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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. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II—OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 4. | | |
Item 6. | | |
| | |
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.
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.
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.
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.
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.
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
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.
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.
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 | |
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
$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 | |
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
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
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.
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.
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 | $ | |