What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-27 compared with 2021-10-27 · 135 added, 267 removed, 197 unchanged (67% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 17, 2022.

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.

Wabtec is one of the world’s largest providers of value-added, technology-based locomotives, equipment, systems, and services for the global freight rail and passenger transit industries.

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

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

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

Wabtec is a global company with operations in over 50 countries and our products can be found in more than 100 countries throughout the world.

In the first nine months of 2021, approximately 58% of the Company’s revenues came from customers outside the United States.

In the first three months of 2022, approximately 60% of the Company’s net sales came from customers outside the United States.

Business Update

The COVID-19 pandemic has continued to impact our sales channels, supply chain, manufacturing operations, workforce and other key aspects of our operations.

The Company continues to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities;

however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, impact of variants of the disease, actions that may be taken by governmental authorities and private industry, including preventing or curtailing the operations of our plants, the potential impact on global economic activity, global supply chain operations, our employees, our customers, suppliers and end-markets and other consequences that could negatively impact our business.

We also face the possibility that government policies may become more restrictive especially if COVID-19 transmission rates increase in certain areas.

As a result of these numerous uncertainties, we are unable to specifically predict the extent and length of time the COVID-19 pandemic will negatively impact our business.

The COVID-19 pandemic has increased the uncertainty around global economic and market conditions, which impacts our sales and operations.

To the extent that these factors cause, or exacerbate, instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected, and the materially adverse impacts that we have experienced as a result of the COVID-19 pandemic could continue or worsen.

In addition, we face risks associated with our growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion.

When necessary, we will modify our financial and operating strategies to address changes in market conditions and risks.

Although the U.S.

and other international governments deemed rail transportation as “critical infrastructure” providing essential services during the COVID-19 pandemic, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the nine months ended September 30, 2021 and 2020, which is discussed in more detail in the Results of Operations section below.

Supply chain disruptions and labor availability have caused component and chip shortages resulting in an adverse effect on the timing of the Company’s revenue generation.

Additionally, broad-based inflation, escalation of metals and commodities costs, transportation and logistics costs and labor costs have all resulted from the COVID-19 pandemic.

The Company has implemented various mitigating actions to lessen the impact of supply chain disruptions caused by the COVID-19 pandemic.

These actions include price escalations in long-term contracts, implementing price surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management, strategic sourcing alignments, and accelerating integration synergies where possible.

The Company expects to continue to realize these increased costs over the next few quarters.

Cybersecurity Exposure

During the third quarter 2021, one of our vendors publicly disclosed vulnerabilities in one of its operating systems that is used in a range of products across the rail sector and other industries, including in certain Wabtec products.

In response, Wabtec reviewed its digital onboard locomotive products and locomotive control systems to determine which products may be affected and the potential impact to Wabtec, our customers and other relevant parties.

To date, no known vulnerabilities in our products have been exploited;

however, we are working closely with our vendor to appropriately address potentially impacted products.

Additionally, we have communicated with potentially affected customers and discussed mitigation strategies.

The unfavorable global economic conditions driven by the impacts of the COVID-19 pandemic and supply chain disruptions, and further intensified by the Russian invasion of Ukraine, continue to have an adverse impact on our operations and business results.

Impacts for the three months ended March 31, 2022 and 2021, are 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 diesel, metals and other commodity costs, transportation and logistics costs, and labor costs all continue to impact our results.

The Russian invasion of Ukraine and the resultant sanctions related to Russia and Belarus have further impacted our supply and distribution channels and caused significant price inflation which had, and are expected to continue to have, adverse effects on Wabtec’s business results.

For the year ended December 31, 2021, Wabtec had earnings of approximately $40 million attributable to customers in Russia, while earnings from customers in Ukraine and Belarus were not significant.

As of March 31, 2022, Wabtec had approximately $16 million of assets related to Russian operations, which were primarily cash and inventory.

Management has determined, based on information currently available, that these assets are expected to be recoverable and therefore no impairment was recorded in the first quarter of 2022.

This will continue to be monitored and may result in a future impairment charge based on changes in the situation.

Management determined that inventory related to operations in Ukraine were not expected to be recoverable and were written off resulting in an insignificant charge during the first quarter of 2022.

Remaining assets related to Ukraine and those in Belarus were not significant.

The Company has implemented various mitigating actions intended to lessen the impact of these unfavorable economic conditions.

These actions include implementing price escalations and surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management, strategically sourcing materials, reviewing and modifying distribution logistics, and accelerating integration synergies where possible.

The Company expects to continue to incur increased costs in future quarters.

Management will continue to monitor the evolving situations but, as a result of the numerous uncertainties surrounding the COVID-19 pandemic, recent supply chain disruptions and the Russian invasion of Ukraine, we are unable to specifically predict the extent and length of time that our business may be negatively impacted.

We also face the possibility that additional actions may be taken by governmental authorities and private industry, or government policies may become more restrictive in response to the COVID-19 pandemic, especially if COVID-19 transmission rates increase in certain areas as is currently happening in China.

Changes in trade regulations and sanctions including retaliatory measures, advancements or changes in the conflict in Ukraine, the impact of variants of COVID-19, actions taken in response to COVID-19 including curtailing operations of our plants, or significant adverse impacts to our customers, suppliers, distribution channels and operating locations, could result in material adverse impacts to the business, including impairment charges from changes in estimates.

Integration 2.0

During the first quarter of 2022, Wabtec announced a three-year strategic review expected to target incremental run rate synergies estimated to be between $75 million and $90 million by 2025.

The scope of the review will include consolidating our operating footprint, reducing headcount, streamlining the end-to-end manufacturing process, restructuring the North America distribution channels, expanding operations in low-cost countries and simplifying the business through systems enablement, including the source-to-pay process.

Management will also consider additional capital investments to further simplify and streamline the business.

The Company anticipates that it will incur one-time restructuring charges in the future to execute on decisions resulting from the review, currently estimated to be approximately $135 million to $165 million.

The estimate could change based on the specific programs approved or changes to the scope of the review.

RESULTS OF OPERATIONS

Consolidated Results

THIRD QUARTER 2021 COMPARED TO THIRD QUARTER 2020

FIRST QUARTER 2022 COMPARED TO FIRST QUARTER 2021

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

Three Months Ended

September 30,

In millions 2022 2021

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Net income attributable to Wabtec shareholders $ 149 $ 112

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:

The following table shows the major components of the change in sales in the three months ended March 31, 2022 from the three months ended March 31, 2021:

In millions Freight Segment Transit Segment Total

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

First Three Months of 2021 Net Sales $ 1,183 $ 647 $ 1,830

Acquisitions 39 1 40

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Organic 104 (10) 94

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.

First Three Months of 2022 Net Sales $ 1,322 $ 605 $ 1,927

Net sales for the three months ended March 31, 2022 increased by $97 million, or 5.3%, to $1.93 billion compared to the same period in 2021.

Freight Segment organic sales increased $104 million driven primarily by Services sales from higher locomotive modernizations and a decrease in locomotive parkings.

In addition, Components sales increased due to a higher railcar build and lower railcar parkings and Equipment sales increased due to higher volumes for mining equipment, partially offset by lower sales in Digital Electronics due primarily to chip shortages caused by continued global supply chain disruptions.

Transit Segment organic sales decreased $10 million primarily due to the prior year exit of low margin contracts in the United Kingdom and supply chain issues caused by the COVID-19 pandemic, particularly in China, despite higher demand for

Original Equipment Manufacturing driven by an increase in government transportation spending.

Sales from acquisitions contributed $40 million and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $37 million.

Cost of sales

Cost of sales for the three months ended September 30, 2021 increased by $6 million, or 0.4%, to $1.30 billion compared to the same period in 2020.

Cost of sales for the three months ended September 30, 2021 includes $23 million of restructuring costs, primarily for footprint rationalization in Europe.

Cost of sales in the three months ended September 30, 2020 included $5 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization, and related headcount actions as part of the GE Transportation acquisition and in response to the COVID-19 pandemic.

Excluding these charges in both years, cost of sales as a percentage of sales was 67.2% in 2021 and 69.4% in 2020, representing a 2.2 percentage point decrease.

The decrease can be attributed to a favorable product mix, the realization of synergies and the effects of prior year restructuring programs, partially offset by increased metals, transportation and labor costs.

Cost of sales for the three months ended March 31, 2022 increased by $36 million, or 2.8%, to $1.33 billion compared to the same period in 2021.

The increase is primarily due to the increase in sales and increased raw materials, commodity, labor and shipping costs.

Cost of sales as a percentage of sales was 69.1% and 70.8% for the three months ended March 31, 2022 and 2021, respectively, representing a 1.7 percentage point decrease.

The decrease as a percentage of sales can be attributed to favorable product mix, higher pricing, improved productivity, synergy savings and structured cost actions taken in prior years, partially offset by the increase in the costs described above.

Cost of sales for the three months ended March 31, 2022 and 2021 included $5 million and $4 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.

Operating expenses

Total operating expenses increased $26 million, or 7.2% to $385 million, for the three months ended September 30, 2021 to 20.2% of sales compared to $360 million, or 19.3% of sales in the same period of 2020.

Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were $12 million for both the three months ended September 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions.

Excluding restructuring and transaction costs and $4 million of incremental expense from the acquisition of Nordco, SG&A increased $13 million primarily for higher employee compensation and benefit costs.

Engineering expense increased $7 million due to investments in new technologies and products and amortization expense increased $2 million due to the acquisition of Nordco.

Total operating expenses increased $14 million, or 4.1%, for the three months ended March 31, 2022 compared to the same period in 2021.

Operating expenses as a percentage of sales was 18.4% and 18.7% for the three months ended March 31, 2022 and 2021, respectively.

Selling, general and administrative expenses ("SG&A") increased $4 million for the three months ended March 31, 2022 compared to the same period in 2021.

The increase is primarily due to higher technology costs and incremental expense from the acquisition of Nordco, partially offset by decreased restructuring and transaction costs.

Restructuring and transaction costs included in SG&A were $2 million and $11 million for the three months ended March 31, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expense increased $7 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco.

Amortization expense increased $3 million due to the acquisition of Nordco.

Interest expense, net

Interest expense, net, decreased $3 million for the three months ended September 30, 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Interest expense, net, decreased $5 million for the three months ended March 31, 2022 compared to the same period in 2021 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.

Other income, net, was $4 million of income for the three months ended March 31, 2022 compared to $14 million of income in the same period of 2021.

The variance is primarily driven by lower foreign exchange gains and lower equity income in the current year.

The effective income tax rate was 25.1% and 27.5% for the three months ended March 31, 2022 and 2021, respectively.

The difference in the quarterly effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred during the three months ended March 31, 2021 that did not recur in the three months ended March 31, 2022.

Freight Segment

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Three Months Ended

September 30,

In millions 2022 2021

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Income from operations 14.3 % 12.0 %

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

The following table shows the major components of the change in net sales for the Freight Segment in the first quarter of 2022 from the first quarter of 2021:

First Quarter 2021 Net Sales $ 1,183

Acquisitions 39

1 unchanged sentence

Changes in Sales by Product Line:

Equipment (21.6)

Components 30

Digital Electronics (2)

Services 29.7

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.

First Quarter 2022 Net Sales $ 1,322

Freight Segment sales increased by $139 million or 11.7%, to $1.32 billion, compared to the same period in 2021.

Services sales increased from higher locomotive modernizations and a decrease in locomotive parkings, Components sales increased due to a higher railcar build and lower railcar parkings and Equipment sales increased due to higher volumes for mining equipment, partially offset by lower sales in Digital Electronics caused by continued global supply chain disruptions, particularly chip shortages.

Sales from the Nordco acquisition contributed $39 million and the effects of unfavorable foreign exchange rates decreased sales by $4 million.

Cost of sales

Freight Segment cost of sales for the three months ended September 30, 2021 increased by $9 million, or 1.0%, to $851 million, compared to the same period in 2020.

Excluding restructuring and transaction costs, cost of sales as a percentage of sales was 65.7% in 2021 and 68.0% in 2020, representing a 2.3 percentage point decrease.

The decrease can be attributed to a favorable mix of sales and improved absorption of fixed costs as the prior year was particularly affected by the COVID-19 pandemic, partially offset by increased metals, transportation and labor costs.

Freight Segment cost of sales for the three months ended March 31, 2022 increased by $71 million, or 8.5%, to $898 million, compared to the same period in 2021.

The increase is primarily due to the increase in sales and increased raw materials, commodity, transportation and labor costs.

Cost of sales as a percentage of sales was 67.9% and 69.9% for the three months ended March 31, 2022 and 2021, respectively, representing a 2.0 percentage point decrease which benefited from favorable product mix, increased pricing, improved productivity and synergy savings.

Cost of sales for the three months ended March 31, 2022 and 2021 includes $2 million and $1 million, respectively, of restructuring costs, primarily for headcount actions.

Operating expenses

Freight Segment operating expenses increased $14 million, or 6.1%, in 2021 to $249 million, or 19.2% of sales compared to $234 million or 18.9% of sales in the same period in 2020.

Restructuring and transaction costs included in SG&A were $3 million and $7 million for the three months ended September 30, 2021 and 2020, respectively .

Excluding restructuring

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.

Freight Segment operating expenses increased $21 million, or 9.8%, for the three months ended March 31, 2022 compared to the same period in 2021.

SG&A increased $10 million for the three months ended March 31, 2022 compared to the same period in 2021.

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

There were no restructuring and transaction costs included in SG&A for the three months ended March 31, 2022 compared to $6 million for the same period in 2021 primarily for headcount actions as part of the integration of GE Transportation.

Engineering expense increased $8 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco.

Amortization expense increased $3 million due to the acquisition of Nordco.

Transit Segment

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Three Months Ended

September 30,

In millions 2022 2021

5 unchanged sentences

Income from operations 10.7 % 10.8 %

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

Changes in Sales by Product Line:

Original Equipment Manufacturing (22.0)

Aftermarket (9.0)

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 September 30, 2021 decreased by $3 million, or 0.6%, to $453 million compared to the same period in 2020.

Cost of sales for the three months ended September 30, 2021 and 2020 includes $22 million and $3 million of restructuring costs, respectively, primarily due to footprint rationalization in Europe.

Excluding these charges, cost of sales as a percentage of sales was 70.4% in 2021 and 72.2% in 2020, representing a 1.8 percentage point decrease.

The decrease can be attributed to improved operational performance stemming from the effects of prior year restructuring programs and disruption from the COVID-19 pandemic, partially offset by increased metals, transportation and labor costs.

Operating expenses

Transit Segment operating expenses increased $7 million, or 6.6%, in 2021 to $115 million or 18.7% of sales, compared to $108 million or 17.1% of sales in the same period in 2020.

Restructuring and transaction costs included in SG&A were $5 million and $3 million for the three months ended September 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions.

Excluding restructuring and transaction costs, SG&A increased $4 million primarily due to employee compensation and benefit costs.

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

FIRST NINE MONTHS OF 2021 COMPARED TO FIRST NINE MONTHS OF 2020

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

Nine Months Ended

September 30,

In millions 2021 2020

Sales of goods $ 4,562.2 $ 4,540.5

Sales of services 1,187.2 991.9

Total net sales 5,749.4 5,532.4

Cost of sales:

Cost of goods (3,368.2) (3,327.1)

Cost of services (664.6) (573.7)

Total cost of sales (4,032.8) (3,900.8)

Gross profit 1,716.6 1,631.6

Operating expenses:

Selling, general and administrative expenses (766.5) (712.9)

Engineering expenses (123.5) (123.7)

Amortization expense (214.7) (211.6)

Total operating expenses (1,104.7) (1,048.2)

Income from operations 611.9 583.4

Other income and expenses:

Interest expense, net (134.7) (150.3)

Other income, net 25.0 5.8

Income before income taxes 502.2 438.9

Income tax expense (130.5) (113.4)

Net income 371.7 325.5

Net (income) loss attributable to noncontrolling interest (3.9) 1.0

Net income attributable to Wabtec shareholders $ 367.8 $ 326.5

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

In millions Freight Segment Transit Segment Total

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

Acquisitions 76.7 — 76.7

Foreign Exchange 25.1 126.7 151.8

Organic (30.6) 19.1 (11.5)

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

Net sales for the nine months ended September 30, 2021 increased by $217 million, or 3.9%, to $5.7 billion compared to the same period in 2020.

Transit segment organic sales increased $19 million due to improved demand for original equipment door, HVAC, and brakes systems.

This increase is partially offset by an organic decrease in the Freight segment of $31 million due to lower locomotive Equipment sales, particularly in North America and lower Digital Electronics sales due to supply chain disruptions partially offset by an increase in Services sales from higher locomotive modernizations and a decrease in

locomotive parkings.

Favorable changes in foreign exchange rates increased sales by $152 million and sales from the acquisition of Nordco contributed $77 million.

Cost of sales

Cost of sales for the nine months ended September 30, 2021 increased by $132 million, or 3.4%, to $4.0 billion compared to the same period in 2020.

Cost of sales for the nine months ended September 30, 2021 includes $48 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe.

Cost of sales in the first nine months of 2020 included $23 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic.

Excluding these charges in both years, cost of sales as a percentage of sales was 69.3% in 2021 and 70.1% in 2020, representing a 0.8 percentage point decrease.

The decrease can be attributed to synergy savings and the structural cost actions taken in the prior year, partially offset by increased metals, transportation and labor costs.

Operating expenses

Total operating expenses increased $57 million, or 5.4%, in the first nine months of 2021 compared to the same period in 2020.

Operating expenses as a percentage of sales was 19.2% and 18.9% for the nine months ended September 30, 2021 and 2020, respectively.

Restructuring and transaction costs included in SG&A were $32 million and $41 million for the nine months ended September 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization programs.

Excluding restructuring and transaction costs and $9 million of incremental expense from the acquisition of Nordco, SG&A increased $54 million primarily due to higher employee compensation and benefit costs and costs incurred to support the higher sales volumes.

Engineering expense remained flat and amortization expense increased $3 million due to the acquisition of Nordco.

Interest expense, net

Interest expense, net, decreased $16 million in the first nine months of 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Other income, net

Other income, net, was $25 million of income in the first nine months of 2021 compared to $6 million of income in the same period of 2020.

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

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:

Nine Months Ended

September 30,

In millions 2021 2020

Sales of goods $ 2,645.6 $ 2,774.6

Sales of services 1,168.6 968.4

Total net sales 3,814.2 3,743.0

Cost of sales:

Cost of goods (1,950.6) (2,039.2)

Cost of services (650.2) (555.0)

Total cost of sales (2,600.8) (2,594.2)

Gross profit 1,213.4 1,148.8

Operating expenses (703.2) (685.4)

Income from operations ($) $ 510.2 $ 463.4

Income from operations (%) 13.4% 12.4%

The following table shows the major components of the change in net sales for the Freight Segment in the first nine months of 2021 from the first nine months of 2020:

First Nine Months of 2020 Net Sales $ 3,743.0

The following table shows the major components of the change in net sales for the Transit Segment in the first quarter of 2022 from the first quarter of 2021:

First Quarter 2021 Net Sales $ 647

Acquisitions 1

1 unchanged sentence

Changes in Sales by Product Line:

Equipment (174.4)

Components 8.0

Digital Electronics (36.3)

Services 172.1

First Nine Months of 2021 Net Sales $ 3,814.2

Freight Segment sales for the nine months ended September 30, 2021 increased by $71 million, or 1.9%, to $3.81 billion, compared to the same period in 2020.

Organic sales decreased by $31 million primarily due to lower locomotive Equipment sales, particularly in North America and lower Digital Electronics sales due to supply chain constraints and COVID-19 disruptions, partially offset by an increase in Services sales due to higher locomotive modernizations and overhauls and a decrease in parking of locomotives.

The organic sales decrease was more than offset by sales from acquisitions of $77 million and the effects of favorable foreign exchange rates of $25 million.

Cost of sales

Freight Segment cost of sales for the nine months ended September 30, 2021 increased by $7 million, to $2.60 billion, compared to the same period in 2020.

Cost of sales for the nine months ended September 30, 2021 includes $6 million of restructuring and transaction costs, primarily for a charge related to purchase price accounting for the step-up of Nordco inventory and headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition.

Cost of sales in the first nine months of 2020 included $16 million of restructuring costs, primarily for the exit of certain product lines, costs for site closures, and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic.

Excluding these charges in both years, cost of sales as a percentage of sales was 68.0% and 68.9% in for the nine months ended September 30, 2021 and 2020, respectively, representing a 0.9 percentage point

The decrease can be attributed to a favorable mix of sales and improved absorption of fixed costs, partially offset by increased metals, transportation and labor costs.

Operating expenses

Freight Segment operating expenses for the nine months ended September 30, 2021 increased $18 million compared to the same period in 2020.

Restructuring and transaction costs included in SG&A were $11 million and $28 million for the nine months ended September 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization as part of the integration of GE Transportation.

Excluding restructuring and transaction and $9 million of incremental expense for acquisitions, SG&A increased $26 million primarily due to higher employee compensation and benefit costs.

Engineering expense decreased $3 million due to cost control measures on research and development projects and amortization expense increased $3 million due to the acquisition of Nordco.

Transit Segment

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

Nine Months Ended

September 30,

In millions 2021 2020

Net sales $ 1,935.2 $ 1,789.4

Cost of sales (1,432.0) (1,306.6)

Gross profit 503.2 482.8

Operating expenses (343.9) (309.9)

Income from operations ($) $ 159.3 $ 172.9

Income from operations (%) 8.2 % 9.7 %

The following table shows the major components of the change in net sales for the Transit Segment in the first nine months of 2021 from the first nine months of 2020:

First Nine Months of 2020 Net Sales $ 1,789.4

Foreign Exchange 126.7

Changes in Sales by Product Line:

Original Equipment Manufacturing 17

Aftermarket (27)

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.

First Quarter 2022 Net Sales $ 605

Transit Segment sales for the three months ended March 31, 2022 decreased by $42 million, or 6.5%, to $605 million compared to the same period in 2021, with foreign exchange rates being the primary driver of the decrease.

Sales of Original Equipment Manufacturing increased due to higher demand and an increase in government transportation spending.

This increase was more than offset by a decrease in Aftermarket sales from lower maintenance and overhaul driven by the prior year exit of low margin contracts in the United Kingdom, as well as supply chain issues caused by the COVID-19 pandemic resulting in an overall decrease in Transit segment organic sales of $10 million as compared to the same period in 2021.

Cost of sales

Transit Segment cost of sales for the nine months ended September 30, 2021 increased by $125 million, or 9.6%, to $1.43 billion compared to the same period in 2020.

Cost of sales for the nine months ended September 30, 2021 and 2020 includes $43 million and $8 million of restructuring and transactions costs, respectively, primarily for footprint rationalization in Europe.

Excluding these costs, cost of sales as a percentage of sales was 71.8% in 2021 and 72.6% in 2020, a 0.8 percentage point decrease over the comparable period in 2020, attributable to improved operational efficiency and the impact that the COVID-19 pandemic had on margins in 2020, partially offset by increased metals, transportation and labor costs.

Transit Segment cost of sales for the three months ended March 31, 2022 decreased by $35 million, or 7.5%, to $434 million compared to the same period in 2021.

The decrease is primarily due to the decrease in sales discussed above, partially offset by increased raw materials, commodity, transportation and labor costs.

Cost of sales as a percentage of sales was 71.7% and 72.5% for the three months ended March 31, 2022 and 2021, respectively, representing a 0.8 percentage point decrease which can be attributed to improved productivity, higher pricing, the exit of low margin business in the United Kingdom, and prior year structured cost actions taken through restructuring programs.

Cost of sales for the three months ended March 31, 2022 and 2021 each included $3 million of restructuring costs, primarily for headcount actions in Europe and footprint rationalization in the UK, respectively.

Operating expenses

Transit Segment operating expenses increased $34 million, or 11.0%, in 2021 to 17.8% of sales.

Restructuring and transaction costs included within SG&A were $12 million and $6 million for the nine months ended September 30, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization in Europe.

Excluding restructuring and transaction costs, SG&A increased $25 million primarily due to higher employee compensation and benefit costs and to support the increase in sales volumes.

Engineering expense increased $3 million and amortization expense remained consistent year over year.

Transit Segment operating expenses decreased $2 million, or 1.9%, for the three months ended March 31, 2022 compared to the same period in 2021.

SG&A decreased $1 million for the three months ended March 31, 2022 compared to the same period in 2021 due to the decrease in sales and the effects of foreign exchange rates.

SG&A for the three months ended March 31, 2022 and 2021 includes $1 million of restructuring costs, respectively, primarily for headcount actions in Europe.

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

Liquidity and Capital Resources

Liquidity is provided primarily by operating cash flow and borrowings under the Company’s Senior Notes and Senior Credit Facility with a consortium of commercial banks.

Liquidity is provided primarily 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:

Nine Months Ended

September 30,

Three Months Ended

In millions 2022 2021

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Financing activities $ (133) $ 8

Operating activities In the first nine months of 2021, cash provided by operations was $759 million compared to cash provided by operations of $458 million in the first nine months of 2020.

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

• ($6) million from net changes in working capital driven by:

($210) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program;

($40) million unfavorable change in inventory primarily from inventory build-ups in response to supply chain challenges;

$244 million improvement from accounts payable, primarily due to the timing of payments to suppliers and the COVID-19 related impacts on expenditures in 2020;

• approximately $140 million related to cash payments made during 2020 for costs related to the GE Transportation acquisition and settlement of litigation that did not recur;

• and $114 attributable to higher Net income and other changes in the related statement of income.

Investing activities In the first nine months of 2021 and 2020, cash used for investing activities was $475 million and $120 million, respectively.

The major components of the cash outflow in 2021 were $79 million in additions to property, plant and equipment for investments in our facilities and manufacturing processes, and $405 million in net cash paid for the acquisition of Nordco.

This compares to $99 million in property, plant, and equipment for additions in the first nine months of 2020 and $40 million in net cash paid for acquisitions during 2020.

Operating activities In the first three months of 2022, cash provided by operating activities was $161 million compared to cash provided by operating activities of $292 million in the first three months of 2021.

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

• $41 million attributable to higher Net income and other changes in the related statements of income;

• ($41) million from net changes in working capital primarily driven by:

$84 million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, and ($126) million unfavorable change in inventory primarily from inventory build-ups in response to supply chain challenges;

• $(77) million from higher employee related benefit payments and $(16) million from changes in the timing of customer deposits;

• $(42) of changes in other assets and liabilities, primarily from changes in contract assets and liabilities.

Investing activities In the first three months of 2022 and 2021, cash used for investing activities was $(18) million and $(422) million, respectively.

The major components of the cash outflow in 2022 were $(20) million in additions to property, plant and equipment for investments in our facilities and manufacturing processes.

This compares to $(27) million in property, plant, and equipment for additions in the first three months of 2021 and $(401) million in net cash paid for acquisitions during 2021.

Additional information with respect to acquisitions is included in Note 3 of the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report.

Financing activities In the first nine months of 2021, cash used for financing activities was $433 million which included $4.3 billion in proceeds from debt, $4.5 billion in repayments of debt, $200 million in stock repurchases and $69 million of dividend payments.

In the first nine months of 2020, cash used for financing activities was $361 million, which included $2.9 billion in proceeds from debt, $3.1 billion in repayments of debt, $105 million in stock repurchases and $69 million of dividend payments.

As of September 30, 2021, the Company held approximately $456 million of cash, cash equivalents and restricted cash, of which $29 million of cash was classified as restricted cash.

Of the $456 million, approximately $55 million was held within the United States and approximately $401 million was held outside of the United States, primarily in Europe, India, Brazil, and China.

While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash could be repatriated to the United States.

Financing activities In the first three months of 2022, cash used for financing activities was $(133) million which included $2,012 million in proceeds from debt, $(1,817) million in repayments of debt, $(296) million in stock repurchases and $(28) million of dividend payments.

In the first three months of 2021, cash provided by financing activities was $8 million, which included $1,435 million in proceeds from debt, $(1,398) million in repayments of debt, $(1) million in stock repurchases and $(23) million of dividend payments.

As of March 31, 2022, the Company held approximately $488 million of cash and cash equivalents.

Of the $488 million, approximately $13 million was held within the United States and approximately $475 million was held outside of the United States, primarily in India, Europe, 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 net of any tax impacts.

Additional information with respect to credit facilities and long-term debt is included in Note 8 of the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report.

We or our affiliates may, from time to time, seek to retire or purchase outstanding debt through negotiated or open-market cash purchases, exchanges, or otherwise, and such transactions, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Revolving Receivables Program

In May 2020, the Company entered into a revolving agreement to transfer up to $150 million of certain receivables of the Originators through our bankruptcy-remote subsidiary to a financial institution on a recurring basis in exchange for cash equal to the gross receivables transferred.

The bankruptcy remote subsidiary is a separate legal entity with its own creditors, and its assets are not available to pay creditors of the Company or any other affiliates of the Company.

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

As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest).

The sold receivables are fully guaranteed by our bankruptcy-remote subsidiary which held additional receivables of $284.8 million at September 30, 2021 that are pledged as collateral under this agreement.

The transfers are recorded at the fair value of the proceeds received and obligations assumed less derecognized receivables.

No obligation was recorded at September 30, 2021 as the estimated expected credit

losses on receivables sold is insignificant.

Our maximum exposure to loss related to these receivables transferred is limited to the amount outstanding.

The Company has agreed to guarantee the performance of the Originators respective obligations under the revolving agreement.

None of the Company (except for the bankruptcy-remote consolidated subsidiary referenced above) nor the Originators guarantees the collectability of the receivables under the revolving agreements.

The Company utilizes a revolving agreement to transfer up to $200 million of certain receivables to a financial institution on a recurring basis in exchange for cash equal to the gross receivables transferred.

As customers pay their balances, we transfer additional receivables into the program, which resulted in our gross receivables sold exceeding collections reinvested for the periods presented.

Net cash proceeds from the revolving receivables program were $155 million and $93 million for the three months ended March 31, 2022 and 2021, respectively.

Additional information with respect to the Revolving Receivables Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part I, Item 1 of this report.

Supply Chain Financing Program

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The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation and does not receive an economic benefit from the financial institutions.

The arrangements do not change the payable terms negotiated by the Company and our vendors and does not result in a change in the classification of amounts due as accounts payable in the consolidated balance sheet.

Guarantor Summarized Financial Information

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

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

subsidiaries.

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The Euro Notes are issued by Wabtec Netherlands and are fully and unconditionally guaranteed by the Company.

The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis for the Company's US Notes, Senior Credit Facility, and 364 Day Facility.

On January 1, 2022, the Company completed an internal legal entity reorganization that resulted in changes to the subsidiaries and operating divisions serving as guarantors under the Company's US Notes and Senior Credit Facility.

As such, certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation in line with the legal reorganization.

Refer to Exhibit 22.1 for the updated list of guarantor subsidiaries.

The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis for the Company's US Notes and Senior Credit Facility.

The combined summarized financial information eliminates intercompany balances and transactions among the parent and guarantor subsidiaries and equity in earnings and investments in any guarantor subsidiaries or non-guarantor subsidiaries.

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and Guarantor Subsidiaries

In millions Nine Months Ended September 30, 2021

In millions Three Months Ended March 31, 2022

Net sales $ 1,055

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and Guarantor Subsidiaries

In millions September 30, 2021 December 31, 2020

In millions March 31, 2022 December 31, 2021

Current assets $ 1,017 $ 1,057

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and Guarantor Subsidiaries

In millions Nine Months Ended September 30, 2021

In millions Three Months Ended March 31, 2022

Net sales to non-guarantor subsidiaries $ 185

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and Guarantor Subsidiaries

In millions September 30, 2021

In millions March 31, 2022

Amount due from/(to) non-guarantor subsidiaries $ (6,643)

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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.

On January 1, 2022, the Company completed an internal legal entity reorganization that resulted in changes to the operating divisions serving as the parent guarantor under the Company's Euro Notes.

As such, certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation in line with the legal reorganization.

The following tables present summarized financial information of Wabtec Netherlands, as the Issuer of the Euro Notes, and the Company, as the parent Guarantor, on a combined basis.

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Issuer and Guarantor

In millions Nine Months Ended September 30, 2021

In millions Three Months Ended March 31, 2022

Net sales $ 103

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Issuer and Guarantor

In millions September 30, 2021 December 31, 2020

In millions March 31, 2022 December 31, 2021

Current assets $ 142 $ 217

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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.

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 Nine Months Ended September 30, 2021

In millions Three Months Ended March 31, 2022

Net sales to non-guarantor subsidiaries $ 6

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Issuer and Guarantor

In millions September 30, 2021

In millions March 31, 2022

Amount due from/(to) non-guarantor subsidiaries $ (7,664)

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On February 10, 2022, the Board of Directors increased its stock repurchase authorization to increase the amount available for stock repurchases to $750 million of the Company’s outstanding shares.

This new stock repurchase authorization supersedes the previous authorization of $500 million of which about $292.2 million remained.

This new stock repurchase authorization superseded the previous authorization of $500 million of which approximately $155 million remained.

No time limit was set for the completion of the program which conforms to the requirements under the Senior Credit Facility and the Senior Notes currently outstanding.

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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

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• performance under material long-term contracts;

• labor relations;

• the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities or intellectual property claims;

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

• labor availability and relations;

• completion and integration of acquisitions;

• the development and use of new technology;

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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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• political developments and laws and regulations, including those related to Positive Train Control;

• tax law, regulation and policy;

• federal and state income tax legislation;

• sanctions imposed on countries and persons;

• the outcome of negotiations with governments;

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Statements in this Quarterly Report on Form 10-Q apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies

A summary of critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the risk factor added in Part II, Item 1A of this report on Form 10-Q.

Critical Accounting Estimates

A summary of critical accounting estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, business combinations, warranty reserves, stock-based compensation, income taxes and revenue recognition.

There have been no significant changes in accounting policies since December 31, 2020.

Contractual Obligations

On June 3, 2021, Wabtec Netherlands completed a public offering and sale of €500.0 million aggregate principal amount of Euro Notes.

The Euro Notes will bear interest from June 3, 2021, at a rate equal to 1.250% per year, with payments made annually commencing on December 3, 2021.

Additionally, during the second quarter of 2021, all U.S.

dollar-denominated Term Loans were repaid.

As a result of these collective changes, interest payment obligations related to total debt as of September 30, 2021 are expected to be $164.8 million for 2021, $310.8 million for 2022-2023, $230.6 million for 2024-2025, and $226.0 million thereafter for a combined total of $932.2 million.

Further, as of September 30, 2021, contractual obligations related to the repayment of Long-term debt are expected to be $3.8 million for 2021, $250.0 million for 2022-2023, $1,261.4 million for 2024-2025, and $2,579.7 million thereafter for a combined total of $4,094.9 million.

There have been no significant changes in the related accounting policies since December 31, 2021.

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