What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-08-05 · 151 added, 137 removed, 335 unchanged (46% of the section changed)

5 unchanged sentences

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

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

In the first nine 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 and six months ended June 30, 2022 and 2021, are discussed in more detail in the Results of Operations section below.

Impacts for the three and nine months ended September 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 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.

As of September 30, 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 during the first nine 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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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.

Based on the Company's assessment to date 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.

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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.

No significant programs related to Integration 2.0 were initiated during the nine months ended September 30, 2022.

RESULTS OF OPERATIONS

Consolidated Results

SECOND QUARTER 2022 COMPARED TO SECOND QUARTER 2021

THIRD QUARTER 2022 COMPARED TO THIRD QUARTER 2021

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

Three Months Ended

September 30,

In millions 2022 2021

21 unchanged sentences

Net income attributable to Wabtec shareholders $ 160 $ 131

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:

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

In millions Freight Segment Transit Segment Total

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

Third Quarter 2021 Net Sales $ 1,295 $ 612 $ 1,907

Acquisitions 18 1 19

1 unchanged sentence

Organic 239 15 254

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, 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.

Third Quarter 2022 Net Sales $ 1,531 $ 550 $ 2,081

Net sales for the three months ended September 30, 2022 increased by $174 million, or 9.1%, to $2.08 billion compared to the same period in 2021.

Freight Segment organic sales increased $239 million driven primarily by Equipment sales from higher international locomotive deliveries and higher mining equipment sales, and Services sales from higher locomotive modernizations and a larger active locomotive fleet.

In addition, Components sales increased due to a higher railcar build and increased railcars in operation, and Digital sales increased due to higher demand for on-board locomotive products and network optimization software.

Transit Segment organic sales increased $15 million primarily due to higher demand for OEM and

Aftermarket products.

Sales from acquisitions contributed $19 million to the change in net sales and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $99 million.

Cost of sales

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.

Cost of sales for the three months ended September 30, 2022 increased by $129 million, or 9.9%, to $1.43 billion compared to the same period in 2021.

Cost of sales as a percentage of sales was 68.9% and 68.4% for the three months ended September 30, 2022 and 2021, respectively, representing a 0.5 percentage point increase.

The increase can be attributed to increased materials, transportation and labor costs and an unfavorable product mix partially offset by improved productivity and decreased restructuring cost.

Cost of sales for the three months ended September 30, 2022 and 2021 included $5 million and $23 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.

Operating expenses

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.

Total operating expenses increased $1 million, or 0.3%, for the three months ended September 30, 2022 compared to the same period in 2021.

Operating expenses as a percentage of sales was 18.6% and 20.2% for the three months ended September 30, 2022 and 2021, respectively.

Selling, general and administrative expenses ("SG&A") decreased $9 million due to lower restructuring and transaction costs.

Restructuring and transaction costs included in SG&A were $4 million and $12 million for the three months ended September 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expenses increased $10 million primarily due to investments in new technology.

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Interest expense, net

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.

Interest expense, net, increased $6 million for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to higher effective interest rates in the current period.

Other income, net

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.

Other income, net, increased to $4 million of income for the three months ended September 30, 2022 driven by higher equity income in the current year.

The effective income tax rate was 24.7% and 24.8% for the three months ended September 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 September 30, 2022.

Freight Segment

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Three Months Ended

September 30,

In millions 2022 2021

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Income from operations (% of net sales) 15.2 % 15.1 %

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

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

Third Quarter 2021 Net Sales $ 1,295

Acquisitions 18

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Changes in Sales by Product Line:

Equipment 113

Components 19

Digital Electronics 18

Second Quarter 2022 Net Sales $ 1,490

Third Quarter 2022 Net Sales $ 1,531

Freight Segment sales increased by $236 million, or 18.2%, to $1.53 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 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.

Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, Services sales increased from higher locomotive modernizations and a larger active locomotive fleet, Components sales increased due to a higher railcar build and increased railcars in operation, and Digital sales increased due to higher demand for on-board locomotive products and network optimization software.

Sales from acquisitions contributed $18 million to the change in net sales and the effects of unfavorable foreign exchange rates decreased sales by $21 million.

Cost of sales

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.

Freight Segment cost of sales for the three months ended September 30, 2022 increased by $183 million, or 21.5%, to $1.03 billion, compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 67.5% and 65.8% for the three months ended September 30, 2022 and 2021, respectively, representing a 1.7 percentage point increase driven by an unfavorable product mix and the increased costs discussed above.

Cost of sales for the three months ended September 30, 2022 included restructuring costs of $4 million primarily for headcount actions.

Cost of sales for the three months ended September 30, 2021 included transaction costs of $1 million primarily related to the acquisition of Nordco.

Operating expenses

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.

Freight Segment operating expenses increased $15 million, or 6.0%, for the three months ended September 30, 2022 compared to the same period in 2021.

SG&A increased $2 million due to incremental expense from acquisitions.

SG&A for the three months ended September 30, 2022 includes $1 million of restructuring costs, compared to $2 million for the same period in 2021.

Engineering expenses increased $13 million primarily due to investments in new technology.

Amortization expense remained flat year over year.

Amortization expense increased $1 million due to acquisitions.

Transit Segment

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Three Months Ended

September 30,

In millions 2022 2021

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Income from operations (% of net sales) 9.6 % 7.2 %

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

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

Third Quarter 2021 Net Sales $ 612

Acquisitions 1

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Aftermarket 10

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.

Third Quarter 2022 Net Sales $ 550

Transit Segment sales for the three months ended September 30, 2022 decreased by $62 million, or 10.1%, to $550 million compared to the same period in 2021.

The effects of unfavorable foreign exchange rates decreased sales by $78 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%.

Transit Segment organic sales increased by $15 million due to increased demand and an increase in government transportation spending partially offset by the carryover effects of the cyber incident in the second quarter.

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.

Transit Segment cost of sales for the three months ended September 30, 2022 decreased by $55 million, or 12.1%, to $399 million compared to the same period in 2021.

The decrease is primarily due to the decrease in sales discussed above along with a decrease in restructuring cost in the current year.

Cost of sales as a percentage of sales was 72.5% and 74.2% for the three months ended September 30, 2022 and 2021, respectively, representing a 1.7 percentage point decrease.

This can be attributed to improved productivity, higher pricing, the exit of low margin businesses in the United Kingdom, and prior year structured cost actions taken through restructuring programs, partially offset by increased materials, transportation and labor costs and inefficiencies associated with the cyber incident.

Cost of sales for the three months ended September 30, 2022 and 2021 includes $1 million and $22 million, respectively, of restructuring costs, primarily for footprint rationalization in Europe 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.

Transit Segment operating expenses decreased $16 million, or 14.0%, for the three months ended September 30, 2022 compared to the same period in 2021.

SG&A decreased $14 million for the three months ended September 30, 2022 compared to the same period in 2021 due to the effects of foreign exchange rates and lower employee compensation and benefit costs.

SG&A for the three months ended September 30, 2022 and 2021 includes $2 million and $5 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

FIRST NINE MONTHS OF 2022 COMPARED TO FIRST NINE MONTHS OF 2021

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2022 2021

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Net income attributable to Wabtec shareholders $ 475 $ 368

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:

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

In millions Freight Segment Transit Segment Total

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

First Nine Months of 2021 Net Sales $ 3,814 $ 1,935 $ 5,749

Acquisitions 62 3 65

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Organic 508 (54) 454

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.

First Nine Months of 2022 Net Sales $ 4,343 $ 1,713 $ 6,056

Net sales for the nine months ended September 30, 2022 increased by $307 million, or 5.3%, to $6.06 billion compared to the same period in 2021.

Freight Segment organic sales increased $508 million driven primarily by Services sales from higher locomotive modernizations and a larger active locomotive fleet.

Transit Segment organic sales decreased $54 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.

Sales from acquisitions contributed $65 million, primarily in the Freight Segment, and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $212 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.

Cost of sales for the nine months ended September 30, 2022 increased by $136 million, or 3.4%, to $4.17 billion compared to the same period in 2021.

The increase is primarily due to the increase in sales and increased materials, 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 70.1% for the nine months ended September 30, 2022 and 2021, respectively, representing a 1.3 percentage point decrease.

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

Cost of sales for the nine months ended September 30, 2022 and 2021 included $12 million and $48 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.

Total operating expenses increased $19 million, or 1.7%, for the nine months ended September 30, 2022 compared to the same period in 2021.

Operating expenses as a percentage of sales was 18.6% and 19.2% for the nine months ended September 30, 2022 and 2021, respectively.

SG&A decreased $9 million for the nine months ended September 30, compared to the same period in 2021 due to the impacts of foreign exchange rates and lower restructuring and transaction costs, partially offset by higher technology costs and incremental expense from acquisitions.

Restructuring and transaction costs included in SG&A were $8 million and $32 million for the nine months ended September 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs.

Engineering expenses increased $25 million primarily due to investments in new technology and incremental expense from acquisitions.

1 unchanged sentence

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.

Interest expense, net, remained consistent for the nine months ended September 30, 2022 compared to the same period in 2021.

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.

Other income, net, was $15 million of income for the nine months ended September 30, 2022 compared to $25 million of income in the same period of 2021 primarily driven by a foreign exchange loss of $5 million in the current year as compared to a gain of $7 million in the prior year.

The effective income tax rate was 25.1% and 26.0% for the nine months ended September 30, 2022 and 2021, respectively.

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

Freight Segment

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2022 2021

10 unchanged sentences

Income from operations (% of net sales) 15.1 % 13.4 %

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

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

First Nine Months of 2021 Net Sales $ 3,814

Acquisitions 62

1 unchanged sentence

Changes in Sales by Product Line:

Equipment 184

Components 66

Digital Electronics 16

First Six Months of 2022 Net Sales $ 2,812

First Nine Months of 2022 Net Sales $ 4,343

Freight Segment sales increased by $529 million or 13.9%, to $4.34 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.

Services sales increased from higher locomotive modernizations and a larger active locomotive fleet, 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 increased railcars in operation.

Sales from acquisitions, contributed $62 million and the effects of unfavorable foreign exchange rates decreased sales by $41 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.

Freight Segment cost of sales for the nine months ended September 30, 2022 increased by $328 million, or 12.6%, to $2.93 billion, compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 67.4% and 68.2% for the nine months ended September 30, 2022 and 2021, respectively, representing a 0.8 percentage point decrease which benefited from favorable product mix, increased pricing, improved productivity and synergy savings.

Cost of sales for the nine months ended September 30, 2022 and 2021 includes $7 million and $6 million, respectively, of restructuring and transaction costs, primarily for headcount actions.

The nine months ended September 30, 2021 also included transaction costs related to the Nordco acquisition.

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.

Freight Segment operating expenses increased $56 million, or 8.0%, for the nine months ended September 30, 2022 compared to the same period in 2021.

SG&A increased $23 million primarily due to incremental expense from acquisitions and higher technology costs, partially offset by a decrease in restructuring and transaction costs.

Restructuring and transaction costs included in SG&A for the nine months ended September 30, 2022 were $1 million compared to $11 million for the same period in 2021 primarily for headcount actions as part of the integration of GE Transportation.

Engineering expenses increased $29 million primarily due to investments in new technology and incremental expense from acquisitions.

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

Amortization expense increased $4 million due to acquisitions.

Transit Segment

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2022 2021

5 unchanged sentences

Income from operations (% of net sales) 9.8 % 8.2 %

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

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

First Nine Months of 2021 Net Sales $ 1,935

Acquisitions 3

3 unchanged sentences

Aftermarket (38)

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.

First Nine Months of 2022 Net Sales $ 1,713

Transit Segment sales for the nine months ended September 30, 2022 decreased by $222 million, or 11.5%, to $1.71 billion compared to the same period in 2021, with unfavorable foreign exchange rates reducing sales $171 million.

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.

Aftermarket sales decreased from lower maintenance and overhauls 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 manufacturing disruption caused by the second quarter cyber incident.

Cost of sales

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.

Transit Segment cost of sales for the nine months ended September 30, 2022 decreased by $193 million, or 13.5%, to $1.24 billion 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.

Cost of sales as a percentage of sales was 72.3% and 74.0% for the nine months ended September 30, 2022 and 2021, respectively, representing a 1.7 percentage point decrease.

Cost of sales for the nine months ended September 30, 2022 and 2021 included $5 million and $43 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization in Europe.

Operating expenses

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.

Transit Segment operating expenses decreased $38 million, or 11.0%, for the nine months ended September 30, 2022 compared to the same period in 2021.

SG&A decreased $33 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.

SG&A for the nine months ended September 30, 2022 and 2021 included $5 million and $12 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:

Six Months Ended

Nine Months Ended

September 30,

In millions 2022 2021

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Financing activities $ (395) $ (433)

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;

Operating activities In the first nine months of 2022, cash provided by operating activities was $628 million compared to $759 million in the first nine months of 2021.

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

• $92 million attributable to higher Net income and other changes in the related statements of income amounts;

• $(252) million from net changes in working capital primarily driven by:

$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.

$(369) million unfavorable change in inventory primarily from proactive inventory build-ups ahead of expected growth and in response to supply chain challenges, $(74) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, and $191 million in accounts payable, primarily due to the timing of payments to suppliers;

• $(100) million from higher employee related benefit payments, inclusive of payments related to severance accruals;

• $156 million from changes in the timing of customer deposits.

Investing activities In the first nine months of 2022 and 2021, cash used for investing activities was $(149) million and $(475) million, respectively.

The major components of the cash outflow in 2022 were $(82) 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.

This compares to $(78) million in additions to property, plant, and equipment and $(405) million in net cash paid for acquisitions in the first nine 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 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.

Financing activities In the first nine months of 2022, cash used for financing activities was $(395) million which included $93 million from changes in debt, $(400) million in stock repurchases, and $(83) million of dividend payments.

In the first nine months of 2021, cash used for financing activities was $(433) million, which included $(162) million in net repayments of debt, $(200) million in stock repurchases and $(69) 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.

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.

On August 15, 2022, the Company amended, restated and replaced the then-existing credit agreement.

The Restated Credit Agreement updated the multi-currency revolving loan facility from $1.2 billion to $1.5 billion and added a new Delayed Draw Term Loan of up to $250 million.

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.

As of September 30, 2022, the Company held approximately $514 million of cash and cash equivalents, of which approximately $1 million was held within the United States and approximately $513 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.

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

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 $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.

The Company utilizes a revolving receivables facility to sell up to $350 million of certain receivables through our bankruptcy-remote facility to a financial institution on a recurring basis in exchange for cash equal to the gross receivables sold.

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

Net cash proceeds from the revolving receivables program were $205 million and $84 million for the nine months ended September 30, 2022 and 2021, respectively.

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

Supply Chain Financing Program

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Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, a Wabtec Company, which has 15,000 shares outstanding of Class A Non-Voting Preferred Stock held by General Electric Company.

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

The Euro Notes are issued by Wabtec Transportation Netherlands B.V.

("Wabtec Netherlands") and are fully and unconditionally guaranteed by the Company.

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.

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and Guarantor Subsidiaries

In millions Six Months Ended June 30, 2022

In millions Nine Months Ended September 30, 2022

Net sales $ 3,431

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and Guarantor Subsidiaries

In millions June 30, 2022 December 31, 2021

In millions September 30, 2022 December 31, 2021

Current assets $ 1,189 $ 1,057

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and Guarantor Subsidiaries

In millions Six Months Ended June 30, 2022

In millions Nine Months Ended September 30, 2022

Net sales to non-guarantor subsidiaries $ 590

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and Guarantor Subsidiaries

In millions June 30, 2022

In millions September 30, 2022

Amount due from/(to) non-guarantor subsidiaries $ (6,601)

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

The combined summarized financial information eliminates all intercompany balances and transactions among Wabtec Netherlands and the Company as well as all equity in earnings from and investments in any subsidiary of the Company, other than Wabtec Netherlands, which we refer to below as the Non-Issuer and Non-Guarantor Subsidiaries.

The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and parent guarantor.

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Issuer and Guarantor

In millions Six Months Ended June 30, 2022

In millions Nine Months Ended September 30, 2022

Net sales $ 311

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Issuer and Guarantor

In millions June 30, 2022 December 31, 2021

In millions September 30, 2022 December 31, 2021

Current assets $ 162 $ 217

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Issuer and Guarantor

In millions Six Months Ended June 30, 2022

In millions Nine Months Ended September 30, 2022

Net sales to non-guarantor subsidiaries $ 24

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Issuer and Guarantor

In millions June 30, 2022

In millions September 30, 2022

Amount due from/(to) non-guarantor subsidiaries $ (8,138)

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Purchases of shares may be made by open market purchases or privately negotiated purchases and may be made pursuant to Rule 10b5-1 plan or otherwise.

As of September 30, 2022, approximately $395 million was remaining under the stock repurchase plan.

Forward Looking Statements

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Economic and industry conditions

• changes in general economic and/or industry specific conditions, including the impacts of tax and tariff programs, inflation, supply chain disruptions, foreign currency exchange, and industry consolidation;

• prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and Africa;

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• labor availability and relations;

• hiring and retention of key personnel;

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

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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.

As a result, 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