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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 033-90866

____________________________________

WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION

(Exact name of registrant as specified in its charter)

____________________________________

Delaware									25-1615902
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)
30 Isabella Street Pittsburgh, Pennsylvania									15212
(Address of principal executive offices)									(Zip code)

412-825-1000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

____________________________________

Securities registered pursuant to Section 12(b) of the Act:

Class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $.01 par value per share			WAB			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Emerging growth company

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 22, 2021, there were 188,997,682 shares of common stock, par value $.01 per share, of the registrant outstanding.

---

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

March 31, 2021

FORM 10-Q

TABLE OF CONTENTS

						Page
			PART I—FINANCIAL INFORMATION
Item 1.			Financial Statements - (Unaudited)			3
			Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020			3
			Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020			4
			Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020			5
			Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020			6
			Condensed Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2021 and 2020			7
			Notes to Condensed Consolidated Financial Statements			8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3.			Quantitative and Qualitative Disclosures about Market Risk			35
Item 4.			Controls and Procedures			35
			PART II—OTHER INFORMATION
Item 1.			Legal Proceedings			36
Item 1A.			Risk Factors			36
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 4.			Mine Safety Disclosures			36
Item 6.			Exhibits			37
			Signatures			38

2

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PART I—FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

			Unaudited
In millions, except par value			March 31, 2021						December 31, 2020
Assets
Current Assets
Cash and cash equivalents			$	483.5					$	598.7
Accounts receivable			985.3						969.3
Unbilled accounts receivable			417.7						443.2
Inventories			1,671.5						1,642.1
Other current assets			221.0						226.5
Total current assets			3,779.0						3,879.8
Property, plant and equipment, net			1,575.5						1,601.6
Goodwill			8,625.7						8,485.2
Other intangible assets, net			3,927.2						3,869.2
Other noncurrent assets			635.8						618.7
Total other assets			13,188.7						12,973.1
Total Assets			$	18,543.2					$	18,454.5
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable			$	955.0					$	909.4
Customer deposits			640.7						642.7
Accrued compensation			261.5						242.3
Accrued warranty			235.6						240.1
Current portion of long-term debt			353.9						447.2
Other accrued liabilities			722.2						744.6
Total current liabilities			3,168.9						3,226.3
Long-term debt			3,923.3						3,792.2
Accrued postretirement and pension benefits			110.0						113.5
Deferred income taxes			186.4						168.4
Contingent consideration			218.6						218.1
Other long term liabilities			758.9						783.3
Total Liabilities			8,366.1						8,301.8
Commitments and contingencies (Note 15)
Equity
Common stock, $.01 par value; 500.0 shares authorized: 226.9 shares issued and 188.9 outstanding at March 31, 2021 and December 31, 2020			2.0						2.0
Additional paid-in capital			7,883.9						7,880.6
Treasury stock, at cost, 38.0 shares, at March 31, 2021 and December 31, 2020			(1,011.1)						(1,010.1)
Retained earnings			3,678.3						3,588.9
Accumulated other comprehensive loss			(409.0)						(339.1)
Total Westinghouse Air Brake Technologies Corporation shareholders’ equity			10,144.1						10,122.3
Noncontrolling interest			33.0						30.4
Total Equity			10,177.1						10,152.7
Total Liabilities and Equity			$	18,543.2					$	18,454.5

The accompanying notes are an integral part of these statements.

3

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

			Unaudited
			Three Months Ended March 31,
In millions, except per share data			2021						2020
Net sales:
Sales of goods			$	1,485.1					$	1,590.8
Sales of services			345.1						339.1
Total net sales			1,830.2						1,929.9
Cost of sales:
Cost of goods			(1,107.7)						(1,155.9)
Cost of services			(188.3)						(195.3)
Total cost of sales			(1,296.0)						(1,351.2)
Gross profit			534.2						578.7
Operating expenses:
Selling, general and administrative expenses			(235.4)						(243.4)
Engineering expenses			(37.7)						(49.0)
Amortization expense			(69.5)						(69.0)
Total operating expenses			(342.6)						(361.4)
Income from operations			191.6						217.3
Other income and expenses:
Interest expense, net			(47.6)						(53.3)
Other income (expense), net			14.2						(14.8)
Income before income taxes			158.2						149.2
Income tax expense			(43.5)						(38.0)
Net income			114.7						111.2
Less: Net (income) loss attributable to noncontrolling interest			(2.3)						0.4
Net income attributable to Wabtec shareholders			$	112.4					$	111.6
Earnings Per Common Share
Basic
Net income attributable to Wabtec shareholders			$	0.59					$	0.58
Diluted
Net income attributable to Wabtec shareholders			$	0.59					$	0.58
Weighted average shares outstanding
Basic			188.5						190.8
Diluted			188.9						191.4

