What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-27 compared with 2021-07-29 · 161 added, 213 removed, 303 unchanged (55% of the section changed)

2 unchanged sentences

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, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles.

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 six months of 2021, approximately 59% of the Company’s revenues came from customers outside the United States.

COVID-19 Update

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.

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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.

and other international governments have deemed rail transportation as “critical infrastructure” providing essential services during the COVID-19 pandemic.

As a supplier and service provider for the global freight rail and passenger transit industries, Wabtec has an obligation to continue operations to support the safe and efficient operation of these industries;

however, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the six months ended June 30, 2021 and 2020 which is discussed in the Results of Operations section below.

We continue to work with our employees, customers, and suppliers to navigate the impacts of COVID-19.

We also continue to assess possible implications to our business, customers, supply chain and end-markets and to take actions in an effort to mitigate adverse consequences.

Management Review and Future Outlook

Wabtec’s long-term financial goals are to drive strong cash flow conversion, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, drive improved efficiencies across the business and increase revenues through a focused growth strategy, including product innovation and new technologies, global and market expansion, aftermarket products and services and acquisitions.

In addition, Management evaluates the Company’s current operational performance through measures such as quality and on-time delivery.

The Company primarily serves the worldwide freight and transit rail industries.

As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of railroads and passenger transit agencies around the world and transportation equipment manufacturers who serve those markets.

Many factors influence these industries, including general economic conditions;

traffic volumes, as measured by freight carloads and passenger ridership;

government spending on public transportation;

and investment in new technologies.

In general, trends such as increasing urbanization, a focus on sustainability and decarbonization, an aging equipment fleet and growth in global trade flows are expected to drive continued investment in freight and transit rail.

The Company monitors a variety of factors and statistics to gauge market activity.

Freight rail markets around the world are driven primarily by overall economic conditions and activity, while Transit markets are driven primarily by government funding and passenger ridership.

Changes in these market drivers can cause fluctuations in demand for Wabtec's products and services.

According to the 2020 bi-annual edition of a market study by UNIFE, the Association of the European Rail Industry, the accessible global market for railway products and services is more than $120 billion and is expected to grow at a compounded annual growth rate of 2.3% through 2025.

As the long-term effects of COVID-19 are still uncertain, UNIFE included a second, less likely scenario in which the recovery is more moderate.

This alternative scenario shows a compounded annual growth rate

of 0.9% through 2025 for the total accessible market.

The three largest geographic markets, which represented about 85% of the total accessible market, were Europe, North America and Asia Pacific.

UNIFE projected above-average growth rates in Latin America, Eastern Europe, North America and Africa-Middle East, with the more mature markets of Western Europe, North America and Asia Pacific accounting for the largest share of absolute growth.

UNIFE said trends such as urbanization, digitalization, legislative action and government support and an increased focus on energy and environmental issues continue to drive investment.

The largest product segments of the market were rolling stock, services and infrastructure, which represent almost 90% of the accessible market.

UNIFE projected spending growth in all product segments, with turnkey management projects, rolling stock and infrastructure to grow the fastest.

UNIFE estimated that the global installed base of diesel and electric locomotives was about 118,200 units, with about 32% in Asia Pacific, about 25% in North America and about 18% in Russia-CIS (Commonwealth of Independent States).

Wabtec estimates that about 3,000 new locomotives were delivered worldwide in 2020.

UNIFE estimated the global installed base of freight cars was about 5.2 million, with about 35% in North America, about 24% in Russia-CIS and about 24% in Asia Pacific.

Wabtec estimates that about 155,000 new freight cars were delivered worldwide in 2020.

UNIFE estimated the global installed base of passenger transit vehicles to be about 620,000 units, with about 45% in Asia Pacific, about 31% in Europe and about 10% in Russia-CIS.

Wabtec estimates that about 32,000 new passenger transit vehicles were ordered worldwide in 2020.

In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as energy and environmental policies encourage continued investment in public mass transit and modal shift from car to rail, albeit this growth may be stunted in the near-term as a result of the COVID-19 pandemic.

According to UNIFE, Germany, France and the United Kingdom were the largest Western European transit markets, representing about two-thirds of industry spending in the European Union.

UNIFE projected the accessible Western European rail market to grow at about 2.0% annually, led by investments in new rolling stock in France and Germany.

About 75% of freight traffic in Europe is hauled by truck, while rail accounts for about 19%.

The largest freight markets in Europe are Germany, Poland and the United Kingdom.

In recent years, the European Commission has adopted a series of measures designed to increase the efficiency of the European rail network by standardizing operating rules and certification requirements.

UNIFE believes that adoption of these measures should have a positive effect on ridership and investment in public transportation over time.

In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation.

Through direct ownership and operating partnerships, U.S.

railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service.

There are more than 600 railroads operating in North America, with the largest railroads, referred to as “Class I”, accounting for more than 90% of the industry’s revenues.

The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain and petroleum.

These commodities represent about 50% of total rail carloads, with intermodal carloads accounting for the rest.

Railroads operate in a competitive environment, especially with the trucking industry, and are always seeking ways to improve safety, cost and reliability.

New technologies offered by Wabtec and others in the industry can provide some of these benefits.

Demand for our freight related products and services in North America is driven by a number of factors, including rail traffic and production of new locomotives and new freight cars.

In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues.

Demand for North American passenger transit products is driven by a number of factors, including government funding, deliveries of new subway cars and buses and ridership.

federal government provides money to local transit authorities, primarily to fund the purchase of new equipment and infrastructure for their transit systems.

Demand for both our freight and passenger transit products and services in North America has been negatively impacted by the COVID-19 pandemic.

Growth in the Asia Pacific market has been driven mainly by the continued urbanization of China and India, and by continued investments in freight rail rolling stock and infrastructure in Australia to serve its mining and natural resources markets.

India is making significant investments in rolling stock and infrastructure to modernize its rail system;

for example, Wabtec is delivering on a 1,000-locomotive contract over 10-years with Indian Railways.

Other key geographic markets include Russia-CIS and Africa-Middle East.

With about 1.3 million freight cars and about 21,000 locomotives, Russia-CIS is among the largest freight rail markets in the world, and it’s expected to invest in both freight and transit rolling stock.

PRASA, the Passenger Rail Agency of South Africa, is expected to continue to invest in new transit cars and new locomotives.

According to UNIFE, emerging markets were expected to grow at above-average rates as global trade led to increased freight volumes and urbanization led to increased demand for efficient mass-transportation systems.

It is currently uncertain as to how the COVID-19 pandemic will impact the expected growth in these emerging markets especially in the near-term.

As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets.

In its study, UNIFE also said it expected increased investment in digitalization, automation, and predictive maintenance through artificial intelligence, all of which would improve efficiency in the global rail industry.

UNIFE said these trends will increase the overall attractiveness of the rail sector as these trends will lead to significant cost savings, allowing rail to be more

competitive in comparison to other modes of transportation.

Wabtec offers products and services to help customers make ongoing investments in these initiatives.

In 2021 and beyond, general global economic and market conditions will have an impact on our sales and operations.

The COVID-19 pandemic has increased the uncertainty around global economic and market conditions.

To the extent that these factors cause 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.

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.

RESULTS OF OPERATIONS

Consolidated Results

SECOND QUARTER 2021 COMPARED TO SECOND QUARTER 2020

THIRD QUARTER 2021 COMPARED TO THIRD QUARTER 2020

The following table shows our Consolidated Statements of Operations for the periods indicated.

Three Months Ended June 30,

Three Months Ended

September 30,

In millions 2021 2020

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Net income 131.8 128.5

Net (income) loss attributable to noncontrolling interest (0.4) 1.0

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 June 30, 2021 from the three months ended June 30, 2020:

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

Second Quarter 2020 Net Sales $ 1,204.7 $ 532.7 $ 1,737.4

Third Quarter 2020 Net Sales $ 1,237.3 $ 627.8 $ 1,865.1

Acquisitions 38.3 — 38.3

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Organic 11.9 (31.0) (19.1)

Second Quarter 2021 Net Sales $ 1,335.9 $ 676.4 $ 2,012.3

Net sales for the three months ended June 30, 2021 increased by $275 million, or 15.8%, to $2.0 billion compared to the same period in 2020.

