WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION 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, 2021 , filed with theSecurities and Exchange Commission onFebruary 17, 2022 . OVERVIEWWabtec 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. 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 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 nine months of 2022, approximately 55% of the Company's net sales came from customers outsidethe United States . Business Update The unfavorable global economic conditions driven by the impacts of the COVID-19 pandemic and supply chain disruptions, and further intensified by the Russian invasion ofUkraine , continue to have an adverse impact on our operations and business results. Impacts for the three and nine months endedSeptember 30, 2022 and 2021, are discussed in more detail in the Results of Operations section below. Supply chain disruptions and labor availability have caused component, raw material and chip shortages resulting in an adverse effect on the timing of the Company's revenue generation. Additionally, broad-based inflation, escalation of diesel, metals and other commodity costs, transportation and logistics costs, and labor costs all continue to impact our results. The Russian invasion ofUkraine and the resultant sanctions related toRussia andBelarus have further impacted our supply and distribution channels and caused significant price inflation which had, and are expected to continue to have, adverse effects onWabtec's business results. For the year endedDecember 31, 2021 ,Wabtec had earnings of approximately$40 million attributable to customers inRussia , while earnings from customers inUkraine andBelarus were not significant. As ofSeptember 30, 2022 ,Wabtec had approximately$16 million of assets related to Russian operations, which were primarily cash and inventory. Management has determined, based on information currently available, that these assets are expected to be recoverable and therefore no impairment was recorded during the first nine months of 2022. This will continue to be monitored and may result in a future impairment charge based on changes in the situation. Management determined that inventory related to operations inUkraine were not expected to be recoverable and were written off resulting in an insignificant charge during the first quarter of 2022. Remaining assets related toUkraine and those inBelarus were not significant. The Company has implemented various mitigating actions intended to lessen the impact of these unfavorable economic conditions. These actions include implementing price escalations and surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management, strategically sourcing materials, reviewing and modifying distribution logistics, and accelerating integration synergies where possible. The Company expects to continue to incur increased costs in future quarters. Management will continue to monitor the evolving situations but, as a result of the numerous uncertainties surrounding the COVID-19 pandemic, recent supply chain disruptions and the Russian invasion ofUkraine , we are unable to specifically predict the extent and length of time that our business may be negatively impacted. We also face the possibility that additional actions may be taken by governmental authorities and private industry, or government policies may become more restrictive in response to the COVID-19 pandemic, especially if COVID-19 transmission rates increase in certain areas. Changes in trade regulations and sanctions including retaliatory measures, advancements or changes in the conflict inUkraine , the impact of variants of COVID-19, actions taken in response to COVID-19 including curtailing operations of our plants, or significant adverse impacts to our customers, suppliers, distribution channels and operating locations, could result in material adverse impacts to the business, including impairment charges from changes in estimates.
Cyber Incident
As previously announced, onJune 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, which is ongoing. 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 to date and on the information currently known, 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,
24
--------------------------------------------------------------------------------operations or financial results. The Company maintains cyber insurance, subject to certain deductibles and policy limitations typical for its size and industry.
Integration 2.0
During the first quarter of 2022,Wabtec announced a three-year strategic review expected to target incremental run rate synergies estimated to be between$75 million and$90 million by 2025. The scope of the review will include consolidating our operating footprint, reducing headcount, streamlining the end-to-end manufacturing process, restructuring theNorth America distribution channels, expanding operations in low-cost countries and simplifying the business through systems enablement, including the source-to-pay process. Management will also consider additional capital investments to further simplify and streamline the business. The Company anticipates that it will incur one-time restructuring charges in the future to execute on decisions resulting from the review, currently estimated to be approximately$135 million to$165 million . The estimate could change based on the specific programs approved or changes to the scope of the review. No significant programs related to Integration 2.0 were initiated during the nine months endedSeptember 30, 2022 . 25 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated Results
THIRD QUARTER 2022 COMPARED TO THIRD QUARTER 2021
The following table shows our Consolidated Statements of Operations for the
periods indicated.
Three Months Ended
September 30,
In millions 2022 2021
Net sales:
Sales of goods $ 1,625 $ 1,489
Sales of services 456 418
Total net sales 2,081 1,907
Cost of sales:
Cost of goods (1,200) (1,075)
Cost of services (233) (229)
Total cost of sales (1,433) (1,304)
Gross profit 648 603
Operating expenses:
Selling, general and administrative expenses (260) (269)
Engineering expenses (54) (44)
Amortization expense (73) (73)
Total operating expenses (387) (386)
Income from operations 261 217
Other income and expenses:
Interest expense, net (48) (42)
Other income, net 4 -
Income before income taxes 217 175
Income tax expense (54) (43)
Net income 163 132
Less: Net income attributable to noncontrolling interest (3) (1)
Net income attributable to Wabtec shareholders$ 160
The following table shows the major components of the change in sales in the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 : In millions Freight Segment Transit Segment
Total
Third Quarter 2021 Net Sales $ 1,295 $ 612$ 1,907 Acquisitions 18 1 19 Foreign Exchange (21) (78) (99) Organic 239 15 254 Third Quarter 2022 Net Sales $ 1,531 $ 550
Net sales Net sales for the three months endedSeptember 30, 2022 increased by$174 million , or 9.1%, to$2.08 billion compared to the same period in 2021. Freight Segment organic sales increased$239 million driven primarily by Equipment sales from higher international locomotive deliveries and higher mining equipment sales, and Services sales from higher locomotive modernizations and a larger active locomotive fleet. In addition, Components sales increased due to a higher railcar build and increased railcars in operation, and Digital sales increased due to higher demand for on-board locomotive products and network optimization software. Transit Segment organic sales increased$15 million primarily due to higher demand for OEM and 26 -------------------------------------------------------------------------------- Aftermarket products. Sales from acquisitions contributed$19 million to the change in net sales and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by$99 million .
Cost of sales
Cost of sales for the three months endedSeptember 30, 2022 increased by$129 million , or 9.9%, to$1.43 billion compared to the same period in 2021. Cost of sales as a percentage of sales was 68.9% and 68.4% for the three months endedSeptember 30, 2022 and 2021, respectively, representing a 0.5 percentage point increase. The increase can be attributed to increased materials, transportation and labor costs and an unfavorable product mix partially offset by improved productivity and decreased restructuring cost. Cost of sales for the three months endedSeptember 30, 2022 and 2021 included$5 million and$23 million , respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.
Operating expenses
Total operating expenses increased$1 million , or 0.3%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. Operating expenses as a percentage of sales was 18.6% and 20.2% for the three months endedSeptember 30, 2022 and 2021, respectively. Selling, general and administrative expenses ("SG&A") decreased$9 million due to lower restructuring and transaction costs. Restructuring and transaction costs included in SG&A were$4 million and$12 million for the three months endedSeptember 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs. Engineering expenses increased$10 million primarily due to investments in new technology. Amortization expense remained flat year over year. Interest expense, net Interest expense, net, increased$6 million for the three months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to higher effective interest rates in the current period.
Other income, net
Other income, net, increased to
Income taxes
The effective income tax rate was 24.7% and 24.8% for the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in the quarterly effective tax rate is primarily the result of a more favorable earnings mix for the period endedSeptember 30, 2022 . 27 --------------------------------------------------------------------------------
Freight Segment
The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
Three Months Ended
September 30,
In millions 2022 2021
Net sales:
Sales of goods $ 1,079 $ 883
Sales of services 452 412
Total net sales 1,531 1,295
Cost of sales:
Cost of goods (804) (626)
Cost of services (230) (225)
Total cost of sales (1,034) (851)
Gross profit 497 444
Operating expenses (264) (249)
Income from operations ($) $ 233 $ 195 Income from operations (% of net sales) 15.2 % 15.1 %
The following table shows the major components of the change in net sales for the Freight Segment in the third quarter of 2022 from the third quarter of 2021: In millions Third Quarter 2021 Net Sales$ 1,295 Acquisitions 18 Foreign Exchange (21) Changes in Sales by Product Line: Equipment 113 Services 89 Components 19Digital Electronics 18 Third Quarter 2022 Net Sales$ 1,531 Net sales Freight Segment sales increased by$236 million , or 18.2%, to$1.53 billion , compared to the same period in 2021. Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, Services sales increased from higher locomotive modernizations and a larger active locomotive fleet, Components sales increased due to a higher railcar build and increased railcars in operation, and Digital sales increased due to higher demand for on-board locomotive products and network optimization software. Sales from acquisitions contributed$18 million to the change in net sales and the effects of unfavorable foreign exchange rates decreased sales by$21 million .
Cost of sales
Freight Segment cost of sales for the three months endedSeptember 30, 2022 increased by$183 million , or 21.5%, to$1.03 billion , compared to the same period in 2021. The increase is primarily due to the increase in sales and increased materials, transportation and labor costs. Cost of sales as a percentage of sales was 67.5% and 65.8% for the three months endedSeptember 30, 2022 and 2021, respectively, representing a 1.7 percentage point increase driven by an unfavorable product mix and the increased costs discussed above. Cost of sales for the three months endedSeptember 30, 2022 included restructuring costs of$4 million primarily for headcount actions. Cost of sales for the three months endedSeptember 30, 2021 included transaction costs of$1 million primarily related to the acquisition ofNordco . 28 --------------------------------------------------------------------------------
Operating expenses
Freight Segment operating expenses increased$15 million , or 6.0%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. SG&A increased$2 million due to incremental expense from acquisitions. SG&A for the three months endedSeptember 30, 2022 includes$1 million of restructuring costs, compared to$2 million for the same period in 2021. Engineering expenses increased$13 million primarily due to investments in new technology. Amortization expense increased$1 million due to acquisitions. 29 --------------------------------------------------------------------------------
Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
Three Months Ended
September 30,
In millions 2022 2021
Net sales $ 550 $ 612
Cost of sales (399) (454)
Gross profit 151 158
Operating expenses (98) (114)
Income from operations ($) $ 53 $ 44
Income from operations (% of net sales) 9.6 % 7.2 %
The following table shows the major components of the change in net sales for
the Transit Segment in the third quarter of 2022 from the third quarter of 2021:
In millions
Third Quarter 2021 Net Sales $ 612
Acquisitions 1
Foreign Exchange (78)
Changes in Sales by Product Line:
Original Equipment Manufacturing 5
Aftermarket 10
Third Quarter 2022 Net Sales
Net sales Transit Segment sales for the three months endedSeptember 30, 2022 decreased by$62 million , or 10.1%, to$550 million compared to the same period in 2021. The effects of unfavorable foreign exchange rates decreased sales by$78 million . Transit Segment organic sales increased by$15 million due to increased demand and an increase in government transportation spending partially offset by the carryover effects of the cyber incident in the second quarter.
Cost of sales
Transit Segment cost of sales for the three months endedSeptember 30, 2022 decreased by$55 million , or 12.1%, to$399 million compared to the same period in 2021. The decrease is primarily due to the decrease in sales discussed above along with a decrease in restructuring cost in the current year. Cost of sales as a percentage of sales was 72.5% and 74.2% for the three months endedSeptember 30, 2022 and 2021, respectively, representing a 1.7 percentage point decrease. This can be attributed to improved productivity, higher pricing, the exit of low margin businesses in theUnited Kingdom , and prior year structured cost actions taken through restructuring programs, partially offset by increased materials, transportation and labor costs and inefficiencies associated with the cyber incident. Cost of sales for the three months endedSeptember 30, 2022 and 2021 includes$1 million and$22 million , respectively, of restructuring costs, primarily for footprint rationalization inEurope and headcount actions.
Operating expenses
Transit Segment operating expenses decreased$16 million , or 14.0%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. SG&A decreased$14 million for the three months endedSeptember 30, 2022 compared to the same period in 2021 due to the effects of foreign exchange rates and lower employee compensation and benefit costs. SG&A for the three months endedSeptember 30, 2022 and 2021 includes$2 million and$5 million of restructuring costs, respectively, primarily for footprint rationalization and related headcount actions. Additionally, engineering and amortization expenses remained consistent year over year. 30
--------------------------------------------------------------------------------
FIRST NINE MONTHS OF 2022 COMPARED TO FIRST NINE MONTHS OF 2021
The following table shows our Consolidated Statements of Operations for the
periods indicated.
Nine Months Ended
September 30,
In millions 2022 2021
Net sales:
Sales of goods $ 4,714 $ 4,562
Sales of services 1,342 1,187
Total net sales 6,056 5,749
Cost of sales:
Cost of goods (3,431) (3,368)
Cost of services (737) (664)
Total cost of sales (4,168) (4,032)
Gross profit 1,888 1,717
Operating expenses:
Selling, general and administrative expenses (757) (766)
Engineering expenses (149) (124)
Amortization expense (218) (215)
Total operating expenses (1,124) (1,105)
Income from operations 764 612
Other income and expenses:
Interest expense, net (135) (135)
Other income, net 15 25
Income before income taxes 644 502
Income tax expense (162) (130)
Net income 482 372
Less: Net income attributable to noncontrolling interest (7) (4)
Net income attributable to Wabtec shareholders$ 475
The following table shows the major components of the change in sales in the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 : In millions Freight Segment Transit Segment Total First Nine Months of 2021 Net Sales $ 3,814 $ 1,935$ 5,749 Acquisitions 62 3 65 Foreign Exchange (41) (171) (212) Organic 508
(54) 454
First Nine Months of 2022 Net Sales $ 4,343 $ 1,713
Net sales Net sales for the nine months endedSeptember 30, 2022 increased by$307 million , or 5.3%, to$6.06 billion compared to the same period in 2021. Freight Segment organic sales increased$508 million driven primarily by Services sales from higher locomotive modernizations and a larger active locomotive fleet. In addition, Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, and Components sales increased due to a higher railcar build, increased railcars in operation and growth in industrial end-markets. Transit Segment organic sales decreased$54 million primarily due to supply chain issues caused by the COVID-19 pandemic and the prior year exit of low margin 31 --------------------------------------------------------------------------------
businesses and contracts in the
Cost of sales
Cost of sales for the nine months endedSeptember 30, 2022 increased by$136 million , or 3.4%, to$4.17 billion compared to the same period in 2021. The increase is primarily due to the increase in sales and increased materials, labor and transportation costs, partially offset due to favorable product mix between operating segments and product lines. Cost of sales as a percentage of sales was 68.8% and 70.1% for the nine months endedSeptember 30, 2022 and 2021, respectively, representing a 1.3 percentage point decrease. The decrease as a percentage of sales can be attributed to favorable product mix, higher pricing and strong productivity and lower restructuring cost, partially offset by the increase in the costs described above. Cost of sales for the nine months endedSeptember 30, 2022 and 2021 included$12 million and$48 million , respectively, of restructuring costs, primarily for headcount actions and footprint rationalization.
Operating expenses
Total operating expenses increased$19 million , or 1.7%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. Operating expenses as a percentage of sales was 18.6% and 19.2% for the nine months endedSeptember 30, 2022 and 2021, respectively. SG&A decreased$9 million for the nine months endedSeptember 30 , compared to the same period in 2021 due to the impacts of foreign exchange rates and lower restructuring and transaction costs, partially offset by higher technology costs and incremental expense from acquisitions. Restructuring and transaction costs included in SG&A were$8 million and$32 million for the nine months endedSeptember 30, 2022 and 2021, respectively, and were primarily for headcount actions and footprint rationalization programs. Engineering expenses increased$25 million primarily due to investments in new technology and incremental expense from acquisitions. Amortization expense increased$3 million primarily due to the acquisition ofNordco .
Interest expense, net
Interest expense, net, remained consistent for the nine months ended
Other income, net
Other income, net, was$15 million of income for the nine months endedSeptember 30, 2022 compared to$25 million of income in the same period of 2021 primarily driven by a foreign exchange loss of$5 million in the current year as compared to a gain of$7 million in the prior year.
Income taxes
The effective income tax rate was 25.1% and 26.0% for the nine months ended
32
--------------------------------------------------------------------------------Freight Segment
The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
Nine Months Ended
September 30,
In millions 2022 2021
Net sales:
Sales of goods $ 3,014 $ 2,646
Sales of services 1,329 1,168
Total net sales 4,343 3,814
Cost of sales:
Cost of goods (2,203) (1,951)
Cost of services (726) (650)
Total cost of sales (2,929) (2,601)
Gross profit 1,414 1,213
Operating expenses (759) (703)
Income from operations ($) $ 655 $ 510 Income from operations (% of net sales) 15.1 % 13.4 %
The following table shows the major components of the change in net sales for the Freight Segment in the first nine months of 2022 from the first nine months of 2021: In millions First Nine Months of 2021 Net Sales$ 3,814 Acquisitions 62 Foreign Exchange (41) Changes in Sales by Product Line: Services 242 Equipment 184 Components 66Digital Electronics 16
First Nine Months of 2022 Net Sales
Net sales
Freight Segment sales increased by$529 million or 13.9%, to$4.34 billion , compared to the same period in 2021. Services sales increased from higher locomotive modernizations and a larger active locomotive fleet, Equipment sales increased due to higher international locomotive deliveries and higher mining equipment sales, and Components sales increased due to a higher railcar build and increased railcars in operation. Sales from acquisitions, contributed$62 million and the effects of unfavorable foreign exchange rates decreased sales by$41 million .
Cost of sales
Freight Segment cost of sales for the nine months endedSeptember 30, 2022 increased by$328 million , or 12.6%, to$2.93 billion , compared to the same period in 2021. The increase is primarily due to the increase in sales and increased materials, transportation and labor costs. Cost of sales as a percentage of sales was 67.4% and 68.2% for the nine months endedSeptember 30, 2022 and 2021, respectively, representing a 0.8 percentage point decrease which benefited from favorable product mix, increased pricing, improved productivity and synergy savings. Cost of sales for the nine months endedSeptember 30, 2022 and 2021 includes$7 million and$6 million , respectively, of restructuring and transaction costs, primarily for headcount actions. The nine months endedSeptember 30, 2021 also included transaction costs related to theNordco acquisition. 33 --------------------------------------------------------------------------------
Operating expenses
Freight Segment operating expenses increased$56 million , or 8.0%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. SG&A increased$23 million primarily due to incremental expense from acquisitions and higher technology costs, partially offset by a decrease in restructuring and transaction costs. Restructuring and transaction costs included in SG&A for the nine months endedSeptember 30, 2022 were$1 million compared to$11 million for the same period in 2021 primarily for headcount actions as part of the integration of GE Transportation. Engineering expenses increased$29 million primarily due to investments in new technology and incremental expense from acquisitions. Amortization expense increased$4 million due to acquisitions. 34 --------------------------------------------------------------------------------
Transit Segment
The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
Nine Months Ended
September 30,
In millions 2022 2021
Net sales $ 1,713 $ 1,935
Cost of sales (1,239) (1,432)
Gross profit 474 503
Operating expenses (306) (344)
Income from operations ($) $ 168 $ 159 Income from operations (% of net sales) 9.8 % 8.2 %
The following table shows the major components of the change in net sales for the Transit Segment in the first nine months of 2022 from the first nine months of 2021: In millions First Nine Months of 2021 Net Sales$ 1,935 Acquisitions 3 Foreign Exchange (171) Changes in Sales by Product Line: Original Equipment Manufacturing (16) Aftermarket (38)
First Nine Months of 2022 Net Sales
Net sales Transit Segment sales for the nine months endedSeptember 30, 2022 decreased by$222 million , or 11.5%, to$1.71 billion compared to the same period in 2021, with unfavorable foreign exchange rates reducing sales$171 million . Sales of Original Equipment Manufacturing decreased due to supply chain issues caused by the COVID-19 pandemic partially offset by higher demand and an increase in government transportation spending. Aftermarket sales decreased from lower maintenance and overhauls driven by the prior year exit of low margin businesses and contracts in theUnited Kingdom , as well as supply chain issues caused by the COVID-19 pandemic. Additionally, both Original Equipment Manufacturing and Aftermarket sales were impacted by a manufacturing disruption caused by the second quarter cyber incident.
Cost of sales
Transit Segment cost of sales for the nine months endedSeptember 30, 2022 decreased by$193 million , or 13.5%, to$1.24 billion compared to the same period in 2021. The decrease is primarily due to the decrease in sales discussed above and decreased restructuring costs. Cost of sales as a percentage of sales was 72.3% and 74.0% for the nine months endedSeptember 30, 2022 and 2021, respectively, representing a 1.7 percentage point decrease. This can be attributed to improved productivity, higher pricing, the exit of low margin businesses in theUnited Kingdom , and prior year structured cost actions taken through restructuring programs, partially offset by increased metals, transportation and labor costs. Cost of sales for the nine months endedSeptember 30, 2022 and 2021 included$5 million and$43 million , respectively, of restructuring costs, primarily for headcount actions and footprint rationalization inEurope .
Operating expenses
Transit Segment operating expenses decreased$38 million , or 11.0%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. SG&A decreased$33 million due to the decrease in sales, the effects of foreign exchange rates and decreased restructuring cost. SG&A for the nine months endedSeptember 30, 2022 and 2021 included$5 million and$12 million , respectively, of restructuring costs, primarily for headcount actions inEurope . Additionally, engineering and amortization expenses remained consistent year over year. 35 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's Senior Notes and unsecured credit facility with a consortium of
commercial banks. Additionally, the Company utilizes the revolving receivables
program and supply chain financing program described below for added flexibility
as part of our liquidity management strategy. The following is a summary of
selected cash flow information and other relevant data:
Nine Months Ended
September 30,
In millions 2022 2021
Cash provided by (used for):
Operating activities $ 628 $ 759
Investing activities $ (149) $ (475)
Financing activities $ (395) $ (433)
Operating activities In the first nine months of 2022, cash provided by
operating activities was $628 million compared to $759 million in the first nine
months of 2021. Significant changes to the sources and (uses) of cash for the
nine month periods include the following:
•$92 million attributable to higher Net income and other changes in the related statements of income amounts;
•$(252) million from net changes in working capital primarily driven by:$(369) million unfavorable change in inventory primarily from proactive inventory build-ups ahead of expected growth and in response to supply chain challenges,$(74) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program, and$191 million in accounts payable, primarily due to the timing of payments to suppliers;
•$(100) million from higher employee related benefit payments, inclusive of payments related to severance accruals; and,
•$156 million from changes in the timing of customer deposits.
Investing activities In the first nine months of 2022 and 2021, cash used for investing activities was$(149) million and$(475) million , respectively. The major components of the cash outflow in 2022 were$(82) million in additions to property, plant and equipment for investments in our facilities and manufacturing processes and$(69) million for strategic acquisitions. This compares to$(78) million in additions to property, plant, and equipment and$(405) million in net cash paid for acquisitions in the first nine months of 2021. Additional information with respect to acquisitions is included in Note 3 of the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report. Financing activities In the first nine months of 2022, cash used for financing activities was$(395) million which included$93 million from changes in debt,$(400) million in stock repurchases, and$(83) million of dividend payments. In the first nine months of 2021, cash used for financing activities was$(433) million , which included$(162) million in net repayments of debt,$(200) million in stock repurchases and$(69) million of dividend payments.
During the second quarter of 2022, the Company redeemed
OnAugust 15, 2022 , the Company amended, restated and replaced the then-existing credit agreement. The Restated Credit Agreement updated the multi-currency revolving loan facility from$1.2 billion to$1.5 billion and added a new Delayed Draw Term Loan of up to$250 million . Additional information with respect to credit facilities and long-term debt is included in Note 8 of the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report. As ofSeptember 30, 2022 , the Company held approximately$514 million of cash and cash equivalents, of which approximately$1 million was held withinthe United States and approximately$513 million was held outside ofthe United States , primarily inIndia ,Europe ,China , andBrazil . While repatriation of some cash held outsidethe United States may be restricted by local laws, most of the Company's foreign cash could be repatriated tothe United States net of any tax impacts. We or our affiliates may, from time to time, seek to retire or purchase outstanding debt through negotiated or open-market cash purchases, exchanges, or otherwise, and such transactions, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. 36 --------------------------------------------------------------------------------
Revolving Receivables Program
The Company utilizes a revolving receivables facility to sell up to$350 million of certain receivables through our bankruptcy-remote facility to a financial institution on a recurring basis in exchange for cash equal to the gross receivables sold. As customers pay their balances, we transfer additional receivables into the program, which results in our gross receivables sold exceeding collections reinvested for any applicable periods. Net cash proceeds from the revolving receivables program were$205 million and$84 million for the nine months endedSeptember 30, 2022 and 2021, 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.
Supply Chain Financing Program
The Company has entered into supply chain financing arrangements with third-party financial institutions to provide our vendors with enhanced payment options while providing the Company with added working capital flexibility. The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation and does not receive an economic benefit from the financial institutions. The arrangements do not change the payable terms negotiated by the Company and our vendors and does not result in a change in the classification of amounts due as accounts payable in the consolidated balance sheets.
Guarantor Summarized Financial Information
The obligations under the Company's US Notes and Senior Credit Facility have been fully and unconditionally guaranteed by certain of the Company'sU.S. subsidiaries. Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, aWabtec Company , which has 15,000 shares outstanding of Class A Non-Voting Preferred Stock held by General Electric Company. The Euro Notes are issued byWabtec Transportation Netherlands B.V. ("Wabtec Netherlands") and are fully and unconditionally guaranteed by the Company. OnJanuary 1, 2022 , the Company completed an internal legal entity reorganization that resulted in changes to the subsidiaries and operating divisions serving as guarantors under the Company's US Notes and Senior Credit Facility. As such, certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation in line with the legal reorganization. Refer to Exhibit 22.1 for the updated list of guarantor subsidiaries. The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis for the Company's US Notes and Senior Credit Facility. The combined summarized financial information eliminates intercompany balances and transactions among the parent and guarantor subsidiaries and equity in earnings and investments in any guarantor subsidiaries or non-guarantor subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.
Summarized Statement of Income
Unaudited
Westinghouse Air
Brake Technologies
Corp. and Guarantor
Subsidiaries
Nine Months Ended
In millions September 30, 2022
Net sales $ 3,431
Gross profit $ 829
Net income attributable to Wabtec shareholders $ 288
Summarized Balance Sheet
Unaudited
Guarantor Subsidiaries
In millions September 30, 2022 December 31, 2021
Current assets $ 1,189 $ 1,057
Noncurrent assets $ 2,435 $ 2,344
Current liabilities $ 1,683 $ 1,414
Long-term debt $ 3,329 $ 3,483
Other non-current liabilities $ 612 $ 592
37-------------------------------------------------------------------------------- The following is a description of the transactions between the combinedWestinghouse Air Brake Technologies Corp. and guarantor subsidiaries with non-guarantor subsidiaries. Unaudited Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries Nine Months Ended In millions September 30, 2022 Net sales to non-guarantor subsidiaries $ 590 Purchases from non-guarantor subsidiaries $ 1,030 Unaudited Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries In millions September 30, 2022 Amount due from/(to) non-guarantor subsidiaries
$ (6,601)
Summarized Financial Information-Euro Notes
The obligations under Wabtec Netherlands' Euro Notes are fully and unconditionally guaranteed by the Company. Wabtec Netherlands is a wholly-owned, indirect subsidiary of the Company. Wabtec Netherlands is a holding company and does not have any independent operations. Its assets consist of its investments in subsidiaries, which are separate and distinct legal entities that are not guarantors of the Euro Notes and have no obligations to pay amounts due under Wabtec Netherlands' obligations. OnJanuary 1, 2022 , the Company completed an internal legal entity reorganization that resulted in changes to the operating divisions serving as the parent guarantor under the Company's Euro Notes. As such, certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation in line with the legal reorganization. The following tables present summarized financial information ofWabtec Netherlands , as the Issuer of the Euro Notes, and the Company, as the parent Guarantor, on a combined basis. The combined summarized financial information eliminates all intercompany balances and transactions among Wabtec Netherlands and the Company as well as all equity in earnings from and investments in any subsidiary of the Company, other than Wabtec Netherlands, which we refer to below as the Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 underSEC Regulation S-X for the issuer and parent guarantor.
Summarized Statement of Income
Unaudited
Issuer and
Guarantor
Nine Months Ended
In millions September 30, 2022
Net sales $ 311
Gross profit $ 46
Net income attributable to Wabtec shareholders $ (237)
Summarized Balance Sheet
Unaudited
Issuer and Guarantor
In millions September 30, 2022 December 31, 2021
Current assets $ 162 $ 217
Noncurrent assets $ 762 $ 770
Current liabilities $ 646 $ 479
Long-term debt $ 3,815 $ 4,044
Other non-current liabilities $ 204 $ 207
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The following is a description of the transactions between the combined
Unaudited
Issuer and
Guarantor
Nine Months Ended
In millions September 30, 2022
Net sales to non-guarantor subsidiaries $ 24
Purchases from non-guarantor subsidiaries $ 59
Unaudited
Issuer and
Guarantor
In millions September 30, 2022
Amount due from/(to) non-guarantor subsidiaries $ (8,138)
Company Stock Repurchase Plan
On February 10, 2022 , the Board of Directors increased its stock repurchase
authorization to increase the amount available for stock repurchases to $750
million of the Company's outstanding shares. This new stock repurchase
authorization superseded the previous authorization of $500 million of which
approximately $155 million remained. No time limit was set for the completion of
the program which conforms to the requirements under the Senior Credit Facility
and 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, 2022 , approximately $395 million was remaining
under the stock repurchase plan.
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 •changes in general economic and/or industry specific conditions, including the impacts of tax and tariff programs, inflation, supply chain disruptions, foreign currency exchange, and industry consolidation;
•prolonged unfavorable economic and industry conditions in the markets served by
us, including
•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;
•availability of credit; or
39
--------------------------------------------------------------------------------•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;
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 availability and relations;
•hiring and retention of key personnel;
•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, competition and anti-trust matters or intellectual property claims;
•completion and integration of acquisitions;
•the development and use of new technology; or
•cybersecurity and data protection risks;
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, including the impacts of war and conflicts;
•future regulation/deregulation of our customers and/or the rail industry;
•levels of governmental funding on transit projects, including for some of our customers;
•political developments and laws and regulations, including those related to Positive Train Control;
•federal and state income tax legislation;
•sanctions imposed on countries and persons; 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, 2021 and the risk factor added in Part II, Item 1A of this report on Form 10-Q.
Critical Accounting Estimates
A summary of critical accounting estimates is included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, business combinations, warranty reserves, stock-based compensation, income taxes, and revenue recognition. There have been no significant changes in the related accounting policies sinceDecember 31, 2021 . 40 --------------------------------------------------------------------------------
Contractual Obligations
During the second quarter of 2022, the Company redeemed$25 million of principal from the 2024 Notes plus a premium and the related accrued interest. As a result, contractual obligations related to the repayment of Long-term debt for 2023-2024 were reduced from$1,012 million to$987 million . 41
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