What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-25 compared with 2023-07-27 · 149 added, 144 removed, 347 unchanged (46% of the section changed)

5 unchanged sentences

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

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

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

Business Update

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.

During the nine months of 2023, Wabtec continued to execute on our value creation framework by signing strategic orders for 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.

During the third quarter of 2023, we delivered our 500th locomotive in Kazakhstan for the CIS region, and during the second quarter of 2023, 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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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 $86 million has been incurred through June 30, 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 $99 million has been incurred through September 30, 2023.

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

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.

During the three and nine months ended September 30, 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $13 million and $30 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 six months ended June 30, 2022.

No significant charges related to Integration 2.0 were recorded during the three and nine months ended September 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 and six months ended June 30, 2023 and 2022 are discussed in more detail in the Results of Operations section below.

Impacts for the three and nine months ended September 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.

1 unchanged sentence

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.

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.

As of September 30, 2023, Wabtec had approximately $2 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.

7 unchanged sentences

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 and the UE subsequently reached an agreement that was ratified by the UE on August 31, 2023, ending the labor strike.

The Company continuously monitors its labor activity.

7 unchanged sentences

Consolidated Results

SECOND QUARTER 2023 COMPARED TO SECOND QUARTER 2022

THIRD QUARTER 2023 COMPARED TO THIRD QUARTER 2022

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

Three Months Ended

September 30,

In millions 2023 2022

21 unchanged sentences

Net income attributable to Wabtec shareholders $ 240 $ 160

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:

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

In millions Freight Segment Transit Segment Total

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

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

Acquisitions 45 — 45

1 unchanged sentence

Organic 312 80 392

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.

Third Quarter 2023 Net sales $ 1,890 $ 660 $ 2,550

Net sales for the three months ended September 30, 2023 increased by $469 million, or 22.5%, to $2.55 billion compared to the same period in 2022.

Organic sales increased $392 million which was attributable to both Freight and Transit Segments driven by an increase across most product lines.

Equipment sales increased from higher North American and international locomotive sales and increased mining sales.

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

Components sales increased from higher original equipment railcar build and increased demand for industrial products.

Transit sales increased from higher demand for Aftermarket and Original Equipment products driven by increased infrastructure investment and the easing of supply chain disruptions.

Additionally, Transit sales during the third quarter of 2022 were unfavorably impacted by the previously disclosed cyber incident.

Sales from acquisitions contributed $45 million in the Freight Segment and favorable changes in foreign exchange rates increased sales by $32 million, primarily in the Transit Segment.

Cost of sales

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 69.9% 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.

Cost of sales for the three months ended September 30, 2023 increased by $325 million, or 22.7%, to $1.76 billion compared to the same period in 2022.

The increase is primarily due to the increase in Net sales.

Cost of sales as a percentage of Net sales was 69.0% and 68.9% for the three months ended September 30, 2023 and 2022, respectively.

The increase was due to manufacturing inefficiencies primarily related to the strike at our Erie facility, 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 September 30, 2023 and 2022 included $13 million and $5 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 primarily being related to Integration 2.0.

Operating expenses

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.

Total operating expenses increased $35 million, or 9.0%, for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to the increase in net sales.

Operating expenses as a percentage of sales was 16.5% and 18.6% for the three months ended September 30, 2023 and 2022, respectively.

Selling, general and administrative expenses ("SG&A") increased $35 million for the three months ended September 30, 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 impacts of Integration 2.0 and prior years’ restructuring actions.

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

There were no restructuring amounts recorded for the three months ended September 30, 2023.

Interest expense, net

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.

Interest expense, net, increased $12 million for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to higher effective interest rates and higher average overall debt balances 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.

Other income, net, increased $6 million for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to higher equity earnings in the current year compared to the prior year.

The effective income tax rate was 24.5% and 24.7% for the three months ended September 30, 2023 and 2022, respectively.

Freight Segment

1 unchanged sentence

Three Months Ended

September 30,

In millions 2023 2022 Change % Change

11 unchanged sentences

Income from operations (% of net sales) 17.3 % 15.2 % 2.1

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

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

Third Quarter 2022 Net sales $ 1,531

Acquisitions 45

1 unchanged sentence

Organic changes in Net sales by Product Line:

Equipment 172

Components 30

Digital Intelligence (5)

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

Third Quarter 2023 Net sales $ 1,890

Freight Segment organic sales increased by $312 million driven primarily by:

• Equipment sales from higher North America and international locomotive sales and increased mining sales

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

• Components sales from higher original equipment railcar build and increased market share for certain products due to product availability and increased demand for industrial products

Additionally, Freight Segment sales also benefited from our recently completed strategic acquisitions, primarily from L&M Radiator Inc., by $45 million.

Cost of sales

1 unchanged sentence

• Higher sales volume

• Unfavorable mix within the Freight Segment product lines

• 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.

• Manufacturing inefficiencies primarily related to the strike at our Erie facility

Partially offset by:

• Favorable mix within the Freight Segment product lines

Cost of sales for the three months ended September 30, 2023 and 2022 included $2 million and $4 million, respectively, of restructuring costs, with the amounts in 2023 being related to Integration 2.0.

Operating expenses

Freight Segment operating expenses increased by $20 million primarily driven by:

• 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

• Higher SG&A expenses of $22 million resulting from higher costs to support increased sales volume, higher employee compensation and benefit costs and incremental expense from acquisitions

• A decrease in Engineering expense of $2 million due to the timing of the investment spend

Operating expenses as a percentage of sales for the Freight Segment were 15.0% and 17.2% for the three months ended September 30, 2023 and 2022, respectively.

Transit Segment

1 unchanged sentence

Three Months Ended

September 30,

In millions 2023 2022 Change % Change

6 unchanged sentences

Income from operations (% of net sales) 10.3 % 9.6 % 0.7

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

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

Third Quarter 2022 Net sales $ 550

Foreign Exchange 30

Organic changes in Net sales by Product Line:

Original Equipment Manufacturing 82

Aftermarket 60

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%.

Original Equipment Manufacturing 20

Third Quarter 2023 Net sales $ 660

Transit Segment organic sales increased by $80 million driven by strong Aftermarket and Original Equipment Manufacturing sales primarily as a result of increased demand for heating, ventilation and air conditioning (HVAC) and brake systems, increased infrastructure investment, and the easing of supply chain disruptions.

Additionally, Transit sales during the third quarter of 2022 were unfavorably impacted by the previously disclosed cyber incident.

Favorable changes in foreign exchange rates also increased sales by $30 million.

Cost of sales

1 unchanged sentence

• Higher sales volume

• Unfavorable mix within product lines

• Increased manufacturing costs

• Higher restructuring costs

1 unchanged sentence

• 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.

Transit Cost of sales for the three months ended September 30, 2023 and 2022 includes $11 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 $15 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

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

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

Transit Operating expenses for the three months ended September 30, 2022, includes $2 million, of restructuring costs, primarily for footprint rationalization and headcount actions in Europe.

The amounts recorded in the three months ended September 30, 2023 were not significant.

Operating expenses as a percentage of sales for the Transit Segment were 17.1% and 17.8% for the three months ended September 30, 2023 and 2022, respectively.

FIRST NINE MONTHS OF 2023 COMPARED TO FIRST NINE MONTHS OF 2022

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2023 2022

21 unchanged sentences

Net income attributable to Wabtec shareholders $ 600 $ 475

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:

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

In millions Freight Segment Transit Segment Total

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

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

Acquisitions 77 — 77

1 unchanged sentence

Organic 772 277 1,049

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.

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.

First Nine Months of 2023 Net sales $ 5,164 $ 1,987 $ 7,151

Net sales for the nine months ended September 30, 2023 increased by $1.10 billion, or 18.1%, to $7.15 billion compared to the same period in 2022.

Organic sales increased $1.05 billion which was attributable to both the Freight and Transit Segments driven by an increase across all product lines.

Equipment sales increased due to higher North American and international locomotive sales and increased mining sales, and Services sales increased from higher parts sales, and higher deliveries of locomotive modernizations and overhauls.

In addition, Components sales increased due to a higher railcar build, 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 $277 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.

Sales from acquisitions contributed $77 million in the Freight Segment and unfavorable changes in foreign exchange rates decreased sales by $31 million, primarily in the Freight Segment.

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.

Cost of sales for the nine months ended September 30, 2023 increased by $803 million, or 19.3%, to $4.97 billion compared to the same period in 2022.

The increase is primarily due to the increase in Net sales.

Cost of sales as a percentage of net sales was 69.5% and 68.8% for the nine months ended September 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 the strike at our Erie facility, 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 nine months ended September 30, 2023 and 2022 included $25 million and $12 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization, with the amounts in 2023 primarily being related to Integration 2.0.

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.

Total operating expenses increased $98 million, or 8.7%, for the nine months ended September 30, 2023 compared to the same period in 2022.

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

SG&A increased $86 million primarily from costs incurred to support the higher sales volume, higher employee compensation and benefit costs, and higher professional services spend.

Restructuring costs included in SG&A were $7 million and $8 million for the nine months ended September 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 $8 million primarily due to investments in new technology.

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

Amortization expense increased $4 million due to accelerated amortization related to restructuring actions and incremental expense from acquisitions.

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.

Interest expense, net, increased $28 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to higher effective interest rates and higher average overall debt balances 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.

Other income, net, increased $2 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to higher equity earnings in the current year compared to the prior year which were partially offset by unfavorable changes in foreign currency loss.

The effective income tax rate was 25.1% for both the nine months ended September 30, 2023 and 2022.

Freight Segment

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2023 2022 Change % Change

11 unchanged sentences

Income from operations (% of net sales) 16.0 % 15.1 % 0.9

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

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

First Nine Months of 2022 Net Sales $ 4,343

Acquisitions 77

4 unchanged sentences

Digital Intelligence 35

First Six Months of 2023 Net Sales $ 3,274

First Nine Months of 2023 Net Sales $ 5,164

Freight Segment organic sales increased across all product lines by $772 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

• Equipment sales increased due to higher North American and international locomotive sales and increased mining sales

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

• Components sales increased due to a higher railcar build and increased market share for certain products due to product availability 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

2 unchanged sentences

• 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.

• Operational inefficiencies, including increased costs from the strike at our Erie operations

Cost of sales for the nine months ended September 30, 2023 and 2022 included $8 million and $7 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.

1 unchanged sentence

Freight Segment operating expenses increased by $48 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 Selling, general and administrative expenses of $43 million resulting from higher costs to support increased sales volume, higher employee compensation and benefits costs and incremental expense from acquisitions

• Higher investments in new technology increasing Engineering expense by $3 million

• Amortization expense increased by $2 million due to acquisitions

Operating expenses as a percentage of sales for the Freight Segment were 15.6% and 17.5% for the nine months ended September 30, 2023 and 2022, respectively.

Transit Segment

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2023 2022 Change % Change

6 unchanged sentences

Income from operations (% of net sales) 10.2 % 9.8 % 0.4

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

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

First Nine Months of 2022 Net Sales $ 1,713

Foreign Exchange (3)

Changes in Sales by Product Line:

Original Equipment Manufacturing 79

Aftermarket 178

First Six Months of 2023 Net Sales $ 1,327

Original Equipment Manufacturing 99

First Nine Months of 2023 Net Sales $ 1,987

Transit Segment organic sales increased by $277 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.

2 unchanged sentences

• Higher sales volume

• Unfavorable mix within product lines

• Increased manufacturing costs

• Higher restructuring costs

1 unchanged sentence

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

• The effects of foreign exchange rates

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.

Transit Cost of sales for the nine months ended September 30, 2023 and 2022 includes $17 million and $5 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 $39 million primarily driven by:

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

• Higher SG&A expenses of $32 million.

The increase is primarily from costs incurred to support the higher sales volume and higher employee compensation and benefit costs, partially offset by the benefits from structured cost actions taken through restructuring actions

• Higher Engineering expenses of $5 million for investments in new technology

Partially offset by:

• Benefits from structured cost actions taken through restructuring actions

• The effects of foreign currency

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.

• Amortization expense increased by $2 million due to accelerated amortization related to restructuring actions

Transit Operating expenses for the nine months ended September 30, 2023 and 2022 includes $6 million and $5 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 as a percentage of sales for the Transit Segment were 17.4% and 17.9% for the nine months ended September 30, 2023 and 2022, respectively.

Liquidity and Capital Resources

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

Six Months Ended

Nine Months Ended

September 30,

In millions 2023 2022

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Financing activities $ (323) $ (395)

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:

• $54 million attributable to higher Net income and other changes in the related statements of income amounts;

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

$(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 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.

Operating activities In the first nine months of 2023, cash provided by operating activities was $515 million compared to $628 million in the first nine months of 2022, resulting in a decrease of $113 million.

The decrease was primarily driven by higher Net income that was more than offset by changes in working capital.

Significant changes to the sources and (uses) of cash from the working capital decrease include the following:

• $200 million of favorable changes in Inventory from less inventory build during the first nine months of 2023 compared to the first nine months of 2022;

• $(282) million unfavorable change in Accounts payable due to timing of payments;

• $(175) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program.

Investing activities In the first nine months of 2023 and 2022, cash used for investing activities was $(336) million and $(149) million, respectively.

During the first nine 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 $(229) million, and used $(109) million for additions to property, plant and equipment for investments in our facilities and manufacturing processes.

During the first nine months of 2022, Wabtec made two strategic acquisitions for a combined purchase price of $(69) million and used $(82) million for additions to property, plant, and equipment.

Financing activities In the first nine months of 2023, cash used for financing activities was $(323) million which included $49 million from net changes in debt, $(252) million in stock repurchases, $(92) million of dividend payments, $(16) million of payments for income tax withholding on share-based compensation, and $(12) million for distributions to noncontrolling interest.

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

During the third quarter of 2023, the Company borrowed the full $250 million of availability under the Delayed Draw Term Loan and subsequently utilized the proceeds to redeem the outstanding 2023 Notes.

Beginning September 15, 2023, the effective interest rates for the 2024 Notes and the 2028 Notes were each reduced by 0.25% due to a favorable change in Wabtec's corporate credit rating and the rating of the aforementioned notes.

Additionally, 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.

As of September 30, 2023, the Company held approximately $392 million of cash, cash equivalents and restricted cash, of which approximately $12 million was held within the United States and approximately $380 million was held outside of the United States, primarily in India, Europe, Brazil, and China.

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

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

Revolving Receivables Program

The Company utilizes a revolving 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 proceeds from the revolving receivables program were $155 million and $180 million for the six months ended June 30, 2023 and 2022, respectively.

Net cash proceeds from the revolving receivables program were $155 million and $205 million for the nine months ended September 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 Six Months Ended June 30, 2023

In millions Nine Months Ended September 30, 2023

Net sales $ 4,154

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and Guarantor Subsidiaries

In millions June 30, 2023 December 31, 2022

In millions September 30, 2023 December 31, 2022

Current assets $ 1,371 $ 1,328

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and Guarantor Subsidiaries

In millions Six Months Ended June 30, 2023

In millions Nine Months Ended September 30, 2023

Net sales to non-guarantor subsidiaries $ 680

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and Guarantor Subsidiaries

In millions June 30, 2023

In millions September 30, 2023

Amount due from/(to) non-guarantor subsidiaries $ (10,178)

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Issuer and Guarantor

In millions Six Months Ended June 30, 2023

In millions Nine Months Ended September 30, 2023

Net sales $ 410

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Issuer and Guarantor

In millions June 30, 2023 December 31, 2022

In millions September 30, 2023 December 31, 2022

Current assets $ 217 $ 264

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Issuer and Guarantor

In millions Six Months Ended June 30, 2023

In millions Nine Months Ended September 30, 2023

Net sales to non-guarantor subsidiaries $ 30

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Issuer and Guarantor

In millions June 30, 2023

In millions September 30, 2023

Amount due from/(to) non-guarantor subsidiaries $ (10,901)

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

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

Forward Looking Statements

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Political/governmental factors

• political stability in relevant areas of the world, including the impacts of war and conflicts;

• political stability in relevant areas of the world, including the impacts of war, conflicts, global military action, and acts of terrorism;

• future regulation/deregulation of our customers and/or the rail industry;

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There have been no significant changes in the related accounting policies since December 31, 2022.

Contractual Obligations

During the third quarter of 2023, the Company utilized the Delayed Draw Term Loan facility included in the Restated Credit Agreement to borrow $250 million, which will mature on August 15, 2027.

The proceeds from the Delayed Draw Term Loan were utilized to redeem the 2023 Notes.

As a result, contractual obligations related to the repayment of Long-term debt for 2026-2027 increased from approximately $1,285 million to approximately $1,535 million.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis