tax asset of $56,783 thousand and $54,098 thousand at December 31, 2017 and 2016. The majority of the net operating losses are located in Australia where losses can be carried forward indefinitely.
UNDISTRIBUTED EARNINGS
Substantially all of our undistributed earnings of our foreign subsidiaries are indefinitely reinvested. Due to the enactment of U.S. tax reform, repatriations of foreign earnings will generally be free of U.S. federal tax but may incur other taxes such as withholding or state taxes. Indefinite reinvestment is determined by management’s intentions concerning the future operations of the Business. Most of these earnings have been reinvested in active non-U.S. business operations, and we do not intend to repatriate these earnings to fund U.S. operations. In addition, as a result of U.S. tax reform, substantially all of our prior unrepatriated foreign earnings were subject to U.S. tax, and accordingly we expect to have the ability to repatriate those earnings without incremental U.S. federal tax cost. As of December 31, 2017, the cumulative amount of indefinitely reinvested foreign earnings is approximately $278,956 thousand. Computation of any deferred tax liability associated with these undistributed earnings and any other basis differences is not practicable.
30

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
TAX REFORM
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. tax reform”) that lowers the statutory tax rate on our U.S. earnings, taxes historic foreign earnings at a reduced rate of tax, creates a territorial tax system and enacts new taxes associated with global operations. The impact of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax on historic foreign earnings. Future guidance could impact the information required for and the calculation of the transition tax charge and could affect decisions on timing of various U.S. and foreign items which would further impact the final 2017 amounts included in the transition charge and the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for tax reform could affect the provisional estimate.
The U.S. has also enacted a minimum tax on foreign earnings (“global intangible low-taxed income”). Because we have tangible assets outside the U.S. and pay a rate of foreign tax above the minimum tax rate, we are not expecting a significant increase in tax liability from this new U.S. minimum tax. Because aspects of the new law and the effect on our operations is uncertain and because aspects of the accounting rules associated with these taxes have not been resolved, our deferred tax may be affected by these or other newly enacted provisions of U.S. law. Pending further accounting guidance and analysis, we have not made a provisional accrual for the deferred tax effects of the tax on base eroding payments and the tax on global intangible low-taxed income.
Included in 2017 is a tax charge of $5,454 thousand for the provisional estimate associated with the transition tax on historic foreign earnings under U.S. Tax Reform. Also, included in 2017 is a tax benefit of $114,168 thousand for the provisional estimate associated with the U.S. tax rate change. We expect to finalize these amount during 2018 as additional guidance is released by the U.S. Department of the Treasury and as we make final decisions and computations based on that guidance. In addition, there may be additional guidance during 2018 on the tax on base erosion payments and the tax on global intangible lower-taxed income. As these amounts are updated and analysis and conclusions to be performed as part of the U.S. tax return process are completed, the effect of revaluation of deferred taxes will also be finalized.

NOTE 14 | OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

OTHER CURRENT LIABILITIES
Other current liabilities as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Employee related liabilities(a) |  | $ | 90,801 |  |  | $ | 105,796 |
Derivative liabilities |  |  | 6,372 |  |  |  | 8,056 |
Discounts and allowances |  |  | 14,132 |  |  |  | 2,593 |
Accrued taxes |  |  | 47,113 |  |  |  | 41,642 |
Accrued costs for freight, utility & other |  |  | 28,563 |  |  |  | 30,735 |
Warranties |  |  | 49,564 |  |  |  | 25,672 |
Restructuring and sundry losses(b) |  |  | 24,032 |  |  |  | 17,689 |
Other current liabilities(c) |  |  | 22,146 |  |  |  | 9,118 |
Total other current liabilities |  | $ | 282,723 |  |  | $ | 241,301 |

(a) | Employee related liabilities are largely comprised of payroll, employee compensation and benefits, pension and other postretirement benefit obligations.
(b) | Restructuring accruals and accruals for legal costs arising from claims, assessments, litigation, fines and penalties and other sources and are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. See Note 18 Restructuring and Other Activities.
(c) | Other current liabilities primarily consists of professional fees and various other accruals.

31

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
OTHER LIABILITIES
Other liabilities as of December 31, 2017 and 2016 consist of the following:

As of December 31 (In thousands) |  | 2017 |  |  | 2016 |
Employee related liabilities(a) |  | $ | 27,135 |  |  | $ | 31,374 |
Sundry losses(b) |  |  | 8,503 |  |  |  | 11,973 |
Warranties |  |  | 30,753 |  |  |  | 75,820 |
Tax related liabilities(c) |  |  | 7,163 |  |  |  | 6,431 |
Other liabilities(d) |  |  | 18,637 |  |  |  | 16,891 |
Total other liabilities |  | $ | 92,191 |  |  | $ | 142,489 |

(a) | Employee related liabilities are largely comprised of long-term employee compensation programs.
(b) | Consists of accruals for legal costs and various other accruals.
(c) | Consists of reserves for uncertain tax positions.
(d) | Other liabilities primarily consist of holdbacks and earn-outs.

NOTE 15 | COMMITMENTS AND CONTINGENCIES

WARRANTY OBLIGATIONS
As part of our product sales we provide standard warranty coverage to our customers as part of customary practices in the market to provide assurance that the equipment sold will comply with agreed upon specifications and such standard warranty at the time of sale is limited to fixing product defects. Issuance of a product warranty constitutes a commitment, which must be accrued as a loss contingency if expenditures under the warranty are both probable and reasonably estimable. The Business provides for estimated product warranty expenses when the related product sale is recognized. Additionally, we may elect certain corrective actions, at our expense, for certain product-related matters impacting our product portfolios. Warranty obligations are recognized for these matters when we commit to these corrective actions and they are estimable. Because warranty estimates are forecasts that are based on the best available information, primarily based on historical warranty claims experience and outstanding warranty period, claims costs may differ from amounts provided.

(In thousands) |  | 2017 |  |  | 2016 |
Balance at January 1 |  | $ | 101,492 |  |  | $ | 120,172 |
Current year provisions |  |  | 54,346 |  |  |  | 50,359 |
Utilizations and other |  |  | (75,521 | ) |  |  | (69,039 | )
Balance at December 31 |  | $ | 80,317 |  |  | $ | 101,492 |

Approximately 38% and 75% of warranty costs as of December 31, 2017 and 2016, respectively, are expected to be incurred beyond 12 months and therefore are classified as a long-term liability in Other liabilities. Refer to Note 14 Other Current Liabilities and Other Liabilities.
GUARANTEES
The Business provides guarantees in the ordinary course of business. The Business believes the likelihood is remote that any such arrangements could have a significant adverse effect on these combined financial statements of the Business. The Business records liabilities for guarantees at estimated fair value, generally the amount of the premium received, or if we do not receive a premium, the amount based on appraisal, observed market values or discounted cash flows, which are zero as of December 31, 2017 and 2016. The Business has off-balance sheet credit exposure through standby letters of credit, bank guarantees, bid bonds, and surety bonds. See Note 11 Borrowings. In addition, our Parent may provide the Business with parent company guarantees in certain jurisdictions where we lack the legal structure to issue the requisite guarantees required on certain projects. We are charged by our Parent the fair market value of such guarantees.
32

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
LITIGATION
The Business is subject to a variety of legal proceedings and legal compliance risks in all parts of the world where the Business operates or buys or sells its equipment and services. The Business has adopted appropriate risk management and compliance programs to address these and other matters that may arise from time to time. The global and diverse nature of our business and the changing enforcement environments in which it operates, means the Business will continue to face legal and compliance risks, the nature and outcome of which cannot be predicted with certainty. Currently, management believes there are no legal contingencies that are likely to have a material effect on the Business's Combined Statements of Financial Position, Earnings, or Cash Flows.
In late November 2017, staff of the Boston office of the U.S. Securities & Exchange Commission (SEC) notified GE that they are conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. We have provided documentation to Parent regarding our long-term service agreement practices. Parent is providing documents and other information requested by the SEC staff, and our Parent is cooperating with their ongoing investigation.
OTHER CONTRACTUAL COMMITMENTS
We also had commitments outstanding for purchase obligations, which represents take-or-pay contracts as well as purchase orders for goods and services utilized in the normal course of business such as capital expenditures, inventory and services under contracts.
At December 31, 2017, we had the following purchase commitments:

(In thousands) |  | 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022 |
Purchase obligations |  | $ | 19,436 |  | $ | 90 |  | $ | — |  | $ | 22,669 |  | $ | 1,300 |

OTHER LOSS CONTINGENCIES
Other loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Suzch contingencies include, but are not limited to, environmental obligations, litigation, regulatory proceedings, product quality and losses resulting from other events and developments.
When a loss is considered probable and reasonably estimable, a liability is recorded in the amount of GE Transportation’s best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low end of such range. However, the likelihood of a loss, with respect to a contingency, is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure is provided.
Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. GE Transportation regularly reviews all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss, or range of loss, can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with, or decisions by, third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
33

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 16 | LEASES

LEASE COMMITMENTS
The Business is a lessee under various cancelable and non-cancelable operating lease arrangements for facilities, information technology, fleet, and other equipment having terms, which expire on various dates. Rent expense for third party leases was $23,274 thousand, $28,255 thousand and $30,411 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. We did not enter into any significant capital leases during the three years ended December 31, 2017.
Future minimum lease payments on non-cancelable operating lease arrangements, net of amounts due under subleases, as of December 31, 2017, consist of the following:

For the years ended December 31 (In thousands) |  | Total |
Due in |  |  |
2018 |  | $ | 23,670 |
2019 |  |  | 15,081 |
2020 |  |  | 9,002 |
2021 |  |  | 8,641 |
2022 |  |  | 7,274 |
2023 and thereafter |  |  | 36,429 |
Total |  | $ | 100,097 |

This table excludes arrangements with GE and GE entities, which are cancelable at the option of the Business. Rent of approximately $5,828 thousand was paid to GE for these leases for the year ended December 31, 2017, which was generally consistent with prior years. See Note 4 Related Party Transactions.

NOTE 17 | PENSION AND POSTRETIREMENT BENEFIT PLANS

Certain employees are covered under GE’s retirement plans (e.g. pension, retiree health and life insurance). In addition, certain Canadian employees participate in the GE Canada Defined Benefit Pension Plan as well as the Canada Postretirement Benefits.
The Business is allocated relevant participation costs for these GE employee benefit plans by GE. As such, the Business has not recorded any liabilities associated with our participation in this multi-employer plan in our Combined Statement of Financial Position as of December 31, 2017 and 2016.
Expenses associated with our employees’ participation in the U.S. GE pension and postretirement benefit plans are $77,965 thousand, $86,285 thousand and $108,647 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Expenses associated with our employees’ participation in the GE Canada Defined Benefit Pension Plan and Canada Postretirement Benefits are $1,019 thousand, $1,015 thousand and $1,792 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.

NOTE 18 | RESTRUCTURING AND OTHER ACTIVITIES

The Business plans for restructuring initiatives to be completed within one year from the date the plan is effective. Restructuring actions are an essential component of our improvement efforts to both existing operations and those recently acquired, and there have been several initiatives in recent years as we have right-sized our businesses for changing market conditions.
Restructuring and other charges relate primarily to workforce reductions, facility exit costs associated with the consolidation of sales, service and manufacturing facilities, and other asset write-downs. The Business continues to closely monitor the economic environment and may undertake further restructuring actions to more closely align our cost structure with earnings goals.
34

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
The Business’s restructuring activities include consolidation of footprint and workforce reductions and realignment. In 2017 and 2016, restructuring activities were primarily in the U.S., Mexico, Canada, Australia, Chile and Brazil. In 2015, restructuring activities were primarily in the U.S., Canada, Mexico, Brazil and Australia. Restructuring expenses and related charges for the years ended December 31, 2017, 2016 and 2015 consist of the following:

|  | For the years ended December 31 |
(In Thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Equipment |  |  |  |  |  |  |  |  |
Asset impairment |  | $ | 73,576 |  |  | $ | 81,774 |  |  | $ | 3,922 |
Contract termination costs |  |  | 33 |  |  |  | 19,359 |  |  |  | — |
Employee separation expense |  |  | 24,522 |  |  |  | 29,375 |  |  |  | 8,861 |
Total Equipment |  | $ | 98,131 |  |  | $ | 130,508 |  |  | $ | 12,783 |
Services |  |  |  |  |  |  |  |  |  |  |  |
Asset impairment |  |  | 12,748 |  |  |  | 21,141 |  |  |  | 68 |
Contract termination costs |  |  | — |  |  |  | — |  |  |  | — |
Employee separation expense |  |  | 14,977 |  |  |  | 24,100 |  |  |  | 2,095 |
Total Services |  | $ | 27,725 |  |  | $ | 45,241 |  |  | $ | 2,163 |
Digital |  |  |  |  |  |  |  |  |  |  |  |
Asset impairment |  |  | 17,971 |  |  |  | 1,544 |  |  |  | — |
Contract termination costs |  |  | — |  |  |  | — |  |  |  | — |
Employee separation expense |  |  | 1,021 |  |  |  | 600 |  |  |  | 39 |
Total Digital |  | $ | 18,992 |  |  | $ | 2,144 |  |  | $ | 39 |
Total |  | $ | 144,848 |  |  | $ | 177,893 |  |  | $ | 14,985 |

Restructuring costs are reflected in the Combined Statement of Earnings in Selling, general and administrative expenses and Costs of revenues. Liabilities related to restructuring are included in Other current liabilities. See Note 14 Other Current Liabilities and Other Liabilities.

NOTE 19 | SEGMENT INFORMATION AND MAJOR CUSTOMERS

BASIS OF PRESENTATION
Our reportable segments are organized based on the nature of markets and customers. Segment accounting policies are the same as described and referenced in Note 2 Summary of Significant Accounting Policies.
Certain information concerning our segments for the years ended December 31, 2017, 2016 and 2015 is presented in the following tables. Consistent accounting policies have been applied by all segments within the Business, within all reporting periods. A description of our reportable segments as of December 31, 2017 have been provided in Note 1 Description of Business and Basis of Presentation.
SEGMENT REVENUES
Refer to the table below for total revenues by segment for the years ended December 31, 2017, 2016 and 2015.

|  | Total revenues |
|  | For the years ended December 31 |
(In Thousands) |  | 2017 |  | 2016 |  | 2015 |
Equipment |  | $ | 1,767,968 |  | $ | 2,444,240 |  | $ | 3,180,942 |
Services |  |  |  | 1,886,955 |  |  |  | 1,891,540 |  |  |  | 1,999,740 |
Digital |  |  |  | 320,406 |  |  |  | 344,854 |  |  |  | 339,423 |
Eliminations |  |  |  | (45,021 | ) |  |  | (74,043 | ) |  |  | (98,626 | )
Total revenues |  | $ | 3,930,308 |  | $ | 4,606,591 |  | $ | 5,421,479 |

35

GE Transportation
(A carve-out business of General Electric Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
Revenues from customers located in the United States were $2,181,365 thousand, $2,837,759 thousand and $3,738,009 thousand for the years ending December 31, 2017, 2016 and 2015, respectively. Revenues from customers located outside the United States were $1,748,943 thousand, $1,768,832 thousand and $1,683,470 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
OTHER SEGMENT INFORMATION
The Business uses segment profit to manage the Business and allocate resources. Management defines segment profit as operating income, plus interest income, less noncontrolling interest. Costs for corporate overhead functions are first attributed to the segments to the extent possible before being subject to various allocation methodologies. Refer to the table below for segment profit and a reconciliation to Net earnings attributable to Parent for the years ended December 31, 2017, 2016 and 2015.

|  | For the years ended December 31 |
(In Thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Equipment |  | $ | (28,907 | ) |  | $ | 142,508 |  |  | $ | 130,407 |
Services |  |  | 603,344 |  |  |  | 683,824 |  |  |  | 710,709 |
Digital |  |  | 27,181 |  |  |  | 93,418 |  |  |  | 119,603 |
Segment profit |  | $ | 601,618 |  |  | $ | 919,750 |  |  | $ | 960,719 |
Non-operating benefit costs |  |  | (16,877 | ) |  |  | (18,455 | ) |  |  | (16,249 | )
Impairment of goodwill |  |  | — |  |  |  | (2,027 | ) |  |  | (85,421 | )
Restructuring costs |  |  | (144,848 | ) |  |  | (177,893 | ) |  |  | (14,985 | )
Interest expense and other finance charges |  |  | (21,805 | ) |  |  | (20,002 | ) |  |  | (14,712 | )
Provision for income taxes |  |  | (44,303 | ) |  |  | (167,428 | ) |  |  | (349,275 | )
Net earnings attributable to Parent |  | $ | 373,785 |  |  | $ | 533,945 |  |  | $ | 480,077 |

The Business does not identify total assets by segment for internal purposes as the Business’ CODM (“Chief Operating Decision Maker”) does not assess performance, make strategic decisions, or allocate resources based on assets.
Refer to the table below for details on depreciation and amortization by segment for the years ended December 31, 2017, 2016 and 2015.

|  | Depreciation and amortization |
|  | For the years ended December 31 |
(In Thousands) |  | 2017 |  | 2016 |  | 2015 |
Equipment |  | $ | 119,657 |  | $ | 166,405 |  | $ | 146,305 |
Services |  |  |  | 47,903 |  |  |  | 39,596 |  |  |  | 45,994 |
Digital |  |  |  | 16,452 |  |  |  | 13,627 |  |  |  | 16,600 |
Total |  | $ | 184,012 |  | $ | 219,628 |  | $ | 208,899 |

MAJOR CUSTOMERS
For the year ended December 31, 2017, a single customer accounted for approximately 17% of combined revenues. For the years ended December 31, 2016 and 2015, three customers each accounted for approximately 19%, 13% and 13%, and 17%, 12% and 12% of combined revenues, respectively. These revenues are within the Equipment, Services, and Digital segments.

NOTE 20 | SUBSEQUENT EVENTS

The Business performed an evaluation of subsequent events through June 4, 2018, the date these combined financial statements were issued, and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in these combined financial statements. Refer to Note 1 Description of Business and Basis of Presentation for further detail on the Proposed Transaction announced on May 21, 2018.
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