What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-04-27 · 222 added, 82 removed, 250 unchanged (55% 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 value-added, technology-based locomotives, 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, as well as the mining, marine and industrial markets.

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.

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

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

In the first six months of 2022, approximately 55% of the Company’s net sales came from customers outside the United States.

Business Update

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.

Impacts for the three and six months ended June 30, 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.

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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.

As of June 30, 2022, Wabtec had approximately $18 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 during the first six months of 2022.

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

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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.

Cyber Incident

As previously announced, on June 26, 2022, we detected a cyber security incident which impacted the Company’s network.

The Company promptly activated incident response protocols, which included shutting down certain systems, and commenced an investigation of the incident, which is ongoing.

The Company also notified law enforcement and engaged legal counsel and other third-party incident response and cybersecurity professionals.

Based on its preliminary assessment and on the information currently known, the incident has not had a significant financial impact and the Company does not believe the incident will have a material impact on its business, operations or

financial results.

The Company maintains cyber insurance, subject to certain deductibles and policy limitations typical for its size and industry.

Integration 2.0

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

During the second quarter of 2022, no significant programs related to the strategic review were initiated.

RESULTS OF OPERATIONS

Consolidated Results

FIRST QUARTER 2022 COMPARED TO FIRST QUARTER 2021

SECOND QUARTER 2022 COMPARED TO SECOND QUARTER 2021

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

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Net income attributable to Wabtec shareholders $ 166 $ 125

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:

The following table shows the major components of the change in sales in the three months ended June 30, 2022 from the three months ended June 30, 2021:

In millions Freight Segment Transit Segment Total

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

Second Quarter 2021 Net Sales $ 1,336 $ 676 $ 2,012

Acquisitions 5 1 6

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Organic 165 (59) 106

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.

Second Quarter 2022 Net Sales $ 1,490 $ 558 $ 2,048

Net sales for the three months ended June 30, 2022 increased by $36 million, or 1.8%, to $2.05 billion compared to the same period in 2021.

Freight Segment organic sales increased $165 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.

In addition, Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, and Components sales increased due to a higher railcar build and growth in industrial end-markets.

Transit Segment organic sales decreased $59 million primarily due to supply chain issues caused by the COVID-19 pandemic and the prior year exit of low margin businesses and contracts in the United

Sales from acquisitions contributed $6 million and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $76 million.

Cost of sales

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.

Cost of sales for the three months ended June 30, 2022 decreased by $29 million, or 2.0%, to $1.40 billion compared to the same period in 2021.

Cost of sales as a percentage of sales was 68.5% and 71.2% for the three months ended June 30, 2022 and 2021, respectively, representing a 2.7 percentage point decrease.

The decrease can be attributed to favorable product mix, increased pricing and strong productivity, partially offset by increased metals, transportation and labor costs.

Cost of sales for the three months ended June 30, 2022 and 2021 included $2 million and $21 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.

Operating expenses

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.

Total operating expenses increased $4 million, or 1.1%, for the three months ended June 30, 2022 compared to the same period in 2021.

Operating expenses as a percentage of sales was 18.6% and 18.7% for the three months ended June 30, 2022 and 2021, respectively.

Selling, general and administrative expenses ("SG&A") decreased $4 million due to lower restructuring and transaction costs, partially offset by higher employee compensation and benefit costs.

Restructuring and transaction costs included in SG&A were $2 million and $9 million for the three months ended June 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expenses increased $8 million primarily due to investments in new technology.

Amortization expense remained flat year over year.

Interest expense, net

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.

Interest expense, net, decreased $1 million for the three months ended June 30, 2022 compared to the same period in 2021 from changes in outstanding balances and effective interest rates.

Other income, net

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.

Other income, net, was $7 million of income for the three months ended June 30, 2022 compared to $11 million of income in the same period of 2021.

The variance is primarily driven by foreign exchange losses in the current year compared to gains in the prior year.

The effective income tax rate was 25.5% and 25.8% for the three months ended June 30, 2022 and 2021, respectively.

The decrease in the quarterly effective tax rate is primarily the result of a more favorable earnings mix for the period ended June 30, 2022.

Freight Segment

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Income from operations ($) $ 233 $ 173

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 first quarter of 2022 from the first quarter of 2021:

First Quarter 2021 Net Sales $ 1,183

Income from operations (% of net sales) 15.7 % 13.0 %

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

Second Quarter 2021 Net Sales $ 1,336

Acquisitions 5

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Digital Electronics 1

First Quarter 2022 Net Sales $ 1,322

Second Quarter 2022 Net Sales $ 1,490

Freight Segment sales increased by $154 million or 11.5%, to $1.49 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.

Services sales increased from higher locomotive modernizations and a decrease in locomotive parkings, Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, and Components sales increased due to a higher railcar build and growth in industrial end-markets.

Sales from acquisitions contributed $5 million and the effects of unfavorable foreign exchange rates decreased sales by $16 million.

Cost of sales

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.

Freight Segment cost of sales for the three months ended June 30, 2022 increased by $75 million, or 8.1%, to $997 million, compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 66.9% and 69.0% for the three months ended June 30, 2022 and 2021, respectively, representing a 2.1 percentage point decrease which benefited from favorable product mix, increased pricing and strong productivity.

Cost of sales for the three months ended June 30, 2022 includes $1 million, of restructuring costs, primarily for headcount actions.

Cost of sales for the three months ended June 30, 2021 includes $4 million of restructuring and transaction costs, primarily for purchase price accounting for the step-up of Nordco inventory.

Operating expenses

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.

Freight Segment operating expenses increased $19 million, or 7.9%, for the three months ended June 30, 2022 compared to the same period in 2021.

SG&A increased $11 million due to higher employee compensation and benefit costs and incremental expense from acquisitions, 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 June 30, 2022 compared to $3 million for the same period in 2021 primarily for headcount actions as part of the integration of GE Transportation.

Engineering expenses increased $8 million primarily due to investments in new technology.

Amortization expense remained flat year over year.

Transit Segment

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Income from operations ($) $ 50 $ 45

Income from operations (% of net sales) 9.0 % 6.7 %

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

Second Quarter 2021 Net Sales $ 676

Acquisitions 1

Foreign Exchange (60)

Changes in Sales by Product Line:

Original Equipment Manufacturing (37)

Aftermarket (22)

Second Quarter 2022 Net Sales $ 558

Transit Segment sales for the three months ended June 30, 2022 decreased by $118 million, or 17.5%, to $558 million compared to the same period in 2021.

The effects of unfavorable foreign exchange rates decreased sales by $60 million.

Sales of Original Equipment Manufacturing decreased due to supply chain issues caused by the COVID-19 pandemic while Aftermarket sales have decreased due to lower maintenance and overhauls driven by the prior year exit of low margin businesses and contracts in the United Kingdom.

Additionally, a late second quarter manufacturing disruption caused by a cyber incident negatively impacted net sales by approximately 5%.

Cost of sales

Transit Segment cost of sales for the three months ended June 30, 2022 decreased by $104 million, or 20.3%, to $406 million compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 72.7% and 75.4% for the three months ended June 30, 2022 and 2021, respectively, representing a 2.7 percentage point decrease.

This can be attributed to product mix, improved productivity, higher pricing, the exit of low margin business in the United Kingdom, and prior year structured cost actions taken through restructuring programs, partially offset by increased metals, transportation and labor costs.

Cost of sales for the three months ended June 30, 2022 and 2021 includes $1 million and $17 million, respectively, of restructuring costs, primarily for footprint rationalization in the UK and headcount actions.

Operating expenses

Transit Segment operating expenses decreased $19 million, or 15.7%, for the three months ended June 30, 2022 compared to the same period in 2021.

SG&A decreased $18 million for the three months ended June 30, 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 June 30, 2022 and 2021 includes $2 million and $6 million of restructuring costs, respectively, primarily for footprint rationalization and related headcount actions.

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

FIRST SIX MONTHS OF 2022 COMPARED TO FIRST SIX MONTHS OF 2021

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

Six Months Ended

In millions 2022 2021

Sales of goods $ 3,089 $ 3,073

Sales of services 886 769

Total net sales 3,975 3,842

Cost of sales:

Cost of goods (2,231) (2,293)

Cost of services (504) (435)

Total cost of sales (2,735) (2,728)

Gross profit 1,240 1,114

Operating expenses:

Selling, general and administrative expenses (497) (497)

Engineering expenses (95) (80)

Amortization expense (145) (142)

Total operating expenses (737) (719)

Income from operations 503 395

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

Other income and expenses:

Interest expense, net (87) (93)

Other income, net 11 25

Income before income taxes 427 327

Income tax expense (108) (87)

Net income 319 240

Net income attributable to noncontrolling interest (4) (3)

Net income attributable to Wabtec shareholders $ 315 $ 237

The following table shows the major components of the change in sales in the six months ended June 30, 2022 from the six months ended June 30, 2021:

In millions Freight Segment Transit Segment Total

First Six Months of 2021 Net Sales $ 2,519 $ 1,323 $ 3,842

Acquisitions 44 2 46

Foreign Exchange (20) (93) (113)

Organic 269 (69) 200

First Six Months of 2022 Net Sales $ 2,812 $ 1,163 $ 3,975

Net sales for the six months ended June 30, 2022 increased by $133 million, or 3.5%, to $3.98 billion compared to the same period in 2021.

Freight Segment organic sales increased $269 million driven primarily by Services sales from higher locomotive modernizations and a decrease in locomotive parkings.

In addition, Equipment sales increased due to higher volumes for mining equipment and Components sales increased due to a higher railcar build, lower railcar parkings and growth in industrial end-markets.

Transit Segment organic sales decreased $69 million primarily due to supply chain issues caused by the COVID-19 pandemic and the prior year exit of low margin businesses and contracts in the United Kingdom.

acquisitions contributed $46 million, primarily in the Freight Segment and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $113 million.

Cost of sales

Cost of sales for the six months ended June 30, 2022 increased by $7 million, or 0.3%, to $2.74 billion compared to the same period in 2021.

The increase is primarily due to the increase in sales and increased metals, labor and transportation costs, partially offset due to favorable product mix between operating segments and product lines.

Cost of sales as a percentage of sales was 68.8% and 71.0% for the six months ended June 30, 2022 and 2021, respectively, representing a 2.2 percentage point decrease.

The decrease as a percentage of sales can be attributed to favorable product mix, higher pricing and strong productivity, partially offset by higher sales and the increase in the costs described above.

Cost of sales for the six months ended June 30, 2022 and 2021 included $7 million and $25 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.

Operating expenses

Total operating expenses increased $18 million, or 2.5%, for the six months ended June 30, 2022 compared to the same period in 2021.

Operating expenses as a percentage of sales was 18.5% and 18.7% for the six months ended June 30, 2022 and 2021, respectively.

SG&A remained flat from lower restructuring and transaction costs, offset by higher compensation costs, higher technology costs and incremental expense for acquisitions primarily Nordco.

Restructuring and transaction costs included in SG&A were $4 million and $20 million for the six months ended June 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expenses increased $15 million primarily due to investments in new technology and incremental expense from acquisitions.

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

Interest expense, net

Interest expense, net, decreased $6 million for the six months ended June 30, 2022 compared to the same period in 2021 primarily attributable to lower effective interest rates.

Other income, net

Other income, net, was $11 million of income for the six months ended June 30, 2022 compared to $25 million of income in the same period of 2021 primarily driven by lower foreign exchange gains in the current year.

The effective income tax rate was 25.3% and 26.6% for the six months ended June 30, 2022 and 2021, respectively.

The decrease in the effective tax rate is primarily the result of a more favorable earnings mix for the six months ended June 30, 2022.

Freight Segment

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

Six Months Ended

In millions 2022 2021

Sales of goods $ 1,935 $ 1,763

Sales of services 877 756

Total net sales 2,812 2,519

Cost of sales:

Cost of goods (1,398) (1,323)

Cost of services (497) (426)

Total cost of sales (1,895) (1,749)

Gross profit 917 770

Operating expenses (495) (455)

Income from operations ($) $ 422 $ 315

Income from operations (% of net sales) 15.0 % 12.5 %

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

First Six Months of 2021 Net Sales $ 2,519

Acquisitions 44

Foreign Exchange (20)

Changes in Sales by Product Line:

Components 47

Digital Electronics (2)

First Six Months of 2022 Net Sales $ 2,812

Freight Segment sales increased by $293 million or 11.6%, to $2.81 billion, compared to the same period in 2021.

Services sales increased from higher locomotive modernizations and a decrease in locomotive parkings, Equipment sales increased due to higher volumes for mining equipment, and Components sales increased due to a higher railcar build and lower railcar parkings.

Sales from acquisitions, primarily Nordco, contributed $44 million and the effects of unfavorable foreign exchange rates decreased sales by $20 million.

Cost of sales

Freight Segment cost of sales for the six months ended June 30, 2022 increased by $146 million, or 8.3%, to $1.90 billion, compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 67.4% and 69.4% for the six months ended June 30, 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 six months ended June 30, 2022 and 2021 includes $3 million and $5 million, respectively, of restructuring and transaction costs, primarily for headcount actions.

The six months ended June 30, 2021 also included amounts related to purchase price accounting for the step-up of Nordco inventory.

Operating expenses

Freight Segment operating expenses increased $40 million, or 8.8%, for the six months ended June 30, 2022 compared to the same period in 2021.

SG&A increased $21 million primarily due to higher employee compensation and benefit costs, incremental expense from acquisitions 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 six months ended June 30, 2022 compared to $9 million for the same period in 2021 primarily for headcount actions as part of the integration of GE Transportation.

Engineering expenses increased $16 million primarily due to investments in new technology and incremental expense from acquisitions.

Amortization expense increased $3 million due to the acquisitions, primarily Nordco.

Transit Segment

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

Six Months Ended

In millions 2022 2021

Net sales $ 1,163 $ 1,323

Cost of sales (840) (979)

Gross profit 323 344

Operating expenses (208) (229)

Income from operations ($) $ 115 $ 115

Income from operations (% of net sales) 9.9 % 8.7 %

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

First Six Months of 2021 Net Sales $ 1,323

Acquisitions 2

Foreign Exchange (93)

Changes in Sales by Product Line:

Original Equipment Manufacturing (21)

Aftermarket (48)

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.

First Six Months of 2022 Net Sales $ 1,163

Transit Segment sales for the six months ended June 30, 2022 decreased by $160 million, or 12.1%, to $1.16 billion compared to the same period in 2021, with foreign exchange rates being the primary driver of the decrease.

Sales of Original Equipment Manufacturing decreased due to supply chain issues caused by the COVID-19 pandemic partially offset by higher demand and an increase in government transportation spending.

Aftermarket sales decreased from lower maintenance and overhaul driven by the prior year exit of low margin businesses and contracts in the United Kingdom, as well as supply chain issues caused by the COVID-19 pandemic.

Additionally, both Original Equipment Manufacturing and Aftermarket sales were impacted by a late second quarter manufacturing disruption caused by a cyber incident.

Cost of sales

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.

Transit Segment cost of sales for the six months ended June 30, 2022 decreased by $139 million, or 14.2%, to $840 million compared to the same period in 2021.

The decrease is primarily due to the decrease in sales discussed above and decreased restructuring costs.

Cost of sales as a percentage of sales was 72.2% and 74.0% for the six months ended June 30, 2022 and 2021, respectively, representing a 1.8 percentage point decrease.

This 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, partially offset by increased metals, transportation and labor costs.

Cost of sales for the six months ended June 30, 2022 and 2021 included $4 million and $20 million, respectively, of restructuring costs, primarily for headcount actions in Europe and footprint rationalization in the UK.

Operating expenses

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.

Transit Segment operating expenses decreased $21 million, or 9.2%, for the six months ended June 30, 2022 compared to the same period in 2021.

SG&A decreased $18 million due to the decrease in sales, the effects of foreign exchange rates and decreased restructuring cost.

SG&A for the six months ended June 30, 2022 and 2021 included $3 million and $7 million, respectively, of restructuring costs, primarily for headcount actions in Europe.

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

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

Three Months Ended

Six Months Ended

In millions 2022 2021

3 unchanged sentences

Financing activities $ (256) $ (213)

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:

Operating activities In the first six months of 2022, cash provided by operating activities was $424 million compared to $515 million in the first six months of 2021.

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

• $64 million attributable to higher Net income and other changes in the related statements of income;

• $(87) 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.

$74 million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, $(264) million unfavorable change in inventory primarily from proactive inventory build-ups ahead of expected growth and in response to supply chain challenges, and $103 million in accounts payable, primarily due to the timing of payments to suppliers;

• $(84) million from higher employee related benefit payments, inclusive of payments related to severance accruals, and $39 million from changes in the timing of customer deposits.

Investing activities In the first six months of 2022 and 2021, cash used for investing activities was $(117) million and $(452) million, respectively.

The major components of the cash outflow in 2022 were $(50) million in additions to property, plant and equipment for investments in our facilities and manufacturing processes and $(69) million for strategic acquisitions.

This compares to $(55) million in additions to property, plant, and equipment and $(405) million in net cash paid for acquisitions in the first six months of 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 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.

Financing activities In the first six months of 2022, cash used for financing activities was $(256) million which included $3,416 million in proceeds from debt, $(3,216) million in repayments of debt, $(399) million in stock repurchases, and $(55) million of dividend payments.

In the first six months of 2021, cash provided by financing activities was $(213) million, which included $3,008 million in proceeds from debt, $(3,170) million in repayments of debt, $(1) million in stock repurchases and $(46) million of dividend payments.

During the second quarter of 2022, the Company redeemed $25 million of principal from the 2024 Notes plus a premium and the related accrued interest.

As of June 30, 2022, the Company held approximately $501 million of cash and cash equivalents.

Of the $501 million, approximately $5 million was held within the United States and approximately $496 million was held outside of the United States, primarily in India, Europe, China, and Brazil.

4 unchanged sentences

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.

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 $180 million and $82 million for the six months ended June 30, 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.

17 unchanged sentences

and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2022

In millions Six Months Ended June 30, 2022

Net sales $ 2,219

4 unchanged sentences

and Guarantor Subsidiaries

In millions March 31, 2022 December 31, 2021

In millions June 30, 2022 December 31, 2021

Current assets $ 1,161 $ 1,057

7 unchanged sentences

and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2022

In millions Six Months Ended June 30, 2022

Net sales to non-guarantor subsidiaries $ 395

2 unchanged sentences

and Guarantor Subsidiaries

In millions March 31, 2022

In millions June 30, 2022

Amount due from/(to) non-guarantor subsidiaries $ (7,192)

11 unchanged sentences

Issuer and Guarantor

In millions Three Months Ended March 31, 2022

In millions Six Months Ended June 30, 2022

Net sales $ 202

3 unchanged sentences

Issuer and Guarantor

In millions March 31, 2022 December 31, 2021

In millions June 30, 2022 December 31, 2021

Current assets $ 154 $ 217

6 unchanged sentences

Issuer and Guarantor

In millions Three Months Ended March 31, 2022

In millions Six Months Ended June 30, 2022

Net sales to non-guarantor subsidiaries $ 14

1 unchanged sentence

Issuer and Guarantor

In millions March 31, 2022

In millions June 30, 2022

Amount due from/(to) non-guarantor subsidiaries $ (8,344)

35 unchanged sentences

• the development and use of new technology;

• cybersecurity and data protection risks;

Competitive factors

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

Contractual Obligations

During the second quarter of 2022, the Company redeemed $25 million of principal from the 2024 Notes plus a premium and the related accrued interest.

As a result, as of June 30, 2022, contractual obligations related to the repayment of Long-term debt for 2023-2024 were reduced from $1,012 million to $987 million.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis