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, 2020 , filed with theSecurities and Exchange Commission onFebruary 19, 2021 . 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, 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 six months of 2021, approximately 59% of the Company's revenues came from customers outsidethe United States . COVID-19 Update The COVID-19 pandemic has continued to impact our sales channels, supply chain, manufacturing operations, workforce and other key aspects of our operations. The Company continues to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities; however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, impact of variants of the disease, actions that may be taken by governmental authorities and private industry, including preventing or curtailing the operations of our plants, the potential impact on global economic activity, global supply chain operations, our employees, our customers, suppliers and end-markets and other consequences that could negatively impact our business. We also face the possibility that government policies may become more restrictive especially if COVID-19 transmission rates increase in certain areas. 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. TheU.S. and other international governments have deemed rail transportation as "critical infrastructure" providing essential services during the COVID-19 pandemic. As a supplier and service provider for the global freight rail and passenger transit industries,Wabtec has an obligation to continue operations to support the safe and efficient operation of these industries; however, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the six months endedJune 30, 2021 and 2020 which is discussed in the Results of Operations section below. 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 drive strong cash flow conversion, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, drive improved efficiencies across the business 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 carloads 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 decarbonization, an aging equipment fleet and growth in global trade flows 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. According to the 2020 bi-annual edition of a market study by UNIFE, theAssociation of the European Rail Industry , the accessible global market for railway products and services is more than$120 billion and is expected to grow at a compounded annual growth rate of 2.3% through 2025. As the long-term effects of COVID-19 are still uncertain, UNIFE included a second, less likely scenario in which the recovery is more moderate. This alternative scenario shows a compounded annual growth rate 26 -------------------------------------------------------------------------------- of 0.9% through 2025 for the total accessible market. The three largest geographic markets, which represented about 85% of the total accessible market, wereEurope ,North America andAsia Pacific . UNIFE projected above-average growth rates inLatin America ,Eastern Europe ,North America andAfrica-Middle East , with the more mature markets ofWestern Europe ,North America andAsia Pacific accounting for the largest share of absolute growth. UNIFE said trends such as urbanization, digitalization, legislative action and government support and an increased focus on energy and environmental issues 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 growth in all product segments, with turnkey management projects, rolling stock and infrastructure to grow the fastest. UNIFE estimated that the global installed base of diesel and electric locomotives was about 118,200 units, with about 32% inAsia Pacific , about 25% inNorth America and about 18% inRussia -CIS (Commonwealth of Independent States).Wabtec estimates that about 3,000 new locomotives were delivered worldwide in 2020. UNIFE estimated the global installed base of freight cars was about 5.2 million, with about 35% inNorth America , about 24% inRussia -CIS and about 24% inAsia Pacific .Wabtec estimates that about 155,000 new freight cars were delivered worldwide in 2020. UNIFE estimated the global installed base of passenger transit vehicles to be about 620,000 units, with about 45% inAsia Pacific , about 31% inEurope and about 10% inRussia -CIS.Wabtec estimates that about 32,000 new passenger transit vehicles were ordered worldwide in 2020. 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 pandemic. According to UNIFE,Germany ,France and theUnited Kingdom were the largest Western European transit markets, representing about two-thirds of industry spending in theEuropean Union . UNIFE projected the accessible Western European rail market to grow at about 2.0% 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 19%. 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 600 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 carloads, 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 has been negatively impacted by the COVID-19 pandemic. Growth in theAsia Pacific market has been driven mainly by the continued urbanization ofChina andIndia , and by continued 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,Wabtec is delivering on a 1,000-locomotive contract over 10-years withIndian Railways . Other key geographic markets include Russia-CIS andAfrica-Middle East . With about 1.3 million freight cars and about 21,000 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 pandemic 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 digitalization, automation, and predictive maintenance through artificial intelligence, all of which would improve efficiency in the global rail industry. UNIFE said these trends will increase the overall attractiveness of the rail sector as these trends will lead to significant cost savings, allowing rail to be more 27 -------------------------------------------------------------------------------- competitive in comparison to other modes of transportation.Wabtec offers products and services to help customers make ongoing investments in these initiatives. In 2021 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. 28 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Consolidated Results SECOND QUARTER 2021 COMPARED TO SECOND QUARTER 2020 The following table shows our Consolidated Statements of Operations for the periods indicated. Three Months Ended June 30, In millions 2021 2020 Net sales: Sales of goods$ 1,588.0 $ 1,406.1 Sales of services 424.3 331.3 Total net sales 2,012.3 1,737.4 Cost of sales: Cost of goods (1,185.0) (1,061.3) Cost of services (247.2) (189.4) Total cost of sales (1,432.2) (1,250.7) Gross profit 580.1 486.7 Operating expenses: Selling, general and administrative expenses (262.1) (216.8) Engineering expenses (42.0) (38.2) Amortization expense (72.7) (72.3) Total operating expenses (376.8) (327.3) Income from operations 203.3 159.4 Other income and expenses: Interest expense, net (44.9) (51.4) Other income, net 10.3 6.3 Income before income taxes 168.7 114.3 Income tax expense (43.5) (28.5) Net income 125.2 85.8 Less: Net (income) loss attributable to noncontrolling interest (0.4) 1.0 Net income attributable to Wabtec shareholders $
124.8
The following table shows the major components of the change in sales in the
three months ended
Freight Segment Transit Segment Total
Second Quarter 2020 Net Sales
$ 1,737.4 Acquisitions 37.9 - 37.9 Foreign Exchange 20.7 62.9 83.6 Organic 72.6 80.8 153.4
Second Quarter 2021 Net Sales
Net sales Net sales for the three months endedJune 30, 2021 increased by$275 million , or 15.8%, to$2.0 billion compared to the same period in 2020. The increase is primarily due to an organic increase of$81 million in the Transit Segment, due to higher 29 -------------------------------------------------------------------------------- demand for original equipment door, HVAC, and brakes systems. Additionally, organic sales in the Freight Segment increased$73 million due to an increase in Services and Components, partially offset by lower Equipment sales. Cost of sales Cost of sales for the three months endedJune 30, 2021 increased by$182 million , or 14.5%, to$1.4 billion compared to the same period in 2020. The increase is primarily due to the sales increases discussed above. Cost of sales for the three months endedJune 30, 2021 includes$21 million of restructuring costs, primarily for footprint rationalization in theUK and as part of the ongoing integration actions related to the GE Transportation acquisition. Cost of sales in the three months endedJune 30, 2020 included$17 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization, and related headcount actions as part of the GE Transportation acquisition integration. Excluding these charges in both years, cost of sales as a percentage of sales was 70.1% in 2021 and 71.0% in 2020, representing a 0.9 percentage point decrease. The decrease can be attributed to improved absorption of overhead costs, product mix in Freight towards higher margin Services sales and by lessening disruption caused by the COVID-19 pandemic in the current year. Operating expenses Total operating expenses increased$50 million , or 15.1%, for the three months endedJune 30, 2021 to 18.7% of sales. Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were$9 million and$13 million for the three months endedJune 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions as part of the ongoing integration actions related to theGE Transportation acquisition. Excluding restructuring and transaction costs, SG&A increased$50 million primarily to support the increased sales volumes and higher employee benefit costs and includes$4 million of incremental expense from the acquisition ofNordco . Engineering expense increased$4 million and amortization expense remained flat. Interest expense, net Interest expense, net, decreased$7 million for the three months endedJune 30, 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates. Other income (expense), net Other income (expense), net, was$10 million of income for the three months endedJune 30, 2021 compared to$6 million of income in the same period of 2020. The variance is primarily driven by foreign exchange gains in the current year and an increase in income from equity method investments. Income taxes The effective income tax rate was 25.8% and 24.9% for the three months endedJune 30, 2021 and 2020, respectively. The increase in the effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred in 2021. 30 --------------------------------------------------------------------------------
Freight Segment The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
Three Months Ended June 30,
In millions 2021 2020
Net sales:
Sales of goods $ 917.9 $ 880.7
Sales of services 418.0 324.0
Total net sales 1,335.9 1,204.7
Cost of sales:
Cost of goods (680.2) (668.5)
Cost of services (242.2) (183.5)
Total cost of sales (922.4) (852.0)
Gross profit 413.5 352.7
Operating expenses (240.3) (211.2)
Income from operations ($) $ 173.2 $ 141.5
Income from operations (%) 13.0 % 11.7 %
The following table shows the major components of the change in net sales for
the Freight Segment in the second quarter of 2021 from the second quarter of
2020:
In millions
Second Quarter 2020 Net Sales $ 1,204.7
Acquisitions 37.9
Foreign Exchange 20.7
Changes in Sales by Product Line:
Equipment (10.9)
Components 20.3
Digital Electronics (9.0)
Services 72.2
Second Quarter 2021 Net Sales
Net sales Freight Segment sales for the three months endedJune 30, 2021 increased by$131 million , or 10.9%, to$1.3 billion , compared to the same period in 2020. Organic sales increased$72 million primarily in Services due to higher locomotive modernizations and lower locomotive parkings and in Components due to a higher freight car build partially offset by lower equipment sales. Sales from acquisitions contributed$38 million and favorable foreign currency exchange rates increased net sales by$21 million . Cost of sales Freight Segment cost of sales for the three months endedJune 30, 2021 increased by$70 million , or 8.3%, to$922 million , compared to the same period in 2020. The increase is attributable to the organic sales increase discussed above. Cost of sales for the three months endedJune 30, 2021 includes a$3 million charge related to purchase price accounting for the step-up ofNordco inventory. The second quarter of 2020 included$13 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization, and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges, cost of sales as a percentage of sales was 68.8% in 2021 and 69.7% in 2020, representing a 0.9 percentage point decrease. The decrease can be attributed to the mix of sales and improved absorption of fixed costs as the prior year was particularly affected by the COVID-19 pandemic. 31 -------------------------------------------------------------------------------- Operating expenses Freight Segment operating expenses increased$29 million , or 13.8%, in 2021 to$240 million , or 18.0% of sales. Restructuring and transaction costs included in SG&A were$2 million and$7 million for the three months endedJune 30, 2021 and 2020, respectively, and were primarily for headcount actions as part of the ongoing integration of GE Transportation. Excluding restructuring and transaction costs, SG&A increased$35 million primarily to support the higher sales volumes and higher employee benefit costs. Additionally, engineering and amortization expenses remained consistent year over year. 32 --------------------------------------------------------------------------------
Transit Segment The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
Three Months Ended June 30,
In millions 2021 2020
Net sales $ 676.4 $ 532.7
Cost of sales (509.8) (398.7)
Gross profit 166.6 134.0
Operating expenses (121.3) (93.8)
Income from operations ($) $ 45.3 $ 40.2
Income from operations (%) 6.7 % 7.5 %
The following table shows the major components of the change in net sales for
the Transit Segment in the second quarter of 2021 from the second quarter of
2020:
In millions
Second Quarter 2020 Net Sales $ 532.7
Foreign Exchange 62.9
Changes in Sales by Product Line:
Original Equipment Manufacturing 64.9
Aftermarket 15.9
Second Quarter 2021 Net Sales
Net sales Transit Segment sales for the three months endedJune 30, 2021 increased by$144 million , or 27.0%, to$676 million compared to the same period in 2020. The increase is primarily attributed to higher demand for Original Equipment and Aftermarket products driven by the recovery from the COVID-19 pandemic and increased global infrastructure investment. Favorable foreign currency exchange rate changes increased net sales by$63 million . Cost of sales Transit Segment cost of sales for the three months endedJune 30, 2021 increased by$111 million , or 27.9%, to$510 million compared to the same period in 2020. The increase is primarily attributable to the organic sales increase discussed above and higher warranty expense in the current year. Cost of sales for the three months endedJune 30, 2021 and 2020 includes$18 million and$4 million of restructuring costs, respectively, primarily due to footprint rationalization in theUK . Excluding these charges, cost of sales as a percentage of sales was 72.8% in 2021 and 74.0% in 2020, representing a 1.2 percentage point decrease. The decrease can be attributed to lessening disruptions caused by the COVID-19 pandemic in the current year as well as favorable product mix towards more higher margin products. Operating expenses Transit Segment operating expenses increased$27.5 million , or 29.3%, in 2021 to$121.3 million or 17.9% of sales. Restructuring and transaction costs included in SG&A were$5 million and$2 million for the three months endedJune 30, 2021 and 2020, respectively, and were primarily for footprint rationalization and related headcount actions. Excluding restructuring and transaction costs, SG&A increased$19 million primarily to support the increase in sales volumes and due to increased employee benefit costs. Additionally, engineering expense increased$5 million and amortization expensed remained consistent year over year. 33 -------------------------------------------------------------------------------- FIRST SIX MONTHS OF 2021 COMPARED TO FIRST SIX MONTHS OF 2020 The following table shows our Consolidated Statements of Operations for the periods indicated. Six Months Ended June 30, In millions 2021 2020 Net sales: Sales of goods$ 3,073.1 $ 2,996.9 Sales of services 769.4 670.4 Total net sales 3,842.5 3,667.3 Cost of sales: Cost of goods (2,292.7) (2,217.2) Cost of services (435.5) (384.7) Total cost of sales (2,728.2) (2,601.9) Gross profit 1,114.3 1,065.4 Operating expenses: Selling, general and administrative expenses (497.5) (460.2) Engineering expenses (79.7) (87.2) Amortization expense (142.2) (141.3) Total operating expenses (719.4) (688.7) Income from operations 394.9 376.7 Other income and expenses: Interest expense, net (92.5) (104.7) Other income (expense), net 24.5 (8.5) Income before income taxes 326.9 263.5 Income tax expense (87.0) (66.5) Net income 239.9 197.0 Less: Net (income) loss attributable to noncontrolling interest (2.7) 1.4 Net income attributable to Wabtec shareholders $
237.2
The following table shows the major components of the change in sales in the six
months ended
Freight Segment Transit Segment Total
First Six Months of 2020 Net Sales $ 2,505.7 $ 1,161.6 $ 3,667.3
Acquisitions 38.4 - 38.4
Foreign Exchange 17.7 111.5 129.2
Organic (42.6) 50.2 7.6
First Six Months of 2021 Net Sales
Net sales Net sales for the six months endedJune 30, 2021 increased by$175 million , or 4.8%, to$3.8 billion compared to the same period in 2020 with foreign exchange rates being the primary driver of the increase. Transit segment organic sales increased$50 million due to improved demand for original equipment door, HVAC, and brakes systems. This increase is partially offset by an organic decrease in the Freight segment of$43 million due to lower locomotive Equipment sales, particularly inNorth America partially offset by an increase in Services sales from higher locomotive modernizations and a decrease in locomotive parkings. Sales from acquisitions contributed$38 million . Cost of sales Cost of sales for the six months endedJune 30, 2021 increased by$126 million , or 4.9%, to$2.7 billion compared to the same period in 2020. The increase is primarily due to the sales increases discussed above. Cost of sales for the six months 34 -------------------------------------------------------------------------------- endedJune 30, 2021 includes$25 million of restructuring costs, primarily for footprint rationalization and headcount actions in theUK and the ongoing integration actions related to the GE Transportation acquisition. Cost of sales in the first six months of 2020 included$19 million of restructuring costs, primarily for the exit of certain product lines, footprint rationalization and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges in both years, cost of sales as a percentage of sales was 70.3% in 2021 and 70.4% in 2020, representing a 0.1 percentage point decrease. The decrease can be attributed to synergy savings and the structural cost actions taken in the prior year. Operating expenses Total operating expenses increased$31 million , or 4.5%, in the first six months of 2021 compared to the same period in 2020. Operating expenses as a percentage of sales was 18.7% and 18.8% for the six months endedJune 30, 2021 and 2020, respectively. Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were$20 million and$29 million for the six months endedJune 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization in theUK and as part of the integration of GE Transportation. Excluding restructuring and transaction costs, SG&A increased$46 million primarily due to costs incurred to support the higher sales volumes and higher employee benefit costs. Incremental expense from acquisitions in SG&A was$4 million related to the acquisition ofNordco . Engineering expense increased$8 million and amortization expense remained flat. Interest expense, net Interest expense, net, decreased$12 million in the first six months of 2021 compared to the same period in 2020 attributable to lower overall average debt balances and lower interest rates. Other income (expense), net Other income (expense), net, was$25 million of income in the first six months of 2021 compared to$9 million of expense in the same period of 2020. The variance is primarily driven by foreign exchange gains in the current year and an increase in income from equity method investments. Income taxes The effective income tax rate was 26.6% and 25.2% for the six months endedJune 30, 2021 and 2020, respectively. The increase in the effective tax rate is primarily the result of withholding tax expense on intercompany dividends incurred in 2021. 35 --------------------------------------------------------------------------------
Freight Segment The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:
Six Months Ended June 30,
In millions 2021 2020
Net sales:
Sales of goods $ 1,762.6 $ 1,851.3
Sales of services 756.6 654.4
Total net sales 2,519.2 2,505.7
Cost of sales:
Cost of goods (1,324.0) (1,379.4)
Cost of services (425.5) (372.0)
Total cost of sales (1,749.5) (1,751.4)
Gross profit 769.7 754.3
Operating expenses (454.7) (451.1)
Income from operations ($) $ 315.0 $ 303.2
Income from operations (%) 12.5% 12.1%
The following table shows the major components of the change in net sales for
the Freight Segment in the first six months of 2021 from the first six months of
2020:
In millions
First Six Months of 2020 Net Sales $ 2,505.7
Acquisitions 38.4
Foreign Exchange 17.7
Changes in Sales by Product Line:
Equipment (152.7)
Components (2.9)
Digital Electronics (29.3)
Services 142.3
First Six Months of 2021 Net Sales
Net sales Freight Segment sales for the six months endedJune 30, 2021 increased by$14 million , or 0.5%, to$2.5 billion , compared to the same period in 2020. Organic sales decreased by$43 million primarily due to lower locomotive Equipment sales, particularly inNorth America , partially offset by an increase in Services sales due to higher locomotive modernizations and overhauls and a decrease in parking of locomotives. The organic sales decrease was more than offset by sales from acquisitions of$38 million and the effects of favorable foreign exchange rates of$18 million . Cost of sales Freight Segment cost of sales for the six months endedJune 30, 2021 decreased by$2 million to$1.7 billion , compared to the same period in 2020. Cost of sales for the six months endedJune 30, 2021 includes$5 million of restructuring and transaction costs, primarily for a charge related to purchase price accounting for the step-up ofNordco inventory and headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition. Cost of sales in the first six months of 2020 included$14 million of restructuring costs, primarily for the exit of certain product lines, costs for site closures, and related headcount actions as part of the integration of the GE Transportation acquisition and in response to the COVID-19 pandemic. Excluding these charges in both years, cost of sales as a percentage of sales was 69.3% in for both the six months endedJune 30, 2021 and 2020, respectively. 36 -------------------------------------------------------------------------------- Operating expenses Freight Segment operating expenses for the six months endedJune 30, 2021 decreased$4 million compared to the same period in 2020. Operating expenses as a percentage of sales was 18.0% in both periods. Restructuring and transaction costs included in selling, general, and administrative expense ("SG&A") were$9 million and$21 million for the six months endedJune 30, 2021 and 2020, respectively and were primarily for headcount actions and footprint rationalization as part of the integration of GE Transportation. Excluding restructuring and transaction costs, SG&A increased$25 million primarily due to costs incurred to support the higher sales volumes and higher employee benefit costs. Additionally, incremental expense from acquisitions in SG&A was$4 million related to the acquisition ofNordco . Engineering expense decreased$10 million due to cost control measures on research and development projects and amortization expense remained consistent year over year. 37 --------------------------------------------------------------------------------
Transit Segment The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:
Six Months Ended June 30,
In millions 2021 2020
Net sales $ 1,323.3 $ 1,161.6
Cost of sales (978.7) (850.5)
Gross profit 344.6 311.1
Operating expenses (229.2) (202.3)
Income from operations ($) $ 115.4 $ 108.8
Income from operations (%) 8.7 % 9.4 %
The following table shows the major components of the change in net sales for
the Transit Segment in the first six months of 2021 from the first six months of
2020:
In millions
First Six Months of 2020 Net Sales $ 1,161.6
Foreign Exchange 111.5
Changes in Sales by Product Line:
Original Equipment Manufacturing 43.6
Aftermarket 6.6
First Six Months of 2021 Net Sales
Net sales Transit Segment sales for the six months endedJune 30, 2021 increased by$162 million , or 13.9%, to$1,323 million compared to the same period in 2020, with foreign exchange rates being the primary driver of the increase. Transit segment organic sales increased$50 million due to improved demand for original equipment door, HVAC, and brakes systems. Cost of sales Transit Segment cost of sales for the six months endedJune 30, 2021 increased by$128 million , or 15.1%, to$979 million compared to the same period in 2020. The increase is in line with the sales increase discussed above. Cost of sales for the six months endedJune 30, 2021 and 2020 includes$20 million and$5 million of restructuring and transactions costs, respectively, primarily for footprint rationalization in theUK . Excluding these costs, cost of sales as a percentage of sales was 72.4% in 2021 and 72.8% in 2020, a 0.4 percentage point decrease over the comparable period in 2020, attributable to a higher mix of Aftermarket products and larger impacts that the COVID-19 pandemic had on margins in 2020. Operating expenses Transit Segment operating expenses increased$27 million , or 13.3%, in 2021 to 17.3% of sales. Restructuring and transaction costs included within SG&A were$6 million and$3 million for the six months endedJune 30, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization in theUK . Excluding restructuring and transaction costs, SG&A increased$21 million primarily to support the increase in sales volumes and higher employee benefit costs. Engineering expense and amortization expense remained consistent year over year. 38 -------------------------------------------------------------------------------- Liquidity and Capital Resources Liquidity is provided primarily by operating cash flow and borrowings under the Company's Senior Notes and Senior Credit Facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data: Six Months Ended June 30, In millions 2021 2020 Cash provided by (used for): Operating activities$ 515.4 $ 228.6 Investing activities$ (452.4) $ (98.2) Financing activities$ (212.5) $ (123.5) Operating activities In the first six months of 2021, cash provided by operations was$515 million compared to cash provided by operations of$229 million in the first six months of 2020. Significant changes to the sources and (uses) of cash for the six month periods include the following: •$6 million from net changes in working capital driven by:($275) million related to changes in receivables due to timing and volume of sales and the net change in the Revolving Receivables Program;$38 million improvement in inventory from higher sales volume;$231 million improvement from accounts payable, primarily due to the timing of payments to suppliers; •and approximately$130 million related to cash payments made during 2020 for costs related to the GE Transportation acquisition and settlement of litigation that did not recur; The remaining change in cash from operating activities is primarily attributable to higher Net income and other changes in the related statement of income and other changes in the consolidated balance sheet. Investing activities In the first six months of 2021 and 2020, cash used for investing activities was$452 million and$98 million , respectively. The major components of the cash outflow in 2021 were$56 million in additions to property, plant and equipment for investments in our facilities and manufacturing processes, and$405 million in net cash paid for the acquisition ofNordco . This compares to$68 million in property, plant, and equipment for additions in the first six months of 2020 and$40 million in net cash paid for acquisitions. 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 six months of 2021, cash used for financing activities was$213 million which included$3.0 billion in proceeds from debt,$3.2 billion in repayments of debt,$1 million in stock repurchases and$46 million of dividend payments. In the first six months of 2020, cash used for financing activities was$124 million , which included$2.1 billion in proceeds from debt,$2.1 billion in repayments of debt,$105 million in stock repurchases and$46 million of dividend payments. As ofJune 30, 2021 , the Company held approximately$454 million of cash and cash equivalents. Of this amount, approximately$56 million was held withinthe United States and approximately$398 million was held outside ofthe United States , primarily inEurope ,India andChina . 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 . 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. Revolving Receivables Program InMay 2020 , the Company entered into a revolving agreement to transfer up to$150 million of certain receivables of the Originators through our bankruptcy-remote subsidiary to a financial institution on a recurring basis in exchange for cash equal to the gross receivables transferred. During the first quarter of 2021, the Company amended its revolving agreement to increase the amount of certain receivables that can be transferred from$150 million to$200 million . As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest). The sold receivables are fully guaranteed by our bankruptcy-remote subsidiary which held additional receivables of$332.7 million atJune 30, 2021 that are pledged as collateral under this agreement. The transfers are recorded at the fair value of the proceeds received and obligations assumed less derecognized receivables. No obligation was recorded atJune 30, 2021 as the estimated expected credit losses on receivables sold is insignificant. Our maximum exposure to loss related to these receivables transferred is limited to the amount outstanding. The Company has agreed to guarantee the performance of the Originators respective obligations under the revolving agreement. None of the Company (except for the bankruptcy-remote 39 -------------------------------------------------------------------------------- consolidated subsidiary referenced above) nor the Originators guarantees the collectability of the receivables under the revolving agreements. 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 sheet. Guarantor Summarized Financial Information The obligations under the Company's US Notes, Senior Credit Facility, and 364 Day 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 by Wabtec Netherlands and are fully and unconditionally guaranteed by the Company. The following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis for the Company's US Notes, Senior Credit Facility, and 364 Day 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 Six Months Ended In millions June 30, 2021 Net sales$ 1,864.8 Gross profit $ 402.9 Net income attributable to Wabtec shareholders $ 43.6 Summarized Balance Sheet Unaudited
Guarantor Subsidiaries
In millions June 30, 2021 December 31, 2020
Current assets $ 887.0 $ 1,092.3
Noncurrent assets $ 1,933.2 $ 1,835.7
Current liabilities $ 1,098.5 $ 1,408.8
Long-term debt $ 3,480.9 $ 3,779.6
Other non-current liabilities $ 573.5 $ 373.9
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The following is a description of the transactions between the combined
Westinghouse Air Brake Technologies Corp. and guarantor subsidiaries with
non-guarantor subsidiaries.
Unaudited
Westinghouse Air Brake
Technologies Corp. and
Guarantor Subsidiaries
Six Months Ended June
In millions 30, 2021
Net sales to non-guarantor subsidiaries $ 349.4
Purchases from non-guarantor subsidiaries $ 67.1
Unaudited
Westinghouse Air Brake
Technologies Corp. and
Guarantor Subsidiaries
In millions June 30, 2021
Amount due from/(to) non-guarantor subsidiaries $ (2,323.1)
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.
The following tables present summarized financial information of Wabtec
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-Issuer and Non-Guarantor Subsidiaries. The summarized financial
information is provided in accordance with the reporting requirements of Rule
13-01 under SEC Regulation S-X for the issuer and parent guarantor.
Summarized Statement of Income
Unaudited
Issuer and Guarantor
In millions Six Months Ended June 30, 2021
Net sales $ 274.5
Gross profit $ 47.7
Net income attributable to Wabtec shareholders $ (193.2)
Summarized Balance Sheet
Unaudited
Issuer and Guarantor
In millions June 30, 2021 December 31, 2020
Current assets $ 216.6 $ 407.9
Noncurrent assets $ 703.6 $ 709.8
Current liabilities $ 428.1 $ 824.1
Long-term debt $ 4,067.5 $ 3,779.6
Other non-current liabilities $ 308.6 $ 314.1
The following is a description of the transactions between the combined
41
--------------------------------------------------------------------------------none of which are guarantors of the Euro Notes.
Unaudited
Wabtec and Wabtec Netherlands
In millions Six Months Ended June 30, 2021
Net sales to non-guarantor subsidiaries $ 36.1
Purchases from non-guarantor subsidiaries $ 55.2
Unaudited
Wabtec and Wabtec Netherlands
In millions June 30, 2021
Amount due from/(to) non-guarantor subsidiaries $ (4,882.1)
Company Stock Repurchase Plan OnFebruary 11, 2021 , the Board of Directors increased its stock repurchase authorization to increase the amount available for stock repurchases to$500 million of the Company's outstanding shares. This new stock repurchase authorization supersedes the previous authorization of$500 million of which about$292.2 million remained. No time limit was set for the completion of the program which conforms to the requirements under the Senior Credit Facility, the 364 Day 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. 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 and 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; 42 -------------------------------------------------------------------------------- •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; •political developments and laws and regulations, including those related to Positive Train Control; or •tax law, regulation and policy; 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, 2020 . 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, 2020 . 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 accounting policies sinceDecember 31, 2020 . Contractual Obligations OnJune 3, 2021 , Wabtec Netherlands completed a public offering and sale of €500.0 million aggregate principal amount of Euro Notes. The Euro Notes will bear interest fromJune 3, 2021 , at a rate equal to 1.250% per year, with payments made annually commencing onDecember 3, 2021 . Additionally, during the second quarter of 2021, allU.S. dollar-denominated Term Loans were repaid. As a result of these collective changes, interest payment obligations related to total debt as ofJune 30, 2021 are expected to be$161.9 million for 2021,$311.3 million for 2022-2023,$230.9 million for 2024-2025, and$226.3 million thereafter for a combined total of$930.4 million . Further, as ofJune 30, 2021 , contractual obligations related to the repayment of Long-term debt are expected to be$0.6 million for 2021,$250.0 million for 2022-2023,$1,261.6 million for 2024-2025, and$2,593.3 million thereafter for a combined total of$4,105.5 million . 43
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