WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP - Quarter Report: 2021 September (Form 10-Q)
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 September 30, 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
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 October 22, 2021, there were 186,821,013 shares of common stock, par value $.01 per share, of the registrant outstanding.
WESTINGHOUSE AIR BRAKE
TECHNOLOGIES CORPORATION
September 30, 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. | ||||||||
2
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| Unaudited | |||||||||||
| In millions, except par value | September 30, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Assets | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 456.4 | $ | 598.7 | |||||||
| Accounts receivable | 960.3 | 969.3 | |||||||||
| Unbilled accounts receivable | 406.7 | 443.2 | |||||||||
| Inventories | 1,689.6 | 1,642.1 | |||||||||
| Other current assets | 247.1 | 226.5 | |||||||||
| Total current assets | 3,760.1 | 3,879.8 | |||||||||
| Property, plant and equipment, net | 1,509.0 | 1,601.6 | |||||||||
| Goodwill | 8,604.7 | 8,485.2 | |||||||||
| Other intangible assets, net | 3,779.8 | 3,869.2 | |||||||||
| Other noncurrent assets | 698.3 | 618.7 | |||||||||
| Total noncurrent assets | 14,591.8 | 14,574.7 | |||||||||
| Total Assets | $ | 18,351.9 | $ | 18,454.5 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 947.3 | $ | 909.4 | |||||||
| Customer deposits | 556.9 | 642.7 | |||||||||
| Accrued compensation | 309.3 | 242.3 | |||||||||
| Accrued warranty | 238.1 | 240.1 | |||||||||
| Current portion of long-term debt | 3.8 | 447.2 | |||||||||
| Other accrued liabilities | 756.2 | 744.6 | |||||||||
| Total current liabilities | 2,811.6 | 3,226.3 | |||||||||
| Long-term debt | 4,067.2 | 3,792.2 | |||||||||
| Accrued postretirement and pension benefits | 104.2 | 113.5 | |||||||||
| Deferred income taxes | 184.7 | 168.4 | |||||||||
| Contingent consideration | 219.8 | 218.1 | |||||||||
| Other long term liabilities | 773.2 | 783.3 | |||||||||
| Total Liabilities | 8,160.7 | 8,301.8 | |||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Equity | |||||||||||
Common stock, $.01 par value; 500.0 shares authorized: 226.9 and 226.9 shares issued and 186.8 and 188.9 outstanding at September 30, 2021 and December 31, 2020, respectively | 2.0 | 2.0 | |||||||||
| Additional paid-in capital | 7,905.6 | 7,880.6 | |||||||||
Treasury stock, at cost, 40.1 and 38.0 shares, at September 30, 2021 and December 31, 2020, respectively | (1,206.2) | (1,010.1) | |||||||||
| Retained earnings | 3,887.8 | 3,588.9 | |||||||||
| Accumulated other comprehensive loss | (432.6) | (339.1) | |||||||||
| Total Westinghouse Air Brake Technologies Corporation shareholders’ equity | 10,156.6 | 10,122.3 | |||||||||
| Noncontrolling interest | 34.6 | 30.4 | |||||||||
| Total Equity | 10,191.2 | 10,152.7 | |||||||||
| Total Liabilities and Equity | $ | 18,351.9 | $ | 18,454.5 | |||||||
The accompanying notes are an integral part of these statements.
3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| Unaudited | Unaudited | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions, except per share data | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Sales of goods | $ | 1,489.1 | $ | 1,543.6 | $ | 4,562.2 | $ | 4,540.5 | |||||||||||||||
| Sales of services | 417.8 | 321.5 | 1,187.2 | 991.9 | |||||||||||||||||||
| Total net sales | 1,906.9 | 1,865.1 | 5,749.4 | 5,532.4 | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of goods | (1,075.5) | (1,109.9) | (3,368.2) | (3,327.1) | |||||||||||||||||||
| Cost of services | (229.1) | (189.0) | (664.6) | (573.7) | |||||||||||||||||||
| Total cost of sales | (1,304.6) | (1,298.9) | (4,032.8) | (3,900.8) | |||||||||||||||||||
| Gross profit | 602.3 | 566.2 | 1,716.6 | 1,631.6 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | (269.0) | (252.7) | (766.5) | (712.9) | |||||||||||||||||||
| Engineering expenses | (43.8) | (36.5) | (123.5) | (123.7) | |||||||||||||||||||
| Amortization expense | (72.5) | (70.3) | (214.7) | (211.6) | |||||||||||||||||||
| Total operating expenses | (385.3) | (359.5) | (1,104.7) | (1,048.2) | |||||||||||||||||||
| Income from operations | 217.0 | 206.7 | 611.9 | 583.4 | |||||||||||||||||||
| Other income and expenses: | |||||||||||||||||||||||
| Interest expense, net | (42.2) | (45.6) | (134.7) | (150.3) | |||||||||||||||||||
| Other income, net | 0.5 | 14.3 | 25.0 | 5.8 | |||||||||||||||||||
| Income before income taxes | 175.3 | 175.4 | 502.2 | 438.9 | |||||||||||||||||||
| Income tax expense | (43.5) | (46.9) | (130.5) | (113.4) | |||||||||||||||||||
| Net income | 131.8 | 128.5 | 371.7 | 325.5 | |||||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interest | (1.2) | (0.4) | (3.9) | 1.0 | |||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 130.6 | $ | 128.1 | $ | 367.8 | $ | 326.5 | |||||||||||||||
| Earnings Per Common Share | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 0.69 | $ | 0.67 | $ | 1.95 | $ | 1.71 | |||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 0.69 | $ | 0.67 | $ | 1.95 | $ | 1.71 | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | 187.6 | 189.8 | 188.2 | 190.1 | |||||||||||||||||||
| Diluted | 188.0 | 190.2 | 188.6 | 190.6 | |||||||||||||||||||
The accompanying notes are an integral part of these statements.
4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Unaudited | Unaudited | ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income attributable to Wabtec shareholders | $ | 130.6 | $ | 128.1 | $ | 367.8 | $ | 326.5 | |||||||||||||||
| Foreign currency translation (loss) gain | (59.9) | 53.8 | (87.8) | (98.4) | |||||||||||||||||||
| Unrealized (loss) gain on derivative contracts | (0.4) | 2.8 | (7.8) | 1.8 | |||||||||||||||||||
| Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans | 4.4 | (0.6) | — | (3.5) | |||||||||||||||||||
| Other comprehensive (loss) income before tax | (55.9) | 56.0 | (95.6) | (100.1) | |||||||||||||||||||
| Income tax (expense) benefit related to components of Other comprehensive (loss) income | (0.9) | (0.5) | 2.1 | 0.4 | |||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (56.8) | 55.5 | (93.5) | (99.7) | |||||||||||||||||||
| Comprehensive income attributable to Wabtec shareholders | $ | 73.8 | $ | 183.6 | $ | 274.3 | $ | 226.8 | |||||||||||||||
The accompanying notes are an integral part of these statements.
5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Unaudited | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 371.7 | $ | 325.5 | |||||||
| Adjustments to reconcile Net income to cash provided by (used for) operating activities: | |||||||||||
| Depreciation and amortization | 368.6 | 353.3 | |||||||||
| Stock-based compensation expense | 34.2 | 17.6 | |||||||||
| Below market intangible amortization | (36.2) | (67.9) | |||||||||
| Net loss on disposal of property, plant and equipment | 7.1 | 3.0 | |||||||||
| Changes in operating assets and liabilities, net of acquisitions | |||||||||||
| Accounts receivable and unbilled accounts receivable | 34.9 | 245.2 | |||||||||
| Inventories | (32.3) | 7.8 | |||||||||
| Accounts payable | 41.1 | (203.4) | |||||||||
| Accrued income taxes | 28.9 | 17.9 | |||||||||
| Accrued liabilities and customer deposits | (11.0) | (76.3) | |||||||||
| Other assets and liabilities | (47.7) | (164.6) | |||||||||
| Net cash provided by operating activities | 759.3 | 458.1 | |||||||||
| Investing Activities | |||||||||||
| Purchase of property, plant and equipment | (78.5) | (98.7) | |||||||||
| Proceeds from disposal of assets and businesses | 8.3 | 19.1 | |||||||||
| Acquisitions of businesses, net of cash acquired | (405.1) | (40.3) | |||||||||
| Net cash used for investing activities | (475.3) | (119.9) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from debt | 4,328.6 | 2,936.0 | |||||||||
| Payments of debt | (4,491.3) | (3,117.1) | |||||||||
| Repurchase of stock | (200.3) | (105.3) | |||||||||
| Cash dividends | (68.9) | (69.2) | |||||||||
| Other financing activities | (1.4) | (5.2) | |||||||||
| Net cash used for financing activities | (433.3) | (360.8) | |||||||||
| Effect of changes in currency exchange rates | 7.0 | (22.3) | |||||||||
| Decrease in cash | (142.3) | (44.9) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 598.7 | 604.2 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 456.4 | $ | 559.3 | |||||||
The accompanying notes are an integral part of these statements.
6
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 | ||||||||||||||||||||||||||||||||||||||||
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 | — | — | (1.1) | 0.1 | 2.5 | — | — | — | 1.4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 13.9 | — | — | — | — | — | 13.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 124.8 | — | 0.4 | 125.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 33.2 | — | 33.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 226.9 | $ | 2.0 | $ | 7,896.7 | (37.9) | $ | (1,008.6) | $ | 3,780.1 | $ | (375.8) | $ | 33.4 | $ | 10,327.8 | ||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.12 dividend per share) | — | — | — | — | — | (22.9) | — | — | (22.9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | 0.8 | 0.1 | 1.5 | — | — | — | 2.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 8.1 | — | — | — | — | — | 8.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 130.6 | — | 1.2 | 131.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (56.8) | — | (56.8) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchase | — | — | — | (2.3) | (199.1) | — | — | — | (199.1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 226.9 | $ | 2.0 | $ | 7,905.6 | (40.1) | $ | (1,206.2) | $ | 3,887.8 | $ | (432.6) | $ | 34.6 | $ | 10,191.2 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
7
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)
(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, 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 | ||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.12 dividend per share) | — | — | — | — | — | (23.4) | — | — | (23.4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | (0.6) | 0.1 | 0.9 | — | — | — | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | (2.7) | — | — | — | — | — | (2.7) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 86.8 | — | (1.0) | 85.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 22.8 | — | 22.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 226.9 | $ | 2.0 | $ | 7,871.7 | (36.6) | $ | (909.3) | $ | 3,419.0 | $ | (537.8) | $ | 35.0 | $ | 9,880.6 | ||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.12 dividend per share) | — | — | — | — | — | (22.8) | — | — | (22.8) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax | — | — | 0.4 | — | (0.1) | — | — | — | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | 10.2 | — | — | — | — | — | 10.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 128.0 | — | 0.5 | 128.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 55.6 | — | 55.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 226.9 | $ | 2.0 | $ | 7,882.3 | (36.6) | $ | (909.4) | $ | 3,524.2 | $ | (482.2) | $ | 35.5 | $ | 10,052.4 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
8
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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. 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 nine months of 2021, approximately 58% 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
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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 September 30, 2021, the Company's remaining performance obligations were $21.1 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.
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. The bankruptcy remote subsidiary is a separate legal entity with its own creditors, and its assets are not available to pay creditors of the Company or any other affiliates of the Company. 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 receivables of $284.8 million at September 30, 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 September 30, 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 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||
| Gross receivables sold/cash proceeds received | $ | 959.1 | $ | 583.0 | |||||||
| Collections reinvested under revolving agreement | 874.9 | 485.5 | |||||||||
| Net cash proceeds received | $ | 84.2 | $ | 97.5 | |||||||
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 that would necessitate an impairment analysis to 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
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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.
Accumulated 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 loss by component, net of tax, for the three months ended September 30, 2021 are as follows:
| In millions | Foreign currency translation | Derivative contracts | Pension and post retirement benefit plans | Total | |||||||||||||||||||
| Balance at June 30, 2021 | $ | (288.1) | $ | (3.1) | $ | (84.6) | $ | (375.8) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (59.9) | (0.3) | 2.7 | (57.5) | |||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss | — | — | 0.7 | 0.7 | |||||||||||||||||||
| Other comprehensive (loss) income, net | (59.9) | (0.3) | 3.4 | (56.8) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | (348.0) | $ | (3.4) | $ | (81.2) | $ | (432.6) | |||||||||||||||
The changes in Accumulated other comprehensive loss by component, net of tax, for the three months ended September 30, 2020 are as follows:
| In millions | Foreign currency translation | Derivative contracts | Pension and post retirement benefit plans | Total | |||||||||||||||||||
| Balance at June 30, 2020 | $ | (460.8) | $ | (4.1) | $ | (72.9) | $ | (537.8) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 53.8 | 2.2 | (1.1) | 54.9 | |||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss | — | — | 0.7 | 0.7 | |||||||||||||||||||
| Other comprehensive income (loss), net | 53.8 | 2.2 | (0.4) | 55.6 | |||||||||||||||||||
| Balance at September 30, 2020 | $ | (407.0) | $ | (1.9) | $ | (73.3) | $ | (482.2) | |||||||||||||||
The changes in Accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 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 | (87.8) | (5.8) | (2.1) | (95.7) | |||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss | — | — | 2.2 | 2.2 | |||||||||||||||||||
| Other comprehensive (loss) income, net | (87.8) | (5.8) | 0.1 | (93.5) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | (348.0) | $ | (3.4) | $ | (81.2) | $ | (432.6) | |||||||||||||||
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The changes in Accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 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 | (98.4) | 1.4 | (4.8) | (101.8) | |||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss | — | — | 2.2 | 2.2 | |||||||||||||||||||
| Other comprehensive (loss) income, net | (98.4) | 1.4 | (2.6) | (99.6) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | (407.0) | $ | (1.9) | $ | (73.3) | $ | (482.2) | |||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss are recognized in "Other income, 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 $410 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 | 22.5 | |||||||
| Inventory | 34.3 | |||||||
| Other current assets | 1.7 | |||||||
| Property, plant and equipment | 16.6 | |||||||
| Goodwill | 214.1 | |||||||
| Other intangible assets | 167.6 | |||||||
| Other noncurrent assets | 13.6 | |||||||
| Total assets acquired | 475.5 | |||||||
| Liabilities assumed | ||||||||
| Current liabilities | 19.1 | |||||||
| Noncurrent liabilities | 46.2 | |||||||
| Total liabilities assumed | 65.3 | |||||||
| Net assets acquired | $ | 410.2 | ||||||
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 in the fair value hierarchy. 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; adjustments to date have not been significant. 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 are reported within the Freight segment
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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 | September 30, 2021 | December 31, 2020 | |||||||||
| Raw materials | $ | 725.5 | $ | 669.4 | |||||||
| Work-in-progress | 342.0 | 339.4 | |||||||||
| Finished goods | 622.1 | 633.3 | |||||||||
| Total inventories | $ | 1,689.6 | $ | 1,642.1 | |||||||
5. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill by segment for the nine months ended September 30, 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 | 214.1 | — | 214.1 | ||||||||||||||
| Foreign currency impact | (9.3) | (85.3) | (94.6) | ||||||||||||||
| Balance at September 30, 2021 | $ | 7,077.0 | $ | 1,527.7 | $ | 8,604.7 | |||||||||||
As of September 30, 2021 and December 31, 2020, the Company’s trade names had a net carrying amount of $646.9 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 | September 30, 2021 | December 31, 2020 | |||||||||
Intellectual property, patents, and other intangibles, net of accumulated amortization of $301.1 and $223.7 | $ | 988.6 | $ | 1,007.6 | |||||||
Backlog, net of accumulated amortization of $285.5 and $206.9 | 1,142.7 | 1,224.7 | |||||||||
Customer relationships, net of accumulated amortization of $319.3 and $276.3 | 1,001.6 | 986.2 | |||||||||
| Total | $ | 3,132.9 | $ | 3,218.5 | |||||||
The weighted average remaining useful life of backlog, intellectual property, customer relationships and other intangible assets were 12 years, 11 years, 16 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 $72.5 million and $214.7 million for the three and nine months ended September 30, 2021, and $70.3 million and $211.6 million for the three and nine months ended September 30, 2020, respectively.
Amortization expense for the five succeeding years is estimated to be as follows:
| In millions | |||||
| Remainder of 2021 | $ | 72.9 | |||
| 2022 | 290.2 | ||||
| 2023 | 289.5 | ||||
| 2024 | 280.0 | ||||
| 2025 | 277.4 | ||||
| 2026 | 273.6 | ||||
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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 $149.4 million at September 30, 2021 and $101.0 million at December 31, 2020. Included in noncurrent contract assets are certain costs that are specifically related to a contract but 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 $83.1 million at September 30, 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 $119.8 million and $108.9 million at September 30, 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 sheets.
The change in the carrying amount of contract assets and contract liabilities for the nine months ended September 30, 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 | 441.6 | 759.2 | |||||||||
| Reclassified to accounts receivable | (423.5) | (868.7) | |||||||||
| Foreign currency impact | (6.2) | (0.7) | |||||||||
Balance at September 30 | $ | 556.1 | $ | 517.3 | |||||||
| Contract Liabilities | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Balance at beginning of year | $ | 831.2 | $ | 799.7 | |||||||
| Acquisitions | 1.7 | 6.9 | |||||||||
| Recognized in current year | 477.0 | 589.1 | |||||||||
| Amounts in beginning balance reclassified to revenue | (387.2) | (430.0) | |||||||||
| Current year amounts reclassified to revenue | (154.3) | (152.6) | |||||||||
| Foreign currency impact | (8.6) | (3.3) | |||||||||
| Balance at September 30 | $ | 759.8 | $ | 809.8 | |||||||
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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. The right-of-use assets are classified as non-current and included within the caption "Other noncurrent assets" on the consolidated balance sheets. The current portion of lease liabilities are classified under the caption "Other accrued liabilities," while the noncurrent portion of lease liabilities are classified under the caption "Other long term liabilities" on the consolidated balance sheets.
As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate the rate to discount lease payments using its incremental borrowing rate. The Company has established discount rates by geographic region ranging from 1% to 9%.
The components of lease expense are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Operating lease expense | $ | 15.3 | $ | 14.1 | $ | 43.8 | $ | 42.9 | |||||||||||||||
| Finance lease expense amortization of leased assets | 0.2 | 0.3 | 0.4 | 0.9 | |||||||||||||||||||
| Short-term and variable lease expense | 0.1 | — | 0.4 | 0.1 | |||||||||||||||||||
| Sublease income | (0.1) | (0.1) | (0.3) | (0.3) | |||||||||||||||||||
| Total | $ | 15.5 | $ | 14.3 | $ | 44.3 | $ | 43.6 | |||||||||||||||
Scheduled payments of lease liabilities are as follows:
| In millions | Operating Leases | Finance Leases | Total | ||||||||||||||
| Remaining 2021 | $ | 15.4 | $ | 0.2 | $ | 15.6 | |||||||||||
| 2022 | 58.1 | 0.8 | 58.9 | ||||||||||||||
| 2023 | 51.9 | 0.5 | 52.4 | ||||||||||||||
| 2024 | 46.9 | 0.3 | 47.2 | ||||||||||||||
| 2025 | 40.3 | 0.2 | 40.5 | ||||||||||||||
| Thereafter | 148.1 | 0.1 | 148.2 | ||||||||||||||
| Total lease payments | 360.7 | 2.1 | 362.8 | ||||||||||||||
| Less: Present value discount | (29.2) | — | (29.2) | ||||||||||||||
| Present value of lease liabilities | $ | 331.5 | $ | 2.1 | $ | 333.6 | |||||||||||
The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of lease liabilities:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | 8.1 | 7.4 | |||||||||
| Finance leases | 3.5 | 4.5 | |||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | 2.4 | % | 2.7 | % | |||||||
| Finance leases | 1.4 | % | 1.4 | % | |||||||
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8. LONG-TERM DEBT
Long-term debt consisted of the following:
| Effective Interest Rate | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||
| In millions | Book Value | Fair Value1 | Book Value | Fair Value1 | |||||||||||||||||||||||||
Senior Credit and 364 Day Facility2: | |||||||||||||||||||||||||||||
U.S. dollar-denominated Term Loans3, net of unamortized debt issuance costs of $— and $0.9 | — | % | — | — | 645.1 | 645.1 | |||||||||||||||||||||||
Multi-Currency Revolving loan facility4, net of unamortized debt issuance costs of $0.4 and $0.8 | 1.5 | % | — | — | — | — | |||||||||||||||||||||||
| Senior Notes: | |||||||||||||||||||||||||||||
4.375% Senior Notes, due 2023, net of unamortized discount and debt issuance costs of $0.5 and $0.7 | 4.5 | % | 249.5 | 262.9 | 249.3 | 267.0 | |||||||||||||||||||||||
4.15% Senior Notes, due 2024, net of unamortized discount and debt issuance costs of $3.3 and $4.3 | 4.6 | % | 746.7 | 806.9 | 745.7 | 817.3 | |||||||||||||||||||||||
3.20% Senior Notes, due 2025, net of unamortized discount and debt issuance costs of $3.6 and $4.4 | 3.4 | % | 496.4 | 532.4 | 495.6 | 533.4 | |||||||||||||||||||||||
3.45% Senior Notes, due 2026, net of unamortized discount and debt issuance costs of $1.1 and $1.3 | 3.5 | % | 748.9 | 806.2 | 748.7 | 819.5 | |||||||||||||||||||||||
1.25% Senior Notes (EUR), due 2027, net of unamortized discount and debt issuance costs of $8.0 and $— | 1.5 | % | 571.7 | 595.9 | — | — | |||||||||||||||||||||||
4.70% Senior Notes, due 2028, net of unamortized discount and debt issuance costs of $7.4 and $8.2 | 5.0 | % | 1,242.6 | 1,441.3 | 1,241.8 | 1,472.2 | |||||||||||||||||||||||
| Other Borrowings | 15.2 | 15.2 | 113.2 | 113.1 | |||||||||||||||||||||||||
| Total | 4,071.0 | 4,460.8 | 4,239.4 | 4,667.6 | |||||||||||||||||||||||||
| Less - current portion | 3.8 | 3.8 | 447.2 | 447.2 | |||||||||||||||||||||||||
| Long-term portion | $ | 4,067.2 | $ | 4,457.0 | $ | 3,792.2 | $ | 4,220.4 | |||||||||||||||||||||
1. See Note 14 for information on the fair value measurement of the Company's long-term debt.
2. During the second quarter of 2021, the Company repaid all outstanding term loan borrowings and related interest under the Senior Credit Facility and the 364 Day Facility.
3. U.S. dollar-denominated Term Loans includes the total outstanding balance of term loans denominated in U.S. dollars from the Senior Credit Facility and the 364 Day Facility.
4. Multi-Currency Revolving loan facility includes total outstanding amounts drawn against the Senior Credit Facility and the 364 Day Facility.
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 September 30, 2021 and December 31, 2020, the Company had total combined unamortized discount and debt issuance costs of $24.3 million and $20.5 million, respectively.
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.
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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 then ended:
Interest Coverage Ratio 1 | 3.0x | |||||||
Leverage Ratio 2 | 3.25x | |||||||
1. The interest coverage ratio is defined as EBITDA (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 Senior Credit Facility was amended in the second quarter of 2021 so the Company may increase the maximum leverage ratio to (x) 3.75 to 1.00 at the end of the fiscal quarter in which the Nordco acquisition was consummated and each of the three fiscal quarters immediately following such fiscal quarter and (y) 3.50 to 1.00 at the end of each of the fourth and fifth full fiscal quarters after the consummation of the Nordco acquisition upon the Company's request. The Company has not requested any increase in the leverage ratio at this time.
The Company was in compliance with all covenants in the Senior Credit Facility as of September 30, 2021.
The following table presents availability under the Senior Credit Facility at September 30, 2021:
| (In millions) | Senior Credit Facility | |||||||
| Maximum Availability | $ | 1,200.0 | ||||||
| Outstanding Borrowings | — | |||||||
| Letters of Credit Under Credit Agreement | (3.5) | |||||||
| Current Availability | $ | 1,196.5 | ||||||
364 Day Facility
On April 10, 2020 the Company entered into a $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"). The agreement called 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 contained 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 were 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. On June 3, 2021, the Company repaid all outstanding borrowings and related interest, effectively retiring the facility.
Senior Notes
The Company or its subsidiaries may issue senior notes from time to time. These notes are comprised of our 4.375% Senior Notes due 2023 (the "2023 Notes"), 4.15% Senior Notes due 2024 (the "2024 Notes"), 3.20% Senior Notes due 2025 (the "2025 Notes"), 3.45% Senior Notes due 2026 (the "2026 Notes"), 1.25% Senior Notes (EUR) due 2027 (the "Euro Notes" discussed below), and 4.70% Senior Notes due 2028 (the "2028 Notes"). The 2023 Notes, 2024 Notes, 2025 Notes, 2026 Notes and 2028 Notes are the “US Notes”, and collectively with the Euro Notes, the “Senior Notes.” Interest on the US Notes is payable semi-annually and interest on the Euro Notes is paid annually. Each series of the Senior Notes may be redeemed 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 US Notes and the Compnay's guarantee of the Euro Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt, and are senior to all existing and future subordinated indebtedness of the Company.
On June 3, 2021, Wabtec Transportation Netherlands B.V. ("Wabtec Netherlands") issued €500.0 million of 1.25% Senior Notes due in 2027, which are fully and unconditionally guaranteed by the Company. The Euro Notes were issued at 99.267% of face value. Interest on the Euro Notes accrues at a rate of 1.25% per annum and is payable annually beginning December 3, 2021. The Company incurred approximately $4.3 million of deferred financing costs related to the issuance of the Euro Notes for total net proceeds of approximately $598.7 million after consideration of the discount.
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 US Notes are fully and
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unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's subsidiaries that is a guarantor under the Senior Credit Facility.
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 September 30, 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 $10.0 million and $12.0 million for the three months ended September 30, 2021 and 2020, respectively, and $34.2 million and $17.6 million for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled $44.1 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 nine months ended September 30, 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 | (74,343) | $ | 52.13 | ||||||||||||||||||||
| Canceled | (26,037) | $ | 74.73 | ||||||||||||||||||||
| Outstanding at September 30, 2021 | 579,083 | $ | 73.11 | 6.3 | $ | 9.0 | |||||||||||||||||
| Exercisable at September 30, 2021 | 336,940 | $ | 58.96 | 5.7 | $ | 9.4 | |||||||||||||||||
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:
| Nine Months Ended September 30, 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 or four years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant.
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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 September 30, 2021, the Company estimates that it will achieve 33%, 113% 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 resulting in recognition 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 nine months ended September 30, 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 | 226,896 | 241,467 | $ | 81.38 | |||||||||||||
| Vested | (303,439) | (37,672) | $ | 71.52 | |||||||||||||
| Adjustment for incentive stock awards expected to vest | — | 120,546 | $ | 74.32 | |||||||||||||
| Canceled | (28,732) | (41,494) | $ | 76.10 | |||||||||||||
| Outstanding at September 30, 2021 | 550,731 | 553,492 | $ | 77.63 | |||||||||||||
10. INCOME TAXES
The overall effective tax rate was 24.8% and 26.0% for the three and nine months ended September 30, 2021, respectively, and 26.7% and 25.8% for the three and nine months ended September 30, 2020, respectively.
The decrease in the quarterly effective tax rate is primarily the result of tax expense on internal restructuring activities incurred during the three months ended September 30, 2020 that did not recur in the three months ended September 30, 2021.
The increase in the year-to-date effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred during the nine months ended September 30, 2021.
As of September 30, 2021, the liability for income taxes associated with uncertain tax positions was $14.9 million, of which $13.3 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 $6.6 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 September 30, | |||||||||||
| In millions, except per share data | 2021 | 2020 | |||||||||
| Numerator | |||||||||||
| Numerator for basic and diluted earnings per common share - net income attributable to Wabtec shareholders | $ | 130.6 | $ | 128.1 | |||||||
| Less: dividends declared - common shares and non-vested restricted stock | (22.6) | (22.8) | |||||||||
| Undistributed earnings | 108.0 | 105.3 | |||||||||
| Percentage allocated to common shareholders (1) | 99.8 | % | 99.8 | % | |||||||
| 107.8 | 105.1 | ||||||||||
| Add: dividends declared - common shares | 22.6 | 22.8 | |||||||||
| Numerator for basic earnings per common share | $ | 130.4 | $ | 127.9 | |||||||
| Numerator for diluted earnings per common share | $ | 130.4 | $ | 127.9 | |||||||
| Denominator | |||||||||||
| Denominator for basic earnings per common share - weighted average shares | 187.6 | 189.8 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Assumed conversion of dilutive stock-based compensation plans | 0.4 | 0.4 | |||||||||
| Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversion | 188.0 | 190.2 | |||||||||
| Net income attributable to Wabtec shareholders per common share | |||||||||||
| Basic | $ | 0.69 | $ | 0.67 | |||||||
| Diluted | $ | 0.69 | $ | 0.67 | |||||||
| (1) Basic weighted-average common shares outstanding | 187.6 | 189.8 | |||||||||
| Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 188.0 | 190.3 | |||||||||
| Percentage allocated to common shareholders | 99.8 | % | 99.8 | % | |||||||
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| Nine Months Ended September 30, | |||||||||||
| In millions, except per share data | 2021 | 2020 | |||||||||
| Numerator | |||||||||||
| Numerator for basic and diluted earnings per common share - net income attributable to Wabtec shareholders | $ | 367.8 | $ | 326.5 | |||||||
| Less: dividends declared - common shares and non-vested restricted stock | (68.0) | (68.7) | |||||||||
| Undistributed earnings | 299.8 | 257.8 | |||||||||
| Percentage allocated to common shareholders (1) | 99.8 | % | 99.7 | % | |||||||
| 299.2 | 257.0 | ||||||||||
| Add: dividends declared - common shares | 67.9 | 68.5 | |||||||||
| Numerator for basic earnings per common share | $ | 367.1 | $ | 325.5 | |||||||
| Numerator for diluted earnings per common share | $ | 367.1 | $ | 325.5 | |||||||
| Denominator | |||||||||||
| Denominator for basic earnings per common share - weighted average shares | 188.2 | 190.1 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Assumed conversion of dilutive stock-based compensation plans | 0.4 | 0.5 | |||||||||
| Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversion | 188.6 | 190.6 | |||||||||
| Net income attributable to Wabtec shareholders per common share | |||||||||||
| Basic | $ | 1.95 | $ | 1.71 | |||||||
| Diluted | $ | 1.95 | $ | 1.71 | |||||||
| (1) Basic weighted-average common shares outstanding | 188.2 | 190.1 | |||||||||
| Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest | 188.6 | 190.6 | |||||||||
| 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. Approximately 0.1 million outstanding shares of Common Stock for the three and nine month period of 2021 were not included in the computation of quarterly or year-to-date 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 | 84.7 | 86.8 | |||||||||
| Warranty claim payments | (84.5) | (95.7) | |||||||||
| Foreign currency impact/other | (8.4) | 1.7 | |||||||||
| Balance at September 30 | $ | 272.0 | $ | 264.8 | |||||||
13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Hedging Activities In the normal course of business, we are exposed to interest rate, commodity price and foreign currency exchange rate fluctuations. At times, we mitigate these risk exposures through the use of derivatives such as cross-currency swaps, foreign currency forward contracts, interest rate swaps, commodity forwards and futures. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.
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Foreign Currency Exchange Risk
The Company uses forward contracts to mitigate its foreign currency exchange rate exposure due to forecasted sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gains and losses is deferred as a component of Accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. These contracts typically mature within two years. For the three and nine months ended September 30, 2021 and 2020, the amounts reclassified into income were not material.
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates. We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including euro, Indian rupee, British pound sterling, Australian dollars and several other foreign currencies. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies and net purchases and sales in non-functional currencies. We have certain foreign currency exchange rate risk management programs that use foreign currency forward contracts and cross-currency swaps. These forward contracts and cross-currency swaps are generally used to offset the potential income statement effects from intercompany loans denominated in non-functional currencies. These programs mitigate but do not entirely eliminate foreign currency exchange rate risk.
The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting, but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of Other income, net. The net loss related to these contracts was $0.2 million and $3.3 million for the three and nine months ended September 30, 2021, respectively, and a net gain of $3.1 million and $2.7 million for the three and nine months ended September 30, 2020, respectively. These contracts typically mature within one year.
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of September 30, 2021:
| Fair Value | Gross Notional Amount | |||||||||||||||||||||||||
| In millions | Designated | Non-Designated | Designated | Non-Designated | ||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||
| Other current assets | $ | 8.9 | $ | — | $ | 768.2 | $ | — | ||||||||||||||||||
| Other current liabilities | — | — | — | 270.1 | ||||||||||||||||||||||
| Cross-currency Swaps | ||||||||||||||||||||||||||
| Other current assets | 5.1 | — | 579.7 | — | ||||||||||||||||||||||
| Total | $ | 14.0 | $ | — | $ | 1,347.9 | $ | 270.1 | ||||||||||||||||||
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2020:
| Fair Value | Gross Notional Amount | |||||||||||||||||||||||||
| In millions | Designated | Non-Designated | Designated | Non-Designated | ||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||
| Other current assets | $ | 9.2 | $ | 0.5 | $ | 793.6 | $ | 1.3 | ||||||||||||||||||
| Other current liabilities | (3.9) | (1.5) | 928.0 | 319.6 | ||||||||||||||||||||||
| Cross-currency Swaps | ||||||||||||||||||||||||||
| Other current liabilities | (26.0) | — | 613.2 | — | ||||||||||||||||||||||
| Total | $ | (20.7) | $ | (1.0) | $ | 2,334.8 | $ | 320.9 | ||||||||||||||||||
Interest Rate Risk
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and,
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in general, does not leverage any of its investment activities that would put principal capital at risk. For the nine months ended September 30, 2021 and 2020 the amounts reclassified into income were not material.
Commodity Price Risk
The Company may use commodity forward contracts and futures to mitigate its exposure to commodity price changes and to reduce its overall cost of manufacturing. For the nine months ended September 30, 2021 and 2020 the amounts recognized as income or expense were not material.
14. FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2021 which are included in other current assets and liabilities on the consolidated balance sheet:
| Fair Value Measurements at September 30, 2021 Using | ||||||||||||||||||||||||||
| Total Carrying Value at September 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||
| Other current assets | $ | 8.9 | $ | — | $ | 8.9 | $ | — | ||||||||||||||||||
| Other current liabilities | — | — | — | — | ||||||||||||||||||||||
| Cross-Currency Swap Agreement | ||||||||||||||||||||||||||
| Other current assets | 5.1 | — | 5.1 | — | ||||||||||||||||||||||
As a result of our global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company mitigates these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at September 30, 2021 and December 31, 2020. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds and temporary cash and cash equivalent investments. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets. Trusts are valued at the net asset value (“NAV”) as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates. The Senior Notes are considered Level 2 based on the fair value valuation hierarchy. Contingent consideration related to the GE Transportation acquisition is considered Level 3 based on the fair value valuation hierarchy and includes $130.0 million classified as "Other accrued liabilities" on the Company's consolidated balance sheet and $219.8 million in long-term liabilities classified as "Contingent consideration" on the Company's consolidated balance sheet. The fair value approximates the carrying value at September 30, 2021.
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15. COMMITMENTS AND CONTINGENCIES
Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Additionally, from time to time, the Company is involved in litigation related to claims arising out of the Company's operations in the ordinary course of business, including claims based on product liability, contracts, intellectual property or other causes of action. Further information and detail on these claims are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. During the first nine months of 2021, there were no material changes to the information described in the Form 10-K related to claims arising from asbestos exposure or the Company's ordinary operations.
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed; Xorail has successfully completed a remediation plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, DTC alleged that total damages were $36.8 million through July 31, 2017 and are continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC. Xorail has denied DTC's assertions, stating that its system satisfied the contractual requirements. Xorail has worked with DTC to modify its system and implement the FRA's and PUC's previously undefined approval requirements; the FRA and PUC have both approved modified wireless crossing system, and as of August 2018, DTC completed the process of certifying the crossings and eliminated the use of flaggers. DTC has not updated its notices against Xorail, nor have they filed any formal claim against Xorail. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail. DTC's claim against RTD proceeded to trial on September 21, 2020; the trial has been completed, included post-trial submission.
As of the date hereof, the Company is involved in no litigation that the Company believes will have a material adverse effect on its financial condition, results of operations or liquidity.
16. SEGMENT INFORMATION
Wabtec has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services and customer type. The Company’s business segments are:
Freight Segment primarily builds new locomotives, manufactures and services components for new and existing freight cars and locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars and utilities.
Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses, builds new commuter locomotives, refurbishes subway cars, provides heating, ventilation, and air conditioning equipment and doors for buses and subway cars. Customers include public transit authorities and municipalities, leasing companies and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense, and other unallocated charges. Since certain administrative and other operating expenses have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
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Segment financial information for the three months ended September 30, 2021 is as follows:
| In millions | Freight Segment | Transit Segment | Corporate Activities and Elimination | Total | |||||||||||||||||||
| Sales to external customers | $ | 1,295.0 | $ | 611.9 | $ | — | $ | 1,906.9 | |||||||||||||||
| Intersegment sales/(elimination) | 12.3 | 8.6 | (20.9) | — | |||||||||||||||||||
| Total sales | $ | 1,307.3 | $ | 620.5 | $ | (20.9) | $ | 1,906.9 | |||||||||||||||
| Income (loss) from operations | $ | 195.2 | $ | 43.9 | $ | (22.1) | $ | 217.0 | |||||||||||||||
| Interest expense and other, net | — | — | (41.7) | (41.7) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 195.2 | $ | 43.9 | $ | (63.8) | $ | 175.3 | |||||||||||||||
Segment financial information for the three months ended September 30, 2020 is as follows:
| In millions | Freight Segment | Transit Segment | Corporate Activities and Elimination | Total | |||||||||||||||||||
| Sales to external customers | $ | 1,237.3 | $ | 627.8 | $ | — | $ | 1,865.1 | |||||||||||||||
| Intersegment sales/(elimination) | 10.9 | 7.8 | (18.7) | — | |||||||||||||||||||
| Total sales | $ | 1,248.2 | $ | 635.6 | $ | (18.7) | $ | 1,865.1 | |||||||||||||||
| Income (loss) from operations | $ | 160.2 | $ | 64.1 | $ | (17.6) | $ | 206.7 | |||||||||||||||
| Interest expense and other, net | — | — | (31.3) | (31.3) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 160.2 | $ | 64.1 | $ | (48.9) | $ | 175.4 | |||||||||||||||
Segment financial information for the nine months ended September 30, 2021 is as follows:
| In millions | Freight Segment | Transit Segment | Corporate Activities and Elimination | Total | |||||||||||||||||||
| Sales to external customers | $ | 3,814.2 | $ | 1,935.2 | $ | — | $ | 5,749.4 | |||||||||||||||
| Intersegment sales/(elimination) | 36.5 | 25.3 | (61.8) | — | |||||||||||||||||||
| Total sales | $ | 3,850.7 | $ | 1,960.5 | $ | (61.8) | $ | 5,749.4 | |||||||||||||||
| Income (loss) from operations | $ | 510.2 | $ | 159.3 | $ | (57.6) | $ | 611.9 | |||||||||||||||
| Interest expense and other, net | — | — | (109.7) | (109.7) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 510.2 | $ | 159.3 | $ | (167.3) | $ | 502.2 | |||||||||||||||
Segment financial information for the nine months ended September 30, 2020 is as follows:
| In millions | Freight Segment | Transit Segment | Corporate Activities and Elimination | Total | |||||||||||||||||||
| Sales to external customers | $ | 3,743.0 | $ | 1,789.4 | $ | — | $ | 5,532.4 | |||||||||||||||
| Intersegment sales/(elimination) | 36.3 | 23.0 | (59.3) | — | |||||||||||||||||||
| Total sales | $ | 3,779.3 | $ | 1,812.4 | $ | (59.3) | $ | 5,532.4 | |||||||||||||||
| Income (loss) from operations | $ | 463.4 | $ | 172.9 | $ | (52.9) | $ | 583.4 | |||||||||||||||
| Interest expense and other, net | — | — | (144.5) | (144.5) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 463.4 | $ | 172.9 | $ | (197.4) | $ | 438.9 | |||||||||||||||
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Sales to external customers by product line are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Freight Segment | ||||||||||||||||||||||||||
| Equipment | $ | 335.2 | $ | 355.3 | $ | 924.8 | $ | 1,098.2 | ||||||||||||||||||
| Components | 222.1 | 208.2 | 648.9 | 624.1 | ||||||||||||||||||||||
| Digital Electronics | 155.2 | 161.0 | 473.5 | 500.1 | ||||||||||||||||||||||
| Services | 582.5 | 512.8 | 1,767.0 | 1,520.6 | ||||||||||||||||||||||
| Total Freight Segment | $ | 1,295.0 | $ | 1,237.3 | $ | 3,814.2 | $ | 3,743.0 | ||||||||||||||||||
| Transit Segment | ||||||||||||||||||||||||||
| Original Equipment Manufacturer | $ | 286.9 | $ | 303.1 | $ | 894.1 | $ | 817.4 | ||||||||||||||||||
| Aftermarket | 325.0 | 324.7 | 1,041.1 | 972.0 | ||||||||||||||||||||||
| Total Transit Segment | $ | 611.9 | $ | 627.8 | $ | 1,935.2 | $ | 1,789.4 | ||||||||||||||||||
17. OTHER INCOME, NET
The components of Other income, net are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Foreign currency (loss) gain | $ | (3.5) | $ | 6.4 | $ | 7.4 | $ | (7.7) | ||||||||||||||||||
| Equity income | 3.2 | 5.6 | 10.5 | 6.7 | ||||||||||||||||||||||
| Expected return on pension assets/amortization | 1.9 | 2.5 | 7.3 | 7.2 | ||||||||||||||||||||||
| Other miscellaneous expense, net | (1.1) | (0.2) | (0.2) | (0.4) | ||||||||||||||||||||||
| Total Other income, net | $ | 0.5 | $ | 14.3 | $ | 25.0 | $ | 5.8 | ||||||||||||||||||
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 19, 2021.
OVERVIEW
Wabtec 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. 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 nine months of 2021, approximately 58% of the Company’s revenues came from customers outside the United States.
Business Update
The COVID-19 pandemic has continued to impact our sales channels, supply chain, manufacturing operations, workforce and other key aspects of our operations. The Company continues to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities; however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, impact of variants of the disease, actions that may be taken by governmental authorities and private industry, including preventing or curtailing the operations of our plants, the potential impact on global economic activity, global supply chain operations, our employees, our customers, suppliers and end-markets and other consequences that could negatively impact our business. We also face the possibility that government policies may become more restrictive especially if COVID-19 transmission rates increase in certain areas. As a result of these numerous uncertainties, we are unable to specifically predict the extent and length of time the COVID-19 pandemic will negatively impact our business.
The COVID-19 pandemic has increased the uncertainty around global economic and market conditions, which impacts our sales and operations. To the extent that these factors cause, or exacerbate, instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected, and the materially adverse impacts that we have experienced as a result of the COVID-19 pandemic could continue or worsen. In addition, we face risks associated with our growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to address changes in market conditions and risks.
Although the U.S. and other international governments deemed rail transportation as “critical infrastructure” providing essential services during the COVID-19 pandemic, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the nine months ended September 30, 2021 and 2020, which is discussed in more detail in the Results of Operations section below. Supply chain disruptions and labor availability have caused component and chip shortages resulting in an adverse effect on the timing of the Company’s revenue generation. Additionally, broad-based inflation, escalation of metals and commodities costs, transportation and logistics costs and labor costs have all resulted from the COVID-19 pandemic. The Company has implemented various mitigating actions to lessen the impact of supply chain disruptions caused by the COVID-19 pandemic. These actions include price escalations in long-term contracts, implementing price surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management, strategic sourcing alignments, and accelerating integration synergies where possible. The Company expects to continue to realize these increased costs over the next few quarters.
Cybersecurity Exposure
During the third quarter 2021, one of our vendors publicly disclosed vulnerabilities in one of its operating systems that is used in a range of products across the rail sector and other industries, including in certain Wabtec products. In response, Wabtec reviewed its digital onboard locomotive products and locomotive control systems to determine which products may be affected and the potential impact to Wabtec, our customers and other relevant parties. To date, no known vulnerabilities in our products have been exploited; however, we are working closely with our vendor to appropriately address potentially impacted products. Additionally, we have communicated with potentially affected customers and discussed mitigation strategies.
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RESULTS OF OPERATIONS
Consolidated Results
THIRD QUARTER 2021 COMPARED TO THIRD QUARTER 2020
The following table shows our Consolidated Statements of Operations for the periods indicated.
| Three Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales: | |||||||||||
| Sales of goods | $ | 1,489.1 | $ | 1,543.6 | |||||||
| Sales of services | 417.8 | 321.5 | |||||||||
| Total net sales | 1,906.9 | 1,865.1 | |||||||||
| Cost of sales: | |||||||||||
| Cost of goods | (1,075.5) | (1,109.9) | |||||||||
| Cost of services | (229.1) | (189.0) | |||||||||
| Total cost of sales | (1,304.6) | (1,298.9) | |||||||||
| Gross profit | 602.3 | 566.2 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative expenses | (269.0) | (252.7) | |||||||||
| Engineering expenses | (43.8) | (36.5) | |||||||||
| Amortization expense | (72.5) | (70.3) | |||||||||
| Total operating expenses | (385.3) | (359.5) | |||||||||
| Income from operations | 217.0 | 206.7 | |||||||||
| Other income and expenses: | |||||||||||
| Interest expense, net | (42.2) | (45.6) | |||||||||
| Other income, net | 0.5 | 14.3 | |||||||||
| Income before income taxes | 175.3 | 175.4 | |||||||||
| Income tax expense | (43.5) | (46.9) | |||||||||
| Net income | 131.8 | 128.5 | |||||||||
| Less: Net income attributable to noncontrolling interest | (1.2) | (0.4) | |||||||||
| Net income attributable to Wabtec shareholders | $ | 130.6 | $ | 128.1 | |||||||
The following table shows the major components of the change in sales in the three months ended September 30, 2021 from the three months ended September 30, 2020:
| In millions | Freight Segment | Transit Segment | Total | ||||||||||||||
| Third Quarter 2020 Net Sales | $ | 1,237.3 | $ | 627.8 | $ | 1,865.1 | |||||||||||
| Acquisitions | 38.3 | — | 38.3 | ||||||||||||||
| Foreign Exchange | 7.5 | 15.1 | 22.6 | ||||||||||||||
| Organic | 11.9 | (31.0) | (19.1) | ||||||||||||||
| Third Quarter 2021 Net Sales | $ | 1,295.0 | $ | 611.9 | $ | 1,906.9 | |||||||||||
Net sales
Net sales for the three months ended September 30, 2021 increased by $42 million, or 2.2%, to $1.91 billion compared to the same period in 2020. Organic sales in the Freight Segment increased $12 million due to an increase in Services and Components, partially offset by lower Equipment and Digital Electronics sales. Transit segment organic sales decreased by $31
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million due to global supply chain and COVID-19 related disruptions. Sales from the acquisition of Nordco were $38 million and favorable changes in foreign currency exchange rates increased sales by $23 million.
Cost of sales
Cost of sales for the three months ended September 30, 2021 increased by $6 million, or 0.4%, to $1.30 billion compared to the same period in 2020. Cost of sales for the three months ended September 30, 2021 includes $23 million of restructuring costs, primarily for footprint rationalization in Europe. Cost of sales in the three months ended September 30, 2020 included $5 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization, and related headcount actions as part of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges in both years, cost of sales as a percentage of sales was 67.2% in 2021 and 69.4% in 2020, representing a 2.2 percentage point decrease. The decrease can be attributed to a favorable product mix, the realization of synergies and the effects of prior year restructuring programs, partially offset by increased metals, transportation and labor costs.
Operating expenses
Total operating expenses increased $26 million, or 7.2% to $385 million, for the three months ended September 30, 2021 to 20.2% of sales compared to $360 million, or 19.3% of sales in the same period of 2020. Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were $12 million for both the three months ended September 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions. Excluding restructuring and transaction costs and $4 million of incremental expense from the acquisition of Nordco, SG&A increased $13 million primarily for higher employee compensation and benefit costs. Engineering expense increased $7 million due to investments in new technologies and products and amortization expense increased $2 million due to the acquisition of Nordco.
Interest expense, net
Interest expense, net, decreased $3 million for the three months ended September 30, 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.
Other income, net
Other income, net, was $1 million of income for the three months ended September 30, 2021 compared to $14 million of income in the same period of 2020. The variance is primarily driven by foreign exchange gains in the prior year compared to losses in the current year.
Income taxes
The effective income tax rate was 24.8% and 26.7% for the three months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate is primarily the result of tax expense on a restructuring that was incurred during the three months ended September 30, 2020 that did not recur in 2021.
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Freight Segment
The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
| Three Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales: | |||||||||||
| Sales of goods | $ | 883.0 | $ | 923.3 | |||||||
| Sales of services | 412.0 | 314.0 | |||||||||
| Total net sales | 1,295.0 | 1,237.3 | |||||||||
| Cost of sales: | |||||||||||
| Cost of goods | (626.6) | (659.8) | |||||||||
| Cost of services | (224.7) | (183.0) | |||||||||
| Total cost of sales | (851.3) | (842.8) | |||||||||
| Gross profit | 443.7 | 394.5 | |||||||||
| Operating expenses | (248.5) | (234.3) | |||||||||
| Income from operations ($) | $ | 195.2 | $ | 160.2 | |||||||
| Income from operations (%) | 15.1 | % | 12.9 | % | |||||||
The following table shows the major components of the change in net sales for the Freight Segment in the third quarter of 2021 from the third quarter of 2020:
| In millions | |||||
| Third Quarter 2020 Net Sales | $ | 1,237.3 | |||
| Acquisitions | 38.3 | ||||
| Foreign Exchange | 7.5 | ||||
| Changes in Sales by Product Line: | |||||
| Equipment | (21.6) | ||||
| Components | 10.9 | ||||
| Digital Electronics | (7.1) | ||||
| Services | 29.7 | ||||
| Third Quarter 2021 Net Sales | $ | 1,295.0 | |||
Net sales
Freight Segment sales for the three months ended September 30, 2021 increased by $58 million, or 4.7%, to $1.30 billion, compared to the same period in 2020. Organic sales increased $12 million primarily in Services due to lower locomotive parkings and increased Components sales. These increases were partially offset by a decrease in Equipment sales due to lower locomotive deliveries primarily in North America and supply chain disruptions. Sales from acquisitions contributed $38 million and favorable foreign currency exchange rates increased net sales by $8 million.
Cost of sales
Freight Segment cost of sales for the three months ended September 30, 2021 increased by $9 million, or 1.0%, to $851 million, compared to the same period in 2020. Excluding restructuring and transaction costs, cost of sales as a percentage of sales was 65.7% in 2021 and 68.0% in 2020, representing a 2.3 percentage point decrease. The decrease can be attributed to a favorable mix of sales and improved absorption of fixed costs as the prior year was particularly affected by the COVID-19 pandemic, partially offset by increased metals, transportation and labor costs.
Operating expenses
Freight Segment operating expenses increased $14 million, or 6.1%, in 2021 to $249 million, or 19.2% of sales compared to $234 million or 18.9% of sales in the same period in 2020. Restructuring and transaction costs included in SG&A were $3 million and $7 million for the three months ended September 30, 2021 and 2020, respectively . Excluding restructuring
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and transaction costs and $4 million of additional costs for acquisitions, SG&A increased $6 million primarily due to higher employee compensation and benefit costs. Engineering costs increased $6 million due to investments in new technologies and products and amortization expenses increased due to the addition of Nordco.
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Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
| Three Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales | $ | 611.9 | $ | 627.8 | |||||||
| Cost of sales | (453.3) | (456.1) | |||||||||
| Gross profit | 158.6 | 171.7 | |||||||||
| Operating expenses | (114.7) | (107.6) | |||||||||
| Income from operations ($) | $ | 43.9 | $ | 64.1 | |||||||
| Income from operations (%) | 7.2 | % | 10.2 | % | |||||||
The following table shows the major components of the change in net sales for the Transit Segment in the third quarter of 2021 from the third quarter of 2020:
| In millions | |||||
| Third Quarter 2020 Net Sales | $ | 627.8 | |||
| Foreign Exchange | 15.1 | ||||
| Changes in Sales by Product Line: | |||||
| Original Equipment Manufacturing | (22.0) | ||||
| Aftermarket | (9.0) | ||||
| Third Quarter 2021 Net Sales | $ | 611.9 | |||
Net sales
Transit Segment sales for the three months ended September 30, 2021 decreased by $16 million, or 2.5%, to $612 million compared to the same period in 2020. The decrease is primarily attributed to global supply chain and COVID-19 pandemic disruptions, partially offset by favorable foreign currency exchange rate changes.
Cost of sales
Transit Segment cost of sales for the three months ended September 30, 2021 decreased by $3 million, or 0.6%, to $453 million compared to the same period in 2020. Cost of sales for the three months ended September 30, 2021 and 2020 includes $22 million and $3 million of restructuring costs, respectively, primarily due to footprint rationalization in Europe. Excluding these charges, cost of sales as a percentage of sales was 70.4% in 2021 and 72.2% in 2020, representing a 1.8 percentage point decrease. The decrease can be attributed to improved operational performance stemming from the effects of prior year restructuring programs and disruption from the COVID-19 pandemic, partially offset by increased metals, transportation and labor costs.
Operating expenses
Transit Segment operating expenses increased $7 million, or 6.6%, in 2021 to $115 million or 18.7% of sales, compared to $108 million or 17.1% of sales in the same period in 2020. Restructuring and transaction costs included in SG&A were $5 million and $3 million for the three months ended September 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions. Excluding restructuring and transaction costs, SG&A increased $4 million primarily due to employee compensation and benefit costs. Additionally, engineering and amortization expenses remained consistent year over year.
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FIRST NINE MONTHS OF 2021 COMPARED TO FIRST NINE MONTHS OF 2020
The following table shows our Consolidated Statements of Operations for the periods indicated.
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales: | |||||||||||
| Sales of goods | $ | 4,562.2 | $ | 4,540.5 | |||||||
| Sales of services | 1,187.2 | 991.9 | |||||||||
| Total net sales | 5,749.4 | 5,532.4 | |||||||||
| Cost of sales: | |||||||||||
| Cost of goods | (3,368.2) | (3,327.1) | |||||||||
| Cost of services | (664.6) | (573.7) | |||||||||
| Total cost of sales | (4,032.8) | (3,900.8) | |||||||||
| Gross profit | 1,716.6 | 1,631.6 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative expenses | (766.5) | (712.9) | |||||||||
| Engineering expenses | (123.5) | (123.7) | |||||||||
| Amortization expense | (214.7) | (211.6) | |||||||||
| Total operating expenses | (1,104.7) | (1,048.2) | |||||||||
| Income from operations | 611.9 | 583.4 | |||||||||
| Other income and expenses: | |||||||||||
| Interest expense, net | (134.7) | (150.3) | |||||||||
| Other income, net | 25.0 | 5.8 | |||||||||
| Income before income taxes | 502.2 | 438.9 | |||||||||
| Income tax expense | (130.5) | (113.4) | |||||||||
| Net income | 371.7 | 325.5 | |||||||||
| Less: Net (income) loss attributable to noncontrolling interest | (3.9) | 1.0 | |||||||||
| Net income attributable to Wabtec shareholders | $ | 367.8 | $ | 326.5 | |||||||
The following table shows the major components of the change in sales in the nine months ended September 30, 2021 from the nine months ended September 30, 2020:
| In millions | Freight Segment | Transit Segment | Total | ||||||||||||||
| First Nine Months of 2020 Net Sales | $ | 3,743.0 | $ | 1,789.4 | $ | 5,532.4 | |||||||||||
| Acquisitions | 76.7 | — | 76.7 | ||||||||||||||
| Foreign Exchange | 25.1 | 126.7 | 151.8 | ||||||||||||||
| Organic | (30.6) | 19.1 | (11.5) | ||||||||||||||
| First Nine Months of 2021 Net Sales | $ | 3,814.2 | $ | 1,935.2 | $ | 5,749.4 | |||||||||||
Net sales
Net sales for the nine months ended September 30, 2021 increased by $217 million, or 3.9%, to $5.7 billion compared to the same period in 2020. Transit segment organic sales increased $19 million due to improved demand for original equipment door, HVAC, and brakes systems. This increase is partially offset by an organic decrease in the Freight segment of $31 million due to lower locomotive Equipment sales, particularly in North America and lower Digital Electronics sales due to supply chain disruptions partially offset by an increase in Services sales from higher locomotive modernizations and a decrease in
33
locomotive parkings. Favorable changes in foreign exchange rates increased sales by $152 million and sales from the acquisition of Nordco contributed $77 million.
Cost of sales
Cost of sales for the nine months ended September 30, 2021 increased by $132 million, or 3.4%, to $4.0 billion compared to the same period in 2020. Cost of sales for the nine months ended September 30, 2021 includes $48 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe. Cost of sales in the first nine months of 2020 included $23 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges in both years, cost of sales as a percentage of sales was 69.3% in 2021 and 70.1% in 2020, representing a 0.8 percentage point decrease. The decrease can be attributed to synergy savings and the structural cost actions taken in the prior year, partially offset by increased metals, transportation and labor costs.
Operating expenses
Total operating expenses increased $57 million, or 5.4%, in the first nine months of 2021 compared to the same period in 2020. Operating expenses as a percentage of sales was 19.2% and 18.9% for the nine months ended September 30, 2021 and 2020, respectively. Restructuring and transaction costs included in SG&A were $32 million and $41 million for the nine months ended September 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization programs. Excluding restructuring and transaction costs and $9 million of incremental expense from the acquisition of Nordco, SG&A increased $54 million primarily due to higher employee compensation and benefit costs and costs incurred to support the higher sales volumes. Engineering expense remained flat and amortization expense increased $3 million due to the acquisition of Nordco.
Interest expense, net
Interest expense, net, decreased $16 million in the first nine months of 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.
Other income, net
Other income, net, was $25 million of income in the first nine months of 2021 compared to $6 million of income in the same period of 2020. The variance is primarily driven by foreign exchange gains in the current year as compared to losses in the prior year as well as higher equity income in the current year.
Income taxes
The effective income tax rate was 26.0% and 25.8% for the nine months ended September 30, 2021 and 2020, respectively. The increase in the effective rate is primarily the result of withholding tax expense on intercompany dividends incurred during the nine months ended September 30, 2021.
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Freight Segment
The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales: | |||||||||||
| Sales of goods | $ | 2,645.6 | $ | 2,774.6 | |||||||
| Sales of services | 1,168.6 | 968.4 | |||||||||
| Total net sales | 3,814.2 | 3,743.0 | |||||||||
| Cost of sales: | |||||||||||
| Cost of goods | (1,950.6) | (2,039.2) | |||||||||
| Cost of services | (650.2) | (555.0) | |||||||||
| Total cost of sales | (2,600.8) | (2,594.2) | |||||||||
| Gross profit | 1,213.4 | 1,148.8 | |||||||||
| Operating expenses | (703.2) | (685.4) | |||||||||
| Income from operations ($) | $ | 510.2 | $ | 463.4 | |||||||
| Income from operations (%) | 13.4% | 12.4% | |||||||||
The following table shows the major components of the change in net sales for the Freight Segment in the first nine months of 2021 from the first nine months of 2020:
| In millions | |||||
| First Nine Months of 2020 Net Sales | $ | 3,743.0 | |||
| Acquisitions | 76.7 | ||||
| Foreign Exchange | 25.1 | ||||
| Changes in Sales by Product Line: | |||||
| Equipment | (174.4) | ||||
| Components | 8.0 | ||||
| Digital Electronics | (36.3) | ||||
| Services | 172.1 | ||||
| First Nine Months of 2021 Net Sales | $ | 3,814.2 | |||
Net sales
Freight Segment sales for the nine months ended September 30, 2021 increased by $71 million, or 1.9%, to $3.81 billion, compared to the same period in 2020. Organic sales decreased by $31 million primarily due to lower locomotive Equipment sales, particularly in North America and lower Digital Electronics sales due to supply chain constraints and COVID-19 disruptions, partially offset by an increase in Services sales due to higher locomotive modernizations and overhauls and a decrease in parking of locomotives. The organic sales decrease was more than offset by sales from acquisitions of $77 million and the effects of favorable foreign exchange rates of $25 million.
Cost of sales
Freight Segment cost of sales for the nine months ended September 30, 2021 increased by $7 million, to $2.60 billion, compared to the same period in 2020. Cost of sales for the nine months ended September 30, 2021 includes $6 million of restructuring and transaction costs, primarily for a charge related to purchase price accounting for the step-up of Nordco inventory and headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition. Cost of sales in the first nine months of 2020 included $16 million of restructuring costs, primarily for the exit of certain product lines, costs for site closures, and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges in both years, cost of sales as a percentage of sales was 68.0% and 68.9% in for the nine months ended September 30, 2021 and 2020, respectively, representing a 0.9 percentage point
35
decrease. The decrease can be attributed to a favorable mix of sales and improved absorption of fixed costs, partially offset by increased metals, transportation and labor costs.
Operating expenses
Freight Segment operating expenses for the nine months ended September 30, 2021 increased $18 million compared to the same period in 2020. Restructuring and transaction costs included in SG&A were $11 million and $28 million for the nine months ended September 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization as part of the integration of GE Transportation. Excluding restructuring and transaction and $9 million of incremental expense for acquisitions, SG&A increased $26 million primarily due to higher employee compensation and benefit costs. Engineering expense decreased $3 million due to cost control measures on research and development projects and amortization expense increased $3 million due to the acquisition of Nordco.
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Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net sales | $ | 1,935.2 | $ | 1,789.4 | |||||||
| Cost of sales | (1,432.0) | (1,306.6) | |||||||||
| Gross profit | 503.2 | 482.8 | |||||||||
| Operating expenses | (343.9) | (309.9) | |||||||||
| Income from operations ($) | $ | 159.3 | $ | 172.9 | |||||||
| Income from operations (%) | 8.2 | % | 9.7 | % | |||||||
The following table shows the major components of the change in net sales for the Transit Segment in the first nine months of 2021 from the first nine months of 2020:
| In millions | |||||
| First Nine Months of 2020 Net Sales | $ | 1,789.4 | |||
| Foreign Exchange | 126.7 | ||||
| Changes in Sales by Product Line: | |||||
| Original Equipment Manufacturing | 21.4 | ||||
| Aftermarket | (2.3) | ||||
| First Nine Months of 2021 Net Sales | $ | 1,935.2 | |||
Net sales
Transit Segment sales for the nine months ended September 30, 2021 increased by $146 million, or 8.1%, to $1.94 billion compared to the same period in 2020, with foreign exchange rates being the primary driver of the increase. Transit segment organic sales increased $19 million due to improved demand for original equipment door, HVAC, and brakes systems.
Cost of sales
Transit Segment cost of sales for the nine months ended September 30, 2021 increased by $125 million, or 9.6%, to $1.43 billion compared to the same period in 2020. Cost of sales for the nine months ended September 30, 2021 and 2020 includes $43 million and $8 million of restructuring and transactions costs, respectively, primarily for footprint rationalization in Europe. Excluding these costs, cost of sales as a percentage of sales was 71.8% in 2021 and 72.6% in 2020, a 0.8 percentage point decrease over the comparable period in 2020, attributable to improved operational efficiency and the impact that the COVID-19 pandemic had on margins in 2020, partially offset by increased metals, transportation and labor costs.
Operating expenses
Transit Segment operating expenses increased $34 million, or 11.0%, in 2021 to 17.8% of sales. Restructuring and transaction costs included within SG&A were $12 million and $6 million for the nine months ended September 30, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization in Europe. Excluding restructuring and transaction costs, SG&A increased $25 million primarily due to higher employee compensation and benefit costs and to support the increase in sales volumes. Engineering expense increased $3 million and amortization expense remained consistent year over year.
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Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under the Company’s Senior Notes and Senior Credit Facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Cash provided by (used for): | |||||||||||
| Operating activities | $ | 759.3 | $ | 458.1 | |||||||
| Investing activities | $ | (475.3) | $ | (119.9) | |||||||
| Financing activities | $ | (433.3) | $ | (360.8) | |||||||
Operating activities In the first nine months of 2021, cash provided by operations was $759 million compared to cash provided by operations of $458 million in the first nine months of 2020. Significant changes to the sources and (uses) of cash for the nine month periods include the following:
•($6) million from net changes in working capital driven by: ($210) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program; ($40) million unfavorable change in inventory primarily from inventory build-ups in response to supply chain challenges; $244 million improvement from accounts payable, primarily due to the timing of payments to suppliers and the COVID-19 related impacts on expenditures in 2020;
•approximately $140 million related to cash payments made during 2020 for costs related to the GE Transportation acquisition and settlement of litigation that did not recur;
•and $114 attributable to higher Net income and other changes in the related statement of income.
Investing activities In the first nine months of 2021 and 2020, cash used for investing activities was $475 million and $120 million, respectively. The major components of the cash outflow in 2021 were $79 million in additions to property, plant and equipment for investments in our facilities and manufacturing processes, and $405 million in net cash paid for the acquisition of Nordco. This compares to $99 million in property, plant, and equipment for additions in the first nine months of 2020 and $40 million in net cash paid for acquisitions during 2020. Additional information with respect to acquisitions is included in Note 3 of the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report.
Financing activities In the first nine months of 2021, cash used for financing activities was $433 million which included $4.3 billion in proceeds from debt, $4.5 billion in repayments of debt, $200 million in stock repurchases and $69 million of dividend payments. In the first nine months of 2020, cash used for financing activities was $361 million, which included $2.9 billion in proceeds from debt, $3.1 billion in repayments of debt, $105 million in stock repurchases and $69 million of dividend payments.
As of September 30, 2021, the Company held approximately $456 million of cash, cash equivalents and restricted cash, of which $29 million of cash was classified as restricted cash. Of the $456 million, approximately $55 million was held within the United States and approximately $401 million was held outside of the United States, primarily in Europe, India, Brazil, and China. While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash could be repatriated to the United States.
Additional information with respect to credit facilities and long-term debt is included in Note 8 of the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report.
Revolving Receivables Program
In May 2020, the Company entered into a revolving agreement to transfer up to $150 million of certain receivables of 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. The bankruptcy remote subsidiary is a separate legal entity with its own creditors, and its assets are not available to pay creditors of the Company or any other affiliates of the Company. 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 $284.8 million at September 30, 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 September 30, 2021 as the estimated expected credit
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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.
Supply Chain Financing Program
The Company has entered into supply chain financing arrangements with third-party financial institutions to provide our vendors with enhanced payment options while providing the Company with added working capital flexibility. The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation and does not receive an economic benefit from the financial institutions. The arrangements do not change the payable terms negotiated by the Company and our vendors and does not result in a change in the classification of amounts due as accounts payable in the consolidated balance sheet.
Guarantor Summarized Financial Information
The obligations under the Company's US Notes, Senior Credit Facility, and 364 Day Facility have been fully and unconditionally guaranteed by certain of the Company's U.S. subsidiaries. Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, a Wabtec Company, which has 15,000 shares outstanding of Class A Non-Voting Preferred Stock held by General Electric Company. The Euro Notes are issued by Wabtec Netherlands and are fully and unconditionally guaranteed by the Company.
The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis for the Company's US Notes, Senior Credit Facility, and 364 Day Facility. The combined summarized financial information eliminates intercompany balances and transactions among the parent and guarantor subsidiaries and equity in earnings and investments in any guarantor subsidiaries or non-guarantor subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.
Summarized Statement of Income
| Unaudited | ||||||||
| Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries | ||||||||
| In millions | Nine Months Ended September 30, 2021 | |||||||
| Net sales | $ | 2,786.5 | ||||||
| Gross profit | $ | 641.5 | ||||||
| Net income attributable to Wabtec shareholders | $ | 106.5 | ||||||
Summarized Balance Sheet
| Unaudited | ||||||||||||||
| Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries | ||||||||||||||
| In millions | September 30, 2021 | December 31, 2020 | ||||||||||||
| Current assets | $ | 926.1 | $ | 1,092.3 | ||||||||||
| Noncurrent assets | $ | 1,950.4 | $ | 1,835.7 | ||||||||||
| Current liabilities | $ | 1,149.8 | $ | 1,408.8 | ||||||||||
| Long-term debt | $ | 3,482.0 | $ | 3,779.6 | ||||||||||
| Other non-current liabilities | $ | 577.1 | $ | 373.9 | ||||||||||
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The following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp. and guarantor subsidiaries with non-guarantor subsidiaries.
| Unaudited | ||||||||
| Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries | ||||||||
| In millions | Nine Months Ended September 30, 2021 | |||||||
| Net sales to non-guarantor subsidiaries | $ | 494.2 | ||||||
| Purchases from non-guarantor subsidiaries | $ | 100.8 | ||||||
| Unaudited | ||||||||
| Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries | ||||||||
| In millions | September 30, 2021 | |||||||
| Amount due from/(to) non-guarantor subsidiaries | $ | (3,356.9) | ||||||
Summarized Financial Information—Euro Notes
The obligations under Wabtec Netherlands’ Euro Notes are fully and unconditionally guaranteed by the Company. Wabtec Netherlands is a wholly-owned, indirect subsidiary of the Company. Wabtec Netherlands is a holding company and does not have any independent operations. Its assets consist of its investments in subsidiaries, which are separate and distinct legal entities that are not guarantors of the Euro Notes and have no obligations to pay amounts due under Wabtec Netherlands’ obligations.
The following tables present summarized financial information of Wabtec Netherlands, as the issuer of the Euro Notes, and the Company, as the parent guarantor, on a combined basis. The combined summarized financial information eliminates all intercompany balances and transactions among Wabtec Netherlands and the Company as well as all equity in earnings from and investments in any subsidiary of the Company, other than Wabtec Netherlands, which we refer to below as the Non-Issuer and Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and parent guarantor.
Summarized Statement of Income
| Unaudited | ||||||||
| Issuer and Guarantor | ||||||||
| In millions | Nine Months Ended September 30, 2021 | |||||||
| Net sales | $ | 401.9 | ||||||
| Gross profit | $ | 76.9 | ||||||
| Net income attributable to Wabtec shareholders | $ | (290.4) | ||||||
Summarized Balance Sheet
| Unaudited | ||||||||||||||
| Issuer and Guarantor | ||||||||||||||
| In millions | September 30, 2021 | December 31, 2020 | ||||||||||||
| Current assets | $ | 213.8 | $ | 407.9 | ||||||||||
| Noncurrent assets | $ | 699.8 | $ | 709.8 | ||||||||||
| Current liabilities | $ | 436.6 | $ | 824.1 | ||||||||||
| Long-term debt | $ | 4,055.4 | $ | 3,779.6 | ||||||||||
| Other non-current liabilities | $ | 308.2 | $ | 314.1 | ||||||||||
The following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp. and Wabtec Netherlands, with the subsidiaries of Westinghouse Air Brake Technologies Corp., other than Wabtec Netherlands,
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none of which are guarantors of the Euro Notes.
| Unaudited | ||||||||
| Issuer and Guarantor | ||||||||
| In millions | Nine Months Ended September 30, 2021 | |||||||
| Net sales to non-guarantor subsidiaries | $ | 52.1 | ||||||
| Purchases from non-guarantor subsidiaries | $ | 82.1 | ||||||
| Unaudited | ||||||||
| Issuer and Guarantor | ||||||||
| In millions | September 30, 2021 | |||||||
| Amount due from/(to) non-guarantor subsidiaries | $ | (5,565.1) | ||||||
Company Stock Repurchase Plan
On February 11, 2021, the Board of Directors increased its stock repurchase authorization to increase the amount available for stock repurchases to $500 million of the Company’s outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $500 million of which about $292.2 million remained. No time limit was set for the completion of the program which conforms to the requirements under the Senior Credit Facility and the Senior Notes currently outstanding. The Company may repurchase shares in the future at any time, depending upon market conditions, our capital needs and other factors. Purchases of shares may be made by open market purchases or privately negotiated purchases and may be made pursuant to Rule 10b5-1 plan or otherwise.
Forward Looking Statements
We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:
Economic and industry conditions
•prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and Africa;
•decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;
•reliance on major original equipment manufacturer customers;
•original equipment manufacturers’ program delays;
•demand for services in the freight and passenger rail industry;
•demand for our products and services;
•orders either being delayed, canceled, not returning to historical levels, or reduced or any combination of the foregoing;
•consolidations in the rail industry;
•continued outsourcing by our customers;
•industry demand for faster and more efficient braking equipment;
•fluctuations in interest rates and foreign currency exchange rates; or
•availability of credit;
Operating factors
•supply disruptions;
•technical difficulties;
•changes in operating conditions and costs;
•increases in raw material costs;
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•successful introduction of new products;
•performance under material long-term contracts;
•labor relations;
•the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities or intellectual property claims;
•completion and integration of acquisitions, including the acquisition of Faiveley Transport and the GE Transportation Business; or
•the development and use of new technology;
Competitive factors
•the actions of competitors; or
•the outcome of negotiations with partners, suppliers, customers or others;
Political/governmental factors
•political stability in relevant areas of the world;
•future regulation/deregulation of our customers and/or the rail industry;
•levels of governmental funding on transit projects, including for some of our customers;
•political developments and laws and regulations, including those related to Positive Train Control; or
•tax law, regulation and policy; or
•the outcome of negotiations with governments.
COVID-19 factors
•the severity and duration of the pandemic;
•deterioration of general economic conditions;
•shutdown of one or more of our operating facilities;
•supply chain and sourcing disruptions;
•ability of our customers to pay timely for goods and services delivered;
•health of our employees;
•ability to retain and recruit talented employees; or
•difficulty in obtaining debt or equity financing.
Statements in this Quarterly Report on Form 10-Q apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies
A summary of critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, business combinations, warranty reserves, stock-based compensation, income taxes and revenue recognition. There have been no significant changes in accounting policies since December 31, 2020.
Contractual Obligations
On June 3, 2021, Wabtec Netherlands completed a public offering and sale of €500.0 million aggregate principal amount of Euro Notes. The Euro Notes will bear interest from June 3, 2021, at a rate equal to 1.250% per year, with payments made annually commencing on December 3, 2021. Additionally, during the second quarter of 2021, all U.S. dollar-denominated Term Loans were repaid. As a result of these collective changes, interest payment obligations related to total debt as of September 30, 2021 are expected to be $164.8 million for 2021, $310.8 million for 2022-2023, $230.6 million for 2024-2025, and $226.0 million thereafter for a combined total of $932.2 million. Further, as of September 30, 2021, contractual obligations related to the repayment of Long-term debt are expected to be $3.8 million for 2021, $250.0 million for 2022-2023, $1,261.4 million for 2024-2025, and $2,579.7 million thereafter for a combined total of $4,094.9 million.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposure to market risk has not changed materially since December 31, 2020. Refer to Note 13 - Derivative Financial Instruments and Hedging of "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report for additional information regarding interest rate and foreign currency exchange risk.
Item 4. CONTROLS AND PROCEDURES
Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2021. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Additional information with respect to legal proceedings is included in Note 15 of “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report.
Item 1A. RISK FACTORS
In response to the cybersecurity exposure discussed in Part I Item II - Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q, the Company has reviewed and updated the below risk factor. Other than the below risk factor, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
We face cybersecurity and data protection risks relating to cyber-attacks and information technology failures that could cause loss of confidential information and other business disruptions.
We rely extensively on the security, stability, and availability of technology systems in our business. We also collect, process, and retain sensitive and confidential customer information, including proprietary business information, personal data and other information that may be subject to privacy and security laws, regulations and/or customer-imposed data protection controls. Our business may be adversely impacted by unintentional technology disruptions, including those resulting from programming errors, employee operational errors, software defects, and product vulnerabilities.
We also provide technological products integral to train operation. Accordingly, our business may be adversely impacted by disruptions to our own or third-party information technology infrastructure, which could result from cybersecurity incidents, including, but not limited to, unauthorized access to the Company’s information technology systems, data access or acquisition, and/or encryption of the Company’s environment. For instance, one of our vendors publicly disclosed vulnerabilities in its operating system that we use for certain Wabtec products. A successful exploitation of our own or our vendors’ information technology infrastructure could result in service interruptions, safety hazards, misappropriation of confidential information, process failures, security breaches or other operational difficulties. Such an event could result in decreased revenues and increased capital, insurance or operating costs, including the increased costs of security to protect the Company’s infrastructure, among other results. Insurance maintained by the Company to protect against loss of business and other related consequences resulting from cyber incidents may not be sufficient to cover all damages. A disruption or compromise of the Company’s technology systems, even for short periods of time, could have a material adverse effect.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's stock repurchase activity for the three months ended September 30, 2021:
| Issuer Purchases of Common Stock | ||||||||||||||||||||||||||
| In millions, except shares and price per share | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs (1) | ||||||||||||||||||||||
| July 2021 | — | $ | — | — | $ | 499.4 | ||||||||||||||||||||
| August 2021 | 2,265,103 | $ | 87.89 | 2,265,103 | $ | 300.3 | ||||||||||||||||||||
| September 2021 | — | $ | — | — | $ | 300.3 | ||||||||||||||||||||
| Total quarter ended September 30, 2021 | 2,265,103 | $ | — | 2,265,103 | $ | 300.3 | ||||||||||||||||||||
(1) On February 11, 2021, the Board of Directors increased its stock repurchase authorization such that the Company has $500 million available for stock repurchases of the Company’s outstanding shares. This new stock repurchase authorization supersedes the previous authorization of $500 million of which about $292.2 million remained. No time limit was set for the completion of the program which conforms to the requirements under the Senior Credit Facility and the Senior Notes currently outstanding. The Company may repurchase shares in the future at any time, depending upon market conditions, our capital needs and other factors. Purchases of shares may be made by open market purchases or privately negotiated purchases and may be made pursuant to Rule 10b5-1 plan or otherwise.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable
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Item 6. EXHIBITS
The following exhibits are being filed with this report:
| 10.1 | |||||
| 10.2 | |||||
| 22.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101.INS | XBRL Instance Document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION | |||||
| By: | /s/ JOHN A. OLIN | ||||
| John A. Olin | |||||
| Executive Vice President and Chief Financial Officer | |||||
| (Duly Authorized Officer and Principal Financial Officer) | |||||
| DATE: | October 27, 2021 | ||||
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