The increase is primarily due to an organic increase of $81 million in the Transit Segment, due to higher

demand for original equipment door, HVAC, and brakes systems.

Additionally, organic sales in the Freight Segment increased $73 million due to an increase in Services and Components, partially offset by lower Equipment sales.

Third Quarter 2021 Net Sales $ 1,295.0 $ 611.9 $ 1,906.9

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

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 June 30, 2021 increased by $182 million, or 14.5%, to $1.4 billion compared to the same period in 2020.

The increase is primarily due to the sales increases discussed above.

Cost of sales for the three months ended June 30, 2021 includes $21 million of restructuring costs, primarily for footprint rationalization in the UK and as part of the ongoing integration actions related to the GE Transportation acquisition.

Cost of sales in the three months ended June 30, 2020 included $17 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 integration.

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 improved absorption of overhead costs, product mix in Freight towards higher margin Services sales and by lessening disruption caused by the COVID-19 pandemic in the current year.

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 $50 million, or 15.1%, for the three months ended June 30, 2021 to 18.7% of sales.

Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were $9 million and $13 million for the three months ended June 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition.

Excluding restructuring and transaction costs, SG&A increased $50 million primarily to support the increased sales volumes and higher employee benefit costs and includes $4 million of incremental expense from the acquisition of Nordco.

Engineering expense increased $4 million and amortization expense remained flat.

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 $7 million for the three months ended June 30, 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Other income (expense), net

Other income (expense), net, was $10 million of income for the three months ended June 30, 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 and an increase in income from equity method investments.

The effective income tax rate was 25.8% and 24.9% for the three months ended June 30, 2021 and 2020, respectively.

The increase in the effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred in 2021.

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.

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.

Freight Segment

The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:

Three Months Ended June 30,

Three Months Ended

September 30,

In millions 2021 2020

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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 second quarter of 2021 from the second quarter of 2020:

Second Quarter 2020 Net Sales $ 1,204.7

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:

Third Quarter 2020 Net Sales $ 1,237.3

Acquisitions 38.3

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Services 29.7

Second Quarter 2021 Net Sales $ 1,335.9

Freight Segment sales for the three months ended June 30, 2021 increased by $131 million, or 10.9%, to $1.3 billion, compared to the same period in 2020.

Organic sales increased $72 million primarily in Services due to higher locomotive modernizations and lower locomotive parkings and in Components due to a higher freight car build partially offset by lower equipment sales.

Third Quarter 2021 Net Sales $ 1,295.0

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 June 30, 2021 increased by $70 million, or 8.3%, to $922 million, compared to the same period in 2020.

The increase is attributable to the organic sales increase discussed above.

Cost of sales for the three months ended June 30, 2021 includes a $3 million charge related to purchase price accounting for the step-up of Nordco inventory.

The second quarter of 2020 included $13 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, cost of sales as a percentage of sales was 68.8% in 2021 and 69.7% in 2020, representing a 0.9 percentage point decrease.

The decrease can be attributed to the mix of sales and improved absorption of fixed costs as the prior year was particularly affected by the COVID-19 pandemic.

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 $29 million, or 13.8%, in 2021 to $240 million, or 18.0% of sales.

Restructuring and transaction costs included in SG&A were $2 million and $7 million for the three months ended June 30, 2021 and 2020, respectively, and were primarily for headcount actions as part of the ongoing integration of GE Transportation.

Excluding restructuring and transaction costs, SG&A increased $35 million primarily to support the higher sales volumes and higher employee benefit costs.

Additionally, engineering and amortization expenses remained consistent year over year.

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

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.

Transit Segment

The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:

Three Months Ended June 30,

Three Months Ended

September 30,

In millions 2021 2020

5 unchanged sentences

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 second quarter of 2021 from the second quarter of 2020:

Second Quarter 2020 Net Sales $ 532.7

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:

Third Quarter 2020 Net Sales $ 627.8

Foreign Exchange 15.1

2 unchanged sentences

Aftermarket (9.0)

Second Quarter 2021 Net Sales $ 676.4

Transit Segment sales for the three months ended June 30, 2021 increased by $144 million, or 27.0%, to $676 million compared to the same period in 2020.

The increase is primarily attributed to higher demand for Original Equipment and Aftermarket products driven by the recovery from the COVID-19 pandemic and increased global infrastructure investment.

Favorable foreign currency exchange rate changes increased net sales by $63 million.

Third Quarter 2021 Net Sales $ 611.9

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 June 30, 2021 increased by $111 million, or 27.9%, to $510 million compared to the same period in 2020.

The increase is primarily attributable to the organic sales increase discussed above and higher warranty expense in the current year.

Cost of sales for the three months ended June 30, 2021 and 2020 includes $18 million and $4 million of restructuring costs, respectively, primarily due to footprint rationalization in the UK.

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 lessening disruptions caused by the COVID-19 pandemic in the current year as well as favorable product mix towards more higher margin products.

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 $27.5 million, or 29.3%, in 2021 to $121.3 million or 17.9% of sales.

Restructuring and transaction costs included in SG&A were $5 million and $2 million for the three months ended June 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions.

Excluding restructuring and transaction costs, SG&A increased $19 million primarily to support the increase in sales volumes and due to increased employee benefit costs.

Additionally, engineering expense increased $5 million and amortization expensed remained consistent year over year.

FIRST SIX MONTHS OF 2021 COMPARED TO FIRST SIX MONTHS OF 2020

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.

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.

Six Months Ended June 30,

Nine Months Ended

September 30,

In millions 2021 2020

15 unchanged sentences

Interest expense, net (134.7) (150.3)

Other income (expense), net 24.5 (8.5)

Other income, net 25.0 5.8

Income before income taxes 502.2 438.9

3 unchanged sentences

Net income attributable to Wabtec shareholders $ 367.8 $ 326.5

The following table shows the major components of the change in sales in the six months ended June 30, 2021 from the six months ended June 30, 2020:

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 Six Months of 2020 Net Sales $ 2,505.7 $ 1,161.6 $ 3,667.3

First Nine Months of 2020 Net Sales $ 3,743.0 $ 1,789.4 $ 5,532.4

Acquisitions 76.7 — 76.7

1 unchanged sentence

Organic (30.6) 19.1 (11.5)

First Six Months of 2021 Net Sales $ 2,519.2 $ 1,323.3 $ 3,842.5

Net sales for the six months ended June 30, 2021 increased by $175 million, or 4.8%, to $3.8 billion compared to the same period in 2020 with foreign exchange rates being the primary driver of the increase.

First Nine Months of 2021 Net Sales $ 3,814.2 $ 1,935.2 $ 5,749.4

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 $43 million due to lower locomotive Equipment sales, particularly in North America partially offset by an increase in Services sales from higher locomotive modernizations and a decrease in locomotive parkings.

Sales from acquisitions contributed $38 million.

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

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 six months ended June 30, 2021 increased by $126 million, or 4.9%, to $2.7 billion compared to the same period in 2020.

The increase is primarily due to the sales increases discussed above.

Cost of sales for the six months

ended June 30, 2021 includes $25 million of restructuring costs, primarily for footprint rationalization and headcount actions in the UK and the ongoing integration actions related to the GE Transportation acquisition.

Cost of sales in the first six months of 2020 included $19 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.

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.

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 $31 million, or 4.5%, in the first six months of 2021 compared to the same period in 2020.

Operating expenses as a percentage of sales was 18.7% and 18.8% for the six months ended June 30, 2021 and 2020, respectively.

Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were $20 million and $29 million for the six months ended June 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization in the UK and as part of the integration of GE Transportation.

Excluding restructuring and transaction costs, SG&A increased $46 million primarily due to costs incurred to support the higher sales volumes and higher employee benefit costs.

Incremental expense from acquisitions in SG&A was $4 million related to the acquisition of Nordco.

Engineering expense increased $8 million and amortization expense remained flat.

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 $12 million in the first six months of 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Other income (expense), net

Other income (expense), net, was $25 million of income in the first six months of 2021 compared to $9 million of expense in the same period of 2020.

The variance is primarily driven by foreign exchange gains in the current year and an increase in income from equity method investments.

The effective income tax rate was 26.6% and 25.2% for the six months ended June 30, 2021 and 2020, respectively.

The increase in the effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred in 2021.

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.

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.

Freight Segment

The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:

Six Months Ended June 30,

Nine Months Ended

September 30,

In millions 2021 2020

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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 six months of 2021 from the first six months of 2020:

First Six Months of 2020 Net Sales $ 2,505.7

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:

First Nine Months of 2020 Net Sales $ 3,743.0

Acquisitions 76.7

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Services 172.1

First Six Months of 2021 Net Sales $ 2,519.2

Freight Segment sales for the six months ended June 30, 2021 increased by $14 million, or 0.5%, to $2.5 billion, compared to the same period in 2020.

Organic sales decreased by $43 million primarily due to lower locomotive Equipment sales, particularly in North America, partially offset by an increase in Services sales due to higher locomotive modernizations and overhauls and a decrease in parking of locomotives.

First Nine Months of 2021 Net Sales $ 3,814.2

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 six months ended June 30, 2021 decreased by $2 million to $1.7 billion, compared to the same period in 2020.

Cost of sales for the six months ended June 30, 2021 includes $5 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 six months of 2020 included $14 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 69.3% in for both the six months ended June 30, 2021 and 2020, respectively.

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

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 six months ended June 30, 2021 decreased $4 million compared to the same period in 2020.

Operating expenses as a percentage of sales was 18.0% in both periods.

Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were $9 million and $21 million for the six months ended June 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 costs, SG&A increased $25 million primarily due to costs incurred to support the higher sales volumes and higher employee benefit costs.

Additionally, incremental expense from acquisitions in SG&A was $4 million related to the acquisition of Nordco.

Engineering expense decreased $10 million due to cost control measures on research and development projects and amortization expense remained consistent year over year.

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.

Transit Segment

The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:

Six Months Ended June 30,

Nine Months Ended

September 30,

In millions 2021 2020

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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 six months of 2021 from the first six months of 2020:

First Six Months of 2020 Net Sales $ 1,161.6

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:

First Nine Months of 2020 Net Sales $ 1,789.4

Foreign Exchange 126.7

2 unchanged sentences

Aftermarket (2.3)

First Six Months of 2021 Net Sales $ 1,323.3

Transit Segment sales for the six months ended June 30, 2021 increased by $162 million, or 13.9%, to $1,323 million compared to the same period in 2020, with foreign exchange rates being the primary driver of the increase.

First Nine Months of 2021 Net Sales $ 1,935.2

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 six months ended June 30, 2021 increased by $128 million, or 15.1%, to $979 million compared to the same period in 2020.

The increase is in line with the sales increase discussed above.

Cost of sales for the six months ended June 30, 2021 and 2020 includes $20 million and $5 million of restructuring and transactions costs, respectively, primarily for footprint rationalization in the UK.

Excluding these costs, cost of sales as a percentage of sales was 72.4% in 2021 and 72.8% in 2020, a 0.4 percentage point decrease over the comparable period in 2020, attributable to a higher mix of Aftermarket products and larger impacts that the COVID-19 pandemic had on margins in 2020.

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 $6 million and $3 million for the six months ended June 30, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization in the UK.

Excluding restructuring and transaction costs, SG&A increased $21 million primarily to support the increase in sales volumes and higher employee benefit costs.

Engineering expense and amortization expense remained consistent year over year.

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.

Liquidity and Capital Resources

1 unchanged sentence

The following is a summary of selected cash flow information and other relevant data:

Six Months Ended June 30,

Nine Months Ended

September 30,

In millions 2021 2020

3 unchanged sentences

Financing activities $ (433.3) $ (360.8)

Operating activities In the first six months of 2021, cash provided by operations was $515 million compared to cash provided by operations of $229 million in the first six months of 2020.

Significant changes to the sources and (uses) of cash for the six month periods include the following:

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;

$38 million improvement in inventory from higher sales volume;

$231 million improvement from accounts payable, primarily due to the timing of payments to suppliers;

• and approximately $130 million related to cash payments made during 2020 for costs related to the GE Transportation acquisition and settlement of litigation that did not recur;

The remaining change in cash from operating activities is primarily attributable to higher Net income and other changes in the related statement of income and other changes in the consolidated balance sheet.

Investing activities In the first six months of 2021 and 2020, cash used for investing activities was $452 million and $98 million, respectively.

($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 $68 million in property, plant, and equipment for additions in the first six months of 2020 and $40 million in net cash paid for acquisitions.

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 six months of 2021, cash used for financing activities was $213 million which included $3.0 billion in proceeds from debt, $3.2 billion in repayments of debt, $1 million in stock repurchases and $46 million of dividend payments.

In the first six months of 2020, cash used for financing activities was $124 million, which included $2.1 billion in proceeds from debt, $2.1 billion in repayments of debt, $105 million in stock repurchases and $46 million of dividend payments.

As of June 30, 2021, the Company held approximately $454 million of cash and cash equivalents.

Of this amount, approximately $56 million was held within the United States and approximately $398 million was held outside of the United States, primarily in Europe, India and China.

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.

2 unchanged sentences

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 $332.7 million at June 30, 2021 that are pledged as collateral under this agreement.

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 June 30, 2021 as the estimated expected credit losses on receivables sold is insignificant.

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.

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

13 unchanged sentences

and Guarantor Subsidiaries

In millions Six Months Ended June 30, 2021

In millions Nine Months Ended September 30, 2021

Net sales $ 2,786.5

4 unchanged sentences

and Guarantor Subsidiaries

In millions June 30, 2021 December 31, 2020

In millions September 30, 2021 December 31, 2020

Current assets $ 926.1 $ 1,092.3

7 unchanged sentences

and Guarantor Subsidiaries

In millions Six Months Ended June 30, 2021

In millions Nine Months Ended September 30, 2021

Net sales to non-guarantor subsidiaries $ 494.2

2 unchanged sentences

and Guarantor Subsidiaries

In millions June 30, 2021

In millions September 30, 2021

Amount due from/(to) non-guarantor subsidiaries $ (3,356.9)

9 unchanged sentences

Issuer and Guarantor

In millions Six Months Ended June 30, 2021

In millions Nine Months Ended September 30, 2021

Net sales $ 401.9

3 unchanged sentences

Issuer and Guarantor

In millions June 30, 2021 December 31, 2020

In millions September 30, 2021 December 31, 2020

Current assets $ 213.8 $ 407.9

6 unchanged sentences

none of which are guarantors of the Euro Notes.

Wabtec and Wabtec Netherlands

In millions Six Months Ended June 30, 2021

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

Wabtec and Wabtec Netherlands

In millions June 30, 2021

Issuer and Guarantor

In millions September 30, 2021

Amount due from/(to) non-guarantor subsidiaries $ (5,565.1)

2 unchanged sentences

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, the 364 Day Facility and the Senior Notes currently outstanding.

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.

59 unchanged sentences

dollar-denominated Term Loans were repaid.

As a result of these collective changes, interest payment obligations related to total debt as of June 30, 2021 are expected to be $161.9 million for 2021, $311.3 million for 2022-2023, $230.9 million for 2024-2025, and $226.3 million thereafter for a combined total of $930.4 million.

Further, as of June 30, 2021, contractual obligations related to the repayment of Long-term debt are expected to be $0.6 million for 2021, $250.0 million for 2022-2023, $1,261.6 million for 2024-2025, and $2,593.3 million thereafter for a combined total of $4,105.5 million.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis