What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-14 compared with 2023-02-15 · 162 added, 179 removed, 306 unchanged (53% of the section changed)

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

Wabtec is one of the world’s largest providers of value-added, technology-based locomotives, equipment, systems and services for the global freight rail and passenger transit industries, and also serves customers in the mining, marine, and industrial markets.

Wabtec is a global provider of value-added, technology-based locomotives, equipment, systems and services for the freight rail and passenger transit industries, as well as the mining, marine, and industrial markets.

Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars, and buses around the world.

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Business Update

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

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

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

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

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

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

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

During 2023, Wabtec continued to execute on our value creation framework by signing strategic orders for locomotive modernizations in North America that will span multiple years, new locomotives with a North American railroad, new locomotives in Brazil, long-term supply and maintenance agreement for brakes in India, 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 transit 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, and acquired the remaining 50% ownership interest in Lokomotiv Kurastyru Zauyty (LKZ), a locomotive manufacturing and assembly plant in Kazakhstan.

We delivered our 500th locomotive in Kazakhstan for the CIS region and 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.

Additionally, Wabtec rebranded our Digital Electronics product line to Digital Intelligence, a change that more accurately reflects the complete digital products and services portfolio offered to our customers.

The Digital Intelligence portfolio was also expanded with entry into the railcar telematics market.

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

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

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

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

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

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

The unfavorable global economic conditions driven by the impacts of the pandemic and supply chain disruptions, and further intensified by the Russian invasion of Ukraine, continue to have an adverse impact on our operations and business results.

Impacts for the years ended December 31, 2022, and 2021 are discussed in more detail in the Results of Operations section below.

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

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

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

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

For the year ended December 31, 2021, prior to the Russian invasion of Ukraine and the resulting imposition of various sanctions against Russia and Belarus, Wabtec had earnings of approximately $40 million attributable to customers in Russia, while earnings from customers in Ukraine and Belarus were not significant.

As of December 31, 2022 and 2021, Wabtec had approximately $14 million and $20 million of assets, respectively, related to Russian operations, which were primarily cash and inventory.

Management has determined, based on information currently available, that these assets are expected to be recoverable and therefore no impairment was recorded during 2022.

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

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

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

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

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

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

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

We also face the possibility that additional actions may be taken by governmental authorities and private industry, or government policies may become more restrictive in response to the pandemic, especially if COVID-19 transmission rates increase in certain areas, which could result in curtailing operations of our plants.

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

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

Management will continue to monitor the evolving situations but, as a result of the numerous uncertainties surrounding the pandemic, continued supply chain disruptions, labor shortages, inflation, and the Russian invasion of Ukraine, we are unable to specifically predict the extent and length of time that our business may be negatively impacted.

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

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

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 $118 million has been incurred through December 31, 2023.

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

During the twelve months ended December 31, 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $49 million which were 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.

Charges related to Integration 2.0 of

$46 million were recorded during the twelve months ended December 31, 2022, primarily for employee-related costs associated with site consolidations in Europe and costs related to the restructuring of North America distribution channels.

In addition to Integration 2.0, Wabtec is focused on exiting various low margin product offerings through Portfolio Optimization to improve profitability while reducing manufacturing complexity.

Wabtec expects to incur approximately $85 million in net exit charges related to Portfolio Optimization, which will be predominately non-cash asset write downs.

Wabtec recorded charges of approximately $28 million in the fourth quarter of 2023 for asset write downs related to Portfolio Optimization.

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

A portion of our workers are represented by labor unions.

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 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.

Cyber Incident

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

Based on the Company's assessment, the incident has not had a material financial impact and the Company does not believe the incident will have a material impact on its business, operations or financial results.

Based on the Company's assessment, the incident has not had a significant financial impact and the Company does not believe the incident will have a material impact on its business, operations or financial results.

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

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

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

During the fourth quarter of 2023, the Company purchased the remaining ownership shares of LKZ, a locomotive manufacturing and assembly company located in Kazakhstan for $111 million, at which time it became a wholly owned subsidiary of the Company.

Prior to this purchase, Wabtec owned 50% of LKZ as a joint venture partner and accounted for its interest as an equity method investment.

During the second quarter of 2023, the Company acquired L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers for the mining sector, for a purchase price of approximately $245 million.

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

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

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

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

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

On March 31, 2021, the Company acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment.

The Company also made acquisitions during 2021 not listed above which are individually and collectively immaterial.

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

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The discussion comparing our results for the year ended December 31, 2022 to the year ended December 31, 2021 is included within Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 15, 2023.

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

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

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

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

Net sales for the year ended December 31, 2023 increased by $1.32 billion, or 15.7%, to $9.68 billion compared to the same period in 2022.

Organic sales increased $1.20 billion which was attributable to both the Freight and Transit Segments.

Freight Segment organic sales increased by $864 million primarily driven by Services sales from higher parts sales and higher deliveries of locomotive modernizations and overhauls, Equipment sales from higher North American and international locomotive sales and increased mining sales, and Components sales due to a higher railcar build and growth in industrial end-markets.

Sales from acquisitions contributed $109 million in the Freight Segment.

Transit Segment organic sales increased by

$340 million primarily as a result of increased demand for Aftermarket and Original Equipment Manufacturing products driven by increased infrastructure investment.

Cost of sales

Cost of sales for the year ended December 31, 2023 increased by $911 million, or 15.6%, to $6.73 billion compared to the same period in 2022.

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

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

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

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

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

Cost of sales as a percentage of sales was 69.6% for the years ended December 31, 2023 and 2022.

Cost of sales for the years ended December 31, 2023 and 2022 included $38 million and $43 million, respectively, of restructuring costs primarily for footprint rationalization and headcount actions, primarily related to Integration 2.0.

Operating expenses

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Operating expenses as a percentage of sales was 17.3% and 18.3% for the years ended December 31, 2023 and 2022, respectively.

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

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

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

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

Amortization expense increased $4 million, due to acquisitions.

Selling, general and administrative expenses ("SG&A") increased $110 million for the year ended December 31, 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.

Restructuring costs included in SG&A were $18 million and $9 million for the years ended December 31, 2023 and 2022, respectively, primarily for headcount actions and footprint rationalization programs, primarily related to Integration 2.0.

Engineering expense increased $9 million primarily due to investments in new technology and Amortization expense increased $30 million, due to Portfolio Optimization costs and increased expense from acquisitions.

Interest expense, net

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

Interest expense, net, increased $32 million to $218 million for the year ended December 31, 2023 over the same period in 2022 primarily attributable to higher effective interest rates and higher average overall debt balances in the current year.

Other income, net

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

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

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

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

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

Other income, net, increased $15 million to $44 million for the year ended December 31, 2023 compared to the same period in 2022.

As a result of the change in ownership interest and obtaining control of LKZ, Wabtec's previously held equity interest balance was remeasured to fair value, resulting in a gain of approximately $35 million recorded to Other income, net.

The gain was partially offset by lower foreign exchange gains and lower equity income in the current year compared to the prior year.

The effective income tax rate was 24.5% and 25.0% for the years ended December 31, 2023 and 2022, respectively.

The decrease in the effective tax rate in 2023 is primarily the result of earnings mix.

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

Freight Segment

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

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

For the year ended December 31,

In millions 2022 2021

In millions 2023 2022 Change % Change

Sales of goods $ 4,945 $ 4,125 $ 820 19.9 %

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Total net sales

6,962 6,012 950 15.8 %

Cost of sales:

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Total cost of sales (4,772) (4,116) 656 15.9 %

Cost of Sales (% of Net sales) 68.5 % 68.5 % —

Gross profit 2,190 1,896 294 15.5 %

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Components 150

Digital Electronics 58

Digital Intelligence 20

2023 Net Sales $ 6,962

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

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

Freight Segment organic sales increased by $864 million driven primarily by:

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

• Equipment sales from higher North America and international locomotive sales and increased mining 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 strategic acquisitions, primarily from L&M Radiator Inc., by $109 million.

Cost of sales

Freight Segment cost of sales increased by $544 million, or 15.2%, to $4.12 billion, compared to the same period in 2021.

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

Cost of sales as a percentage of sales was 68.5% and 68.2% for the years ended December 31, 2022 and 2021, respectively, representing a 0.3 percentage point increase primarily from the higher costs described above, higher restructuring costs and unfavorable product mix, partially offset by improved productivity.

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

Freight Segment Cost of sales increased $656 million and Cost of sales as a percentage of sales remained consistent at 68.5%.

The increase in Cost of sales was primarily driven by:

• Higher sales volume

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

• Higher next generation product development costs in Digital Intelligence and Equipment

Partially offset by:

• Favorable mix within the Freight Segment product lines

• Benefits from structured cost actions

Cost of sales for the years ended December 31, 2023 and 2022 included $13 million and $15 million, respectively, of restructuring costs, primarily related to Integration 2.0 and Portfolio Optimization costs.

Operating expenses

Freight Segment operating expenses increased $82 million, or 8.6%, for the year ended December 31, 2022 compared to the same period in 2021.

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

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

acquisitions and higher technology costs.

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

Amortization expense increased $5 million due to acquisitions.

Operating expenses as a percentage of sales for the Freight Segment were 16.1% and 17.2% for the years ended December 31, 2023 and 2022, respectively.

Freight Segment operating expenses increased by $87 million primarily driven by:

• Higher SG&A expenses of $56 million resulting from higher costs to support increased sales volume, higher employee compensation and benefit costs and incremental expense from acquisitions

• Higher amortization expense of $28 million, due to Portfolio Optimization costs and increased expense from acquisitions

Freight Operating expenses for the year ended December 31, 2023 includes $28 million of restructuring costs related to Integration 2.0 and Portfolio Optimization.

Transit Segment

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

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

For the year ended December 31,

In millions 2022 2021

In millions 2023 2022 Change % Change

Net sales $ 2,715 $ 2,350 $ 365 15.5 %

Cost of sales (1,961) (1,706) 255 14.9 %

Cost of sales (% of Net sales) 72.2 % 72.6 % (0.4)

Gross profit 754 644 110 17.1 %

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Foreign Exchange 25

Acquisitions 4

Changes in Sales by Product Line:

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2023 Net Sales $ 2,715

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

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

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

Transit segment organic sales increased $340 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 in 2022 were unfavorably impacted by the previously disclosed cyber incident.

Favorable changes in foreign exchange rates also increased sales by $25 million.

Cost of sales

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

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

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

This can be attributed to improved productivity and savings from prior year cost actions taken through restructuring programs, partially offset by increased materials, transportation and labor costs and inefficiencies associated with the cyber incident.

Cost of sales for the years ended December 31, 2022 and 2021 included $28 million and $45 million of restructuring costs, respectively, primarily for headcount actions and footprint rationalization in Europe, with the amount in 2022 primarily related to Integration 2.0.

Transit Segment Cost of sales increased by $255 million and Cost of sales as a percentage of sales decreased by 0.4 percentage points primarily due to higher sales volume partially offset by benefits from structured cost actions taken through prior years' restructuring and integration projects, including Integration 2.0.

Cost of sales for the years ended December 31, 2023 and 2022 included $25 million and $28 million, respectively, of restructuring costs, primarily related to Integration 2.0 for headcount actions and footprint rationalization in Europe.

Operating expenses

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

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

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

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

Operating expenses as a percentage of sales for the Transit Segment were 17.1% and 17.6% for the years ended December 31, 2023 and 2022, respectively.

Transit Segment operating expenses increased by $52 million primarily driven by:

• Higher SG&A expenses of $44 million to support higher sales volume and higher employee compensation and benefit costs, partially offset by benefits from structured cost actions taken through prior years' restructuring and integration projects, including Integration 2.0

• An increase in engineering expense of $6 million due to investments in new technology

Transit Operating expenses for the years ended December 31, 2023 and 2022, includes $15 million and $9 million, respectively, of restructuring costs primarily related to Integration 2.0 for footprint rationalization and headcount actions in Europe.

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:

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Financing activities $ (633) $ (708)

Operating activities .

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

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

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

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

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

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

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

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

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

Investing activities.

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

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

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

Financing activities .

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

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

Operating activities In 2023, cash provided by operating activities was $1,201 million, primarily from $1,298 million attributable to Net income and other changes in the related statements of income amounts.

This was partially offset by $(97) million of net cash used from increases in receivables due to higher sales, increases in inventory and accounts payable to support higher sales and timing of payments for expenses and receipts from customer deposits.

In 2022, cash provided by operating activities was $1,038 million, primarily from $1,147 million attributable to Net income and other changes in the related statements of income amounts, partially offset by $(109) million of net cash used from changes in working capital accounts to support increased demand.

Investing activities In 2023 and 2022, cash used for investing activities was $(492) million and $(235) million, respectively.

During 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 the remaining ownership shares of LKZ for net cash of approximately $(81) million.

During 2023, Wabtec also used $(186) million for additions to property, plant and equipment for investments in our facilities and manufacturing processes.

During 2022, Wabtec made three strategic acquisitions for a combined purchase price of $(89) million and used $(149) million for additions to property, plant and equipment.

Financing activities In 2023, cash used for financing activities was $(633) million, which included $42 million from net changes in debt, $(409) million of stock repurchases, $(123) million of dividend payments, $(112) million of contingent consideration payments related to the GE Transportation acquisition, $(17) million of distributions to noncontrolling interest, and $(16) million of payments for income tax withholding on share-based compensation.

In 2022, cash used for financing activities was $(708) million which included $(30) million from net changes in debt, $(473) million of stock repurchases, $(111) million of dividend payments, and $(101) million of contingent consideration payments related to the GE Transportation acquisition.

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 debt financing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of December 31, 2023, the Company held approximately $620 million of cash, cash equivalents, and restricted cash, of which approximately $190 million was held within the United States and approximately $430 million was held outside of the United States, primarily in India, Europe, Brazil, and Kazakhstan.

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

As of December 31, 2023, approximately $5 million of the Company's $620 million cash balance was classified as restricted cash.

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

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

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 customer collections remitted to the financial institution for any applicable period.

Net cash (remitted)/received from the revolving receivables program was $(60) million and $60 million for the years ended December 31, 2023 and 2022, respectively.

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

Supply Chain Financing Program

The Company has entered into supply chain financing arrangements with third-party financial institutions to provide our vendors with enhanced payment options while providing the Company with added working capital flexibility.

The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation and does not receive an economic benefit from the financial institutions.

The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation, does not receive an economic benefit from the financial institutions, and no assets are pledged under the arrangements.

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

Guarantor Summarized Financial Information—US Notes

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

subsidiaries.

Additional information with respect to the Supply Chain Financing Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report.

Guarantor Summarized Financial Information

The obligations under the US Notes issued by Westinghouse Air Brake Technologies Corporation (the "Parent Company") have been fully and unconditionally guaranteed by certain of the Parent Company's U.S.

subsidiaries ("Guarantor Subsidiaries").

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

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

On January 1, 2022, the Company completed an internal legal entity reorganization that resulted in changes to the subsidiaries and operating divisions serving as guarantors under the Company's US Notes.

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

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

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

The combined summarized financial information eliminates intercompany balances and transactions among the parent and guarantor subsidiaries and equity in earnings and investments in any guarantor subsidiaries or non-guarantor subsidiaries.

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

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

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

The combined summarized financial information eliminates intercompany balances and transactions among the Parent Company and guarantor subsidiaries and equity in earnings and investments in any guarantor subsidiaries or non-guarantor subsidiaries.

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

Summarized Statement of Income

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

Parent Company and Guarantor Subsidiaries

In millions Year Ended December 31, 2023

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Net income attributable to Wabtec shareholders $ 481

Summarized Balance Sheets

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

Summarized Balance Sheet

Parent Company and Guarantor Subsidiaries

In millions December 31, 2023 December 31, 2022

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Other non-current liabilities $ 662 $ 551

The following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp.

and guarantor subsidiaries with non-guarantor subsidiaries.

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

The following is a description of the transactions between the combined Parent Company and guarantor subsidiaries with non-guarantor subsidiaries.

Parent Company and Guarantor Subsidiaries

In millions Year Ended December 31, 2023

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Purchases from non-guarantor subsidiaries $ 1,571

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

Parent Company and Guarantor Subsidiaries

In millions December 31, 2023

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

Amount due to non-guarantor subsidiaries $ 10,208

Summarized Financial Information—Euro Notes

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

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

Wabtec Netherlands is a wholly-owned, indirect subsidiary of the Parent Company.

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

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

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

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

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

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

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

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

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

Summarized Statement of Income

Issuer and Guarantor

In millions Twelve Months Ended December 31, 2022

In millions Year Ended December 31, 2023

Net sales $ 562

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Net loss attributable to Wabtec shareholders $ (370)

Summarized Balance Sheets

Summarized Balance Sheet

Issuer and Guarantor

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Other non-current liabilities $ 84 $ 128

The following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp.

and Wabtec Netherlands, with the subsidiaries of Westinghouse Air Brake Technologies Corp., other than Wabtec Netherlands, none of which are guarantors of the Euro Notes.

The following is a description of the transactions between the combined Wabtec Netherlands, as the Issuer of the Euro Notes, and the Parent Company, as the parent Guarantor, with the subsidiaries of Westinghouse Air Brake Technologies Corp., other than Wabtec Netherlands, none of which are guarantors of the Euro Notes.

Issuer and Guarantor

In millions Twelve Months Ended December 31, 2021

Net sales to non-issuer and non-guarantor subsidiaries $ 33

Purchases from non-issuer and non-guarantor subsidiaries 82

In millions Year Ended December 31, 2023

Net sales to non-guarantor subsidiaries $ 38

Purchases from non-guarantor subsidiaries 153

Issuer and Guarantor

In millions December 31, 2023

Amount due from/(to) non-issuer and non-guarantor subsidiaries $ (7,703)

Amount due to non-guarantor subsidiaries $ 11,112

Contractual Obligations and Off-Balance Sheet Arrangements

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Contingent consideration (6)

154 105 49 — —

Total $ 5,485 $ 1,323 $ 1,636 $ 2,297 $ 229

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The Company expects to contribute $2 million to pension plan investments in 2024.

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

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

(4) Interest payments on the Senior Notes and the amount borrowed under the Delayed Draw Term Loan as of December 31, 2023 are based on interest rates in effect as of December 31, 2023 and are calculated on debt with maturities that extend to 2028.

(5) Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $142 million beginning in 2024.

(6) Contingent consideration represents the total remaining payable to General Electric (GE) resulting from the 2019 acquisition of GE Transportation.

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• demand for our products and services;

• orders either being delayed, canceled, not returning to historical levels, or reduced or any combination of the foregoing;

• orders either being delayed, canceled, not returning to historical levels, or being reduced, and/or economic conditions affecting the ability of our customers to pay timely for goods and services delivered;

• consolidations in the rail industry;

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• fluctuations in interest rates and foreign currency exchange rates;

• availability of credit;

• changes in market consensus as to what attributes are required for projects to be considered "green" or "sustainable" or negative perceptions regarding determinations in such regard with respect to our Green Finance Framework;

• availability of credit or difficulty in obtaining debt or equity financing;

• changes in the ESG topics that have the highest relative priority for Wabtec's external stakeholders;

Operating factors

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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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• the outcome of negotiations with governments;

COVID-19 factors

• the severity and duration of the pandemic;

• deterioration of general economic conditions;

• shutdown of one or more of our operating facilities;

• supply chain and sourcing disruptions;

• ability of our customers to pay timely for goods and services delivered;

• health of our employees;

• ability to retain and recruit talented employees;

• difficulty in obtaining debt or equity financing.

Natural hazards / health crises

• impacts of climate change, including evolving climate change policy;

• disruptive natural hazards, including earthquakes, fires, floods, tornadoes, hurricanes or weather conditions;

• epidemics, pandemics, or similar public health crises;

• deterioration of general economic conditions as a result of natural hazards or health crises;

• shutdown of one or more of our operating facilities as a result of natural hazards and health crises;

• supply chain and sourcing disruptions as a result of natural hazards and health crises;

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

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

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

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

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

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

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

to reduce the carrying value of inventory.

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

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

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The amount of purchase price which is in excess of the fair values of assets acquired and liabilities assumed is recognized as goodwill.

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

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

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

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

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

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Goodwill and Indefinite-Lived Intangible Assets:

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

The Company performs its annual impairment test during the fourth quarter and more frequently when indicators of impairment are present.

Description Goodwill represents the excess of cost over the fair value of the net assets acquired in a business combination.

Indefinite-lived intangible assets primarily represent certain trade names acquired in a business combination that were determined to have indefinite useful lives.

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

The Company performs its annual impairment tests during the fourth quarter and more frequently when indicators of impairment are present.

The Company reviews goodwill for impairment at the reporting unit level.

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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-K

Item 7. Management’s Discussion and Analysis