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Item 2. Management’s Discussion and Analysis

2024-04-24 compared with 2023-10-25 · 113 added, 289 removed, 207 unchanged (66% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 14, 2024.

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

In the first three months of 2024, approximately 50% of the Company’s Net sales came from customers outside the United States.

Business Update

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.

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.

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.

During the first three months of 2024, Wabtec continued to execute on our value creation framework by signing a long term parts agreement with a customer in Asia, securing a multi-year order for new locomotives in Africa and launching the next generation of railcar movers with its Shuttlewagon Commander NXT.

Additionally, as a result of Wabtec's strong revenue and profitability growth over the past few years, S&P Global Ratings upgraded Wabtec's credit rating from BBB- to BBB and has maintained the Stable outlook.

Moody's also updated Wabtec's outlook to positive from stable.

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 in 2025.

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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 $99 million has been incurred through September 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 $126 million has been incurred through March 31, 2024.

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

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.

During the three months ended March 31, 2024 and 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $8 million and $9 million, respectively, primarily for employee-related costs and asset write downs associated with site consolidations in Europe.

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

No significant charges related to Integration 2.0 were recorded during the three 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 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.

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 $3 million during the three months ended March 31, 2024 for asset write downs related to Portfolio Optimization.

No charges related to Portfolio Optimization were recorded during the three months ended March 31, 2023.

Total one-time restructuring charges related to Portfolio Optimization to date are approximately $31 million.

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

As of 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.

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

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

These actions include implementing price escalations and surcharges, driving operational efficiencies through various cost mitigation

efforts and discretionary spend management, strategically sourcing materials, reviewing and modifying distribution logistics, and accelerating integration synergies through Integration 2.0.

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

As previously announced, on June 26, 2022, we detected a cyber security incident which impacted the Company’s network.

The Company promptly activated incident response protocols, which included shutting down certain systems, and commenced an investigation of the incident.

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

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

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

During the first quarter of 2024, Company management determined that certain parts of the business would be better aligned with management oversight in different product lines.

These changes were immaterial to the individual product lines and segments affected, and historical amounts have been reclassified to conform to the current period presentation.

RESULTS OF OPERATIONS

Consolidated Results

THIRD QUARTER 2023 COMPARED TO THIRD QUARTER 2022

FIRST QUARTER 2024 COMPARED TO FIRST QUARTER 2023

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

Three Months Ended

September 30,

In millions 2024 2023

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Interest expense, net (47) (48)

Other income, net 10 4

Other (expense) income, net (2) 5

Income before income taxes 363 233

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Net income attributable to Wabtec shareholders $ 272 $ 169

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:

The following table shows the major components of the change in Net sales in the three months ended March 31, 2024 from the three months ended March 31, 2023:

In millions Freight Segment Transit Segment Total

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

First Quarter 2023 Net sales $ 1,556 $ 638 $ 2,194

Acquisitions 36 — 36

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Organic 231 31 262

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.

First Quarter 2024 Net sales $ 1,824 $ 673 $ 2,497

Net sales for the three months ended March 31, 2024 increased by $303 million, or 13.8%, to $2.50 billion compared to the same period in 2023.

Organic sales increased $262 million which was attributable to both Freight and Transit Segments.

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

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

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

Sales from acquisitions contributed $36 million in the Freight Segment and favorable changes in foreign exchange rates increased sales by $5 million, primarily in the Transit Segment.

Cost of sales

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.

Cost of sales for the three months ended March 31, 2024 increased by $153 million, or 10.0%, to $1.68 billion compared to the same period in 2023.

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.

Cost of sales as a percentage of net sales was 67.3% and 69.7% for the three months ended March 31, 2024 and 2023, respectively.

The improvement in gross margin is attributable to improved pricing, favorable mix between Freight and Transit segments, and slightly favorable input costs.

Costs of sales for the three months ended March 31, 2024 and 2023 included $6 million and $4 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization related to Integration 2.0 in both years and Portfolio Optimization in 2024.

Operating expenses

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.

Total operating expenses increased $14 million, or 3.6%, for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to the increase in net sales.

Operating expenses as a percentage of sales was 16.2% and 17.7% for the three months ended March 31, 2024 and 2023, respectively.

Selling, general and administrative expenses ("SG&A") increased $18 million for the three months ended March 31, 2024 compared to the same period in 2023.

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.

Restructuring costs included in SG&A were $4 million and $5 million for the three months ended March 31, 2024 and 2023, respectively, primarily for headcount actions and footprint rationalization programs related to Integration 2.0.

Interest expense, net

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, 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.

Interest expense, net, decreased $1 million to $47 million for the three months ended March 31, 2024 compared to the same period in 2023 primarily due to lower average overall debt balances in the current period, partially offset by higher effective interest rates.

Other (expense) income, net

Other (expense) income, net, decreased $7 million to $(2) million for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to unfavorable foreign exchange rates.

The effective income tax rate was 23.6% and 25.5% for the three months ended March 31, 2024 and 2023, respectively.

The year over year decrease was primarily driven by higher discrete equity compensation tax deductions for the three months ended March 31, 2024.

Freight Segment

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Three Months Ended

September 30,

In millions 2024 2023 Change % Change

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Income from operations (% of net sales) 20.2 % 14.5 % 5.7

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

The following table shows the major components of the change in Net sales for the Freight Segment in the first quarter of 2024 from the first quarter of 2023:

First Quarter 2023 Net sales $ 1,556

Acquisitions 36

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Digital Intelligence (10)

Third Quarter 2023 Net sales $ 1,890

First Quarter 2024 Net sales $ 1,824

Freight Segment organic sales increased by $231 million driven primarily by:

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

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

• 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.

Additionally, Freight Segment sales also benefited from our recently completed strategic acquisition of L&M Radiator, Inc.

by $36 million.

Cost of sales

Freight Segment Cost of sales increased $245 million and Cost of sales as a percentage of Net sales increased 0.2 percentage points due to:

• Higher sales volume

• 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.

Freight Segment Cost of sales increased $121 million from higher sales volume and Cost of sales as a percentage of Net sales decreased 3.6 percentage points.

The improvement in gross margin is attributable to improved pricing, favorable mix within the Freight Segment product lines, and slightly favorable input costs.

Cost of sales for the three months ended March 31, 2024 and 2023 included $3 million and $1 million, respectively, of restructuring costs, primarily related to Integration 2.0 in both years and Portfolio Optimization in 2024.

Operating expenses

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

• 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.

Freight Segment operating expenses increased by $5 million primarily driven by higher SG&A expenses resulting from higher costs to support increased sales volume, higher employee compensation and benefit costs and incremental expense from acquisitions.

Transit Segment

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Three Months Ended

September 30,

In millions 2024 2023 Change % Change

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Income from operations (% of net sales) 11.0 % 11.0 % —

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

The following table shows the major components of the change in Net sales for the Transit Segment in the first quarter of 2024 from the first quarter of 2023:

First Quarter 2023 Net sales $ 638

Foreign Exchange 4

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Original Equipment Manufacturing 13

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.

First Quarter 2024 Net sales $ 673

Transit Segment organic sales increased by $31 million driven by strong Aftermarket and Original Equipment Manufacturing sales primarily as a result of increased demand for products and services, increased infrastructure investment, and the easing of supply chain disruptions.

Favorable changes in foreign exchange rates also increased sales by $4 million.

Cost of sales

Transit Segment Cost of sales increased by $80 million and Costs of sales as a percentage of sales increased by 0.1 percentage points primarily due to:

• Higher sales volume

• Higher restructuring costs

Partially offset by:

• 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 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 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 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.

Nine Months Ended

September 30,

In millions 2023 2022

Sales of goods $ 5,631 $ 4,714

Sales of services 1,520 1,342

Total net sales 7,151 6,056

Cost of sales:

Cost of goods (4,132) (3,431)

Cost of services (839) (737)

Total cost of sales (4,971) (4,168)

Gross profit 2,180 1,888

Operating expenses:

Selling, general and administrative expenses (843) (757)

Engineering expenses (157) (149)

Amortization expense (222) (218)

Total operating expenses (1,222) (1,124)

Income from operations 958 764

Other income and expenses:

Interest expense, net (163) (135)

Other income, net 17 15

Income before income taxes 812 644

Income tax expense (204) (162)

Net income 608 482

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

Net income attributable to Wabtec shareholders $ 600 $ 475

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

Acquisitions 77 — 77

Foreign Exchange (28) (3) (31)

Organic 772 277 1,049

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

Interest expense, net

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, 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:

Nine Months Ended

September 30,

In millions 2023 2022 Change % Change

Sales of goods $ 3,654 $ 3,014 $ 640 21.2 %

Sales of services 1,510 1,329 181 13.6 %

Total Net sales $ 5,164 $ 4,343 $ 821 18.9 %

Cost of sales:

Cost of goods $ (2,701) $ (2,203) $ 498 22.6 %

Cost of services (831) (726) 105 14.5 %

Total cost of sales $ (3,532) $ (2,929) $ 603 20.6 %

Cost of Sales (% of net sales) 68.4 % 67.4 % 1.0

Gross profit $ 1,632 $ 1,414 $ 218 15.4 %

Operating expenses (807) (759) 48 6.3 %

Income from operations $ 825 $ 655 $ 170 26.0 %

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 nine months of 2023 from the first nine months of 2022:

First Nine Months of 2022 Net Sales $ 4,343

Acquisitions 77

Foreign Exchange (28)

Organic changes in Net sales by Product Line:

Equipment 336

Components 142

Digital Intelligence 35

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 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

Cost of sales

Freight Segment Cost of sales increased $603 million and Cost of sales as a percentage of sales increased 1.0 percentage points due to:

• Higher sales volume

• Higher next generation product development costs in Digital Intelligence

• 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.

Operating expenses

Freight Segment operating expenses increased by $48 million primarily driven by:

• 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:

Nine Months Ended

September 30,

In millions 2023 2022 Change % Change

Net sales $ 1,987 $ 1,713 $ 274 16.0 %

Cost of sales (1,439) (1,239) 200 16.1 %

Cost of sales (% of net sales) 72.4 % 72.3 % 0.1

Gross profit $ 548 $ 474 $ 74 15.6 %

Operating expenses (345) (306) 39 12.7 %

Income from operations $ 203 $ 168 $ 35 20.8 %

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 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:

Aftermarket 178

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.

Cost of sales

Transit Segment Cost of sales increased by $200 million and Cost of sales as a percentage of sales increased by 0.1 percentage points due to:

• Higher sales volume

• Higher restructuring costs

Partially offset by:

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

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.

Transit Segment Cost of sales increased by $32 million primarily from higher sales volume, and Costs of sales as a percentage of sales increased by 1.2 percentage points.

The decrease in gross margin is primarily attributable to higher input costs and unfavorable mix within the Transit Segment, partially offset by 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 March 31, 2024 and 2023 includes $3 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe related to Integration 2.0.

Operating expenses

Transit Segment operating expenses increased by $39 million primarily driven by:

• 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

• 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.

Transit Segment operating expenses decreased by $1 million as compared to the prior year.

Higher SG&A expenses to support higher sales volume and higher employee compensation and benefit costs were more than offset by benefits from structured cost actions taken through Integration 2.0 and prior years' restructuring and integration projects.

Transit Operating expenses for the three months ended March 31, 2024 and 2023 includes $4 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe related to Integration 2.0.

Liquidity and Capital Resources

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

Liquidity is provided by operating cash flows and borrowings under the Company’s Senior Notes, the 2022 Credit Agreement and the 2024 Credit Agreement, each with a consortium of commercial banks.

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:

Nine Months Ended

September 30,

Three Months Ended

In millions 2024 2023

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Financing activities $ (289) $ (72)

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.

Operating activities In the first three months of 2024, cash provided by operating activities was $334 million compared to cash used for operating activities of $(25) million in the first three months of 2023.

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

• $104 million from increased Net Income;

• $172 million from favorable changes in accounts receivable driven by the timing of collections from customers and a net $65 million increase in the utilization of the Revolving Receivables Program;

• $103 million from changes in inventory.

Investing activities In the first three months of 2024 and 2023, cash used for investing activities was $(19) million and $(32) million, respectively.

During the first three months of 2024, Wabtec used $(31) million for additions to property, plant and equipment for investments in our facilities and manufacturing processes and received $12 million of proceeds from disposals of property, plant and equipment.

During the first three months of 2023, Wabtec used $(32) million for additions to property, plant, and equipment.

Financing activities In the first three months of 2024, cash used for financing activities was $(289) million which included $(58) million from net changes in debt, $(175) million in stock repurchases, $(36) million of dividend payments, and $(23) million of payments for income tax withholding on share-based compensation.

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

During the first quarter of 2024, the Company entered in the 2024 Credit Agreement for a term loan of $225 million.

Also during the first quarter of 2024, the Company issued $500 million of Senior Notes due in 2034.

Proceeds from the 2034 Notes, combined with the proceeds from the term loan under the 2024 Credit Agreement and cash on hand, were utilized to redeem the outstanding amount of 2024 Notes.

As of March 31, 2024, the Company held approximately $639 million of cash, cash equivalents and restricted cash, of which approximately $249 million was held within the United States and approximately $390 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.

As of March 31, 2024, approximately $5 million of the Company's $639 million of cash balance was classified as restricted.

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

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 $205 million for the nine months ended September 30, 2023 and 2022, respectively.

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 periods.

Net cash proceeds included in cash from operations from the revolving receivables program were $210 million and

$145 million for the three months ended March 31, 2024 and 2023, 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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Guarantor Summarized Financial Information

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

subsidiaries.

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.

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Summarized Statement of Income

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

In millions Nine Months Ended September 30, 2023

Parent Company and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2024

Net sales $ 1,500

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Summarized Balance Sheet

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

In millions September 30, 2023 December 31, 2022

Parent Company and Guarantor Subsidiaries

In millions March 31, 2024 December 31, 2023

Current assets $ 1,482 $ 1,513

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

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

In millions Nine Months Ended September 30, 2023

Parent Company and Guarantor Subsidiaries

In millions Three Months Ended March 31, 2024

Net sales to non-guarantor subsidiaries $ 233

Purchases from non-guarantor subsidiaries $ 435

Westinghouse Air Brake Technologies Corp.

and Guarantor Subsidiaries

In millions September 30, 2023

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

Parent Company and Guarantor Subsidiaries

In millions March 31, 2024

Amount due to non-guarantor subsidiaries $ 10,153

Summarized Financial Information—Euro Notes

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Issuer and Guarantor

In millions Nine Months Ended September 30, 2023

In millions Three Months Ended March 31, 2024

Net sales $ 138

Gross profit $ 27

Net income attributable to Wabtec shareholders $ (296)

Net loss attributable to Wabtec shareholders $ (108)

Summarized Balance Sheet

Issuer and Guarantor

In millions September 30, 2023 December 31, 2022

In millions March 31, 2024 December 31, 2023

Current assets $ 476 $ 493

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Other non-current liabilities $ 82 $ 84

The following is a description of the transactions between the combined Parent Company 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 Nine Months Ended September 30, 2023

In millions Three Months Ended March 31, 2024

Net sales to non-guarantor subsidiaries $ 12

1 unchanged sentence

Issuer and Guarantor

In millions September 30, 2023

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

In millions March 31, 2024

Amount due to non-guarantor subsidiaries $ 11,153

Company Stock Repurchase Plan

On February 14, 2023, the Board of Directors reauthorized its stock repurchase program to refresh the amount available for stock repurchases to $750 million of the Company’s outstanding shares.

On February 9, 2024, the Board of Directors reauthorized its stock repurchase program to refresh the amount available for stock repurchases to $1 billion of the Company’s outstanding shares.

This new stock repurchase authorization supersedes the previous authorization of $750 million, of which approximately $333 million remained at the reauthorization date.

No time limit was set for the completion of the program which conforms to the requirements under the Restated Credit Agreement and the indentures for the Senior Notes currently outstanding.

No time limit was set for the completion of the program which conforms to the requirements under the 2022 Credit Agreement and the 2024 Credit Agreement and the indentures for the Senior Notes currently outstanding.

The Company may repurchase shares in the future at any time, depending upon market conditions, our capital needs and other factors.

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

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

As of March 31, 2024, approximately $923 million was remaining under the stock repurchase plan.

Forward Looking Statements

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

• 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;

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

Operating factors

23 unchanged sentences

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

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

• epidemics, pandemics (including the COVID-19 pandemic), or similar public health crises;

• disruptive natural hazards, including earthquakes, fires, floods, tornadoes, hurricanes or other 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 Quarterly Report on Form 10-Q apply only as of the date on which such statements are made, and 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.

• supply chain and sourcing disruptions as a result of natural hazards, health crises or other external factors;

Statements in this Quarterly Report on Form 10-Q 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.

Reference is also made to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

1 unchanged sentence

A summary of critical accounting estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, business combinations, goodwill and indefinite-lived intangibles, warranty reserves, income taxes, and revenue recognition.

In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, business combinations, goodwill and indefinite-lived intangible assets, warranty reserves, income taxes, and revenue recognition.

There have been no significant changes in the related accounting policies since December 31, 2023.

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.

During the first quarter of 2024, the Company entered into the 2024 Credit Agreement for a term loan of $225 million which is scheduled to mature on March 14, 2029.

Also during the first quarter of 2024, the Company issued $500 million of Senior Notes due in 2034.

Proceeds from the 2034 Notes, combined with the proceeds from the term loan under the 2024 Credit Agreement and cash on hand, were utilized to redeem the outstanding amount of 2024 Notes.

As a result of these transactions, contractual obligations related the repayment of Long-term debt for 2029 and beyond has increased to $725 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