 

The accompanying notes are an integral part of these statements.

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Unaudited
			Three Months Ended March 31,
In millions			2021						2020
Net income attributable to Wabtec shareholders			$	112.4					$	111.6
Foreign currency translation loss			(61.7)						(181.4)
Unrealized (loss) gain on derivative contracts			(7.9)						8.1
Unrealized loss on pension benefit plans and post-retirement benefit plans			(3.3)						(3.6)
Other comprehensive loss before tax			(72.9)						(176.9)
Income tax benefit (expense) related to components of other comprehensive income			3.0						(1.1)
Other comprehensive loss, net of tax			(69.9)						(178.0)
Comprehensive income (loss) attributable to Wabtec shareholders			$	42.5					$	(66.4)

 

The accompanying notes are an integral part of these statements.

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

			Unaudited
			Three Months Ended March 31,
In millions			2021						2020
Operating Activities
Net income			$	114.7					$	111.2
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Depreciation and amortization			120.0						115.8
Stock-based compensation expense			8.2						7.3
Below market intangible amortization			(12.6)						(37.6)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable and unbilled accounts receivable			9.3						(22.6)
Inventories			(11.2)						(23.5)
Accounts payable			47.0						(60.2)
Accrued income taxes			13.4						(4.4)
Accrued liabilities and customer deposits			25.9						(84.7)
Other assets and liabilities			(22.5)						(83.2)
Net cash provided by (used for) operating activities			292.2						(81.9)
Investing Activities
Purchase of property, plant and equipment			(26.5)						(33.3)
Proceeds from disposal of assets and businesses			5.9						6.4
Acquisitions of businesses, net of cash acquired			(401.4)						(35.7)
Net cash used for investing activities			(422.0)						(62.6)
Financing Activities
Proceeds from debt			1,435.0						981.5
Payments of debt			(1,398.0)						(663.8)
Repurchase of stock			(1.2)						(105.3)
Cash dividends			(23.0)						(23.0)
Other financing activities			(5.1)						(5.9)
Net cash provided by financing activities			7.7						183.5
Effect of changes in currency exchange rates			6.9						(27.3)
(Decrease) increase in cash			(115.2)						11.7
Cash and cash equivalents, beginning of period			598.7						604.2
Cash and cash equivalents, end of period			$	483.5					$	615.9

 

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

In millions, except per share data						Common Stock Shares						Common Stock Amount						Additional Paid-in Capital						Treasury Stock Shares						Treasury Stock Amount						Retained Earnings						Accumulated Other Comprehensive Loss						Non-controlling Interest						Total
Balance, December 31, 2020						226.9						$	2.0					$	7,880.6					(38.0)						$	(1,010.1)					$	3,588.9					$	(339.1)					$	30.4					$	10,152.7
Cash dividends ($0.12 dividend per share)						—						—						—						—						—						(23.0)						—						—						(23.0)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax						—						—						(5.4)						—						0.2						—						—						—						(5.2)
Stock based compensation						—						—						8.7						—						—						—						—						—						8.7
Net income						—						—						—						—						—						112.4						—						2.3						114.7
Other comprehensive loss, net of tax						—						—						—						—						—						—						(69.9)						—						(69.9)
Stock repurchase						—						—						—						—						(1.2)						—						—						—						(1.2)
Other						—						—						—						—						—						—						—						0.3						0.3
Balance, March 31, 2021						226.9						$	2.0					$	7,883.9					(38.0)						$	(1,011.1)					$	3,678.3					$	(409.0)					$	33.0					$	10,177.1
Balance, December 31, 2019						226.9						$	2.0					$	7,877.2					(35.3)						$	(807.1)					$	3,267.0					$	(382.6)					$	37.1					$	9,993.6
Cash dividends ($0.12 dividend per share)						—						—						—						—						—						(23.0)						—						—						(23.0)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax						—						—						(7.9)						0.2						2.2						—						—						—						(5.7)
Stock based compensation						—						—						10.0						—						—						—						—						—						10.0
Net income (loss)						—						—						—						—						—						111.6						—						(0.4)						111.2
Other comprehensive loss, net of tax						—						—						—						—						—						—						(178.0)						—						(178.0)
Stock repurchase						—						—						—						(1.6)						(105.3)						—						—						—						(105.3)
Other						—						—						(4.3)						—						—						—						—						(0.8)						(5.1)
Balance, March 31, 2020						226.9						$	2.0					$	7,875.0					$	(36.7)					$	(910.2)					$	3,355.6					$	(560.6)					$	35.9					$	9,797.7

The accompanying notes are an integral part of these statements.

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021 (UNAUDITED)

1. BUSINESS

Westinghouse Air Brake Technologies Corporation (“Wabtec” or the "Company") is one of the world’s largest providers of locomotives, value-added, technology-based equipment, systems and services for the global freight rail and passenger transit industries. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in over 50 countries and our products can be found in more than 100 countries throughout the world. In the first three months of 2021, approximately 64% of the Company’s revenues came from customers outside the United States.

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year particularly in light of the ongoing COVID-19 pandemic that is continuing to impact our sales channels, supply chain, manufacturing operations, workforce, and other key aspects of our operations and the high degree of uncertainty regarding the pandemic's duration and severity, availability and effectiveness of vaccines, impact of variants of the disease, actions to control it, and the potential impact on global economic activity, global supply chain operations and our customers, suppliers, and end-markets.

The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30 and December 31.

The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2020. The December 31, 2020 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates The preparation of financial statements in conformity with GAAP in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Revenue Recognition A majority of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms.

The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract revenues and cost estimates are reviewed and revised periodically through the year and adjustments are reflected in the accounting period as such amounts are determined.

Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These

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assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.

Generally, the Company’s revenue contains a single performance obligation for each distinct good or service; however, a single contract may have multiple performance obligations comprising multiple promises to customers. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, liquidating damages and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience.

Remaining performance obligations represent the transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of March 31, 2021, the Company's remaining performance obligations were $21.0 billion. The Company expects to recognize revenue of approximately 25% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter.

SEC regulations require that revenue categories that exceed 10% of total revenue are presented separately on the company's Statement of income. As such, the Company has displayed sales of goods and sales of services, and the related cost, in line with those regulations. Additionally, those regulations also require that goods are to include all sales of tangible products, and services must include all other sales. In Note 16 we refer to sales of both goods, such as spare parts and equipment upgrades, and related services, such as monitoring, maintenance and repairs, as sales in our Services product line.

Revolving Receivables Program In May 2020, the Company entered into a revolving agreement to transfer up to $150 million of certain receivables of certain subsidiaries of the Company (the "Originators") through our bankruptcy-remote subsidiary to a financial institution on a recurring basis in exchange for cash equal to the gross receivables transferred. During the first quarter of 2021, the Company amended its revolving agreement to increase the amount of certain receivables that can be transferred from $150 million to $200 million. As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest). The sold receivables are fully guaranteed by our bankruptcy-remote subsidiary which held additional receivables of $259.7 million at March 31, 2021 that are pledged as collateral under this agreement. The transfers are recorded at the fair value of the proceeds received and obligations assumed less derecognized receivables. No obligation was recorded at March 31, 2021 as the estimated expected credit losses on receivables sold is insignificant. Our maximum exposure to loss related to these receivables transferred is limited to the amount outstanding. The Company has agreed to guarantee the performance of the Originators respective obligations' under the revolving agreement. None of the Company (except for the bankruptcy-remote consolidated subsidiary referenced above) nor the Originators guarantees the collectability of the receivables under the revolving agreements.

The following table sets forth a summary of receivables sold:

In millions			Three Months Ended March 31, 2021
Gross receivables sold/cash proceeds received			$	257.9
Collections reinvested under revolving agreement			165.0
Net cash proceeds received			$	92.9

Depreciation Expense Depreciation of property, plant and equipment related to the manufacturing of products or services provided is included in Cost of goods or Cost of services. Depreciation of other property, plant and equipment that is not attributable to the manufacturing of products or services provided is included in Selling, general and administrative expenses or Engineering expense depending on how the property, plant and equipment is used.

Goodwill and Intangible Assets Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Amortizable intangible assets are reviewed for impairment when indicators of impairment are present. The Company tests goodwill and indefinite-lived intangible assets for impairment at the reporting unit level and at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed, and also tests for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Periodically, management of the Company assesses whether or not an indicator of impairment is present would necessitate an impairment analysis be performed.

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Accounting Standards Recently Adopted In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for certain income tax transactions by removing specific exceptions to the general principles in Accounting Standards Codification ("ASC") 740, "Income Taxes." This guidance is effective for fiscal years beginning after December 15, 2020 with early adoption permitted. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Other Comprehensive Income (Loss) Comprehensive income comprises both net income and the change in equity from transactions and other events and circumstances from non-owner sources.

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2021 are as follows:

In millions			Foreign currency translation						Derivative contracts						Pension and post retirement benefit plans						Total
Balance at December 31, 2020			$	(260.2)					$	2.4					$	(81.3)					$	(339.1)
Other comprehensive loss before reclassifications			(61.7)						(5.9)						(3.0)						(70.6)
Amounts reclassified from accumulated other comprehensive loss			—						—						0.7						0.7
Net current-period other comprehensive loss			(61.7)						(5.9)						(2.3)						(69.9)
Balance at March 31, 2021			$	(321.9)					$	(3.5)					$	(83.6)					$	(409.0)

The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2020 are as follows:

In millions			Foreign currency translation						Derivative contracts						Pension and post retirement benefit plans						Total
Balance at December 31, 2019			$	(308.6)					$	(3.3)					$	(70.7)					$	(382.6)
Other comprehensive (loss) income before reclassifications			(181.4)						6.1						(3.4)						(178.7)
Amounts reclassified from accumulated other comprehensive loss			—						—						0.7						0.7
Net current-period other comprehensive (loss) income			(181.4)						6.1						(2.7)						(178.0)
Balance at March 31, 2020			$	(490.0)					$	2.8					$	(73.4)					$	(560.6)

Reclassifications out of accumulated other comprehensive income (loss) are recognized in "Other income (expense), net" with the tax impact recognized in "Income tax expense."

3. ACQUISITIONS

Nordco

On March 31, 2021, the Company acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment. Nordco's products and services portfolio includes mobile railcar movers and ultrasonic rail flaw detection technologies. The purchase price paid for 100% ownership of Nordco was approximately $407 million.

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The following table summarizes the preliminary fair value of the Nordco assets acquired and liabilities assumed:

In millions
Assets acquired
Cash and cash equivalents						$	5.1
Accounts receivable						22.7
Inventory						34.3
Other current assets						1.7
Property, plant and equipment						16.5
Goodwill						214.5
Other intangible assets						163.5
Other noncurrent assets						9.4
Total assets acquired						467.7
Liabilities assumed
Current liabilities						18.3
Noncurrent liabilities						42.9
Total liabilities assumed						61.2
Net assets acquired						$	406.5

The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. Discounted cash flow models were used to estimate the fair values of acquired intangibles. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3. These estimates are preliminary in nature and subject to adjustments, which could be material, as the Company has not completed its valuation of assets acquired and liabilities assumed. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all of the accounts receivable acquired are expected to be collectible. Intangible assets acquired include customer relationships and intellectual property that are subject to amortization, and trade names that were assigned an indefinite life and are not subject to amortization. Contingent liabilities assumed as part of the transaction were not material.

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the assembled workforce and the future economic benefits, including synergies, that are expected to be achieved as a result of the acquisition. The purchased goodwill is not expected to be deductible for tax purposes. The results of this business since the date of acquisition will be reported within the Freight segment and the Services product line. The pro-forma impact on Wabtec’s sales and results of operations, including the pro forma effect of events that are directly attributable to the acquisition, was not significant.

4. INVENTORIES

The components of inventory, net of reserves, were:

In millions			March 31, 2021						December 31, 2020
Raw materials			$	681.5					$	669.4
Work-in-progress			329.8						339.4
Finished goods			660.2						633.3
Total inventories			$	1,671.5					$	1,642.1

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5. GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill by segment for the three months ended March 31, 2021 is as follows:

In millions			Freight Segment						Transit Segment						Total
Balance at December 31, 2020			$	6,872.2					$	1,613.0					$	8,485.2
Additions / opening balance sheet adjustments			214.6						—						214.6
Foreign currency impact			(9.0)						(65.1)						(74.1)
Balance at March 31, 2021			$	7,077.8					$	1,547.9					$	8,625.7

As of March 31, 2021 and December 31, 2020, the Company’s trade names had a net carrying amount of $659.2 million and $650.7 million, respectively. The Company believes these intangibles have indefinite lives, with the exception of the right to use the GE Transportation trade name, to which the Company has assigned a useful life of 5 years.

Intangible assets of the Company, other than goodwill and trade names, consist of the following:

In millions			March 31, 2021						December 31, 2020
Intellectual property, patents, and other intangibles, net of accumulated amortization of $248.6 and $223.7			$	1,038.1					$	1,007.6
Backlog, net of accumulated amortization of $231.8 and $206.9			1,192.6						1,224.7
Customer relationships, net of accumulated amortization of $287.4 and $276.3			1,037.3						986.2
Total			$	3,268.0					$	3,218.5

The weighted average remaining useful life of backlog, intellectual property, customer relationships and other intangible assets were 13 years, 12 years, 17 years and 8 years, respectively. The backlog intangible asset primarily consists of in-place long-term service agreements acquired by the Company in conjunction with the acquisition of GE Transportation in 2019. Amortization expense for intangible assets was $69.5 million and $69.0 million for the three months ended March 31, 2021 and 2020, respectively.

Amortization expense for the five succeeding years is estimated to be as follows:

In millions
Remainder of 2021			$	217.9
2022			289.9
2023			289.3
2024			279.8
2025			277.1

6. CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled accounts receivable” while the noncurrent contract assets are classified as other assets under the caption "Other noncurrent assets" on the consolidated balance sheet. Noncurrent contract assets were $112.4 million at March 31, 2021 and $101.0 million at December 31, 2020, respectively. Included in noncurrent contract assets are certain costs that are specifically related to a contract, however, do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.

Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract liabilities are classified as current liabilities under the caption “Customer deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other long-term liabilities" on the consolidated balance sheet. Noncurrent contract liabilities were $72.3 million at March 31, 2021 and $79.6 million at December 31, 2020. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were

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$120.2 million and $108.9 million at March 31, 2021 and December 31, 2020, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the consolidated balance sheet.

The change in the carrying amount of contract assets and contract liabilities for the three months ended March 31, 2021 and 2020 is as follows:

			Contract Assets
In millions			2021						2020
Balance at beginning of year			$	544.2					$	623.4
Acquisitions			—						4.1
Recognized in current year			233.4						293.0
Reclassified to accounts receivable			(242.0)						(282.9)
Foreign currency impact			(5.5)						(8.3)
Balance at March 31			$	530.1					$	629.3
			Contract Liabilities
In millions			2021						2020
Balance at beginning of year			$	831.2					$	799.7
Acquisitions			1.7						6.9
Recognized in current year			233.6						290.2
Amounts in beginning balance reclassified to revenue			(213.5)						(317.6)
Current year amounts reclassified to revenue			(11.4)						(11.8)
Foreign currency impact			(8.4)						(6.2)
Balance at March 31			$	833.2					$	761.2

7. LEASES

The Company leases property and equipment under finance and operating leases. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of lease payments when appropriate. The Company does not separate lease and non-lease components contracts.

As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate our incremental borrowing rate to discount lease payments. The Company has established discount rates by geographic region ranging from 1.0% to 12.3%.

The components of lease expense are as follows:

			Three Months Ended March 31,
In millions			2021						2020
Operating lease expense			$	14.2					$	14.7
Finance lease expense amortization of leased assets			—						0.3
Short-term and variable lease expense			0.1						0.1
Sublease income			(0.1)						(0.1)
Total			$	14.2					$	15.0

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Scheduled payments of lease liabilities are as follows:

In millions			Operating Leases						Finance Leases						Total
Remaining 2021			$	42.8					$	0.3					$	43.1
2022			51.7						0.3						52.0
2023			45.6						0.2						45.8
2024			40.3						0.2						40.5
2025			34.8						0.1						34.9
Thereafter			114.2						0.1						114.3
Total lease payments			329.4						1.2						330.6
Less: Present value discount			(28.3)						—						(28.3)
Present value of lease liabilities			$	301.1					$	1.2					$	302.3

The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of lease liabilities:

			March 31, 2021
Weighted-average remaining lease term (years)
Operating leases			7.8
Finance leases			4.5
Weighted-average discount rate
Operating leases			2.7		%
Finance leases			1.5		%

8. LONG-TERM DEBT

Long-term debt consisted of the following:

			Effective						March 31, 2021												December 31, 2020
In millions			Interest Rate						Book Value						Fair Value 1						Book Value						Fair Value 1
Senior Credit and 364 Day Facility:
U.S. dollar-denominated Term Loans, net of unamortized debt issuance costs of $0.5 and $0.9			2.3		%				625.5						625.5						645.1						645.1
Multi-Currency Revolving loan facility net of unamortized debt issuance costs of $0.4 and $0.8			1.5		%				149.6						149.6						—						—
Senior Notes:
4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $0.6 and $0.7			4.5		%				249.4						266.4						249.3						267.0
4.15% Senior Notes, due 2024, net of unamortized debt issuance costs of $4.0 and $4.3			4.6		%				746.0						810.8						745.7						817.3
3.20% Senior Notes, due 2025, net of unamortized debt discount and debt issuance costs of $4.1 and $4.4			3.4		%				495.9						524.8						495.6						533.4
3.45% Senior Notes, due 2026, net of unamortized debt issuance costs of $1.2 and $1.3			3.5		%				748.8						803.1						748.7						819.5
4.70% Senior Notes, due 2028, net of unamortized debt issuance costs of $8.0 and $8.2			5.0		%				1,242.1						1,419.1						1,241.8						1472.2
Other Borrowings									19.9						19.9						113.2						113.1
Total									4,277.2						4,619.2						4,239.4						4,667.6
Less - current portion									353.9						353.9						447.2						447.2
Long-term portion									$	3,923.3					$	4,265.3					$	3,792.2					$	4,220.4

1. See Note 14 for information on the fair value measurement of the Company's long-term debt.

For those debt securities that have a premium or discount at the time of issuance, the Company amortizes the amount through interest expense based on the maturity date or the first date the holders may require the Company to repurchase the debt securities, if applicable. A premium would result in a decrease in interest expense, and a discount would result in an increase in interest expense in future periods. Additionally, the Company has debt issuance costs related to certain financing transactions which are also amortized through interest expense. As of March 31, 2021 and December 31, 2020, the Company had total

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unamortized debt issuance costs of $18.8 million and $20.5 million, respectively. At March 31, 2021, the weighted average interest rate on the Company's variable rate debt was 1.5%

Credit Facilities

Senior Credit Facility

On June 8, 2018, the Company entered into a credit agreement ("Senior Credit Facility"), which replaced the Company's then-existing credit agreement. The Senior Credit Facility is with a syndicate of lenders and provides for borrowings consisting of (i) term loans denominated in euros and U.S. dollars ("Term Loans"); and (ii) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $1,200.0 million in multi-currency revolving loans (inclusive of swingline loans of up to $75.0 million and letters of credit of up to $450.0 million (the "Revolving Credit Facility")). The Revolving Credit Facility will mature on June 8, 2023.

Under the Senior Credit Facility, we can elect to receive advances bearing interest based on either the Alternate Base Rate ("ABR") or the London Interbank Offered Rate ("LIBOR") (each as defined in the Senior Credit Facility) plus applicable margin that is determined based on our credit ratings or the Company's Leverage (as defined in the Senior Credit Facility). The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type. The obligations under the Senior Credit Facility are guaranteed by Wabtec and certain of Wabtec's U.S. subsidiaries, as guarantors.

The Company has agreed that, so long as any lender has any commitment under the Senior Credit Facility, any letter of credit is outstanding under the Senior Credit Facility, or any loan or other obligation is outstanding under the Senior Credit Facility, it will maintain the following as of the end of each fiscal quarter or the period of four quarters the ended:

Interest Coverage Ratio 1						3.0x
Leverage Ratio 2						3.25x

1. The interest coverage ratio is defined as EBITDA (defined as earnings before interest, taxes, depreciation and amortization), as defined in the Senior Credit Facility, to net interest expense for the four quarters then ended.

2. The leverage ratio is defined as net debt as of the last day of such fiscal quarter to EBITDA, as defined in the Senior Credit Facility, for the four quarters then ended.

The company was in compliance with all covenants in the Senior Credit Facility as of March 31, 2021.

364-Day Facility

On April 10, 2020 the Company entered into a new $600 million 364 day credit facility ("364 Day Facility") initially scheduled to mature in April 2021 with a group of banks which includes a $144.0 million revolving credit facility ("364 Day Revolver") and a $456.0 million term loan ("364 Term Loan"), of which $305.9 million was outstanding at March 31, 2021. The agreement calls for interest at either a LIBOR-based rate, or a rate based on the prime lending rate of the agent bank, at the Company's option. The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type and substantially similar to our existing Senior Credit Facility. The obligations under the 364 Day Facility are guaranteed by certain of the Company's U.S. subsidiaries, as guarantors. On June 12, 2020 the Company amended the 364 Day Facility maturity to July 9, 2021. The Company was in compliance with all covenants in the 364 Senior Credit Facility as of March 31, 2021.

The following table presents availability under the Revolving Credit Facility and the 364 Day Revolver (the "Revolving Facilities"):

(in millions)						Revolving Credit Facility						364 Day Revolver
Maximum Availability						$	1,200.0					$	144.0
Outstanding Borrowings						(149.6)						—
Letters of Credit Under Credit Agreement						(5.8)						—
Current Availability						$	1,044.6					$	144.0

Senior Notes

The "Senior Notes" comprises our 4.375% Senior Notes due 2023, 4.15% Senior Notes due 2024, 3.20% Senior Notes due 2025, 3.45% Senior Notes due 2026 and 4.70% Senior Notes due 2028. Interest on the Senior Notes is payable semi-annually. The Company may redeem each series of the notes at any time in whole or from time to time in part in accordance with the provisions of the indenture, under which such series of notes was issued. Each of the Senior Notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest. The Senior

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Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company.

The indentures under which the Senior Notes were issued contain covenants and restrictions which limit, subject to certain exceptions, certain sale and leaseback transactions with respect to principal properties, the incurrence of secured debt without equally and ratably securing the Senior Notes, and certain merger and consolidation transactions. The covenants do not require the Company to maintain any financial ratios or specified levels of net worth or liquidity. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's subsidiaries that is a guarantor under the Revolving Facilities.

The Company is in compliance with the restrictions and covenants in the indentures under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.

9. STOCK-BASED COMPENSATION

As of March 31, 2021, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 15, 2030 and provides a maximum of 9.1 million shares for grants or awards, plus any shares which remain available under the 2000 Plan. The amendment and restatement of the 2011 Plan was approved by stockholders of Wabtec on May 15, 2020. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).

Stock-based compensation expense was $8.2 million and $7.3 million for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled $60.2 million.

Stock Options Stock options are granted to eligible employees at an exercise price equivalent to the stock's fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options granted prior to 2019 become exercisable over a four-year vesting period, while options granted in 2019 and after become exercisable over a three-year vesting period. Both vesting periods expire 10 years from the date of grant.

The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the three months ended March 31, 2021:

			Options						Weighted Average Exercise Price						Weighted Average Remaining Contractual Life						Aggregate Intrinsic value (in millions)
Outstanding at December 31, 2020			552,669						$	69.82					6.1						$	4.2
Granted			126,794						$	81.21
Exercised			(10,128)						$	40.28
Canceled			(12,422)						$	71.87
Outstanding at March 31, 2021			656,913						$	72.15					6.6						$	5.6
Exercisable at March 31, 2021			406,953						$	57.82					6.0						$	5.2

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

			Three Months Ended March 31, 2021
Dividend yield			0.60		%
Risk-free interest rate			0.81		%
Stock price volatility			36.1		%
Expected life (years)			5.0

The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.

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Restricted Stock, Restricted Units and Incentive Stock Beginning in 2006, the Company adopted a restricted stock program. As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over three or four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant.

In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Based on the Company’s performance for each three-year period then ended, the incentive stock units can vest, with underlying shares of common stock being awarded in an amount ranging from 0% to 200% of the amount of initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of March 31, 2021, the Company estimates that it will achieve 0%, 100% and 100% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2021, 2022, and 2023, respectively, and has recorded incentive compensation expense accordingly. If the estimate of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.

Compensation expense for the non-vested restricted stock and incentive stock units is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.

The following table summarizes the restricted stock activity and incentive stock units activity for the three months ended March 31, 2021:

			Restricted Stock and Units						Incentive Stock Units						Weighted Average Grant Date Fair Value
Outstanding at December 31, 2020			656,006						270,645						$	73.80
Granted			184,646						241,467						81.21
Vested			(260,675)						(37,672)						73.17
Canceled			(15,661)						(7,498)						75.56
Outstanding at March 31, 2021			564,316						466,942						77.00

10. INCOME TAXES

The overall effective tax rate was 27.5% and 25.5% for the three months ended March 31, 2021 and 2020, respectively. The increase in the effective rate is primarily the result of withholding tax expense on intercompany dividends incurred during the three months ended March 31, 2021.

As of March 31, 2021, the liability for income taxes associated with uncertain tax positions was $16.4 million, of which $14.7 million, if recognized, would favorably affect the Company’s effective income tax rate. As of December 31, 2020, the liability for income taxes associated with unrecognized tax benefits was $16.4 million, of which $14.8 million, if recognized, would favorably affect the Company's effective tax rate.

At this time, the Company believes it is reasonably possible that unrecognized tax benefits of approximately $11.7 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.  

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11. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:

			Three Months Ended March 31,
In millions, except per share data			2021						2020
Numerator
Numerator for basic and diluted earnings per common share - net income attributable to Wabtec shareholders			$	112.4					$	111.6
Less: dividends declared - common shares and non-vested restricted stock			(23.0)						(23.0)
Undistributed earnings			89.4						88.6
Percentage allocated to common shareholders (1)			99.8		%				99.7		%
			89.2						88.3
Add: dividends declared - common shares			22.9						22.9
Numerator for basic earnings per common share			112.1						111.2
Numerator for diluted earnings per common share			112.1						111.2
Denominator
Denominator for basic earnings per common share - weighted average shares			188.5						190.8
Effect of dilutive securities:
Assumed conversion of dilutive stock-based compensation plans			0.4						0.6
Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversion			188.9						191.4
Net income attributable to Wabtec shareholders per common share
Basic			$	0.59					$	0.58
Diluted			$	0.59					$	0.58
(1) Basic weighted-average common shares outstanding			188.5						190.8
Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest			188.9						191.4
Percentage allocated to common shareholders			99.8		%				99.7		%

The Company’s non-vested restricted stock contains rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share. The calculation of earnings per share for common stock shown above excludes the income attributable to the non-vested restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator. Options to purchase approximately 349,000 shares of Common Stock were outstanding at March 31, 2021, but were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price of the Company's common stock.

12. WARRANTIES

The following table reconciles the changes in the Company’s product warranty reserve as follows:

In millions			2021						2020
Balance at beginning of year			$	278.5					$	267.7
Acquisitions			1.7						4.3
Warranty expense			29.2						22.7
Warranty claim payments			(28.8)						(34.0)
Foreign currency impact/other			(6.8)						(3.3)
Balance at March 31			$