What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-19 · 190 added, 157 removed, 280 unchanged (55% of the section changed)

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Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world.

Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles.

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 2021, approximately 60% of the Company’s net sales came from customers outside the U.S.

COVID-19 Update

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus, known as COVID-19, as a global pandemic.

Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibit many employees from going to work.

Our top concern is, and remains, the health and well-being of our employees around the world.

To date, COVID-19 has surfaced in nearly all regions around the world and has impacted our sales channels, supply chain, manufacturing operations, workforce, and other key aspects of our operations.

The outbreak and preventive measures taken to help curb the spread, including temporary plant closures in China, India, Italy and other countries where outbreaks and stay-at-home orders were most prevalent had an adverse impact on our operations and business results for the year ended December 31, 2020.

We continue to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations;

however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, 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, supplier 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.

COVID-19 had a materially adverse impact on our operations and business results for the year-ended December 31, 2020 which is discussed in the Results of Operations section below and we expect COVID-19 to continue to have a materially adverse impact on our operations and business results into 2021.

The future adverse impact may include reduced demand for our products, reduced cash from operations and a volatile effective tax rate driven by changes in earnings mix across the Company’s different jurisdictions.

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.

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

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

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

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.

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.

ACQUISITION OF GE TRANSPORTATION

Wabtec acquired GE Transportation, a former business unit of GE, on February 25, 2019.

For additional information related to this acquisition refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report.

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 years ended December 31, 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, raw material 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.

Uncertainty around general global economic and market conditions, exacerbated by the COVID-19 pandemic, will have an impact on our sales and operations in 2022 and beyond.

To the extent that these factors cause instability of capital markets, supply chain disruptions including shortages of raw materials or component parts, labor availability, 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.

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, we are unaware of any exploitation of these vulnerabilities;

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.

Wabtec acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment, on March 31, 2021, and GE Transportation, a former business unit of GE, on February 25, 2019.

For additional information related to these acquisitions refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report.

RESULTS OF OPERATIONS

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Interest expense, net (177) (199)

Other income (expense), net 11.6 2.8

Other income, net 38 11

Income before income taxes 737 557

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Net income 565 412

Net loss attributable to noncontrolling interest 2.1 0.2

Net (income) loss attributable to noncontrolling interest (7) 2

Net income attributable to Wabtec shareholders $ 558 $ 414

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2020 Net Sales

$ 5,082 $ 2,474 $ 7,556

Acquisitions 138 — 138

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2021 Net Sales

Results of operations were negatively impacted during the year ended December 31, 2020 as a result of the COVID-19 pandemic.

Management’s discussion below includes analysis as to the impact of the COVID-19 pandemic where it could be explicitly identified;

however, in many instances it is difficult to quantify with a high level of certainty the negative impact the COVID-19 pandemic had on our results of operations.

$ 5,239 $ 2,583 $ 7,822

The following discussion compares our results for the year ended December 31, 2021 to the year ended December 31, 2020.

The discussion comparing our results for the year ended December 31, 2020 to the year ended December 31, 2019 is included within Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 19, 2021.

Net sales decreased by $644 million, or 7.9%, to $7,556 million.

The decrease is primarily attributable to an organic decrease of $833 million in the Freight Segment, due to lower locomotive Equipment sales, lower sales in Components from a

reduction of freight carbuilds in 2020 compared to 2019, a decrease in Services sales due to lower freight rail volumes and an increase in parking of locomotives, particularly in North America.

The lower freight rail volumes and increased parking of locomotives is partially due to the COVID-19 pandemic and its impact on the economy.

The Transit Segment experienced an organic decrease in sales of $307 million, primarily due to COVID-19 related production delays and reduced passenger traffic.

The decrease is partially offset by sales from acquisitions of $546 million, mainly, the acquisition of GE Transportation.

Unfavorable changes in foreign currency exchange rates reduced net sales by $50 million.

Net sales for the year ended December 31, 2021 increased by $266 million, or 3.5%, to $7.82 billion compared to the same period in 2020.

Organic sales decreased $6 million which is primarily attributable to a net organic decrease of $4 million in the Freight Segment.

Services sales increased from higher locomotive modernizations and overhauls and a decrease in locomotive parkings while Components sales increased due to a higher railcar build and lower railcar parkings.

These increases were offset by lower Equipment sales due to lower locomotive sales, particularly in North America and Egypt, and lower Digital Electronics sales primarily due to chip shortages caused by supply chain disruptions.

These decreases in Freight were

offset by an increase in sales from acquisitions, which contributed $138 million, and favorable changes in foreign exchange rates increased sales by $134 million, primarily in the Transit segment.

Cost of sales

Cost of sales decreased by $503 million to $5,419 million in 2020 compared to $5,922 million in 2019.

The decrease is primarily due to the sales decreases discussed above.

Cost of sales in 2020 includes $44 million of restructuring costs, primarily for footprint rationalization and related headcount reductions as part of the ongoing integration actions related to the GE Transportation acquisition and in response to the COVID-19 pandemic.

Cost of sales in 2019 included a $185 million charge related to purchase price accounting for the step-up of GE Transportation inventory and $38 million of restructuring costs, primarily for footprint rationalization and related headcount actions.

Excluding these charges in both years, cost of sales as a percentage of sales was 71.1% in 2020 and 69.5% in 2019, representing a 1.6% increase.

The increase can be attributed to an unfavorable sales mix, lower absorption of overhead costs due to the decrease in sales volumes, increased parking of locomotives, and lower rail passenger traffic.

This was partially offset by increased synergy savings related to the GE Transportation acquisition and actions taken to reduce costs in response to the COVID-19 pandemic.

Cost of sales for the year ended December 31, 2021 increased by $34 million, or 0.6%, to $5.45 billion compared to the same period in 2020.

The increase is primarily due to the increase in sales, increased metals, transportation and labor costs and higher restructuring costs.

Cost of sales as a percentage of sales was 69.7% and 71.7% for the years ended December 31, 2021 and 2020, respectively, representing a 2.0 percentage point decrease.

The decrease as a percentage of sales is primarily due to favorable product mix, improved productivity, synergy savings and the structural cost actions taken in the prior year, partially offset by the increase in the costs described above.

Cost of sales for the year ended December 31, 2021 included $53 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe.

Cost of sales for the year ended December 31, 2020 included $45 million of restructuring costs, primarily for footprint rationalization and related headcount actions as part of the acquisition of GE Transportation and in response to the COVID-19 pandemic.

Operating expenses

Total operating expenses decreased $222 million to 18.4% of net sales in 2020 compared to 19.7% in 2019.

Restructuring and transaction costs, primarily for headcount actions and costs related to acquisition of GE Transportation, included in SG&A were $71 million and $192 million for the year ended December 31, 2020 and 2019, respectively.

Additionally, SG&A expenses decreased $155 million related to the acquisition synergy savings, reduced employee benefit costs, cost reduction initiatives and lower sales volumes, partially offset by $57 million of incremental expense from acquisitions.

Engineering expense decreased $48 million due to cost control measures on research and development projects partially offset by incremental expense from acquisitions.

Amortization expense increased $44 million, due to the acquisition of GE Transportation.

Total operating expenses increased $101 million, or 7.3%, for the year ended December 31, 2021 compared to the same period in 2020.

Operating expenses as a percentage of sales was 19.1% and 18.4% for the year ended December 31, 2021 and 2020, respectively.

Selling, general and administrative expenses ("SG&A") increased $82 million for the year ended December 31, 2021 compared to the same period in 2020.

The increase is primarily due to higher employee compensation and benefit costs, costs incurred to support the higher sales volume and incremental expense from the acquisition of Nordco, partially offset by a decrease in restructuring and transaction costs.

Restructuring and transaction costs included in SG&A were $25 million and $71 million for the year ended December 31, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expense increased $14 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco.

Amortization expense increased $5 million, due to the acquisition of Nordco.

Interest expense, net

Interest expense, net, decreased $20 million in the 2020 over the same period in 2019 attributable to lower variable interest rates and lower overall average debt balances in 2020.

Other income (expense), net

Other expense, net, was $12 million of income in 2020 compared to $3 million of income in the same period of 2019.

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

Interest expense, net, decreased $22 million for the year ended December 31, 2021 over the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Other income, net

Other income, net, was $38 million of income in 2021 compared to $11 million of income in the same period of 2020.

The increase is primarily attributable to foreign exchange gains in the current year compared to losses in the prior year as well as higher equity income in the current year.

The effective income tax rate was 23.2% and 26.0% in 2021 and 2020, respectively.

The decrease in the effective tax rate in 2020 is primarily the result of non-deductible transaction related expenses incurred during 2019 as a result of the GE Transportation acquisition that did not recur in 2020 and a decrease in the estimated liabilities resulting from provisions of the Tax Cuts and Jobs Act that were recognized in 2019.

The change in effective tax rate in 2021 is primarily the result of filing amended federal and state income tax returns in 2021.

The Company amended the 2019 federal tax return to incorporate changes in tax regulations which generated a net operating loss that was carried back to tax years 2014 to 2016, which were at a higher federal tax rate.

See Note 11 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report for additional information.

Freight Segment

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Acquisitions 138

Foreign Exchange 23

Changes in Sales by Product Line:

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Digital Electronics (33)

Services (189.0)

Foreign Exchange (69.1)

2021 Net Sales $ 5,239

Freight Segment sales decreased by $359 million, or 6.6%, to $5,082 million, primarily due to an organic decrease of $833 million due to lower locomotive Equipment Sales, lower sales in Components from a reduction of freight carbuilds in 2020 compared to 2019, and a decrease in Services sales due to lower freight rail volumes and an increase in parking of locomotives, particularly in North America.

The lower freight rail volumes and increased parking of locomotives is partially due to the COVID-19 pandemic and its impact on the economy.

These decreases were partially offset by sales from acquisitions of $543 million, primarily related to GE Transportation.

Unfavorable foreign currency exchange rates decreased sales by $69 million.

Freight Segment sales increased by $157 million, or 3.1%, to $5.24 billion, compared to the same period in 2020, however, net organic sales decreased $4 million.

These increases were offset by lower Equipment Sales due to lower locomotive sales, particularly in North America and Egypt, and lower Digital Electronics sales primarily due to chip shortages caused by supply chain disruptions that have caused order delays but have not resulted in order cancellations.

The organic sales decrease was more than offset by sales from acquisitions of $138 million and the effects of favorable foreign exchange rates of $23 million.

Cost of sales

Freight Segment cost of sales decreased by $266 million to $3,594 million in 2020.

The decrease is attributable to the organic sales decrease discussed above, partially offset by $391 million of incremental cost of sales from acquisitions, mainly the acquisition of GE Transportation.

Included in cost of sales in 2020 is $30 million of restructuring costs, primarily for costs for footprint rationalization, and related headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition and in response to the COVID-19 pandemic.

Cost of sales in 2019 includes a $185 million charge related to purchase price accounting for the step-up of GE Transportation inventory and $34 million of restructuring costs, primarily for costs for footprint rationalization and related headcount reductions to integrate our combined businesses.

Excluding these charges, cost of sales as a percentage of sales was 70.1% in 2020 and 66.9% in 2019, representing a 3.2 percentage point increase.

The increase can be attributed to an unfavorable sales mix and lower absorption of overhead costs due to the decrease in organic sales volumes partially offset by increased synergy savings related to the GE Transportation acquisition and efforts to reduce costs in response to the COVID-19 pandemic.

Freight Segment cost of sales decreased by $22 million, to $3.57 billion, compared to the same period in 2020.

The decrease is primarily due to favorable product mix, productivity and synergies and lower restructuring costs partially offset by increased metals, transportation and labor costs.

Cost of sales as a percentage of sales was 68.2% and 70.7% for the years ended December 31, 2021 and 2020, respectively, representing a 2.5 percentage point decrease which also benefited from improved absorption of fixed costs.

Cost of sales for the year ended December 31, 2021 includes $8 million of restructuring and transaction costs, primarily for amortization of the inventory step-up recorded in purchase accounting for the acquisition of Nordco and headcount actions as part of the ongoing integration of GE Transportation.

Cost of sales for the year ended December 31, 2020 included $30 million of restructuring costs, primarily for costs for footprint rationalization and related headcount actions as part of the integration of GE Transportation and in response to the COVID-19 pandemic.

Operating expenses

Freight Segment operating expenses decreased $34 million, or 3.6%, in 2020 to 17.8% of sales.

Restructuring and transaction costs, primarily for headcount actions and costs related to acquisition of GE Transportation, included in SG&A were $46 million and $33 million for the years ended December 31, 2020 and 2019, respectively.

SG&A expenses, excluding restructuring and transaction costs in both years, decreased $116 million primarily due to synergy savings, a reduction in employee benefit costs, and lower sales volumes partially offset by $56 million in incremental expense from acquisitions, primarily GE Transportation.

Additionally, engineering expense decreased $32 million due to cost control measures on research and development projects partially offset by incremental expense from acquisitions.

Amortization expense increased $44 million, due to the acquisition of GE Transportation

Freight Segment operating expenses increased $46 million, or 5.1%, for the year ended December 31, 2021 compared to the same period in 2020.

SG&A increased $31 million for the year ended December 31, 2021 compared to the same period in 2020.

The increase is primarily due to higher employee compensation and benefit costs and incremental expense from the acquisition of Nordco, partially offset by a decrease in restructuring and transaction costs.

Restructuring and transaction costs included in SG&A were $1 million and $46 million for the years ended December 31, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization as part of the integration of GE Transportation.

Engineering expense increased $10 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco.

Amortization expense increased $5 million due to the acquisition of Nordco.

Transit Segment

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2020 Net Sales $ 2,474

Acquisitions 3.0

Foreign Exchange 111

Changes in Sales by Product Line:

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Aftermarket (8)

Foreign Exchange 19.1

2021 Net Sales $ 2,583

Transit Segment net sales decreased by $285 million, or 10.3%, primarily due to disruptions to our operations caused by the COVID-19 pandemic, particularly in Asia and Europe.

This impact was felt in both the Original Equipment Manufacturing and Aftermarket product lines as the pandemic lead to shutdowns that affected factory output and ridership levels.

Favorable foreign currency exchange rate changes increased net sales by $19 million.

Transit Segment sales for the year ended December 31, 2021 increased by $109 million, or 4.4%, to $2.58 billion compared to the same period in 2020, with foreign exchange rates being the primary driver of the increase.

Transit segment organic sales decreased $2 million due to supply chain issues and disruptions caused by the COVID-19 pandemic.

Cost of sales

Transit Segment cost of sales decreased by $237 million to $1,825 million in 2020 primarily due to the reduction in sales.

Cost of sales in 2020 includes $14 million of restructuring costs primarily for footprint rationalization in the UK.

Cost of Sales in 2019 included $5 million of restructuring costs primarily related to headcount actions and footprint rationalization.

Excluding these costs, cost of sales as a percentage of sales was 73.2%, a 1.4 percentage point decrease over the comparable period in 2019, attributable to improved operational performance.

Transit Segment cost of sales for the year ended December 31, 2021 increased by $56 million, or 3.1%, to $1.88 billion compared to the same period in 2020.

The increase is primarily due to higher restructuring costs, increased metals, transportation and labor costs and the effect of foreign exchange rates.

Cost of sales as a percentage of sales was 72.8% and 73.8% for the years ended December 31, 2021 and 2020, respectively, representing a 1.0 percentage point decrease which also benefited from improved operational efficiency and the impact that the COVID-19 pandemic had on margins in 2020.

Cost of sales for the years ended December 31, 2021 and 2020 included $45 million and $14 million of restructuring costs, respectively, primarily for footprint rationalization in Europe.

Operating expenses

Transit Segment operating expenses decreased $63 million to $419 million, or 12.9% in 2020 to 17.0% of net sales.

SG&A expenses decreased $47 million in 2020, primarily due to lower sales and cost saving initiatives put in place to offset the adverse impact of COVID-19 and reduced employee benefit costs.

SG&A included restructuring charges, mainly for severance, of $14 million and $13 million for the year ended December 31, 2020 and 2019, respectively.

Engineering expense decreased $16 million due to cost savings measures put in place as a result of the COVID-19 pandemic and amortization expense remained consistent year over year.

The combination of improved operational performance and cost saving initiatives mentioned above have resulted in a 200 basis point operating margin improvement in 2020 from 2019.

Transit Segment operating expenses increased $45 million, or 10.7%, in 2021 compared to the same period in 2020.

SG&A increased $41 million for the year ended December 31, 2021 compared to the same period in 2020.

The increase is primarily due to higher employee compensation and benefit costs and the effect of foreign exchange rates.

Restructuring and transaction costs included within SG&A were $14 million for both years ended December 31, 2021 and 2020 and were primarily for headcount actions and footprint rationalization in Europe.

Engineering expense increased $4 million due to investments in new technology, and amortization expense remained consistent year over year.

Liquidity and Capital Resources

Liquidity is provided by operating cash flow and borrowings under the Company’s Senior Notes and unsecured credit facility with a consortium of commercial banks.

Additionally, the Company utilizes the revolving receivables program and supply chain financing program described below for added flexibility as part of our liquidity management strategy.

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

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Financing activities $ (653) $ (619)

Proceeds from debt 3,878.0 3,982.4 3,480.7

Payments of debt (4,077.3) (3,423.6) (1,454.0)

Cash dividends (92.5) (81.7) (46.3)

Operating activities .

Cash provided by operations in 2020 was $784 million compared with $1,016 million in 2019.

In comparison to 2019, cash provided by operations decreased due to an unfavorable change in other assets and liabilities of $492 million primarily due to the timing of payments related to accrued expenses including litigation settlements, unfavorable change in accounts payable of $125 million due to the timing of payments to suppliers, an unfavorable change in accrued liabilities and customer deposits of $80 million primarily related to the timing of accrued compensation payments and an unfavorable change in inventory of $75 million .

These unfavorable changes were offset by higher net income of $86 million, a favorable change in non-cash items of $35 million related primarily to increased depreciation and amortization as a result of the acquisition of GE Transportation, and a favorable change in accounts receivable of $321 million due to improved collections and the acceleration of collections due to the newly implemented Revolving Receivable Program.

Cash provided by operations increased $289 million in 2021 to $1,073 million compared with $784 million in 2020.

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

• $280 million attributable to higher Net income and other favorable changes in the related statement of income;

• $(235) million from net changes in working capital driven by:

$(266) million from changes in receivables due to timing and volume of sales and $(125) million from the pay down of the Revolving Receivables Program;

$(222) million unfavorable change in inventory primarily from inventory build-ups in response to supply chain challenges;

$378 million improvement from accounts payable, primarily due to the timing of payments to suppliers and the COVID-19 related impacts on expenditures in 2020;

• favorable change in accrued liabilities and customer deposits of $175 million, which related to approximately $120 million of cash payments made during 2020 for costs related to the GE Transportation acquisition, higher incentive compensation accruals and timing of severance accruals related to site rationalization;

• approximately $40 million related to settlement of litigation in 2020 that did not recur in 2021.

Investing activities.

In 2021 and 2020, cash used in investing activities was $(540) million and $(155) million, respectively.

The major components of the cash outflow in 2020 was planned additions to property, plant, and equipment of $136 million for continued investments in our facilities and manufacturing processes, and $40 million in net cash paid for various small acquisitions.

The major components of the cash outflow in 2019 was $185 million for additions to property, plant, and equipment and $2,996 million in net cash paid for various acquisitions, primarily GE Transportation.

The major components of the cash outflow in 2021 was planned additions to property, plant, and equipment of $(130) million for continued investments in our facilities and manufacturing processes, and $(435) million in net cash paid for acquisitions, primarily for Nordco.

The major components of the cash outflow in 2020 was $(136) million for additions to property, plant, and equipment and $(40) million in net cash paid for various small acquisitions.

Financing activities .

In 2020, cash used for financing activities was $619 million, which included net debt payments of $199 million, $115 million of contingent consideration payments, $93 million of dividend payments, and $207 million for share repurchases.

In 2019, cash provided by financing activities was $462 million, which included net proceeds from debt of $559 million and dividend payments of $82 million.

The COVID-19 pandemic had an adverse impact on cash from operating activities for the year ended December 31, 2020, and management expects the COVID-19 pandemic to negatively impact cash from operations into 2021.

The extent and length of time in which the Company’s cash from operations will be negatively impacted is uncertain.

Because of this uncertainty, the Company took prudent measures to decrease cash used for investing activities in 2020.

Additionally, the Company implemented new debt arrangements and a receivables securitization program (described below) as part of its liquidity planning.

These measures further strengthen our liquidity position as we address the impacts of the COVID-19 pandemic.

Management continues to monitor the rapidly evolving situation and will periodically reassess and adjust the Company’s cash management strategy as circumstances dictate.

In 2021, cash used for financing activities was $(653) million, which included net debt payments of $(161) million, $(99) million of contingent consideration payments related to the GE Transportation acquisition, $(92) million of dividend payments, and $(300) million for share repurchases.

In 2020, cash used for financing activities was $(619) million, which included net debt payments of $(199) million, $(115) million of contingent consideration payments related to the GE Transportation acquisition, $(93) million of dividend payments, and $(207) million for share repurchases.

On June 3, 2021, Wabtec Transportation Netherlands B.V.

("Wabtec Netherlands") issued €500 million of 1.25% Senior Notes due in 2027, which are fully and unconditionally guaranteed by the Company.

Also on June 3, 2021, the Company repaid all outstanding borrowings and interest related to the 364 Day Facility, effectively retiring the facility.

Additional information with respect to Senior Notes, credit facilities and long-term debt is included in Note 8 of "Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

The Company borrows and repays against the Multi-Currency Revolving loan facility for added flexibility in liquidity to manage cash during the operating cycle.

The proceeds from borrowing and the repayments are shown within the "Proceeds from debt, net of issuance costs" and "Payments of debt" lines, respectively, presented in the Consolidated Statements of Cash Flows.

As of December 31, 2021, the Company held approximately $473 million of cash and cash equivalents.

Of this amount, approximately $108 million was held within the United States and approximately $491 million was held outside of the United States, primarily in Europe, India and China.

Of this amount, approximately $91 million was held within the United States and approximately $382 million was held outside of the United States, primarily in Europe, India, China, and Brazil.

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.

Revolving Receivables Program

In May 2020, the Company entered into a revolving agreement to transfer up to $150.0 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.

Additional information with respect to the Revolving Receivables Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report and referenced herein.

In May 2020, the Company entered into a revolving agreement to transfer up to $150 million of certain receivables of certain subsidiaries of the Company (the "Originators") through our bankruptcy-remote subsidiary to a financial institution on a

recurring basis in exchange for cash equal to the gross receivables transferred.

During the first quarter of 2021, the Company amended its revolving agreement to increase the amount of certain receivables that can be transferred from $150 million to $200 million.

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.

This arrangement does 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.

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 Sheets.

Guarantor Summarized Financial Information

The obligations under the Company's Senior Notes, Senior Credit Facility and 364 Day Facility have been fully and unconditionally guaranteed by certain of the Company's U.S.

The obligations of Westinghouse Air Brake Technologies Corporation under the Senior Notes, Senior Credit Facility and 364 Day Facility have been fully and unconditionally guaranteed by certain of the parent company's U.S.

subsidiaries.

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Net income attributable to Wabtec shareholders 175

Summarized Balance Sheet

Summarized Balance Sheets

Westinghouse Air Brake Technologies Corp.

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Amount due from/(to) Non-Guarantor Subsidiaries $ (6,428)

Summarized Financial Information—Euro Notes

The obligations under Wabtec Netherlands’ Euro Notes are fully and unconditionally guaranteed by Westinghouse Air Brake Technologies Corporation.

Wabtec Netherlands is a wholly-owned, indirect subsidiary of the parent 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 Westinghouse Air Brake Technologies Corporation, as the parent guarantor, on a combined basis.

The combined summarized financial information eliminates all intercompany balances and transactions among Wabtec Netherlands and Westinghouse Air Brake Technologies Corporation as well as all equity in earnings from and investments in any subsidiary of Westinghouse Air Brake Technologies Corporation, 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

Issuer and Guarantor

In millions Twelve Months Ended December 31, 2021

Net sales $ 540

Gross profit 97

Net loss attributable to Wabtec shareholders (267)

Summarized Balance Sheets

Issuer and Guarantor

In millions December 31, 2021 December 31, 2020

Current assets $ 252 $ 408

Noncurrent assets $ 805 $ 710

Current liabilities $ 499 $ 824

Long-term debt $ 4,044 $ 3,780

Other non-current liabilities $ 209 $ 314

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, none of which are guarantors of the Euro Notes.

Issuer and Guarantor

In millions Twelve Months Ended December 31, 2021

Net sales to non-issuer and non-guarantor subsidiaries $ 69

Purchases from non-issuer and non-guarantor subsidiaries 109

Issuer and Guarantor

In millions December 31, 2021

Amount due from/(to) non-issuer and non-guarantor subsidiaries $ (6,262)

Contractual Obligations and Off-Balance Sheet Arrangements

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and has certain contingent commitments such as debt guarantees.

The Company is obligated to make future payments under various contracts such as debt and lease agreements, and has certain contingent commitments.

The Company has grouped these contractual obligations and off-balance sheet arrangements into operating activities, financing activities, and investing activities in the same manner as they are classified in the Statement of Consolidated Cash Flows to provide a better understanding of the nature of the obligations and arrangements and to provide a basis for comparison to historical information.

The table below provides a summary of contractual obligations and off-balance sheet arrangements as of December 31, 2021:

Less than 1 - 3 3 - 5 More than

In millions Total 1 year years years 5 years

In millions Total 2022 2023-24 2025-26 2027+

Operating activities:

Purchase obligations (1)

$ 117 $ 73 $ 40 $ 4 $ —

Operating leases (2)

Pension benefit payments (3) 185.8 16.7 35.1 36.7 97.3

Postretirement benefit payments (4) 9.4 1.1 2.1 2.0 4.2

Financing activities:

345 60 99 73 113

Pension and postretirement benefit payments (3)

202 18 38 40 106

Interest payments (4)

765 155 282 198 130

Financing activities:

Long-term debt 4,081 2 1,012 1,250 1,817

Dividends to shareholders (5)

Standby letters of credit (8) 736.6 162.9 184.6 217.9 171.2

111 111 — — —

Contingent consideration (6)

256 110 146 — —

Total $ 5,877 $ 529 $ 1,617 $ 1,565 $ 2,166

(1) Purchase obligations represent non-cancelable contractual obligations at December 31, 2021.

In addition, the Company had $1.1 billion of open purchase orders for which the related goods or services had not been received.

In addition, the Company had approximately $1 billion of open purchase orders for which the related goods or services had not been received.

Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

(2) Future minimum payments for operating leases are disclosed by year in Note 15 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(3) Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted.

Pension benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets and rate of compensation increases.

The Company expects to contribute about $7.3 million to pension plan investments in 2021.

See further disclosure in Note 10 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(4) Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted.

Postretirement payments are based on actuarial estimates using current assumptions for discount rates and health care costs.

(5) Interest payments are payable February and August of each year at 4.375% of $250 million Senior Notes due in 2023.

Interest payments are payable May and September of each year at 4.15% of $750 million Senior Notes due 2024.

Interest payments are payable June and December of each year at 3.20% of the $500 million Senior Notes due in 2025.

Interest payments are payable May and November of each year at 3.45% of $750 million Senior Notes due in 2026.

Interest payments are payable March and September of each year at 4.7% of $1,250 million Senior Note due 2028.

(2) Operating leases represent multi-year obligations for rental of facilities and equipment.

(3) Pension and postretirement benefit payments includes expected payments to participants out of plan assets and corporate assets.

The benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets and rate of compensation increases.

The Company expects to contribute $3 million to pension plan investments in 2022.

(4) Interest payments on the Senior Notes are based on interest rates in effect as of December 31, 2021 and are calculated on debt with maturities that extend to 2028.

Interest payments for the Revolving Credit Facility and Other Borrowings are based on contractual terms and the Company’s current interest rates.

(6) Scheduled principal repayments of outstanding loan balances are disclosed in Note 9 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(5) Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $111 million.

(8) The $736.6 million of standby letters of credit is comprised of outstanding letters of credit for performance and bid bond purposes, which expire in various dates through 2039.

Amounts include interest payments based on contractual terms and the Company’s current interest rate.

(6) Contingent consideration represents the total remaining payable to General Electric (GE) resulting from the 2019 acquisition of GE Transportation.

The timing of the cash payments to GE is directly related to the future timing of tax benefits received by the Company and could change.

The above table does not reflect uncertain tax positions of $32 million, the timing of which are uncertain.

Refer to Note 11 of the “Notes to Consolidated Financial Statements” for additional information on uncertain tax positions.

Obligations for operating activities.

The Company has entered into $98.5 million of material long-term non-cancelable materials and supply purchase obligations.

Operating leases represent multi-year obligations for rental of facilities and equipment.

Estimated pension funding and post-retirement benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets, rate of compensation increases and health care cost trend rates.

Benefits paid for pension obligations were $17.3 million and $16.0 million in 2020 and 2019, respectively.

Benefits paid for post-retirement plans were $0.9 million and $1.0 million in 2020 and in 2019, respectively.

Obligations for financing activities.

Cash requirements for financing activities consist primarily of long-term debt repayments, interest payments and dividend payments to shareholders.

The Company has historically paid quarterly dividends to shareholders, subject to quarterly approval by our Board of Directors, currently at a rate of approximately $90.7 million annually.

The Company arranges for performance bonds to be issued by third party insurance companies to support certain long term customer contracts.

At December 31, 2020, the initial value of performance bonds issued on the Company’s behalf is about $878 million.

Additionally, the Company arranges for certain types of bank guarantees and letters of credit, such as performance bonds, bid bonds and financial guarantees, that are issued by certain banks and insurance companies to support customer contracts.

At December 31, 2021, the total value of these bank guarantees and letters of credit were $791 million and expire on various dates through 2039.

Amounts include interest payments based on contractual terms and the Company’s current interest rate.

Forward Looking Statements

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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 South Africa;

• 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;

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• availability of credit;

• changes in market consensus as to what attributes are required for projects to be considered "green" or "sustainable" or negative perceptions regarding determinations in such regard with respect to our Green Finance Framework;

Operating factors

• supply disruptions including but not limited to disease outbreak, fires, earthquakes, explosions, floods, tornadoes, hurricanes or weather conditions;

• supply disruptions;

• technical difficulties;

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• 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, competition and anti-trust matters or intellectual property claims;

• completion and integration of acquisitions, including the acquisition of GE Transportation;

• completion and integration of acquisitions;

• the development and use of new technology;

• unexpected costs, charges or expenses resulting from the GE Transportation acquisition;

• failure to realize the anticipated benefits of the GE Transportation acquisition, including as a result of integrating GE Transportation into Wabtec;

• the severity and duration of the evolving COVID-19 pandemic and the resulting impact on the global economy;

Competitive factors

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Political/governmental factors

• political stability in relevant areas of the world;

• political stability in relevant areas of the world, including the impacts of war and conflicts;

• future regulation/deregulation of our customers and/or the rail industry;

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• the outcome of negotiations with governments;

Statements in this 10-K 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.

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;

• difficulty in obtaining debt or equity financing.

Statements in this 10-K apply only as of the date on which such statements are made, and except as required by law, 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.

Critical Accounting Estimates

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Judgments and Uncertainties The allowance for doubtful accounts receivable reflects our best estimate of expected losses inherent in our receivable portfolio determined on the basis of historical experience, relevant credit forecast information, changes to customer's solvency and other currently available evidence.

Effect if Actual Results Differ From Assumptions If our estimates regarding the collectability of troubled accounts, and/or our actual losses within our receivable portfolio exceed our estimated losses, we may be exposed to the expense of increasing our allowance for doubtful accounts.

Description Inventories are stated at the lower of cost or net realizable value and are reviewed to ensure that an adequate provision is recognized for excess, slow moving and obsolete inventories, and net realizable value reserves.

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Also, specific reserves are established for known inventory obsolescence, a decline in market value, or loss of a customer with specific inventory.

Effect if Actual Results Differ From Assumptions If the market value or demand for of our products were to decrease due to changing market conditions, the Company could be at risk of incurring write-downs to adjust inventory value to a net realizable value lower than stated cost.

Effect if Actual Results Differ From Assumptions If the market value or demand for our products were to decrease due to changing market conditions, the Company could be at risk of incurring write-downs to adjust inventory value to a net realizable value lower than stated cost.

If our estimates regarding sales and backlog requirements are inaccurate, we may be exposed to the expense of increasing our reserves for slow moving and obsolete inventory.

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The amount of purchase price which is in excess of the fair values of assets acquired and liabilities assumed is recognized as goodwill.

Judgments and Uncertainties Discounted cash flow models are used to estimate the fair values of acquired contract backlog, customer relationships, intellectual property intangibles, and below-market customer contract liabilities.

The significant assumptions used to estimate the value of the intangible assets and below-market customer contract liabilities included revenue growth rates, projected profit margins, discount rates, royalty rates, customer attrition rates, revenue obsolescence rates and market participant profit margins.

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If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.

For example, based on the quantitative analysis performed as of October 1, 2020, a decline in the terminal growth rate by 100 basis points would decrease fair market value by $1,218 million, or an increase in the weighted-average cost of capital by 100 basis points would result in a decrease in fair market value by $2,031 million.

Even with such changes the fair value of the reporting units would be greater than their net book values.

At December 31, 2021, all three of the Company’s reporting units had fair values which were substantially in excess of their carrying values .

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Effect if Actual Results Differ From Assumptions If assumptions used in determining the estimated three-year performance change significantly, stock-based compensation expense related to the unvested incentive stock awards can fluctuate from period to period.

For example, a 10% decrease or increase in the estimated vesting percentage for incentive stock awards would decrease or increase stock-based compensation expense by approximately $2.5 million.

Income Taxes:

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Revenue Recognition:

Description Revenue is recognized in accordance with ASC 606 “Revenue from Contracts with Customers.” Company recognizes a portion of its revenues on 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.

Description Revenue is recognized in accordance with ASC 606 Revenue from Contracts with Customers .

Company recognizes a portion of its revenues on 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.

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.

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Generally, pricing is defined in our contracts but may include an estimate of variable consideration when required by the terms of the individual customer contract.

variable consideration that the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses.

Types of variable consideration that the Company typically has include volume discounts, prompt payment discounts, liquidating damages, and performance bonuses.

Effect if Actual Results Differ From Assumptions Should market conditions and customer demands dictate changes to our standard shipping terms, the Company may be impacted by longer than typical revenue recognition cycles.

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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-K

Item 7. Management’s Discussion and Analysis