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, 2019, filed with the Securities and Exchange Commission on
February 24, 2020.
OVERVIEW
Wabtec is one of the world's largest providers of locomotives, value-added,
technology-based equipment, systems and services for the global freight rail and
passenger transit industries. 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. Our products enhance safety, improve
productivity and reduce maintenance costs for customers, and many of our core
products and services are essential in the safe and efficient operation of
freight rail and passenger transit vehicles. Wabtec is a global company with
operations in over 50 countries and our products can be found in more than 100
countries throughout the world. In the first three months of 2020, approximately
59% of the Company's revenues came from customers outside the United States.
COVID-19 Update
On March 11, 2020, the World Health Organization designated the outbreak of the
novel strain of coronavirus, known as COVID-19, as a global pandemic.
Governments and businesses around the world have taken unprecedented actions to
mitigate the spread of COVID-19, including but not limited to, shelter-in-place
orders, quarantines, significant restrictions on travel, as well as restrictions
that prohibit many employees from going to work. Our top concern is, and
remains, the health and well-being of our employees around the world. To date,
COVID-19 has surfaced in nearly all regions around the world and has impacted
our sales channels, supply chain, manufacturing operations, workforce, and other
key aspects of our operations. The outbreak and preventive measures, including
temporary plant closures in China, India, Italy and other countries where
outbreaks were most prevalent as well as stay at home orders, taken to help curb
the spread had an adverse impact on our operations and business results for the
first three months of 2020.
We continue to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including federal, state and local
public health authorities and may take additional actions based on their
recommendations; however, there are numerous uncertainties, including the
duration and severity of the pandemic, actions that may be taken by governmental
authorities, including preventing or curtailing the operations of our plants,
the potential impact on global economic activity, global supply chain
operations, our employees, and our customers, supplier and end-markets, and
other consequences that could negatively impact our business. As a result of
these numerous uncertainties, we are unable to specifically predict the extent
and length of time the COVID-19 pandemic will negatively impact our business;
however, we do expect COVID-19 to have a materially adverse impact on our
operations and business results in 2020 and may lead to reduced demand for our
products, reduced cash from operations and a volatile effective tax rate driven
by changes in earnings mix across the Company's different jurisdictions. We
continue to work with our employees, customers, and suppliers to navigate the
impacts of COVID-19. We also continue to assess possible implications to our
business, customers, supply chain and end-markets, and to take actions in an
effort to mitigate adverse consequences.
Management Review and Future Outlook
Wabtec's long-term financial goals are to generate cash flow from operations in
excess of net income, maintain a strong credit profile while minimizing our
overall cost of capital, increase margins through strict attention to cost
controls and implementation of the Wabtec Excellence Program, and increase
revenues through a focused growth strategy, including product innovation and new
technologies, global and market expansion, aftermarket products and services,
and acquisitions. In addition, Management evaluates the Company's current
operational performance through measures such as quality and on-time delivery.
The Company primarily serves the worldwide freight and transit rail industries.
As such, our operating results are largely dependent on the level of activity,
financial condition and capital spending plans of railroads and passenger
transit agencies around the world, and transportation equipment manufacturers
who serve those markets. Many factors influence these industries, including
general economic conditions; traffic volumes, as measured by freight carloadings
and passenger ridership; government spending on public transportation; and
investment in new technologies. In general, trends such as increasing
urbanization, a focus on sustainability and environmental awareness, an aging
equipment fleet, and growth in global trade are expected to drive continued
investment in freight and transit rail.
The Company monitors a variety of factors and statistics to gauge market
activity. Freight rail markets around the world are driven primarily by overall
economic conditions and activity, while Transit markets are driven primarily by
government funding and passenger ridership. Changes in these market drivers can
cause fluctuations in demand for Wabtec's products and services.
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According to the 2018 bi-annual edition of a market study by UNIFE, the
Association of the European Rail Industry, the accessible global market for
railway products and services was more than $100 billion and was expected to
grow at a compounded annual growth rate of 2.6% through 2023. It is currently
uncertain how the COVID-19 pandemic will negatively impact these annual growth
rates. The three largest geographic markets, which represented about 80% of the
total accessible market, were Europe, North America and Asia Pacific. UNIFE
projected above-average growth rates in North America, Latin America and
Africa/Middle East, with Asia Pacific and Europe growing at about the industry
average. UNIFE said trends such as urbanization and increasing mobility,
deregulation, investments in new technologies, energy and environmental issues,
and increasing government support continue to drive investment. The largest
product segments of the market were rolling stock, services and infrastructure,
which represent almost 90% of the accessible market. UNIFE projected spending on
turnkey management projects and infrastructure to grow at above-average rates.
UNIFE estimated that the global installed base of diesel and electric
locomotives was about 114,800 units, with about 33% in Asia Pacific, about 26%
in North America and about 18% in Russia-CIS (Commonwealth of Independent
States). Wabtec estimates that about 2,900 new locomotives were delivered
worldwide in 2019. UNIFE estimated the global installed base of freight cars was
about 5.1 million, with about 33% in North America, about 26% in Asia Pacific
and about 24% in Russia-CIS. Wabtec estimates that about 174,000 new freight
cars were delivered worldwide in 2019. UNIFE estimated the global installed base
of passenger transit vehicles to be about 600,000 units, with about 45% in Asia
Pacific, about 33% in Europe and about 12% in Russia-CIS. Wabtec estimates that
about 35,000 new passenger transit vehicles were ordered worldwide in 2019.
In Europe, the majority of the rail system serves the passenger transit market,
which is expected to continue growing as energy and environmental policies
encourage continued investment in public mass transit and modal shift from car
to rail, albeit this growth may be stunted in the near-term as a result of the
COVID-19 outbreak. According to UNIFE, France, Germany and the United Kingdom
were the largest Western European transit markets, representing almost
two-thirds of industry spending in the European Union. UNIFE projected the
accessible Western European rail market to grow at about 2.3% annually, led by
investments in new rolling stock in France and Germany. About 75% of freight
traffic in Europe is hauled by truck, while rail accounts for about 20%. The
largest freight markets in Europe are Germany, Poland and the United Kingdom. In
recent years, the European Commission has adopted a series of measures designed
to increase the efficiency of the European rail network by standardizing
operating rules and certification requirements. UNIFE believes that adoption of
these measures should have a positive effect on ridership and investment in
public transportation over time.
In North America, railroads carry about 40% of intercity freight, as measured by
ton-miles, which is more than any other mode of transportation. Through direct
ownership and operating partnerships, U.S. railroads are part of an integrated
network that includes railroads in Canada and Mexico, forming what is regarded
as the world's most-efficient and lowest-cost freight rail service. There are
more than 500 railroads operating in North America, with the largest railroads,
referred to as "Class I," accounting for more than 90% of the industry's
revenues. The railroads carry a wide variety of commodities and goods, including
coal, metals, minerals, chemicals, grain, and petroleum. These commodities
represent about 50% of total rail carloadings, with intermodal carloads
accounting for the rest. Railroads operate in a competitive environment,
especially with the trucking industry, and are always seeking ways to improve
safety, cost and reliability. New technologies offered by Wabtec and others in
the industry can provide some of these benefits. Demand for our freight related
products and services in North America is driven by a number of factors,
including rail traffic, and production of new locomotives and new freight
cars. In the U.S., the passenger transit industry is dependent largely on
funding from federal, state and local governments, and from fare box revenues.
Demand for North American passenger transit products is driven by a number of
factors, including government funding, deliveries of new subway cars and buses,
and ridership. The U.S. federal government provides money to local transit
authorities, primarily to fund the purchase of new equipment and infrastructure
for their transit systems. Demand for both our freight and passenger transit
products and services in North America may be negatively impacted by the
COVID-19 outbreak.
Growth in the Asia Pacific market has been driven mainly by the continued
urbanization of China and India, and by investments in freight rail rolling
stock and infrastructure in Australia to serve its mining and natural resources
markets. India is making significant investments in rolling stock and
infrastructure to modernize its rail system; for example, the country has
awarded a 1,000-unit locomotive order to GE Transportation.
Other key geographic markets include Russia-CIS and Africa-Middle East. With
about 1.2 million freight cars and about 20,000 locomotives, Russia-CIS is among
the largest freight rail markets in the world, and it's expected to invest in
both freight and transit rolling stock. PRASA, the Passenger Rail Agency of
South Africa, is expected to continue to invest in new transit cars and new
locomotives. According to UNIFE, emerging markets were expected to grow at
above-average rates as global trade led to increased freight volumes and
urbanization led to increased demand for efficient mass-transportation systems.
It is currently uncertain as to how the COVID-19 outbreak will impact the
expected growth in these emerging markets especially in the near-term. As this
growth occurs, Wabtec expects to have additional opportunities to provide
products and services in these markets.
In its study, UNIFE also said it expected increased investment in digital tools
for data and asset management, and in rail control technologies, both of which
would improve efficiency in the global rail industry. UNIFE said data-driven
asset
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management tools have the potential to reduce equipment maintenance costs and
improve asset utilization, while rail control technologies have been focused on
increasing track capacity, improving operational efficiency and ensuring safer
railway traffic. Wabtec offers products and services to help customers make
ongoing investments in these initiatives.
In 2020 and beyond, general global economic and market conditions will have an
impact on our sales and operations. The COVID-19 pandemic has increased the
uncertainty around global economic and market conditions. To the extent that
these factors cause instability of capital markets, shortages of raw materials
or component parts, longer sales cycles, deferral or delay of customer orders or
an inability to market our products effectively, our business and results of
operations could be materially adversely affected. In addition, we face risks
associated with our growth strategy including the level of investment that
customers are willing to make in new technologies developed by the industry and
the Company, and risks inherent in global expansion. When necessary, we will
modify our financial and operating strategies to address changes in market
conditions and risks.
MERGER OF WABTEC WITH GE TRANSPORTATION
Wabtec, General Electric Company ("GE"), GE Transportation, a Wabtec Company
formerly known as Transportation System Holdings Inc. ("SpinCo"), which was a
newly formed wholly owned subsidiary of GE, and Wabtec US Rail Holdings, Inc.
("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company,
entered into the Original Merger Agreement on May 20, 2018, and GE, SpinCo,
Wabtec and Wabtec US Rail, Inc. ("Direct Sale Purchaser") entered into the
Original Separation Agreement on May 20, 2018, which together provided for the
combination of Wabtec and GE Transportation. The Original Merger Agreement and
Original Separation Agreement were subsequently amended on January 25, 2019 and
the Merger was completed on February 25, 2019.
As part of the Merger, certain assets of GE Transportation, including the equity
interests of certain pre-Transaction subsidiaries of GE that composed part of GE
Transportation, were sold to Direct Sale Purchaser for a cash payment of $2.875
billion, and Direct Sale Purchaser assumed certain liabilities of GE
Transportation in connection with this purchase (the "Direct Sale"). Thereafter,
GE transferred the SpinCo business to SpinCo and its subsidiaries (to the extent
not already held by SpinCo and its subsidiaries), and SpinCo issued to GE shares
of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class
C preferred stock and additional shares of SpinCo common stock. Following this
issuance of additional SpinCo common stock to GE, and immediately prior to the
Distribution (as defined below), GE owned 8,700,000,000 shares of SpinCo common
stock, 15,000 shares of SpinCo Class A preferred stock, 10,000 shares of SpinCo
Class B preferred stock and one share of SpinCo Class C preferred stock, which
constituted all of the outstanding stock of SpinCo.
Following the Direct Sale, GE distributed the distribution shares of SpinCo in a
spin-off transaction to its stockholders (the "Distribution"). Immediately after
the Distribution, Merger Sub merged with and into SpinCo (the "Merger"), whereby
the separate corporate existence of Merger Sub ceased and SpinCo continued as
the surviving company and a wholly owned subsidiary of Wabtec (except with
respect to shares of SpinCo Class A preferred stock held by GE). In the Merger,
subject to adjustment in accordance with the Merger Agreement, each share of
SpinCo common stock converted into the right to receive a number of shares of
Wabtec common stock based on the common stock exchange ratio set forth in the
Merger Agreement and the share of SpinCo Class C preferred stock was converted
into the right to receive (a) 10,000 shares of Wabtec convertible preferred
stock and (b) a number of shares of Wabtec common stock equal to 9.9% of the
fully-diluted pro forma Wabtec shares. Immediately prior to the Merger, Wabtec
paid $10.0 million in cash to GE in exchange for all of the shares of SpinCo
Class B preferred stock.
Upon consummation of the Merger, Wabtec issued 46,763,975 shares of common stock
to the holders of GE common stock, 19,018,207 shares of common stock to GE and
10,000 shares of preferred stock to GE and made a cash payment to GE of $2.885
billion. As a result and calculated based on Wabtec's outstanding common stock
on a fully-diluted, as-converted and as-exercised basis, as of February 25,
2019, approximately 49.2% of the outstanding shares of Wabtec common stock was
held collectively by GE and holders of GE common stock (with 9.9% held by GE
directly in shares of Wabtec common stock and 15% underlying the shares of
Wabtec convertible preferred stock held by GE) and approximately 50.8% of the
outstanding shares of Wabtec common stock held by pre-Merger Wabtec
stockholders, in each case calculated on a fully-diluted, as-converted and
as-exercised basis. Following the Merger, GE also retained 15,000 shares of
SpinCo Class A non-voting preferred stock, and Wabtec held 10,000 shares of
SpinCo Class B non-voting preferred stock.
After the Merger, SpinCo, which is Wabtec's wholly owned subsidiary (except with
respect to shares of SpinCo Class A preferred stock held by GE), and Direct Sale
Purchaser, which also is Wabtec's wholly owned subsidiary, together own and
operate the post-transaction GE Transportation. All shares of the Company's
common stock, including those issued in the Merger, are listed on the NYSE under
the Company's current trading symbol "WAB." On the date of the Distribution, GE
and SpinCo, directly or through subsidiaries entered into additional agreements
relating to, among other things, intellectual property, employee matters, tax
matters, research and development and transition services.
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On May 6, 2019, GE completed the sale of approximately 8,780 shares of Wabtec's
Series A Preferred stock which converted upon the sale to 25,300,000 shares of
Wabtec's common stock. On August 9, 2019, GE completed a sale of the remaining
shares of Series A Preferred Stock outstanding which converted to approximately
3,515,500 shares of common stock, as well as 16,969,656 shares of common stock
owned directly by GE. Finally, on September 12, 2019, GE completed a sale of all
of its remaining shares of common stock of Wabtec, approximately 2,048,515
shares. In conjunction with these secondary offerings, the Company waived the
requirements under the shareholders agreement for GE to maintain certain
ownership levels of Wabtec's stock following the closing date of the Merger. The
Company did not receive any proceeds from the sale of any of these shares.
Total future consideration to be paid by Wabtec to GE includes a fixed payment
of $470.0 million, which is directly related to the timing of tax benefits
expected to be realized by Wabtec as a result of the acquisition of GE
Transportation. This payment is considered contingent consideration because the
timing of cash payments to GE is directly related to the future timing of tax
benefits received by the Company as a result of the acquisition of GE
Transportation. The total value of the consideration paid, and to be paid, by
Wabtec in the acquisition transaction is approximately $10.3 billion, including
the cash paid for the Direct Sales Assets, equity transferred for SpinCo,
contingent consideration, assumed debt and net of cash acquired. The estimated
consideration is based on the Company's closing share price of $73.36 on
February 22, 2019 and the fair value of the contingent consideration.
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RESULTS OF OPERATIONS
Consolidated Results
FIRST QUARTER 2020 COMPARED TO FIRST QUARTER 2019
The following table shows our Consolidated Statements of Operations for the
periods indicated.
                                                                             Three Months Ended
                                                                                 March 31,
In millions                                                     2020               2019           Percent Change
Net sales:
Sales of goods                                              $ 1,590.8          $ 1,434.5                 10.9  %
Sales of services                                               339.1              159.1                113.1  %
Total net sales                                               1,929.9            1,593.6                 21.1  %
Cost of sales:
Cost of goods                                                (1,155.9)          (1,073.6)                 7.7  %
Cost of services                                               (195.3)            (131.0)                49.1  %
Total cost of sales                                          (1,351.2)          (1,204.6)                12.2  %
Gross profit                                                    578.7              389.0                 48.8  %
Operating expenses:
Selling, general and administrative expenses                   (243.4)            (259.8)                (6.3) %
Engineering expenses                                            (49.0)             (34.5)                42.0  %
Amortization expense                                            (69.0)             (27.4)               151.8  %
Total operating expenses                                       (361.4)            (321.7)                12.3  %
Income from operations                                          217.3               67.3                222.9  %
Other income and expenses:
Interest expense, net                                           (53.3)             (44.6)                19.5  %
Other expense, net                                              (14.8)              (8.2)                80.5  %
Income from operations before income taxes                      149.2               14.5                929.0  %
Income tax expense                                              (38.0)             (18.5)               105.4  %
Net income (loss)                                               111.2               (4.0)                n/m*

Less: Net loss (gain) attributable to noncontrolling interest

                                                          0.4               (0.5)                 n/m
Net income (loss) attributable to Wabtec shareholders           111.6               (4.5)                 n/m

* n/m - not meaningful


Segment change
The Company has two reportable segments - the Freight Segment and the Transit
Segment. Initiatives to integrate GE Transportation operations into Wabtec
including recent restructuring programs announced in late 2019 resulted in
changes to the Company's organizational structure and the financial reporting
utilized by the Company's chief operating decision maker to assess performance
and allocate resources; as a result, certain asset groups were reorganized from
the Freight Segment to the Transit Segment and vice versa. The change in the
Company's reportable segments was effective in the fourth quarter of 2019 and is
reflected below in 2020 and through the retrospective revision of 2019 segment
information. The Company believes these changes better present management's new
view of the business.
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The following table shows the major components of the change in sales in the first quarter of 2020 from the first quarter of 2019:


                                   Freight        Transit
In millions                        Segment        Segment         Total
First Quarter 2019 Net Sales     $   915.5       $ 678.1       $ 1,593.6
Acquisitions                         506.4           3.0           509.4
Foreign Exchange                     (13.4)        (18.0)          (31.4)
Organic                             (107.5)        (34.2)         (141.7)
First Quarter 2020 Net Sales     $ 1,301.0       $ 628.9       $ 1,929.9


Results of operations were negatively impacted during the first quarter,
particularly in the latter portion of the quarter, as a result of the COVID-19
pandemic. Management's discussion below includes analysis as to the impact of
the COVID-19 pandemic where it could be explicitly identified; however, in many
instances it is difficult to quantify with a high level of certainty the
negative impact the COVID-19 pandemic had on our net sales, cost of goods,
operating expenses, interest expense, and income tax expense. On a consolidated
basis, the Company estimates the impact of the COVID-19 pandemic on sales and
operating income was approximately $40 million and $15 million in the first
quarter of 2020.
Net sales
Net sales for the three months ended March 31, 2020 increased by $0.3 billion,
or 21.1%, to $1.9 billion. The increase is primarily due to sales from
acquisitions of $0.5 billion, mainly, the acquisition of GE Transportation. This
increase is partially offset by an organic decrease of $108 million in the
Freight Segment, primarily in Components due to a lower number of carbuilds in
the first quarter of 2020 and in Equipment due to the timing of locomotive
deliveries. The Transit Segment experienced an organic decrease in sales of $34
million, primarily due to COVID-19 related production delays, partially offset
by increased sales for brake products. Unfavorable changes in foreign currency
exchange rates reduced net sales by $31 million.
Cost of sales
Cost of sales increased by $147 million to $1.4 billion in 2020 compared to
$1.2 billion in 2019. The increase is primarily due to $355 million of
incremental cost of sales from acquisitions, mainly from the acquisition of GE
Transportation. This increase is partially offset by an organic sales decrease
and an $80 million non-recurring charge related to purchase price accounting for
the step-up of GE Transportation inventory that occurred in the first quarter of
2019. Excluding the $80 million non-recurring charge, cost of sales as a
percentage of sales was 70.0% in 2020 and 70.6% in 2019, representing a 0.6%
improvement. The improvement as a percentage of sales can be attributed to a mix
shift towards higher margin Freight Segment sales and improved Transit
operations.
Operating expenses
Total operating expenses increased $40 million to 18.7% of sales in the first
quarter of 2020 compared to 20.2% during the first quarter of 2019. Selling,
general, and administrative expenses decreased $16 million or 6.3%, primarily
due to a decrease of $43 million in reduced GE Transportation transaction and
restructuring costs and a $21 million decrease driven by reduced employee
benefit costs and synergy savings, partially offset by $54 million of
incremental expense from acquisitions. In the first quarter of 2020, selling,
general, and administrative expenses included $16 million of GE Transportation
transaction and restructuring costs compared to $59 million of transaction and
restructuring costs in the first quarter of 2019. Engineering expense increased
$15 million and amortization expense increased $42 million due to incremental
expense from the GE Transportation acquisition.
Interest expense, net
Interest expense, net, increased $9 million in the first quarter of 2020 over
the same period in 2019 attributable to higher overall average debt balances in
2020, related to the acquisition of GE Transportation.
Other expense, net
Other expense, net, was $14.8 million in the first quarter of 2020 compared to
$8.2 million in the same period of 2019, primarily driven by foreign exchange
losses.
Income taxes
The effective income tax rate was 25.5% and 127.7% for the first quarter of 2020
and 2019, respectively. The decrease in the effective rate is primarily the
result of non-deductible transaction related expenses incurred during the three
months ended March 31, 2019 as a result of the GE Transportation acquisition
that did not recur in 2020.
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Freight Segment The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:


                                              Three Months Ended March 31,
In millions                         2020                        2019        Percent Change
Net sales:
Sales of goods                $      970.6                   $ 765.7                26.8  %
Sales of services                    330.4                     149.8               120.6  %
Total net sales                    1,301.0                     915.5                42.1  %
Cost of sales:
Cost of goods                       (711.2)                   (577.2)               23.2  %
Cost of services                    (188.2)                   (123.3)               52.6  %
Total cost of sales                 (899.4)                   (700.5)               28.4  %

Gross profit                         401.6                     215.0                86.8  %

Operating expenses                  (239.9)                   (134.1)               78.9  %

Income from operations ($)           161.7                      80.9                99.9  %
Income from operations (%)            12.4   %                   8.8  %


The following table shows the major components of the change in net sales for
the Freight Segment in 2020 from 2019:
In millions
2019 Net Sales                       $   915.5
Acquisitions                             506.4
Change in Sales by Product Line:
Equipment                                (51.3)
Components                               (75.1)
Digital Electronics                        8.3
Services                                  10.6
Foreign Exchange                         (13.4)
2020 Net Sales                       $ 1,301.0


Net sales
Freight Segment sales increased by $0.4 billion, or 42.1%, to $1.3 billion, due
to $0.5 billion of incremental sales from acquisitions, primarily GE
Transportation. This increase was partially offset by lower net sales in
Components due to a lower number of carbuilds in the first quarter of 2020 and
in Equipment due to the timing of locomotive deliveries. Unfavorable foreign
currency exchange rates decreased sales by $13 million.
Cost of sales
Freight Segment cost of sales increased by $199 million to $0.9 billion in 2020.
The increase is primarily due to $352 million of incremental cost of sales from
acquisitions, mainly from the acquisition of GE Transportation. This increase in
cost of sales is partially offset by an organic sales decrease and an $80
million non-recurring charge related to purchase price accounting for the
step-up of GE Transportation inventory that occurred in the first quarter of
2019. Excluding the $80 million charge related to the step-up of GE
Transportation inventory, cost of sales as a percentage of sales was 67.8%,
compared to 69.1% in the current quarter. The increase as a percentage of sales
is attributable to an unfavorable product mix and locomotive delivery timing.
Operating expenses
Freight Segment operating expenses increased $106 million, or 78.9%, in 2020 to
18.4% of sales. Selling, general, and administrative expenses increased $49
million due to $54 million in incremental expense from acquisitions, primarily
GE Transportation, partially offset by lower employee benefit costs and synergy
savings. In the first quarter of 2020, selling, general, and administrative
expenses included $14 million of costs related to the GE Transportation
transaction and
                                       36
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restructuring costs compared to $5 million of transaction and restructuring
costs in the first quarter of 2019. Engineering expense increased $15 million
and amortization expense increased $42 million, both due to the acquisition of
GE Transportation.
                                       37
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Transit Segment The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:


                                               Three Months Ended March 31,
In millions                          2020                        2019        Percent Change
Net sales                      $      628.9                   $ 678.1                (7.3) %
Cost of sales                        (451.8)                   (504.1)              (10.4) %
Gross profit                          177.1                     174.0                 1.8  %

Operating expenses                   (108.5)                   (114.1)               (4.9) %

Income from operations ($)             68.6                      59.9                14.5  %
Income from operations (%)             10.9   %                   8.8  %


The following table shows the major components of the change in net sales for
the Transit Segment in 2020 from 2019:
In millions
2019 Net Sales                       $ 678.1
Acquisitions                             3.0
Change in Sales by Product Line:
OEM                                    (31.9)
Aftermarket                             (2.3)
Foreign Exchange                       (18.0)
2020 Net Sales                       $ 628.9


Net sales
Transit Segment sales decreased by $49 million, or 7.3% primarily due to the
timing of original equipment project deliveries for HVAC, door, and brake and
coupler systems compared to the prior year and due to the effect of the COVID-19
pandemic on operations, particularly in China and Europe. Unfavorable foreign
currency exchange rate changes decreased net sales by $18 million.
Cost of sales
Transit Segment cost of sales decreased by $52 million to $452 million in the
first quarter of 2020. In 2020, cost of sales as a percentage of sales was 71.8%
compared to 74.3% in 2019. The decrease as a percentage of sales can be
attributed to a favorable product mix shift towards more aftermarket spares
which typically carry a higher margin and certain discrete project adjustments
in 2019 that did not recur.
Operating expenses
Transit Segment operating expenses decreased $6 million to $109 million, or
4.9%, in the first quarter of 2020 and increased 50 basis points to 17.3% as a
percentage of sales compared to the same period in 2019. Selling, general, and
administrative expenses decreased $5 million in 2020, consisting of a $3 million
organic decrease and a $2 million decrease due to foreign currency exchange rate
changes. Engineering expense and amortization expense remained consistent year
over year.
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Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's unsecured credit facility with a consortium of commercial banks. The
following is a summary of selected cash flow information and other relevant
data:
                                                       Three Months Ended
                                                            March 31,
In millions                                           2020           2019
Cash (used for) provided by:
Operating activities                               $ (81.9)      $     31.3
Investing activities                                 (62.6)        (2,739.6)
Financing activities                                 183.5            883.0

Increase (decrease) in cash and restricted cash $ 11.7 $ (1,829.5)




Operating activities In the first three months of 2020, cash used for operations
was $82 million compared to cash provided by operations of $31 million in the
first three months of 2019. The major components of the decrease in operational
cash flow were as follows: an unfavorable change in other assets and liabilities
of $188 million primarily due to the timing of payments related to accrued
expenses and costs related to the GE Transportation acquisition, an unfavorable
change in inventories of $99 million due to the liquidation of acquired
inventory related to the acquisition of GE Transportation that occurred in the
prior year. These changes were offset by a favorable change in net income of
$115.2 million, a favorable change in depreciation and amortization of
$60 million, and a favorable change in accounts payable of $56 million due to
the timing of payments to suppliers.
Investing activities In the first three months of 2020 and 2019, cash used for
investing activities was $63 million and $2.7 billion, respectively. The major
components of the cash outflow in 2020 were $36 million in net cash paid for
acquisitions, and $33 million in additions to property, plant and equipment for
investments in our facilities and manufacturing processes. This compares to $2.7
billion in net cash paid for acquisitions and $30 million in property, plant,
and equipment for additions in the first three months of 2019. Refer to Note 3
of the "Notes to Condensed Consolidated Financial Statements" for additional
information on acquisitions.
Financing activities In the first three months of 2020, cash provided by
financing activities was $184 million which included $982 million in proceeds
from the Revolving Facility, $664 million in repayments of debt on the Revolving
Facility, $105 million in stock repurchases and $23 million of dividend
payments. In the first three months of 2019, cash provided by financing
activities was $883 million, which included $1.7 billion in proceeds from the
Revolving Facility, $838 million in repayments of debt on the Revolving
Facility, and $12 million of dividend payments.
Although the COVID-19 pandemic did not have a materially adverse impact on cash
from operating activities for the three months ended March 31, 2020, management
expects the COVID-19 pandemic to negatively impact cash from operations for the
remainder of 2020. The extent and length of time in which the Company's cash
from operations will be negatively impacted is uncertain. Because of this
uncertainty, the Company has taken prudent measures to decrease cash used for
investing activities for the remainder of 2020. Additionally, in April of 2020,
the Company implemented the new debt arrangement described below as part of its
liquidity planning. This facility further strengthens our liquidity position as
we address the impacts of the COVID-19 pandemic. Management continues to monitor
the rapidly evolving situation and will periodically reassess and adjust the
Company's cash management strategy as circumstances dictate.
On April 10, 2020 the Company entered into a new $600 million 364 day credit
facility maturing April 2021 with a group of banks which includes a $144 million
revolving credit facility and a $456 million term loan. The agreement calls for
interest at either a LIBOR-based rate, or a rate based on the prime lending rate
of the agent bank, at the Company's option. The agreement contains affirmative,
negative and financial covenants, and events of default customary for facilities
of this type and substantially similar to the Senior Credit Facility.
Debt
Additional information with respect to Senior Notes and long-term debt is
included in Note 8 of "Notes to Consolidated Financial Statements" included in
Part I, Item 1 of this report and incorporated by reference herein.
Company Stock Repurchase Plan
On February 7, 2020, the Board of Directors amended its stock repurchase
authorization to $500 million of the Company's outstanding shares. This new
stock repurchase authorization supersedes the previous authorization of $350
million of which about $138 million remained. During the first three months of
2020, the Company purchased 1.6 million shares for $105 million, leaving $395
million remaining under the authorization. No time limit was set for the
completion of the program
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which conforms to the requirements under the Senior Credit Facility, as well as
the Senior Notes currently outstanding. Subsequent to the end of the first
quarter of fiscal 2020, to enhance our liquidity position in response to
COVID-19, management elected to temporarily suspend share repurchases under our
existing stock repurchase program. The existing program remains authorized by
the Board of Directors and we may resume share repurchases in the future at any
time, depending upon market conditions, our capital needs and other factors.
Forward Looking Statements
We believe that all statements other than statements of historical facts
included in this report, including certain statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure that our
assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
Economic and industry conditions
•prolonged unfavorable economic and industry conditions in the markets served by
us, including North America, South America, Europe, Australia, Asia and South
Africa;
•decline in demand for freight cars, locomotives, passenger transit cars, buses
and related products and services;
•reliance on major original equipment manufacturer customers;
•original equipment manufacturers' program delays;
•demand for services in the freight and passenger rail industry;
•demand for our products and services;
•orders either being delayed, canceled, not returning to historical levels, or
reduced or any combination of the foregoing;
•consolidations in the rail industry;
•continued outsourcing by our customers;
•industry demand for faster and more efficient braking equipment;
•fluctuations in interest rates and foreign currency exchange rates; or
•availability of credit;
Operating factors
•supply disruptions;
•technical difficulties;
•changes in operating conditions and costs;
•increases in raw material costs;
•successful introduction of new products;
•performance under material long-term contracts;
•labor relations;
•the outcome of our existing or any future legal proceedings, including
litigation involving our principal customers and any litigation with respect to
environmental matters, asbestos-related matters, pension liabilities,
warranties, product liabilities or intellectual property claims;
•completion and integration of acquisitions, including the acquisition of
Faiveley Transport and the GE Transportation Business; or
•the development and use of new technology;
Competitive factors
•the actions of competitors; or
•the outcome of negotiations with partners, suppliers, customers or others;
Political/governmental factors
•political stability in relevant areas of the world;
•future regulation/deregulation of our customers and/or the rail industry;
•levels of governmental funding on transit projects, including for some of our
customers;
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•political developments and laws and regulations, including those related to
Positive Train Control; or
•federal and state income tax legislation; or
•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; or
•difficulty in obtaining debt or equity financing.
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.
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, 2019.
Critical Accounting Policies
A summary of critical accounting policies is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2019. In particular,
judgment is used in areas such as accounts receivable and the allowance for
doubtful accounts, inventories, goodwill and indefinite-lived intangibles,
warranty reserves, pensions and postretirement benefits, income taxes and
revenue recognition. There have been no other significant changes in accounting
policies since December 31, 2019.
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