What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-26 · 233 added, 88 removed, 258 unchanged (55% of the section changed)

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

In the first three months of 2023, approximately 55% of the Company’s net sales came from customers outside the United States.

In the first six months of 2023, approximately 55% of the Company’s net sales came from customers outside the United States.

Business Update

During the first quarter of 2023, Wabtec continued to execute on our value creation framework by signing a strategic order for new locomotives in Brazil, securing a key order for mining drive systems in high altitude applications and delivering our 500th locomotive to Indian Railways - a significant milestone in our 10-year contract.

During the six months of 2023, Wabtec continued to execute on our value creation framework by signing strategic orders for 30 new locomotives with a North American railroad, new locomotives in Brazil, and mining drive systems in high altitude applications.

We announced our largest certified pre-owned order for 69 locomotives for a North American customer and won a contract to supply pantograph and Passenger Information Systems for up to 504 Stadler cars.

Wabtec completed the strategic acquisition of L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers for the mining sector.

We delivered our 500th locomotive to Indian Railways which was a significant milestone in our 10-year contract.

Our senior unsecured debt was upgraded by Moody's, which reflects resiliency of the business, our balance sheet strength and strong cash generation.

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a change that more accurately reflects the complete digital products and services portfolio offered to our customers.

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 restructuring charges of approximately $135 million to $165 million related to this initiative, of which approximately $78 million has been incurred through March 31, 2023.

The Company anticipates that it will incur one-time restructuring charges of approximately $135 million to $165 million related to this initiative, of which approximately $86 million has been incurred through June 30, 2023.

Total estimated initiative charges could change based on the specific programs approved or changes to the scope of the review.

During three months ended March 31, 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $9 million, primarily for employee-related costs and asset write downs associated with site consolidations in Europe.

During the three and six months ended June 30, 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $8 million and $17 million, respectively, primarily for employee-related costs and asset write downs associated with site consolidations in Europe.

Programs approved to date are expected to result in approximately 15 facility closures and impact approximately 1,100 employees.

No significant charges related to Integration 2.0 were recorded during the three months ended March 31, 2022.

No significant charges related to Integration 2.0 were recorded during the six months ended June 30, 2022.

The Company continues to navigate macroeconomic volatility which is impacting our supply chain, results of operations and business results.

Impacts for the three months ended March 31, 2023 and 2022 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 and cash flows.

Impacts for the three and six months ended June 30, 2023 and 2022 are discussed in more detail in the Results of Operations section below.

Future supply chain disruptions and labor availability could cause component and raw material shortages resulting in an adverse effect on the timing of the Company’s revenue and cash flows.

Additionally, broad-based inflation, 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.

As of March 31, 2023, Wabtec had approximately $14 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 has been recorded.

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

During the second quarter of 2023, based on changes in facts and circumstances, management determined that assets related to Russian operations, excluding cash, were not expected to be recoverable and, as a result, a charge of approximately $3 million was recorded.

As of June 30, 2023, Wabtec had approximately $8 million of cash related to Russian operations which will be utilized to settle remaining obligations in Russia.

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.

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The Company utilizes various mitigating actions intended to lessen the impact of macroeconomic volatility.

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 through Integration 2.0.

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

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 through Integration 2.0.

A portion of our workers are represented by labor unions.

For 2023, the United Electrical, Radio and Machine Workers of America (UE), Locals 506 and 618 collective bargaining agreement, covering approximately 1,400 locomotive manufacturing workers in Erie, Pennsylvania, expires on June 9, 2023.

Negotiations with UE will officially begin on April 27, 2023.

The United Electrical, Radio and Machine Workers of America (UE), Locals 506 and 618 collective bargaining agreement, covering approximately 1,400 locomotive manufacturing workers in Erie, Pennsylvania, expired on June 9, 2023.

Negotiations with UE officially began on April 27, 2023 and an agreement between the Company and the UE was not reached before the contract expired.

On June 22, 2023, the UE voted against ratification of the Company's proposed agreement and authorized a strike.

The Company and the UE are continuing negotiations with the assistance of a federal mediator.

The Company continuously monitors its labor activity.

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Consolidated Results

FIRST QUARTER 2023 COMPARED TO FIRST QUARTER 2022

SECOND QUARTER 2023 COMPARED TO SECOND QUARTER 2022

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

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Net income attributable to Wabtec shareholders $ 191 $ 166

The following table shows the major components of the change in Net sales in the three months ended March 31, 2023 from the three months ended March 31, 2022:

The following table shows the major components of the change in Net sales in the three months ended June 30, 2023 from the three months ended June 30, 2022:

In millions Freight Segment Transit Segment Total

First Quarter 2022 Net sales $ 1,322 $ 605 $ 1,927

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

Acquisitions 11 — 11

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Organic 216 139 355

First Quarter 2023 Net sales $ 1,566 $ 628 $ 2,194

Net sales for the three months ended March 31, 2023 increased by $267 million, or 13.9%, to $2.19 billion compared to the same period in 2022.

Organic sales increased $302 million which was primarily attributable to the Freight Segment driven by an increase across all product lines.

Equipment sales increased due to higher international locomotive sales and Services sales increased from a larger active locomotive fleet, partially offset by lower deliveries of locomotive modernizations.

In addition, Components sales increased due to a higher railcar build, increased railcars in operation, and growth in industrial end-markets, and Digital Intelligence sales increased due to higher demand for on-board locomotive and mining solutions, international Positive Train Control (PTC) sales and technology upgrades.

Transit Segment organic sales increased by $58 million primarily as a result of increased demand for Aftermarket products driven by increased infrastructure investment.

Second Quarter 2023 Net sales $ 1,708 $ 699 $ 2,407

Net sales for the three months ended June 30, 2023 increased by $359 million, or 17.5%, to $2.41 billion compared to the same period in 2022.

Organic sales increased $355 million which was attributable to both Freight and Transit Segments driven by an increase across all product lines.

Services sales increased from higher deliveries of locomotive modernizations and higher parts sales.

Components sales increased from higher original equipment railcar build and increased market share for certain products due to product availability and growth in industrial end-markets.

Equipment sales increased from higher locomotive sales and Digital Intelligence sales increased due to higher demand for on-board locomotive solutions and international Positive Train Control (PTC) sales.

Transit sales increased from higher demand for Original Equipment and Aftermarket products driven by increased infrastructure investment.

Sales from acquisitions contributed $11 million in the Freight Segment and unfavorable changes in foreign exchange rates decreased sales by $7 million.

Cost of sales

Cost of sales for the three months ended March 31, 2023 increased by $197 million, or 14.8%, to $1.53 billion compared to the same period in 2022.

Cost of sales for the three months ended June 30, 2023 increased by $281 million, or 20.0%, to $1.68 billion compared to the same period in 2022.

The increase is primarily due to the increase in sales.

Cost of sales as a percentage of net sales was 69.7% and 69.1% for the three months ended March 31, 2023 and 2022, respectively.

The increase was due to unfavorable product mix between business groups and higher next generation product development costs in Digital Intelligence.

These increases were partially offset by operational efficiencies resulting in favorable productivity and higher absorption rates, benefits from structured cost actions taken through Integration 2.0 and prior years restructuring and integration projects, and the effects of foreign exchange rates.

Costs of sales for the three months ended March 31, 2023 and 2022 included $4 million and $5 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 being related to Integration 2.0.

Cost of sales as a percentage of net sales was 69.9% and 68.5% for the three months ended June 30, 2023 and 2022, respectively.

The increase was due to unfavorable product mix between and within business groups, manufacturing inefficiencies primarily related to labor, and higher restructuring costs, partially offset by benefits from structured cost actions taken through Integration 2.0 and prior years’ restructuring and integration projects.

Costs of sales for the three months ended June 30, 2023 and 2022 included $8 million and $2 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 primarily being related to Integration 2.0.

The amounts in 2023 also include the write off of non-cash assets in Russia that were determined to not be recoverable in the second quarter.

Operating expenses

Total operating expenses increased $33 million, or 9.3%, for the three months ended March 31, 2023 compared to the same period in 2022.

Operating expenses as a percentage of sales was 17.7% and 18.4% for the for the three months ended March 31, 2023 and 2022, respectively.

Selling, general and administrative expenses ("SG&A") increased $25 million for the three months ended March 31, 2023 compared to the same period in 2022.

The increase is primarily from costs incurred to support the higher sales volume and higher employee compensation and benefit costs, partially offset by the effects of foreign exchange rates.

Restructuring costs included in SG&A were $5 million and $2 million for the for the three months ended March 31, 2023 and 2022, respectively, and were primarily for headcount actions and footprint rationalization programs, with the amounts in 2023 primarily related to Integration 2.0.

Total operating expenses increased $30 million, or 7.9%, for the three months ended June 30, 2023 compared to the same period in 2022.

Operating expenses as a percentage of sales was 17.1% and 18.6% for the three months ended June 30, 2023 and 2022, respectively.

Selling, general and administrative expenses ("SG&A") increased $26 million for the three months ended June 30, 2023 compared to the same period in 2022.

The increase is primarily from costs incurred to support the higher sales volume, higher employee compensation and benefit costs and higher professional services spend, partially offset by the impacts of Integration 2.0 and prior years’ restructuring actions.

Restructuring costs included in SG&A were $2 million for both the three months ended June 30, 2023 and 2022, and were primarily for headcount actions and footprint rationalization programs, with the amounts in 2023 primarily related to Integration 2.0.

Engineering expense increased $3 million primarily due to investments in new technology.

Interest expense, net

Interest expense, net, increased $5 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to higher effective interest rates in the current period.

The effective income tax rate was 25.5% and 25.1% for the three months ended March 31, 2023 and 2022, respectively.

The increase in the quarterly effective tax rate is primarily the result of a change in the mix of earnings across jurisdictions.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law.

This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions.

This act has not had, and is not expected to have, a material impact on our consolidated financial position, results of operations, or cash flows.

Interest expense, net, increased $11 million for the three months ended June 30, 2023 compared to the same period in 2022 primarily due to higher average overall debt balances and higher effective interest rates in the current period.

Other Income, net

Other income, net, decreased $5 million for the three months ended June 30, 2023 compared to the same period in 2022 primarily due to higher foreign exchange losses in the current year compared to the prior year.

The effective income tax rate for the three months ended June 30, 2023 was 25.5% consistent with the same period in 2022.

Freight Segment

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Income from operations (% of net sales) 15.9 % 15.7 % 0.2

The following table shows the major components of the change in net sales for the Freight Segment in the first quarter of 2023 from the first quarter of 2022:

First Quarter 2022 Net sales $ 1,322

The following table shows the major components of the change in Net sales for the Freight Segment in the second quarter of 2023 from the second quarter of 2022:

Second Quarter 2022 Net sales $ 1,490

Acquisitions 11

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Organic changes in Net sales by Product Line:

Equipment 124

Components 55

Digital Intelligence 21

First Quarter 2023 Net sales $ 1,566

Freight Segment organic sales increased by $244 million driven primarily by:

• Equipment sales from higher international locomotive sales

• Components sales from higher original equipment railcar build, more railcars in operation and growth in industrial end-markets

• Services sales from a larger active locomotive fleet, partially offset by lower deliveries of locomotive modernizations

• Digital Intelligence sales due to higher demand for on-board locomotive and mining solutions and technology upgrades and international PTC sales.

Second Quarter 2023 Net sales $ 1,708

Freight Segment organic sales increased across all product lines by $216 million driven primarily by:

• Services sales from higher deliveries of locomotive modernizations and higher parts sales

• Components sales from higher original equipment railcar build and increased market share for certain products due to product availability and growth in industrial end-markets

• Equipment sales from higher locomotive sales

• Digital Intelligence sales due to higher demand for on-board locomotive solutions and international PTC sales

Cost of sales

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• Unfavorable mix within the Freight Segment product lines

• Higher next generation product development costs in Digital Intelligence

Partially offset by:

• Operational efficiencies resulting in favorable productivity and higher absorption rates

Cost of sales for the three months ended March 31, 2023 and 2022 included $1 million and $2 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 related to Integration 2.0.

• Manufacturing inefficiencies primarily related to labor negotiations at our Erie facility

• Higher restructuring costs

Cost of sales for the three months ended June 30, 2023 and 2022 included $5 million and $1 million, respectively, of restructuring costs, with the amounts in 2023 primarily related to the write off of non-cash assets in Russia that were determined to not be recoverable in the second quarter.

Operating expenses

Freight Segment operating expenses increased by $10 million primarily driven by:

• Higher Selling, general and administrative expenses of $14 million resulting from higher costs to support increased sales volume and higher employee compensation and benefits

• Higher SG&A expenses of $6 million resulting from higher costs to support increased sales volume and higher professional services spend

• Higher employee compensation and benefit costs

• Higher investments in new technology increasing Engineering expense by $2 million

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Income from operations (% of net sales) 9.5 % 9.0 % 0.5

The following table shows the major components of the change in net sales for the Transit Segment in the first quarter of 2023 from the first quarter of 2022:

First Quarter 2022 Net sales $ 605

The following table shows the major components of the change in Net sales for the Transit Segment in the second quarter of 2023 from the second quarter of 2022:

Second Quarter 2022 Net sales $ 558

Foreign Exchange 2

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Aftermarket 57

First Quarter 2023 Net sales $ 628

Transit Segment organic sales increased by $58 million primarily as a result of increased demand for Aftermarket products driven by increased infrastructure investment, partially offset by a decrease in Original Equipment Manufacturing sales.

Second Quarter 2023 Net sales $ 699

Transit Segment organic sales increased by $139 million driven by strong Original Equipment Manufacturing and Aftermarket sales primarily as a result of increased demand for original equipment door, heating, ventilation and air conditioning (HVAC) and brake systems and increased infrastructure investment.

Additionally, sales for the second quarter of 2022 were negatively impacted by a manufacturing disruption caused by a cyber incident which decreased net sales by approximately 5%.

Cost of sales

Transit Segment Cost of sales increased by $9 million due to:

Transit Segment Cost of sales increased by $111 million and Costs of sales as a percentage of sales increased by 1.3 percentage points primarily due to:

• Higher sales volume

• Unfavorable mix within product lines

• Increased manufacturing costs

• Higher restructuring costs

Partially offset by:

• Improved sales mix

• Operational efficiencies driven by structured cost actions taken through Integration 2.0 and prior years' restructuring and integration projects

• Benefits from structured cost actions taken through Integration 2.0 and prior years' restructuring and integration projects

Transit Cost of sales for the three months ended June 30, 2023 and 2022 includes $3 million and $1 million, respectively, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

Operating expenses

Transit Segment operating expenses increased by $14 million primarily driven by:

• Higher SG&A expenses of $11 million to support higher sales volume and higher employee compensation and benefit costs

• Higher Engineering expenses of $3 million for investments in new technology

Partially offset by:

• Benefits from structured cost actions taken through restructuring actions

Transit Operating expenses for the three months ended June 30, 2023 and 2022 includes $3 million and $2 million, respectively, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

FIRST SIX MONTHS OF 2023 COMPARED TO FIRST SIX MONTHS OF 2022

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

Six Months Ended

In millions 2023 2022

Sales of goods $ 3,583 $ 3,089

Sales of services 1,018 886

Total net sales 4,601 3,975

Cost of sales:

Cost of goods (2,657) (2,231)

Cost of services (556) (504)

Total cost of sales (3,213) (2,735)

Gross profit 1,388 1,240

Operating expenses:

Selling, general and administrative expenses (548) (497)

Engineering expenses (104) (95)

Amortization expense (148) (145)

Total operating expenses (800) (737)

Income from operations 588 503

Other income and expenses:

Interest expense, net (103) (87)

Other income, net 7 11

Income before income taxes 492 427

Income tax expense (126) (108)

Net income 366 319

Net income attributable to noncontrolling interest (6) (4)

Net income attributable to Wabtec shareholders $ 360 $ 315

The following table shows the major components of the change in Net sales in the six months ended June 30, 2023 from the six months ended June 30, 2022:

In millions Freight Segment Transit Segment Total

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

Acquisitions 32 — 32

Foreign Exchange (30) (33) (63)

Organic 460 197 657

First Six Months of 2023 Net sales $ 3,274 $ 1,327 $ 4,601

Net sales for the six months ended June 30, 2023 increased by $626 million, or 15.7%, to $4.60 billion compared to the same period in 2022.

Organic sales increased $657 million which was primarily attributable to both the Freight and Transit Segments driven by an increase across all product lines.

Equipment sales increased due to higher locomotive and mining sales and Services sales increased from a larger active locomotive fleet and higher deliveries of locomotive modernizations.

Transit Segment organic sales increased by $197 million primarily as a result of increased demand for Aftermarket and Original Equipment Manufacturing products driven by increased infrastructure investment.

Sales from acquisitions contributed $32 million in the Freight Segment and unfavorable changes in foreign exchange rates decreased sales by $63 million.

Cost of sales

Cost of sales for the six months ended June 30, 2023 increased by $478 million, or 17.5%, to $3.2 billion compared to the same period in 2022.

The increase is primarily due to the increase in sales.

Cost of sales as a percentage of net sales was 69.8% and 68.8% for the six months ended June 30, 2023 and 2022, respectively.

The increase was due to unfavorable product mix between and within business groups, higher next generation product development costs in Digital Intelligence, manufacturing inefficiencies primarily related to labor, and increased restructuring costs in the current year, partially offset by benefits from structured cost actions taken through Integration 2.0 and prior years' restructuring and integration projects, and the effects of foreign exchange rates.

Costs of sales for the six months ended June 30, 2023 and 2022 included $12 million and $7 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 being related to Integration 2.0.

The amounts in 2023 also include the write-off of non-cash assets in Russia that were determined to not be recoverable in the second quarter.

Operating expenses

Total operating expenses increased $63 million, or 8.5%, for the six months ended June 30, 2023 compared to the same period in 2022.

Operating expenses as a percentage of sales was 17.4% and 18.5% for the six months ended June 30, 2023 and 2022, respectively.

SG&A increased $51 million primarily from costs incurred to support the higher sales volume, higher employee compensation and benefit costs, and higher professional services spend, partially offset by the effects of foreign exchange rates.

Restructuring costs included in SG&A were $7 million and $4 million for the six months ended June 30, 2023 and 2022, respectively, and were primarily for headcount actions and footprint rationalization programs, with the amounts in 2023 primarily related to Integration 2.0.

Engineering expenses increased $9 million primarily due to investments in new technology.

Amortization expense increased $3 million primarily due to accelerated amortization related to restructuring actions.

Interest expense, net

Interest expense, net, increased $16 million for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to higher average overall debt balances and higher effective interest rates in the current period.

Other Income, net

Other income, net, decreased $4 million for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to higher foreign exchange losses in the current year compared to the prior year.

The effective income tax rate was 25.5% and 25.3% for the six months ended June 30, 2023 and 2022, respectively.

The increase in the quarterly effective tax rate is primarily the result of a change in the mix of earnings across jurisdictions.

Freight Segment

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

Six Months Ended

In millions 2023 2022 Change % Change

Sales of goods $ 2,263 $ 1,935 $ 328 17.0 %

Sales of services 1,011 877 134 15.3 %

Total Net sales $ 3,274 $ 2,812 $ 462 16.4 %

Cost of sales:

Cost of goods $ (1,703) $ (1,398) $ 305 21.8 %

Cost of services (550) (497) 53 10.7 %

Total cost of sales $ (2,253) $ (1,895) $ 358 18.9 %

Cost of Sales (% of net sales) 68.8 % 67.4 % 1.4

Gross profit $ 1,021 $ 917 $ 104 11.3 %

Operating expenses $ (523) $ (495) $ 28 5.7 %

Income from operations $ 498 $ 422 $ 76 18.0 %

Income from operations (% of net sales) 15.2 % 15.0 % 0.2

The following table shows the major components of the change in Net sales for the Freight Segment in the first six months of 2023 from the first six months of 2022:

First Six Months of 2022 Net Sales $ 2,812

Acquisitions 32

Foreign Exchange (30)

Organic changes in Net sales by Product Line:

Equipment 164

Components 112

Digital Intelligence 40

First Six Months of 2023 Net Sales $ 3,274

Freight Segment organic sales increased across all product lines by $460 million driven primarily by:

• Equipment sales increased due to higher locomotive and mining sales

• Services sales increased from a larger active locomotive fleet which drives higher parts and services sales, and higher deliveries of locomotive modernizations

• Components sales increased due to a higher railcar build, increased railcars in operation, and growth in industrial end-markets

• Digital Intelligence sales increased due to higher demand for on-board locomotive and mining solutions, international Positive Train Control (PTC) sales and technology upgrades

Cost of sales

Freight Segment Cost of sales increased $358 million and Cost of sales as a percentage of sales increased 1.4 percentage points due to:

• Higher sales volume

• Unfavorable mix within the Freight Segment product lines

• Higher next generation product development costs in Digital Intelligence

• Operational inefficiencies, including increased costs from labor negotiations at our Erie operations

• Higher restructuring costs

Cost of sales for the six months ended June 30, 2023 and 2022 included $6 million and $3 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with a portion of the amounts in 2023 related to Integration 2.0.

The amounts in 2023 also include the write-off of non-cash assets in Russia that were determined to not be recoverable in the second quarter.

Operating expenses

Freight Segment operating expenses increased by $28 million primarily driven by:

• Higher Selling, general and administrative expenses of $20 million resulting from higher costs to support increased sales volume and higher employee compensation and benefits costs

• Higher investments in new technology increasing Engineering expense by $6 million

Transit Segment

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

Six Months Ended

In millions 2023 2022 Change % Change

Net sales $ 1,327 $ 1,163 $ 164 14.1 %

Cost of sales $ (960) $ (840) $ 120 14.3 %

Cost of sales (% of net sales) 72.3 % 72.2 % 0.1

Gross profit $ 367 $ 323 $ 44 13.6 %

Operating expenses $ (232) $ (208) $ 24 11.5 %

Income from operations $ 135 $ 115 $ 20 17.4 %

Income from operations (% of net sales) 10.2 % 9.9 % 0.3

The following table shows the major components of the change in net sales for the Transit Segment in the first six months of 2023 from the first six months of 2022:

First Six Months of 2022 Net Sales $ 1,163

Foreign Exchange (33)

Changes in Sales by Product Line:

Original Equipment Manufacturing 79

Aftermarket 118

First Six Months of 2023 Net Sales $ 1,327

Transit Segment organic sales increased by $197 million primarily driven by strong Aftermarket and Original Equipment Manufacturing sales primarily as a result of increased infrastructure investment and demand for original equipment door, HVAC and brake systems.

Cost of sales

Transit Segment Cost of sales increased by $120 million and Cost of sales as a percentage of sales increased by 0.1 percentage points due to:

• Higher sales volume

• Unfavorable mix within product lines

• Increased manufacturing costs

• Higher restructuring costs

Partially offset by:

• Benefits from structured cost actions taken through Integration 2.0 and prior years' restructuring and integration projects

• The effects of foreign exchange rates

Cost of sales as a percentage of sales decreased due to the same reasons discussed above.

Transit Cost of sales for both the three months ended March 31, 2023 and 2022 includes $3 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

Transit Cost of sales for the six months ended June 30, 2023 and 2022 includes $6 million and $4 million, respectively, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

Operating expenses

Transit Segment operating expenses increased by $10 million primarily from higher SG&A of $7 million and higher Amortization expense of $2 million driven by:

• Higher Selling, general and administrative expenses to support higher sales volume

• Higher employee compensation and benefit costs

• Increased restructuring costs

Transit Segment operating expenses increased by $24 million primarily driven by:

• Higher SG&A expenses of $19 million to support higher sales volume and higher employee compensation and benefit costs

• Higher Engineering expenses of $4 million for investments in new technology

Partially offset by:

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• The effects of foreign currency

Transit Operating expenses for the three months ended March 31, 2023 and 2022 includes $4 million and $1 million, respectively, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

Transit Operating expenses for the six months ended June 30, 2023 and 2022 includes $7 million and $3 million, respectively, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe, with the amounts in 2023 related to Integration 2.0.

Liquidity and Capital Resources

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.

Additionally, the Company utilizes the revolving receivables program and supply chain financing program described below, as well as other short-term financing agreements with certain banks for added flexibility as part of our liquidity management strategy.

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

Three Months Ended

Six Months Ended

In millions 2023 2022

Cash (used for) provided by:

Cash provided by (used for):

Operating activities $ 90 $ 424

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Financing activities $ 30 $ (256)

Operating activities In the first three months of 2023, cash used for operating activities was $(25) million compared to cash provided by operating activities of $161 million in the first three months of 2022, resulting in a decrease of $186 million.

Operating activities In the first six months of 2023, cash provided by operating activities was $90 million compared to $424 million in the first six months of 2022, resulting in a decrease of $334 million.

Significant changes to the sources and (uses) of cash causing the decrease include the following:

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• $(377) million from net changes in working capital primarily driven by:

$(144) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, and $(51) million unfavorable change in inventory;

$(195) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, $(190) million unfavorable change in Accounts payable and $8 million of favorable change in Inventory;

• $(45) million from changes in the timing of customer deposits;

• $52 million from changes to employee related benefit payments.

Investing activities In the first three months of 2023 and 2022, cash used for investing activities was $(32) million and $(18) million, respectively.

The cash outflow in 2023 was the result of $(32) million in additions to property, plant and equipment for investments in our facilities and manufacturing processes compared with $(20) million in additions to property, plant, and equipment in the first three months of 2022.

Financing activities In the first three months of 2023, cash used for financing activities was $(72) million which included $154 million from net changes in debt, $(178) million in stock repurchases, $(31) million of dividend payments, and $(14) million of payments for income tax withholding on share-based compensation.

In the first three months of 2022, cash used for financing activities was $(133) million, which included $195 million from net changes in debt, $(296) million in stock repurchases, $(28) million of dividend payments, and $(2) million of payments for income tax withholding on share-based compensation.

As of March 31, 2023, the Company held approximately $417 million of cash and cash equivalents, of which approximately $7 million was held within the United States and approximately $410 million was held outside of the United States, primarily in India, Europe, China, and Brazil.

Investing activities In the first six months of 2023 and 2022, cash used for investing activities was $(293) million and $(117) million, respectively.

During the first six months of 2023, Wabtec acquired L&M Radiator Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers, for net cash of approximately $(223) million, and expended $(70) million in additions to property, plant and equipment for investments in our facilities and manufacturing processes.

During the first six months of 2022, Wabtec made two strategic acquisitions for a combined purchase price of $(69) million and expended $(50) million for additions to property, plant, and equipment.

Financing activities In the first six months of 2023, cash provided by financing activities was $30 million which included $374 million from net changes in debt, $(252) million in stock repurchases, $(62) million of dividend payments, $(15) million of payments for income tax withholding on share-based compensation, and $(12) million for distributions to noncontrolling interest.

In the first six months of 2022, cash used for financing activities was $(256) million, which included $200 million from net changes in debt, $(399) million in stock repurchases, $(55) million of dividend payments, and $(1) million of payments for income tax withholding on share-based compensation.

As of June 30, 2023, the Company held approximately $371 million of cash, cash equivalents and restricted cash, of which approximately $13 million was held within the United States and approximately $358 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.

Beginning September 15, 2023, the effective interest rates for the 2024 Notes and the 2028 Notes will each be reduced by 0.25% due to a favorable change in Wabtec's corporate bond rating.

Additionally, Management is evaluating options to refinance the $250 million of Senior Notes due on August 15, 2023, including the option to utilize the Delayed Draw Term Loan in the Restated Credit Agreement.

During 2023, the Company has also entered into $250 million of interest rate contracts to manage its net exposure to interest rate changes and its overall cost of borrowing.

These contracts may be utilized for future bond refinancing.

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.

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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 proceeds from the revolving receivables program were $145 million and $155 million for the three months ended March 31, 2023 and 2022, respectively.

Net cash proceeds from the revolving receivables program were $155 million and $180 million for the six months ended June 30, 2023 and 2022, 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.

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and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2023

In millions Six Months Ended June 30, 2023

Net sales $ 2,731

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and Guarantor Subsidiaries

In millions March 31, 2023 December 31, 2022

In millions June 30, 2023 December 31, 2022

Current assets $ 1,357 $ 1,328

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and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2023

In millions Six Months Ended June 30, 2023

Net sales to non-guarantor subsidiaries $ 500

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and Guarantor Subsidiaries

In millions March 31, 2023

In millions June 30, 2023

Amount due from/(to) non-guarantor subsidiaries $ (6,861)

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Issuer and Guarantor

In millions Three Months Ended March 31, 2023

In millions Six Months Ended June 30, 2023

Net sales $ 272

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Issuer and Guarantor

In millions March 31, 2023 December 31, 2022

In millions June 30, 2023 December 31, 2022

Current assets $ 165 $ 264

5 unchanged sentences

Issuer and Guarantor

In millions Three Months Ended March 31, 2023

In millions Six Months Ended June 30, 2023

Net sales to non-guarantor subsidiaries $ 21

1 unchanged sentence

Issuer and Guarantor

In millions March 31, 2023

In millions June 30, 2023

Amount due from/(to) non-guarantor subsidiaries $ (7,704)

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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 March 31, 2023, approximately $663 million was remaining under the stock repurchase plan.

As of June 30, 2023, approximately $588 million was remaining under the stock repurchase plan.

Forward Looking Statements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis