What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-15 compared with 2022-02-17 · 168 added, 153 removed, 317 unchanged (50% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Wabtec is one of the world’s largest providers of value-added, technology-based locomotives, equipment, systems and services for the global freight rail and passenger transit industries, and also serves customers in 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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In 2022, approximately 55% of the Company’s net sales came from customers outside the U.S.

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

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

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

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

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

Many factors influence these industries, including general economic conditions;

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

number of locomotives and railcars in operation;

government spending on public transportation;

and investment in new technologies.

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

In general, trends such as urbanization and growth in developing markets, sustainability and environmental awareness, investment in technology solutions, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight rail and passenger transit.

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

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Business Update

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

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

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

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

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

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

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

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

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

Although the U.S.

and other international governments deemed rail transportation as “critical infrastructure” providing essential services during the COVID-19 pandemic, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the years ended December 31, 2021 and 2020, which is discussed in more detail in the Results of Operations section below.

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

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

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

These actions include price escalations in long-term contracts, implementing price surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management,

strategic sourcing alignments, and accelerating integration synergies where possible.

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

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

To the extent that these factors cause instability of capital markets, supply chain disruptions including shortages of raw materials or component parts, labor availability, longer sales cycles, deferral or delay of customer orders, or an inability to market our products effectively, our business and results of operations could be materially adversely affected.

Cybersecurity Exposure

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

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

To date, we are unaware of any exploitation of these vulnerabilities;

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

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

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

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

During 2022, Wabtec achieved a multitude of accomplishments while successfully navigating volatile market conditions.

Through leveraging our installed customer base and our innovative scalable technologies, Wabtec was able to secure several key contracts globally that position the Company for long-term revenue generation.

These contracts include the largest locomotive modernization deal in rail industry history, orders for our FLXdrive battery-electric powered locomotives, international locomotive orders, as well as a North American locomotive order with a Class I railroad.

Wabtec executed on calculated market expansions through several strategic acquisitions that will allow us to leverage current and future product and service offerings for greater market share.

Wabtec continued significant progress on our sustainability initiatives as exhibited in our completed green bond allocation and with our battery electric locomotive being recognized for sustainable innovation by the Business Intelligence Group and awarded “Commercial Technology of the Year” at the Platts Global Energy Awards.

Management also launched Integration 2.0 to further poise the company for operational efficiencies into the future.

During the first quarter of 2022, Wabtec announced Integration 2.0, a three-year strategic initiative to target incremental run rate synergies estimated to be between $75 million and $90 million by 2025.

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

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

The Company anticipates that it will incur one-time charges of approximately $135 million to $165 million related to this initiative.

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

During 2022, the Company incurred one-time charges related to the initiative of approximately $46 million, primarily for employee-related costs associated with site consolidations in Europe and costs related to the restructuring of the North America distribution channels.

See Note 21 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report for additional information.

The unfavorable global economic conditions driven by the impacts of the 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 years ended December 31, 2022, and 2021 are discussed in more detail in the Results of Operations section below.

Supply chain disruptions and labor availability have caused component, raw material and chip shortages

resulting in an adverse effect on the timing of the Company’s revenue generation.

Additionally, broad-based inflation, escalation of diesel, metals, energy and other commodity costs, transportation and logistics costs, labor costs, and foreign currency exchange rate fluctuations all continue to impact our results.

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

For the year ended December 31, 2021, prior to the Russian invasion of Ukraine and the resulting imposition of various sanctions against Russia and Belarus, 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 December 31, 2022 and 2021, Wabtec had approximately $14 million and $20 million of assets, respectively, 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 2022.

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

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

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

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

These actions include implementing price escalations and surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management, strategically sourcing materials, reviewing and modifying distribution logistics, and accelerating integration synergies where possible, including Integration 2.0.

Additionally, the Company has proactively built-up inventory ahead of expected growth and in response to supply chain challenges to minimize further interruption on customer orders.

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

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 pandemic, especially if COVID-19 transmission rates increase in certain areas, which could result in curtailing operations of our plants.

Uncertainty around the economic conditions driven by the pandemic and the Russian invasion of Ukraine could result in significant adverse impacts to the Company.

Changes in trade regulations, retaliatory measures, advancements, or changes in the conflict in Ukraine could cause significant adverse impacts to our customers, suppliers, distribution channels and operating locations, and in turn could result in material adverse impacts to the business, including impairment charges from changes in estimates.

Management will continue to monitor the evolving situations but, as a result of the numerous uncertainties surrounding the pandemic, continued supply chain disruptions, labor shortages, inflation, 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.

Uncertainty around general global economic and market conditions, including fluctuations in currency exchange rates, could have an impact on our sales and operations in 2023 and beyond.

To the extent that these factors cause further instability of capital markets, supply chain disruptions including shortages of raw materials or component parts, labor availability, longer sales cycles, deferral or delay of customer orders, or an inability to market or distribute our products effectively, our business and results of operations could be materially adversely affected.

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.

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

Based on the Company's assessment, the incident has not had a material 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.

During 2022, the Freight Segment made three strategic acquisitions for a combined purchase price of $89 million.

Two of the acquisitions are reported in the Digital Electronics product line and one is reported in the Services product line.

Each of the acquisitions in 2022 are individually and collectively immaterial.

On March 31, 2021, the Services product line of the Freight Segment acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment.

The Company also made acquisitions in prior periods not listed above which are individually and collectively immaterial.

For additional information related to these acquisitions refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report.

RESULTS OF OPERATIONS

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Net income 641 565

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

Net income attributable to noncontrolling interest (8) (7)

Net income attributable to Wabtec shareholders $ 633 $ 558

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Net sales for the year ended December 31, 2022 increased by $540 million, or 6.9%, to $8.36 billion compared to the same period in 2021.

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

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

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

These decreases in Freight were

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

Organic sales increased $757 million which is primarily attributable to the Freight Segment driven by an increase in Services sales from higher locomotive modernizations and a larger active locomotive fleet, and an increase in Equipment sales due to higher international locomotive sales and higher mining equipment sales.

In addition, Components sales increased due to a higher railcar build, increased railcars in operation, and growth in industrial end-markets and Digital Electronics sales increased due to higher demand for on-board locomotive products and technology upgrades.

acquisitions contributed $87 million, primarily in the Freight Segment and unfavorable changes in foreign exchange rates decreased sales by $304 million, primarily in the Transit segment.

Cost of sales

Cost of sales for the year ended December 31, 2022 increased by $369 million, or 6.8%, to $5.82 billion compared to the same period in 2021.

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

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

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

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

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

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

Cost of sales as a percentage of sales was 69.6% and 69.7% for the years ended December 31, 2022 and 2021, respectively.

The decrease as a percentage of sales is primarily due to improved productivity and lower restructuring costs, partially offset by unfavorable product mix and the increase in the costs described above.

Cost of sales for the years ended December 31, 2022 and 2021 included $43 million and $53 million, respectively, of restructuring costs primarily for footprint rationalization and headcount actions, with the amount in 2022 primarily related to Integration 2.0.

Operating expenses

Total operating expenses increased $36 million, or 2.4%, for the year ended December 31, 2022 compared to the same period in 2021.

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

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

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

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

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

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

Operating expenses as a percentage of sales was 18.3% and 19.1% for the years ended December 31, 2022 and 2021, respectively.

Selling, general and administrative expenses ("SG&A") decreased $1 million for the year ended December 31, 2022 compared to the same period in 2021.

The decrease is primarily due to a decrease in restructuring costs, the effects of foreign exchange rates and lower employee compensation and benefit costs, partially offset by costs incurred to support the higher sales volume and incremental expense from acquisitions.

Restructuring costs included in SG&A were $9 million and $25 million for the years ended December 31, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs, with the amount in 2022 primarily related to Integration 2.0.

Engineering expense increased $33 million primarily due to investments in new technology and incremental costs from acquisitions.

Amortization expense increased $4 million, due to acquisitions.

Interest expense, net

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

Interest expense, net, increased $9 million to $186 million for the year ended December 31, 2022 over the same period in 2021 primarily attributable to higher average interest rates.

Other income, net

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

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

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

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

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

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

Other income, net, decreased $9 million to $29 million for the year ended December 31, 2022 compared to the same period of 2021.

The decrease is primarily attributable to lower foreign exchange gains and lower equity income in the current year compared to the prior year.

The effective income tax rate was 25.0% and 23.2% for the years ended December 31, 2022 and 2021, respectively, representing a 1.8 percentage point increase.

The rate for the year ended December 31, 2021 was favorably impacted by filing amended federal and state income tax returns for a prior year to incorporate changes in tax regulations.

The absence of this benefit in the current year was partially offset by a more favorable earnings mix across jurisdictions.

See Note 11 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report for additional information.

Freight Segment

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Income from operations ($) $ 864 $ 717

Income from operations (%) 13.7 % 11.5 %

Income from operations (% of net sales) 14.4 % 13.7 %

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

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2022 Net Sales $ 6,012

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

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

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

Freight Segment sales increased by $773 million, or 14.8%, to $6.01 billion, compared to the same period in 2021 which was primarily attributable to an increase in Services sales from higher locomotive modernizations and a larger active locomotive fleet, and an increase in Equipment sales due to higher international locomotive sales and higher mining equipment sales.

Sales from acquisitions contributed $83 million and the effects of unfavorable foreign exchange rates decreased sales by $62 million.

Cost of sales

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

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

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

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

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

Freight Segment cost of sales increased by $544 million, or 15.2%, to $4.12 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 68.5% and 68.2% for the years ended December 31, 2022 and 2021, respectively, representing a 0.3 percentage point increase primarily from the higher costs described above, higher restructuring costs and unfavorable product mix, partially offset by improved productivity.

Cost of sales for the years ended December 31, 2022 and 2021 includes $15 million and $8 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amount in 2022 primarily related to Integration 2.0.

Operating expenses

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SG&A increased $41 million for the year ended December 31, 2022 compared to the same period in 2021.

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

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

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

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

The increase is primarily due to higher costs to support the increase in sales volumes, incremental expense from

acquisitions and higher technology costs.

Engineering expense increased $36 million primarily due to investments in new technology and incremental expense from acquisitions.

Amortization expense increased $5 million due to acquisitions.

Transit Segment

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Income from operations ($) $ 231 $ 238

Income from operations (%) 9.2 % 9.3 %

Income from operations (% of net sales) 9.8 % 9.2 %

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

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Foreign Exchange (242)

Acquisitions 4

Changes in Sales by Product Line:

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2022 Net Sales $ 2,350

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

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

Transit Segment sales for the year ended December 31, 2022 decreased by $233 million, or 9.0%, to $2.35 billion compared to the same period in 2021, with foreign exchange rates being the primary driver of the decrease.

Transit segment organic sales increased $5 million with the primary driver being increased demand and an increase in government transportation spending, particularly for Aftermarket products.

Additionally, both Original Equipment Manufacturing and Aftermarket sales were impacted by supply chain issues and manufacturing disruptions caused by the second quarter cyber incident.

Cost of sales

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

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

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

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

Transit Segment cost of sales for the year ended December 31, 2022 decreased by $175 million, or 9.3%, to $1.71 billion compared to the same period in 2021.

The decrease is primarily due to the decreased sales discussed above, decreased restructuring costs and the effect of foreign exchange rates.

Cost of sales as a percentage of sales was 72.6% and 72.8% for the years ended December 31, 2022 and 2021, respectively, representing a 0.2 percentage point decrease.

This can be attributed to improved productivity and savings from prior year 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 years ended December 31, 2022 and 2021 included $28 million and $45 million of restructuring costs, respectively, primarily for headcount actions and footprint rationalization in Europe, with the amount in 2022 primarily related to Integration 2.0.

Operating expenses

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

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

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

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

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

Transit Segment operating expenses decreased $51 million, or 11.0%, in 2022 compared to the same period in 2021 driven primarily by a decrease in SG&A of $47 million.

The decrease is due to the decrease in sales, the effects of foreign exchange rates, lower employee compensation and benefit costs, the cost actions taken in the prior year and decreased restructuring costs.

Restructuring costs included within SG&A were $9 million and $14 million for the years ended December 31, 2022 and 2021, respectively, and were primarily for headcount actions for footprint rationalization in Europe, with the amount in 2022 primarily related to Integration 2.0.

Engineering expense decreased $3 million and amortization expense decreased $1 million both due to the effects of foreign exchange rates.

Liquidity and Capital Resources

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

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

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

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Operating activities .

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

Cash provided by operations decreased $35 million in 2022 to $1,038 million compared with $1,073 million in 2021.

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

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

• $11 million attributable to higher Net income and other changes in the related statements of income amounts;

• $(106) million from net changes in working capital driven by:

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

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

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

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

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

$(327) million unfavorable change in inventory from proactive inventory build-ups ahead of expected growth, in response to supply chain challenges, and in preparation for certain large contracts secured during 2022, as well as higher costs of inventory due to inflation;

$197 million in accounts payable, primarily due to the timing of payments to suppliers;

and, $24 million from changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program;

• $143 million from changes in the timing of customer deposits;

• $(100) million from higher employee related benefits and the timing of payments related to severance accruals.

Investing activities.

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

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

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

In 2022 and 2021, cash used for investing activities was $(235) million and $(540) million, respectively.

The major components of the cash outflow in 2022 was planned additions to property, plant, and equipment of $(149) million for continued investments in our facilities and manufacturing processes, and $(89) million in net cash paid for acquisitions.

The major components of the cash outflow in 2021 were $(435) million in net cash paid for acquisitions, primarily for Nordco, and $(130) million for additions to property, plant, and equipment.

Financing activities .

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

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

In 2022, cash used for financing activities was $(708) million, which included $(473) million for share repurchases, $(111) million of dividend payments, $(101) million of contingent consideration payments related to the GE Transportation acquisition, and net debt payments of $(30) million, which includes the partial redemption of the 2024 Notes mentioned below.

In 2021, cash used for financing activities was $(653) million which included, $(300) million for share repurchases, net debt payments of $(161) million, primarily resulting from the repayment of the 364 Day Facility and issuance of the Euro Notes mentioned below, $(99) million of contingent consideration payments related to the GE Transportation acquisition and $(92) 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.

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

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

The Company borrows and repays against the revolving credit facility for added flexibility in liquidity to manage cash during the operating cycle.

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

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

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

("Wabtec Netherlands") issued €500 million of 1.25% Senior Notes due in 2027, which are fully and unconditionally guaranteed by the Company, for approximately $599 million in proceeds after consideration of the discount.

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

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

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

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

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

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

Additional information with respect to credit facilities and long-term debt is included in Note 9 of "Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report.

As of December 31, 2022, the Company held approximately $541 million of cash, cash equivalents, and restricted cash.

Of this amount, approximately $88 million was held within the United States and approximately $453 million was held outside

of the United States, primarily in India, China, Europe, 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.

As of December 31, 2022, $7 million of the Company's $541 million cash balance was classified as restricted cash.

Revolving Receivables Program

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

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

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

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

The Company utilizes a revolving receivables facility to sell up to $350 million of certain receivables through our bankruptcy-remote subsidiary 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 could result in our gross receivables sold being higher or lower than collections reinvested for any applicable periods.

Net cash received/(remitted) from the revolving receivables program was $60 million and $(53) million for the years ended December 31, 2022 and 2021, respectively.

Additional information with respect to the Revolving Receivables Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report and incorporated by reference herein.

Supply Chain Financing Program

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

Guarantor Summarized Financial Information

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

Guarantor Summarized Financial Information—US Notes

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

subsidiaries.

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.

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.

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

Refer to Exhibit 22 for the updated list of guarantor subsidiaries.

The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis.

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In millions December 31, 2022

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

Amount due (to)/from Non-Guarantor Subsidiaries $ (6,821)

Summarized Financial Information—Euro Notes

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

The obligations under Wabtec Netherlands’ Euro Notes are fully and unconditionally guaranteed by the Company.

Wabtec Netherlands is a wholly-owned, indirect subsidiary of the parent company.

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Its assets consist of its investments in subsidiaries, which are separate and distinct legal entities that are not guarantors of the Euro Notes and have no obligations to pay amounts due under Wabtec Netherlands’ obligations.

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

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

The following tables present summarized financial information of Wabtec Netherlands, as the issuer of the Euro Notes, and Westinghouse Air Brake Technologies Corporation, as the parent guarantor, on a combined basis.

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Contractual Obligations and Off-Balance Sheet Arrangements

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

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

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

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(4) Interest payments on the Senior Notes are based on interest rates in effect as of December 31, 2022 and are calculated on debt with maturities that extend to 2028.

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

(5) Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $123 million.

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The above table does not reflect uncertain tax positions of $33 million, the timing of which are uncertain.

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

Refer to Note 11 of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report for additional information on uncertain tax positions.

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

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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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• performance under material long-term contracts;

• labor relations;

• labor availability and relations;

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

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• the development and use of new technology;

• cybersecurity and data protection risks;

Competitive factors

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• federal and state income tax legislation;

• sanctions imposed on countries and persons;

• the outcome of negotiations with governments;

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• difficulty in obtaining debt or equity financing.

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

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

Critical Accounting Estimates

The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses.

Areas of uncertainty that require judgments, estimates and assumptions include the accounting for allowance for doubtful accounts, inventories, business combinations, the testing of goodwill and other intangibles for impairment, warranty reserves, stock based compensation, income taxes, and revenue recognition.

Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time.

Areas of uncertainty that require judgments, estimates and assumptions include the accounting for allowance for doubtful accounts, inventories, business combinations, goodwill and other intangible assets, warranty reserves, income taxes, and revenue recognition.

Management uses historical experience and all available information to make these judgments and estimates, and actual results may differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time.

Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company.

A summary of the Company’s significant accounting policies is included in Note 2 in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

A summary of the Company’s significant accounting policies is included in Note 2 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report.

Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

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

Judgments and Uncertainties Cost is determined under the first-in, first-out (FIFO) method.

Judgments and Uncertainties Cost is determined primarily using the first-in, first-out (FIFO) method.

Inventory costs include material, labor and overhead.

The Company compares inventory components to prior year sales history and current backlog and anticipated future requirements.

To the extent that inventory parts exceed estimated usage and demand, a reserve is recognized to reduce the carrying value of inventory.

The Company compares inventory components to prior year sales history, current backlog and anticipated future requirements.

To the extent that inventory parts exceed estimated usage and demand, a reserve is recognized

to reduce the carrying value of inventory.

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

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

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

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

These significant assumptions are forward-looking and could be affected by future economic and market conditions.

Effect if Actual Results Differ From Assumptions Different assumptions may result in materially different values for assets acquired and liabilities assumed, which may impact the Company's financial position and future results of operations.

Goodwill and Indefinite-Lived Intangibles:

Goodwill and Indefinite-Lived Intangible Assets:

Description Goodwill and indefinite-lived intangibles are required to be tested for impairment at least annually.

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The evaluation of impairment involves comparing the current fair value of the business to the recorded value (including goodwill).

Judgments and Uncertainties A number of significant assumptions and estimates are involved in the application of the impairment test, including the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Wabtec specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such amount.

We also consider Wabtec-specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such amount.

Effect if Actual Results Differ From Assumptions Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

However, actual amounts realized may differ from those used to evaluate the impairment of goodwill.

However, actual amounts realized may differ from those used to evaluate the impairment of goodwill and indefinite lived intangible assets.

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

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

See Note 2 in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for additional discussion regarding impairment testing.

Warranty Reserves:

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Effect if Actual Results Differ From Assumptions If actual results are not consistent with the assumptions and judgments used to calculate our warranty liability, the Company may be exposed to the expense of increasing our reserves for warranty expense.

Stock-based Compensation:

Description The Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals.

The program is structured as a rolling three-year plan;

each year starts a new three-year performance cycle with the most recently completed cycle being 2019-2021.

No incentive stock units will vest for performance below the three-year cumulative threshold.

The Company utilizes an economic profit measure for this performance goal.

Economic profit is a measure of the extent to which the Company produces financial results in excess of its cost of capital.

Based on the Company’s achievement of the threshold and three-year cumulative performance, the stock units vested can range from 0% to 200% of the shares granted.

Judgments and Uncertainties Significant judgments and estimates are used in determining the estimated three-year performance, which is then used to estimate the total shares expected to vest over the three year vesting cycle and corresponding expense based on the grant date fair value of the award.

When determining the estimated three-year performance, the Company utilizes a combination of historical actual results, budgeted results and forecasts.

Upon the initial grant of a performance cycle, the Company estimates the three-year performance at 100%.

As actual performance results for a cycle begin to accumulate and the Company completes its budgeting and forecasting cycles the performance estimates are updated.

These judgments and estimates are reviewed and updated on a quarterly basis.

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

Income Taxes:

Description Wabtec records an estimated liability or benefit for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates in accordance with ASC 740-10 Accounting for Income Taxes and Accounting for Uncertainty in Income Taxes .

Description Wabtec records an estimated liability for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates in accordance with ASC 740-10 Accounting for Income Taxes and Accounting for Uncertainty in Income Taxes .

Judgments and Uncertainties The estimate of our tax obligations are uncertain because management must use judgment to estimate the exposures associated with our various filing positions, as well as realization of our deferred tax assets.

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

Company recognizes a portion of its revenues on long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination.

The Company recognizes a portion of its revenues on long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination.

Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements.

The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation.

The input method used for these agreements recognizes revenue based on our efforts to satisfy the performance obligation and includes costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation.

The Company may also use the output method which recognizes revenue based on direct measurements of the value transferred to the customer.

Judgments and Uncertainties Accounting for long-term customer agreements involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated profit margin percentages.

Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years.

These assumptions include cost of materials;

labor availability and productivity;

complexity of the work to be performed;

and the performance of suppliers, customers and subcontracts that may be associated with the contract.

Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.

These assumptions include cost of materials, labor availability and productivity, complexity of the work to be performed, and the performance of suppliers, customers and subcontractors that may be associated with the contract.

Factors that influence these estimates include inflationary trends, foreign exchange rates, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.

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

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

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

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

The development of expected contract costs and contract profit margin percentages involves procedures and personnel in all areas that provide financial or production information on the status of contracts.

Due to the significance of judgments in the estimation process, it is likely that materially different revenue amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods.

Due to the significance of judgments in the estimation process, it is likely that materially different revenue and cost amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Changes in underlying assumptions/estimates, inflation or deflation, foreign currency exchange rates, supplier performance, or other circumstances may adversely or positively affect financial performance in future periods.

Some of our contracts are expected to be completed in a loss position.

Provisions are made currently for estimated losses on uncompleted contracts.

Provisions are made currently for estimated losses on uncompleted contracts and are updated as necessary.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis