The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein andWestinghouse 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 24, 2020 . OVERVIEWWabtec 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 outsidethe United States . COVID-19 Update OnMarch 11, 2020 , theWorld 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 inChina ,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 OutlookWabtec'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 forWabtec's products and services. 30 -------------------------------------------------------------------------------- According to the 2018 bi-annual edition of a market study by UNIFE, theAssociation 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, wereEurope ,North America andAsia Pacific . UNIFE projected above-average growth rates inNorth America ,Latin America and Africa/Middle East , withAsia Pacific andEurope 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% inAsia Pacific , about 26% inNorth America and about 18% inRussia -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% inNorth America , about 26% inAsia Pacific and about 24% inRussia -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% inAsia Pacific , about 33% inEurope and about 12% inRussia -CIS.Wabtec estimates that about 35,000 new passenger transit vehicles were ordered worldwide in 2019. InEurope , 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 theUnited Kingdom were the largest Western European transit markets, representing almost two-thirds of industry spending in theEuropean Union . UNIFE projected the accessible Western European rail market to grow at about 2.3% annually, led by investments in new rolling stock inFrance andGermany . About 75% of freight traffic inEurope is hauled by truck, while rail accounts for about 20%. The largest freight markets inEurope areGermany ,Poland and theUnited Kingdom . In recent years, theEuropean 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. InNorth 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 inCanada andMexico , forming what is regarded as the world's most-efficient and lowest-cost freight rail service. There are more than 500 railroads operating inNorth 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 byWabtec and others in the industry can provide some of these benefits. Demand for our freight related products and services inNorth America is driven by a number of factors, including rail traffic, and production of new locomotives and new freight cars. In theU.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. TheU.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 inNorth America may be negatively impacted by the COVID-19 outbreak. Growth in theAsia Pacific market has been driven mainly by the continued urbanization ofChina andIndia , and by investments in freight rail rolling stock and infrastructure inAustralia 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 andAfrica-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, thePassenger 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 31 -------------------------------------------------------------------------------- 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 TRANSPORTATIONWabtec , General Electric Company ("GE"), GE Transportation, aWabtec Company formerly known asTransportation System Holdings Inc. ("SpinCo"), which was a newly formed wholly owned subsidiary ofGE , andWabtec US Rail Holdings, Inc. ("Merger Sub"), which was a newly formed wholly owned subsidiary of the Company, entered into the Original Merger Agreement onMay 20, 2018 , andGE ,SpinCo ,Wabtec andWabtec US Rail, Inc. ("Direct Sale Purchaser") entered into the Original Separation Agreement onMay 20, 2018 , which together provided for the combination ofWabtec and GE Transportation. The Original Merger Agreement and Original Separation Agreement were subsequently amended onJanuary 25, 2019 and the Merger was completed onFebruary 25, 2019 . As part of the Merger, certain assets of GE Transportation, including the equity interests of certain pre-Transaction subsidiaries ofGE that composed part ofGE Transportation, were sold to Direct Sale Purchaser for a cash payment of$2.875 billion , and Direct Sale Purchaser assumed certain liabilities ofGE Transportation in connection with this purchase (the "Direct Sale"). Thereafter,GE transferred theSpinCo business toSpinCo and its subsidiaries (to the extent not already held bySpinCo and its subsidiaries), andSpinCo issued toGE shares of SpinCo Class A preferred stock, SpinCo Class B preferred stock, SpinCo Class C preferred stock and additional shares ofSpinCo common stock. Following this issuance of additionalSpinCo common stock toGE , and immediately prior to the Distribution (as defined below),GE owned 8,700,000,000 shares ofSpinCo common stock, 15,000 shares of SpinCo Class A preferred stock, 10,000 shares ofSpinCo Class B preferred stock and one share of SpinCo Class C preferred stock, which constituted all of the outstanding stock ofSpinCo . Following the Direct Sale,GE distributed the distribution shares ofSpinCo in a spin-off transaction to its stockholders (the "Distribution"). Immediately after the Distribution, Merger Sub merged with and intoSpinCo (the "Merger"), whereby the separate corporate existence of Merger Sub ceased andSpinCo continued as the surviving company and a wholly owned subsidiary ofWabtec (except with respect to shares of SpinCo Class A preferred stock held byGE ). In the Merger, subject to adjustment in accordance with the Merger Agreement, each share ofSpinCo common stock converted into the right to receive a number of shares ofWabtec 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 ofWabtec convertible preferred stock and (b) a number of shares ofWabtec common stock equal to 9.9% of the fully-diluted pro formaWabtec shares. Immediately prior to the Merger,Wabtec paid$10.0 million in cash toGE in exchange for all of the shares ofSpinCo Class B preferred stock. Upon consummation of the Merger,Wabtec issued 46,763,975 shares of common stock to the holders ofGE common stock, 19,018,207 shares of common stock toGE and 10,000 shares of preferred stock toGE and made a cash payment toGE of$2.885 billion . As a result and calculated based onWabtec's outstanding common stock on a fully-diluted, as-converted and as-exercised basis, as ofFebruary 25, 2019 , approximately 49.2% of the outstanding shares ofWabtec common stock was held collectively byGE and holders ofGE common stock (with 9.9% held byGE directly in shares ofWabtec common stock and 15% underlying the shares ofWabtec convertible preferred stock held byGE ) and approximately 50.8% of the outstanding shares ofWabtec 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, andWabtec held 10,000 shares of SpinCo Class B non-voting preferred stock. After the Merger,SpinCo , which isWabtec's wholly owned subsidiary (except with respect to shares of SpinCo Class A preferred stock held byGE ), and Direct Sale Purchaser, which also isWabtec'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 andSpinCo , 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. 32 -------------------------------------------------------------------------------- OnMay 6, 2019 ,GE completed the sale of approximately 8,780 shares ofWabtec's Series A Preferred stock which converted upon the sale to 25,300,000 shares ofWabtec's common stock. OnAugust 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 byGE . Finally, onSeptember 12, 2019 ,GE completed a sale of all of its remaining shares of common stock ofWabtec , approximately 2,048,515 shares. In conjunction with these secondary offerings, the Company waived the requirements under the shareholders agreement forGE to maintain certain ownership levels ofWabtec'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 byWabtec toGE includes a fixed payment of$470.0 million , which is directly related to the timing of tax benefits expected to be realized byWabtec as a result of the acquisition ofGE Transportation. This payment is considered contingent consideration because the timing of cash payments toGE is directly related to the future timing of tax benefits received by the Company as a result of the acquisition ofGE Transportation. The total value of the consideration paid, and to be paid, byWabtec in the acquisition transaction is approximately$10.3 billion , including the cash paid for the Direct Sales Assets, equity transferred forSpinCo , contingent consideration, assumed debt and net of cash acquired. The estimated consideration is based on the Company's closing share price of$73.36 onFebruary 22, 2019 and the fair value of the contingent consideration. 33 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Consolidated Results FIRST QUARTER 2020 COMPARED TO FIRST QUARTER 2019 The following table shows our Consolidated Statements of Operations for the periods indicated. Three Months Ended March 31, In millions 2020 2019 Percent Change Net sales: Sales of goods$ 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 intoWabtec 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. 34 --------------------------------------------------------------------------------
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 endedMarch 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 ofGE 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$8.2 million in the same period of 2019, primarily driven by foreign exchange losses. Income taxes The effective income tax rate was 25.5% and 127.7% for the first quarter of 2020 and 2019, respectively. The decrease in the effective rate is primarily the result of non-deductible transaction related expenses incurred during the three months endedMarch 31, 2019 as a result of the GE Transportation acquisition that did not recur in 2020. 35 --------------------------------------------------------------------------------
Freight Segment The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
Three Months Ended March 31, In millions 2020 2019 Percent Change Net sales: Sales of goods$ 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, primarilyGE 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 ofGE 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 -------------------------------------------------------------------------------- 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$42 million , both due to the acquisition of GE Transportation. 37 --------------------------------------------------------------------------------
Transit Segment The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
Three Months Ended March 31, In millions 2020 2019 Percent Change Net sales$ 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 inChina andEurope . 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$2 million decrease due to foreign currency exchange rate changes. Engineering expense and amortization expense remained consistent year over year. 38 -------------------------------------------------------------------------------- Liquidity and Capital Resources Liquidity is provided primarily by operating cash flow and borrowings under the Company's unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data: Three Months Ended March 31, In millions 2020 2019 Cash (used for) provided by: Operating activities$ (81.9) $ 31.3 Investing activities (62.6) (2,739.6) Financing activities 183.5 883.0
Increase (decrease) in cash and restricted cash
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 endedMarch 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. OnApril 10, 2020 the Company entered into a new$600 million 364 day credit facility maturingApril 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 OnFebruary 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 39 -------------------------------------------------------------------------------- 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, includingNorth America ,South America ,Europe ,Australia ,Asia andSouth 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 ofFaiveley 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; 40 -------------------------------------------------------------------------------- •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 endedDecember 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 endedDecember 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 sinceDecember 31, 2019 . 41
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