Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.86M
2: EX-10.1 Material Contract HTML 683K
3: EX-22.1 Published Report re: Matters Submitted to a Vote HTML 26K
of Security Holders
4: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
12: R1 Cover Page HTML 76K
13: R2 Condensed Consolidated Balance Sheets HTML 160K
14: R3 Condensed Consolidated Balance Sheets HTML 34K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Income HTML 128K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 58K
Income
17: R6 Condensed Consolidated Statements of Cash Flows HTML 97K
18: R7 Consolidated Statements of Shareholders' Equity HTML 117K
19: R8 Consolidated Statements of Shareholders' Equity HTML 26K
(Parenthetical)
20: R9 Business HTML 27K
21: R10 Accounting Policies HTML 94K
22: R11 Acquisitions HTML 40K
23: R12 Inventories HTML 32K
24: R13 Goodwill and Intangible Assets HTML 47K
25: R14 Contract Assets and Contract Liabilities HTML 49K
26: R15 Leases HTML 38K
27: R16 Long-Term Debt HTML 79K
28: R17 Stock-Based Compensation HTML 54K
29: R18 Income Taxes HTML 28K
30: R19 Earnings Per Share HTML 46K
31: R20 Warranties HTML 34K
32: R21 Fair Value Measurement and Derivative Instruments HTML 67K
33: R22 Commitments and Contingencies HTML 31K
34: R23 Segment Information HTML 125K
35: R24 Other Income, Net HTML 40K
36: R25 Accounting Policies (Policies) HTML 59K
37: R26 Accounting Policies (Tables) HTML 80K
38: R27 Acquisitions (Tables) HTML 37K
39: R28 Inventories (Tables) HTML 33K
40: R29 Goodwill and Intangible Assets (Tables) HTML 54K
41: R30 Contract Assets and Contract Liabilities (Tables) HTML 44K
42: R31 Leases (Tables) HTML 38K
43: R32 Long-Term Debt (Tables) HTML 72K
44: R33 Stock-Based Compensation (Tables) HTML 51K
45: R34 Earnings Per Share (Tables) HTML 45K
46: R35 Warranties (Tables) HTML 35K
47: R36 Fair Value Measurement and Derivative Instruments HTML 57K
(Tables)
48: R37 Segment Information (Tables) HTML 122K
49: R38 Other Income, Net (Tables) HTML 40K
50: R39 Business (Details) HTML 35K
51: R40 ACCOUNTING POLICIES - Additional Information HTML 51K
(Details)
52: R41 ACCOUNTING POLICIES - Remaining Performance HTML 32K
Obligations (Details)
53: R42 ACCOUNTING POLICIES - Summary of Receivables Sold HTML 30K
(Details)
54: R43 ACCOUNTING POLICIES - Accumulated Other HTML 69K
Comprehensive Loss by Component, Net of Tax
(Details)
55: R44 ACQUISITIONS - Additional Information (Details) HTML 35K
56: R45 ACQUISITIONS - Summary of Preliminary Estimated HTML 61K
Fair Values of Assets Acquired and Liabilities
Assumed (Details)
57: R46 Inventories (Details) HTML 34K
58: R47 GOODWILL AND INTANGIBLE ASSETS - Change in the HTML 38K
Carrying Amount of Goodwill by Segment (Details)
59: R48 GOODWILL AND INTANGIBLE ASSETS - Additional HTML 43K
Information (Details)
60: R49 GOODWILL AND INTANGIBLE ASSETS - Intangible Assets HTML 36K
Other Than Goodwill and Trade Names (Details)
61: R50 GOODWILL AND INTANGIBLE ASSETS - Amortization HTML 35K
Expense (Details)
62: R51 CONTRACT ASSETS AND CONTRACT LIABILITIES - HTML 31K
Additional Information (Details)
63: R52 CONTRACT ASSETS AND CONTRACT LIABILITIES - Change HTML 50K
in Carrying Amount of Contract Assets and Contract
Liabilities (Details)
64: R53 LEASES - Additional Information (Details) HTML 36K
65: R54 LEASES - Maturity of Lease Liabilities (Details) HTML 42K
66: R55 LEASES - Lease Term and Discount Rate (Details) HTML 28K
67: R56 LONG-TERM DEBT - Schedule of Long-term Debt HTML 81K
(Details)
68: R57 LONG-TERM DEBT - Additional Information (Details) HTML 75K
69: R58 LONG-TERM DEBT - Schedule of Line of Credit HTML 43K
Facilities (Details)
70: R59 STOCK-BASED COMPENSATION - Additional Information HTML 64K
(Details)
71: R60 STOCK-BASED COMPENSATION - Stock Option Activity HTML 61K
(Details)
72: R61 STOCK-BASED COMPENSATION - Restricted Stock HTML 57K
Activity and Incentive Stock Awards Activity
(Details)
73: R62 Income Taxes (Details) HTML 26K
74: R63 EARNINGS PER SHARE - Computation of Earnings Per HTML 62K
Share (Details)
75: R64 EARNINGS PER SHARE - Narrative (Details) HTML 28K
76: R65 Warranties (Details) HTML 36K
77: R66 FAIR VALUE MEASUREMENT AND DERIVATIVE INSTRUMENTS HTML 41K
- Additional Information (Details)
78: R67 FAIR VALUE MEASUREMENT AND DERIVATIVE INSTRUMENTS HTML 55K
- Summary of Notional Amounts and Fair Value
(Details)
79: R68 Commitments and Contingencies (Details) HTML 30K
80: R69 SEGMENT INFORMATION - Additional Information HTML 26K
(Details)
81: R70 SEGMENT INFORMATION - Segment Financial HTML 57K
Information (Details)
82: R71 SEGMENT INFORMATION - Sales by Product (Details) HTML 49K
83: R72 Other Income, Net (Details) HTML 36K
86: XML IDEA XML File -- Filing Summary XML 157K
84: XML XBRL Instance -- wab-20220930_htm XML 2.23M
85: EXCEL IDEA Workbook of Financial Reports XLSX 146K
8: EX-101.CAL XBRL Calculations -- wab-20220930_cal XML 198K
9: EX-101.DEF XBRL Definitions -- wab-20220930_def XML 551K
10: EX-101.LAB XBRL Labels -- wab-20220930_lab XML 1.55M
11: EX-101.PRE XBRL Presentations -- wab-20220930_pre XML 929K
7: EX-101.SCH XBRL Schema -- wab-20220930 XSD 150K
87: JSON XBRL Instance as JSON Data -- MetaLinks 410± 613K
88: ZIP XBRL Zipped Folder -- 0001628280-22-027500-xbrl Zip 607K
(Exact name of registrant as specified in its charter)
____________________________________
iDelaware
i25-1615902
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i30 Isabella StreetiPittsburgh,
iPennsylvania
i15212
(Address of principal executive offices)
(Zip code)
i412-i825-1000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $.01 par value per share
iWAB
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Emerging growth company
i☐
Smaller reporting company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 27, 2022, there were i181,867,864 shares of common stock, par value $.01 per share, of the registrant outstanding.
Common
stock, $ii.01/ par value; ii500.0/
shares authorized and ii226.9/ shares issued: i181.9
and i185.8 outstanding at September 30, 2022 and December 31, 2021, respectively
Westinghouse Air Brake Technologies Corporation (“Wabtec” or the "Company") 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 i50
countries and our products can be found in more than i100 countries throughout the world. In the first nine months of 2022, approximately i55% of the
Company’s net sales came from customers outside the United States.
2. iACCOUNTING POLICIES
iBasis
of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation.
Results
for these interim periods are not necessarily indicative of results to be expected for the full year particularly in light of the ongoing COVID-19 pandemic, supply chain disruptions, labor availability, broad-based inflation, and the impacts resulting from Russia's invasion of Ukraine. These factors continue to impact our sales channels, supply chain, manufacturing operations, workforce, and other key aspects of our operations. We are unable to reasonably predict the full impact of these factors due to the high degree of uncertainty regarding their duration and severity, their potential impact on global economic activity, and the impact that current and new sanctions may have on our business, global supply chain operations and our customers, suppliers, and end-markets.
For the year ended December 31, 2021, Wabtec had earnings of approximately $i40 million
attributable to customers in Russia, while earnings from customers in Ukraine and Belarus were inot significant. As of September 30, 2022, Wabtec had approximately $i16 million
of assets related to Russian operations, which were primarily cash and inventory. Assets related to Ukraine and Belarus operations are not significant.
iThe Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.
The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31,
2021. The December 31, 2021 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
iUse of Estimates The preparation of financial statements in conformity with GAAP in the United States requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
i
Revenue Recognition A majority of the
Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms.
The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the
Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. Contract
9
revenues and cost estimates are reviewed and
revised periodically throughout the year and adjustments are reflected in the accounting period as such amounts are determined.
Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We
have a disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.
Generally, the Company’s revenue contains a single performance obligation for each distinct good or service; however, a single
contract may have multiple performance obligations comprising multiple promises to customers. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, liquidating damages and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the
related revenue is recognized, based upon the Company’s experience.
Remaining performance obligations represent the transaction price of firm customer orders subject to standard industry cancellation provisions and substantial scope-of-work adjustments. As of September 30, 2022, the Company's remaining performance obligations were approximately $i22.2
billion. The Company expects to recognize revenue of approximately i25% of the remaining performance obligations over the next i12
months, with the remainder recognized thereafter.
iRevolving Receivables Program The Company utilizes a revolving facility to sell certain receivables of the Company and certain of its subsidiaries (the "Originators").
The Originators contribute receivables to our bankruptcy-remote subsidiary, which sells the receivables to a financial institution on a recurring basis in exchange for cash equal to the gross receivables sold. During the third quarter of 2022, the Company amended its revolving receivables facility to increase the amount of certain receivables that can be sold to such financial institution from $i200 million
to up to $i350 million. The bankruptcy remote subsidiary is a separate legal entity with its own creditors, and its assets are not available to pay creditors of the Company or any other affiliates of the Company. 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 period. The sold receivables are fully guaranteed by our bankruptcy-remote subsidiary, which holds additional receivables that are pledged as collateral under this facility. The Company has agreed to guarantee the performance of the Originators respective obligations under the revolving agreement. Neither the Company (except for the bankruptcy-remote consolidated subsidiary referenced above) nor the Originators guarantees the collectability of the receivables under the revolving agreements.
At September 30, 2022 and 2021 the bankruptcy-remote subsidiary held receivables of $i634 million
and $i285 million, respectively. The transfers are recorded at the fair value of the proceeds received and obligations assumed less derecognized receivables.No obligation was recorded at September 30, 2022 or 2021 as the estimated expected credit losses on receivables sold is insignificant. Our maximum exposure to losses related to these receivables transferred is limited to the amount outstanding.
iThe
following table sets forth a summary of receivables sold:
Collections
reinvested under revolving receivables agreement
(i1,076)
(i875)
Net
cash proceeds received
$
i205
$
i84
/
iDepreciation
Expense Depreciation of property, plant and equipment related to the manufacturing of products or services provided is included in Cost of goods or Cost of services. Depreciation of other property, plant and equipment that is not attributable to the manufacturing of products or services provided is included in Selling, general and administrative expenses or Engineering expenses depending on how the property, plant and equipment is used.
iGoodwill and Intangible Assets Goodwill
and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Amortizable
10
intangible assets are reviewed for impairment when indicators of impairment are present. The Company tests goodwill and indefinite-lived intangible assets for impairment at the reporting unit level and at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed, and also tests for impairment whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Periodically, management of the Company assesses whether or not an indicator of impairment is present that would necessitate an impairment analysis to be performed.
i
Accounting Standards Recently Issued In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-04, Liabilities - Supplier Finance Programs
(Subtopic 405-50): Disclosure of Supplier Finance Obligations. The amendments in this update outline specific quantitative and qualitative disclosure requirements for entities that use supplier finance programs in connection with the purchase of goods or services. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this update will be effective for Wabtec's reporting periods beginning January 1, 2023 and will require increased interim and annual disclosures be provided on current and comparable reporting periods presented in annual and interim company filings.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract
Assets and Contract Liabilities from Contracts with Customers. The amendments in this update provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination and address how to determine whether a contract liability is recognized by the acquirer in a business combination. The amendments in this update will be effective
for Wabtec on January 1, 2023 and will be applied prospectively to business combinations occurring on or after the effective date.
iAccumulated Other Comprehensive Loss Comprehensive income (loss) comprises both net income and Other comprehensive (loss) income resulting from the change in equity from transactions and other events and circumstances from non-owner sources.
i
The
changes in Accumulated other comprehensive loss by component, including any tax impacts, for the three months ended September 30, 2022 and 2021 are as follows:
The
changes in Accumulated other comprehensive loss by component, including any tax impacts, for the nine months ended September 30, 2022 and 2021 are as follows:
Other
comprehensive (loss) income before reclassifications
(i352)
(i88)
i3
(i6)
i6
(i2)
(i343)
(i96)
Amounts
reclassified from Accumulated other comprehensive loss
i—
i—
i—
i—
i1
i2
i1
i2
Other
comprehensive (loss) income, net
(i352)
(i88)
i3
(i6)
i7
i—
(i342)
(i94)
Balance
at September 30
$
(i748)
$
(i348)
$
(i2)
$
(i3)
$
(i58)
$
(i82)
$
(i808)
$
(i433)
/
Amounts
reclassified from Accumulated other comprehensive loss are recognized in "Other income, net" with the tax impact recognized in "Income tax expense."
11
3. iACQUISITIONS
Nordco
On
March 31, 2021, the Company acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment. Nordco's products and services portfolio includes mobile railcar movers and ultrasonic rail flaw detection technologies. The purchase price paid for i100% ownership of Nordco was approximately $i410 million.
iThe following table summarizes the fair value of the Nordco assets acquired and liabilities assumed:
In millions
Assets acquired
Cash
and cash equivalents
$
i5
Accounts receivable
i23
Inventory
i34
Other
current assets
i2
Property, plant and equipment
i17
Goodwill
i215
Other
intangible assets
i168
Other noncurrent assets
i12
Total
assets acquired
i476
Liabilities assumed
Current liabilities
i20
Noncurrent
liabilities
i46
Total liabilities assumed
i66
Net
assets acquired
$
i410
/
The fair values of the assets acquired and liabilities assumed were determined
using the income, cost and market approaches. Discounted cash flow models were used to estimate the fair values of acquired intangibles. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 in the fair value hierarchy. Intangible assets acquired include customer relationships and acquired technology that are subject to amortization, and trade names that were assigned an indefinite life and are not subject to amortization. Contingent liabilities assumed as part of the transaction were not material.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the assembled workforce and the future economic benefits, including synergies, that are expected to be achieved as a result of the acquisition. The purchased goodwill is not
expected to be deductible for tax purposes. The results of this business since the date of acquisition are reported within the Services product line of the Freight Segment. The pro forma impact on Wabtec’s sales and results of operations, including the pro forma effect of events that are directly attributable to the acquisition, was not significant.
During the second quarter of 2022 the Company made itwo strategic acquisitions for a combined
purchase price of $i69 million within the Digital Electronics product line of the Freight Segment which are individually and collectively immaterial. The Company also made acquisitions in prior periods not listed above which are individually and collectively immaterial.
4.
iINVENTORIES
iThe components of inventory, net of reserves, were:
As
of September 30, 2022 and December 31, 2021, the Company’s trade names had a net carrying amount of $i568 million and $i635
million, respectively. The Company believes these intangibles have indefinite lives, with the exception of the right to use the GE Transportation trade name, to which the Company has assigned a useful life of i5 years.
iIntangible
assets of the Company, other than goodwill and trade names, consist of the following:
Backlog, net of accumulated amortization of $i391
and $i309
$
i1,035
$
i1,114
Customer
relationships, net of accumulated amortization of $i359 and $i331
i904
i979
Acquired
technology, net of accumulated amortization of $i412 and $i334
i903
i977
Total
$
i2,842
$
i3,070
/
At
September 30, 2022 the weighted average remaining useful lives of backlog, customer relationships and acquired technology were i10 years, i16
years and i9 years, respectively. The backlog intangible asset primarily consists of in-place long-term service agreements acquired by the Company in conjunction with the acquisition of GE Transportation in 2019. Amortization expense for intangible assets was $i73
million and $i218 million for the three and nine months ended September 30, 2022, respectively, and $i73
million and $i215 million for the three and nine months ended September 30, 2021, respectively.
iAmortization
expense for the five succeeding years is estimated to be as follows:
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized
over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled accounts receivable” while the noncurrent contract assets are classified as other assets under the caption "Other noncurrent assets" on the consolidated balance sheets. Noncurrent contract assets were $i198 million
at September 30, 2022 and $i153 million at December 31, 2021. Included in noncurrent contract assets are certain costs that are specifically related to a contract but do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring
engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.
Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract liabilities are classified as current liabilities under the caption “Customer deposits” while the noncurrent contract
liabilities are classified as noncurrent liabilities under the caption "Other long-term liabilities" on the consolidated balance sheets. Noncurrent contract liabilities were $i79 million at September 30, 2022 and $i88 million
at December 31, 2021. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss
13
contracts
were $i110 million and $i107 million at September 30, 2022 and December 31, 2021,
respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the consolidated balance sheets.
Amounts
in beginning balance reclassified to revenue
(i348)
(i387)
Current
year amounts reclassified to revenue
(i343)
(i154)
Foreign
currency impact
(i33)
(i10)
Balance
at September 30
$
i880
$
i760
/
7. iLEASES
The Company leases certain property, buildings and equipment. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the
Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of lease payments when appropriate. The Company does not separate lease and non-lease components. The right-of-use assets are classified as noncurrent and included within the caption "Other noncurrent assets" on the consolidated balance sheets. The current portion of lease liabilities are classified under the caption "Other accrued liabilities," while the noncurrent portion of lease liabilities are classified under the caption "Other long-term liabilities" on the consolidated balance sheets.
Operating lease expense was $i15
million and $i44 million for the three and nine months ended September 30, 2022, respectively, and $i16 million and $i44
million for the three and nine months ended September 30, 2021, respectively. New operating leases of $i34 million and $i58 million
were added during the three and nine months ended September 30, 2022, respectively. Wabtec does not have material financing leases, short-term or variable leases or sublease income.
As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate the rate to discount lease payments using its incremental borrowing rate. The Company has established discount rates by geographic region ranging from i1%
to i9%.
14
iScheduled
payments of lease liabilities are as follows:
In millions
Operating Leases
Remaining 2022
$
i14
2023
i56
2024
i50
2025
i43
2026
i36
Thereafter
i139
Total
lease payments
i338
Less: Present value discount
(i26)
Present
value of lease liabilities
$
i312
/
iThe
following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of operating lease liabilities:
1.
See Note 13 for information on the fair value measurement of the Company's long-term debt.
/
Variances between Face Value and Book Value are the result of unamortized discounts and debt issuance fees. Amortization of discounts and debt issuance fees are included in the calculation of Effective Interest Rate.
For those debt securities that have a premium or discount at the time of issuance, the Company amortizes the amount through interest expense based on the maturity date or the first date the holders may require the
Company to repurchase the debt securities, if applicable. A premium would result in a decrease in interest expense, and a discount would result in an increase in interest expense in future periods. Additionally, the Company has debt issuance costs related to certain financing transactions which are also amortized through interest expense. As of September 30, 2022 and December 31, 2021, the Company had total combined unamortized discount and debt issuance costs of $i22 million
and $i23 million, respectively.
Credit Agreement
On June 8, 2018, the Company entered into a credit agreement (“Original Credit Agreement”) consisting of (i) term loans denominated in euros and U.S. dollars and (ii) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $i1.2 billion.
On August 15, 2022, the Company entered into a new unsecured credit agreement ("Restated
15
Credit Agreement"), which amended, restated and replaced the Original Credit Agreement. The Restated Credit Agreement is with a syndicate of lenders and provides for borrowings consisting of (i) a multi-currency revolving credit facility, providing for an equivalent in U.S. dollars of up to $i1.5 billion
(the “Revolving Credit Facility”) and (ii) a new $i250 million delayed draw term loan facility (the “Delayed Draw Term Loan”), all pursuant to the terms and conditions of the Restated Credit Agreement (which are substantially similar with the terms of the Original Credit Agreement). The Restated Credit Agreement allows the Company to request, at prevailing market rates, an aggregate amount not to exceed $i750 million,
(a) increases to the borrowing commitments under the Revolving Credit Facility and/or (b) new incremental term loan commitments. The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type.
The Revolving Credit Facility matures on August 15, 2027. The Delayed Draw Term Loan is available for borrowings until February 15, 2024 and any borrowings under the Delayed Draw Term Loan will mature on August 15, 2027. Amounts borrowed and repaid under the Delayed Draw Term Loan may not be reborrowed. The applicable interest rate for borrowings under the Restated Credit Agreement includes a base rate plus an interest rate spread up to i1.75%
based on the lower of the pricing corresponding to (i) the Company’s financial leverage or (ii) the Company’s public rating. Obligations under the Restated Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.
Under the Restated Credit Agreement, the Company has agreed to maintain an Interest Coverage Ratio of at least i3.0
to 1.0, and a Leverage Ratio not to exceed i3.5 to 1.0. The Interest Coverage Ratio is defined as EBITDA (earnings before interest, taxes, depreciation, and amortization) to Interest Expense for the four quarters then ended. The Leverage Ratio is defined as Net Debt as of the last day of such fiscal quarter to EBITDA for the four quarters then ended. Additionally, the Company may submit a request for an increased maximum Leverage Ratio in contemplation of a Material Acquisition. All terms are as defined
in the Restated Credit Agreement.
The Company was in compliance with all financial covenants in the Restated Credit Agreement as of September 30, 2022.
iThe following table presents availability under the Restated Credit Agreement at September 30, 2022:
In
millions
Maximum Revolving Credit Facility Availability
$
i1,500
Delayed Draw Term Loan
i250
Outstanding
Borrowings
(i122)
Letters of Credit Under Credit Agreement
(i3)
Current
Availability
$
i1,625
/
Senior Notes
The Company or its subsidiaries
may issue senior notes from time to time. These notes are comprised of our i4.375% Senior Notes due 2023 (the "2023 Notes"), i4.15% Senior Notes due 2024 (the "2024 Notes"),
i3.20% Senior Notes due 2025 (the "2025 Notes"), i3.45% Senior Notes due 2026 (the "2026 Notes"), i1.25%
Senior Notes (EUR) due 2027 (the "Euro Notes"), and i4.70% Senior Notes due 2028 (the "2028 Notes"). The 2023 Notes, 2024 Notes, 2025 Notes, 2026 Notes and 2028 Notes are the “US Notes”, and collectively with the Euro Notes, the “Senior Notes.” Interest on the US Notes is payable semi-annually and interest on the Euro Notes is paid annually. Each series of the Senior Notes may be redeemed at any time in whole or from time to time in part in accordance with the provisions of the indenture,
under which such series of notes was issued. Each of the Senior Notes may be redeemed at a redemption price of i100% of the principal amount plus a specified make-whole premium and accrued interest. The US Notes and the Company's guarantee of the Euro Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt, and are senior to all existing and future
subordinated indebtedness of the Company.
During the second quarter of 2022, the Company redeemed $i25 million of principal from the 2024 Notes plus a premium and the related accrued interest.
The indentures under which the Senior Notes were issued
contain covenants and restrictions which limit, subject to certain exceptions, certain sale and leaseback transactions with respect to principal properties, the incurrence of secured debt without equally and ratably securing the Senior Notes, and certain merger and consolidation transactions. The covenants do not require the Company to maintain any financial ratios or specified levels of net worth or liquidity. The US Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's subsidiaries that is a guarantor under the Senior Credit Facility. The Euro Notes were issued by Wabtec Transportation Netherlands B.V. and are fully and unconditionally guaranteed
by the Company.
16
The Company is in compliance with the restrictions and covenants in the indentures under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.
9. iSTOCK-BASED
COMPENSATION
As of September 30, 2022, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 15, 2030, and as of September 30, 2022 the number of shares available for future grants under the 2011 Plan was approximately i5.3
million shares. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).
Stock-based compensation expense was $i12 million and $i35 million
for the three and nine months ended September 30, 2022, respectively, and $i10 million and $i34 million
for the three and nine months ended September 30, 2021, respectively. At September 30, 2022, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest totaled $i57 million.
Stock Options Stock options
are granted to eligible employees at an exercise price equivalent to the stock's fair market value, which is the average of the high and low Wabtec stock price on the date of grant. New options granted become exercisable over a ithree-year vesting period. Options expire i10
years from the date of grant. iNo stock options were granted during the nine months ended September 30, 2022.
iThe
following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the nine months ended September 30, 2022:
Restricted
Stock, Restricted Units and Incentive Stock As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over ithree years from the date of grant. Under the Directors Plan, restricted stock awards vest ione
year from the date of grant.
In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative ithree-year performance goals. Based on the Company’s performance for each ithree-year
period then ended, the incentive stock units can vest, with underlying shares of common stock being awarded in an amount ranging from i0% to i200%
of the amount of initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of September 30, 2022, the Company estimates that it will achieve i135%,
i120% and i106%
for the incentive stock awards expected to vest based on performance for the ithree-year periods ending December 31, 2022, 2023, and 2024, respectively, and has recorded incentive compensation expense accordingly. If the estimate of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase
or decrease resulting in recognition in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.
Compensation expense for the non-vested restricted stock and incentive stock units is based on the average of the high and low Wabtec stock price on the date of grant and recognized over the applicable vesting period.
17
iThe
following table summarizes the restricted stock activity and incentive stock units' activity for the nine months ended September 30, 2022:
The overall effective tax rate of i24.7% and i25.1%
for the three and nine months ended September 30, 2022, respectively, differs from the U.S. federal statutory rate of 21.0% primarily due to the impact of state and foreign taxes.
11. iEARNINGS PER SHARE
iThe
computation of basic and diluted earnings per share for Net income attributable to Wabtec shareholders is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
In millions, except per share data
2022
2021
2022
2021
Numerator
Net
income attributable to Wabtec shareholders
$
i160
$
i131
$
i475
$
i368
Denominator
Weighted
average shares outstanding - basic
i181.3
i187.6
i182.6
i188.2
Effect
of dilutive securities:
Assumed conversion of dilutive stock-based compensation plans
i0.6
i0.4
i0.5
i0.4
Weighted
average shares outstanding - diluted
i181.9
i188.0
i183.1
i188.6
Net
income attributable to Wabtec shareholders per common share
Basic
$
i0.88
$
i0.69
$
i2.60
$
i1.95
Diluted
$
i0.88
$
i0.69
$
i2.59
$
i1.95
/
Approximately
ii0.1/ million
outstanding shares of stock options for the three and nine months ended September 30, 2021 were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price of the Company's common stock.
12. iWARRANTIES
iThe following table reconciles the changes in the Company’s product warranty reserve for the nine months ended September 30, 2022 and 2021:
In
millions
2022
2021
Balance at beginning of year
$
i259
$
i279
Acquisitions
i3
i2
Warranty
expense
i55
i85
Warranty
claim payments
(i65)
(i85)
Foreign
currency impact/other
(i16)
(i9)
Balance
at September 30
$
i236
$
i272
/
18
13.
iFAIR VALUE MEASUREMENT AND DERIVATIVE INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous
market for the asset or liability and defines fair value based upon an exit price model.
Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and, Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification
within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company’s cash and cash equivalents are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash and cash equivalents approximated the carrying value at September 30, 2022 and December 31, 2021. The Company’s defined benefit pension plan assets consist primarily of equity security funds, debt security funds, insurance contracts, and temporary
cash and cash equivalent investments. These investments are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, and money markets. Trusts are valued at the net asset value (“NAV”) as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates. The Senior Notes are considered Level 2 based on the fair value valuation hierarchy. Contingent consideration related to the GE Transportation acquisition is considered Level 3 based on the fair value valuation hierarchy. At September 30, 2022 and December 31, 2021, $ii110/ million
was classified as "Other accrued liabilities" on the Company's Consolidated Balance Sheets and $i143 million and $i141 million,
respectively, was included within long-term liabilities classified as "Contingent consideration" on the Company's Consolidated Balance Sheets. The fair value approximates the carrying value at September 30, 2022 and December 31, 2021.
Hedging Activities In the normal course of business, the Company is exposed to market risk related to interest rates, commodity prices and foreign currency exchange rate fluctuations, which may adversely affect our operating results and financial position. At times, we limit these risks through the use of derivatives such as cross-currency swaps, foreign currency forward contracts,
interest rate swaps, commodity swaps and options. These hedging contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.
Foreign Currency Exchange Risk
The Company uses forward contracts to hedge forecasted foreign currency denominated sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used
to hedge firm commitments relevant to sales and purchases and forecasted transactions to be realized with high probability that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gains and losses is deferred as a component of Accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. For the three and nine months ended September 30, 2022 and 2021, the amounts reclassified into income were not material.
The Company has also established balance sheet risk management and net investment hedging programs to protect its balance sheet against foreign currency exchange rate volatility. We conduct
our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including euro, Indian rupee, British pound sterling, Australian dollars and several other foreign currencies. Changes in these foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We hedge these exposures using foreign currency swap contracts and cross-currency swaps to offset the potential income statement effects on intercompany loans denominated in non-functional
currencies. These programs reduce but do not eliminate foreign currency exchange rate risk entirely.
The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting, but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a
19
component
of Other income, net. The net loss related to these contracts was $i3 million and $i11
million for the three and nine months ended September 30, 2022, respectively, and a net loss of $i3 million for the nine months ended September 30, 2021. These contracts typically mature within ione
year.
i
The following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of September 30, 2022, which are included in "Other current assets" and "Other accrued liabilities" on the Consolidated Balance Sheets:
The
following table summarizes the gross notional amounts and fair values of the designated and non-designated hedges discussed in the above sections as of December 31, 2021, which are included in "Other current assets" and "Other accrued liabilities" on the Consolidated Balance Sheets:
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.For the nine months ended September 30, 2022 and 2021 the amounts reclassified into income were not material.
Commodity
Price Risk
The Company may use commodity forward contracts and futures to mitigate its exposure to commodity price changes and to reduce its overall cost of manufacturing. For the nine months ended September 30, 2022 and 2021 the amounts recognized as income or expense were not material.
14. iCOMMITMENTS
AND CONTINGENCIES
The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. The Company believes its operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements.
Claims have been filed against the
Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. The vast majority of the claims are submitted to insurance carriers for defense and indemnity, or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all of these claims will be fully covered by insurance, or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated. A limited number of claims are not covered by insurance, nor are they subject to indemnity from non-affiliated parties. Management believes that the costs of the Company’s asbestos-related cases will not be material
to the Company’s overall financial position, results of operations and cash flows.
20
Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have
been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed; Xorail has successfully completed a remediation plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, DTC alleged that total damages were $i37 million through July 31, 2017 and were continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal
Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC. Xorail has denied DTC's assertions, stating that its system satisfied the contractual requirements. Xorail has worked with DTC to modify its system and implement the FRA's and PUC's previously undefined approval requirements; the FRA and PUC have both approved modified wireless crossing system, and as of August 2018, DTC completed the process of certifying the crossings and eliminated the use of flaggers. DTC has not updated its claim notices or alleged damages against Xorail, nor have they filed any formal claim against Xorail. On September
21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements. DTC’s complaint generally supports Xorail’s position and does not name or implicate Xorail. DTC's claim against RTD proceeded to trial on September 21, 2020; the trial has been completed, including post-trial submissions.
From time to time the Company is involved in litigation relating to claims arising out of its operations in the ordinary course of business. As of the date hereof, the Company
is involved in no litigation that the Company believes will have a material adverse effect on its financial condition, results of operations or liquidity.
15. iSEGMENT INFORMATION
Wabtec has itwo
reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services and customer type.
Freight Segment primarily builds new locomotives, manufactures and services components for new and existing freight cars and locomotives, rebuilds freight locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services and provides related heat exchange and cooling systems. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars and utilities. We refer to sales of both goods, such as spare parts and equipment upgrades, and related
services, such as monitoring, maintenance and repairs, as sales in our Services product line.
Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles and buses. It also refurbishes subway cars and provides heating, ventilation, and air conditioning equipment and doors for buses and subway cars. Customers include public transit authorities and municipalities, leasing companies and manufacturers of subway cars and buses around the world.
The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions
with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense, and other unallocated charges.
iSegment financial information for the three months ended September 30, 2022 is as follows:
In
millions
Freight Segment
Transit Segment
Corporate Activities and Elimination
Total
Sales to external customers
$
i1,531
$
i550
$
—
$
i2,081
Intersegment
sales/(elimination)
i13
i7
(i20)
—
Total
sales
$
i1,544
$
i557
$
(i20)
$
i2,081
Income
(loss) from operations
$
i233
$
i53
$
(i25)
$
i261
Interest
expense and other, net
i—
i—
(i44)
(i44)
Income
(loss) before income taxes
$
i233
$
i53
$
(i69)
$
i217
/
21
Segment
financial information for the three months ended September 30, 2021 is as follows:
In millions
Freight Segment
Transit Segment
Corporate Activities
and Elimination
Total
Sales to external customers
$
i1,295
$
i612
$
—
$
i1,907
Intersegment
sales/(elimination)
i12
i8
(i20)
—
Total
sales
$
i1,307
$
i620
$
(i20)
$
i1,907
Income
(loss) from operations
$
i195
$
i44
$
(i22)
$
i217
Interest
expense and other, net
i—
i—
(i42)
(i42)
Income
(loss) before income taxes
$
i195
$
i44
$
(i64)
$
i175
Segment
financial information for the nine months ended September 30, 2022 is as follows:
In millions
Freight Segment
Transit Segment
Corporate Activities and Elimination
Total
Sales
to external customers
$
i4,343
$
i1,713
$
—
$
i6,056
Intersegment
sales/(elimination)
i38
i24
(i62)
—
Total
sales
$
i4,381
$
i1,737
$
(i62)
$
i6,056
Income
(loss) from operations
$
i655
$
i168
$
(i59)
$
i764
Interest
expense and other, net
i—
i—
(i120)
(i120)
Income
(loss) before income taxes
$
i655
$
i168
$
(i179)
$
i644
Segment
financial information for the nine months ended September 30, 2021 is as follows:
In millions
Freight Segment
Transit Segment
Corporate Activities
and Elimination
Total
Sales to external customers
$
i3,814
$
i1,935
$
—
$
i5,749
Intersegment
sales/(elimination)
i37
i25
(i62)
—
Total
sales
$
i3,851
$
i1,960
$
(i62)
$
i5,749
Income
(loss) from operations
$
i510
$
i159
$
(i57)
$
i612
Interest
expense and other, net
i—
i—
(i110)
(i110)
Income
(loss) before income taxes
$
i510
$
i159
$
(i167)
$
i502
iSales
to external customers by product line are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Freight
Segment
Services
$
i669
$
i583
$
i2,046
$
i1,767
Equipment
i443
i335
i1,098
i925
Components
i232
i222
i695
i649
Digital
Electronics
i187
i155
i504
i473
Total
Freight Segment
$
i1,531
$
i1,295
$
i4,343
$
i3,814
Transit
Segment
Original Equipment Manufacturer
$
i264
$
i287
$
i815
$
i894
Aftermarket
i286
i325
i898
i1,041
Total
Transit Segment
$
i550
$
i612
$
i1,713
$
i1,935
/
22
16.
iOTHER INCOME, NET
iThe components of Other income, net are as follows:
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Foreign currency (loss) gain
$
(i6)
$
(i4)
$
(i5)
$
i7
Equity
income
i6
i4
i13
i11
Expected
return on pension assets/amortization
i2
i2
i7
i7
Other
miscellaneous income (expense), net
i2
(i2)
i—
i—
Total
Other income, net
$
i4
$
i—
$
i15
$
i25
/
23
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 17, 2022.
OVERVIEW
Wabtec is one of the world’s largest providers
of value-added, technology-based locomotives, equipment, systems, and services for the global freight rail and passenger transit industries, as well as the mining, marine and industrial markets. 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 outside the 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 of Ukraine, continue to have an adverse impact on our operations and business results. Impacts for the three and nine months ended September 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 of Ukraine and the resultant sanctions related to Russia and Belarus have further impacted our supply and distribution channels and caused significant price inflation which had, and are expected to continue to have, adverse effects on Wabtec’s business results. For the year ended December 31, 2021, Wabtec had earnings of approximately $40 million attributable to customers in Russia, while earnings from customers in Ukraine and Belarus were not significant. As of September 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 in Ukraine were not expected to be recoverable and were written off resulting in an insignificant charge during the first quarter of 2022. Remaining assets related to Ukraine and those in Belarus were not significant.
The Company 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 of Ukraine, 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 in Ukraine, 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, on June 26, 2022, we detected a cyber security incident which impacted the Company’s network. The Company promptly activated incident response protocols, which included shutting down certain systems, and commenced an investigation of the incident, 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 the North 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 ended September 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
$
131
The following table shows the major components of the change
in sales in the three months ended September 30, 2022 from the three months ended September 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
$
2,081
Net
sales
Net sales for the three months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 $4 million of income for the three months
ended September 30, 2022 driven by higher equity income in the current year.
Income taxes
The effective income tax rate was 24.7% and 24.8% for the three months ended September 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 ended September 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
19
Digital
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 ended September 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 ended September 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 ended September
30, 2022 included restructuring costs of $4 million primarily for headcount actions. Cost of sales for the three months ended September 30, 2021 included transaction costs of $1 million primarily related to the acquisition of Nordco.
28
Operating expenses
Freight Segment operating expenses increased $15 million, or 6.0%, for the three months ended September 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 ended September 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
$
550
Net sales
Transit Segment sales for the three months ended September 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 ended September 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 ended September 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 the United 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 ended September 30, 2022 and 2021 includes $1 million and $22 million, respectively, of restructuring costs, primarily for footprint rationalization in Europe and headcount actions.
Operating expenses
Transit Segment operating expenses decreased $16 million, or 14.0%, for the three months ended September 30, 2022 compared to the same period in 2021. SG&A decreased $14 million for the three months ended September
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 ended September 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
$
368
The
following table shows the major components of the change in sales in the nine months ended September 30, 2022 from the nine months ended September 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
$
6,056
Net sales
Net sales for the nine months ended September 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 United Kingdom. Sales from acquisitions contributed $65 million, primarily in the Freight Segment, and unfavorable exchange rates, primarily in the Transit Segment, decreased sales by $212 million.
Cost of sales
Cost of sales for the nine months
ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022 and 2021, respectively. SG&A decreased $9 million for the nine months ended September 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 ended September 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 of Nordco.
Interest expense, net
Interest expense, net, remained consistent for the nine months ended September 30, 2022 compared to the same period in 2021.
Other income, net
Other income, net, was $15 million of income for the nine months
ended September 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 September 30, 2022 and 2021, respectively. The decrease in the effective tax rate is primarily the result of a more favorable earnings mix for the nine months ended September 30, 2022.
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
66
Digital Electronics
16
First Nine Months of 2022 Net Sales
$
4,343
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 ended September 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 ended September 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 ended September 30, 2022 and 2021 includes $7 million and $6 million, respectively, of restructuring and transaction costs, primarily for headcount actions. The nine months ended September 30, 2021 also included transaction costs related to the Nordco acquisition.
33
Operating
expenses
Freight Segment operating expenses increased $56 million, or 8.0%, for the nine months ended September 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 ended September 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
$
1,713
Net sales
Transit Segment sales for the nine months ended September 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 the United 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 ended September 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 ended September 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 the United 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 ended September 30, 2022 and 2021 included $5 million and $43 million, respectively, of restructuring costs, primarily for headcount actions and footprint rationalization in Europe.
Operating expenses
Transit Segment operating expenses decreased $38 million, or 11.0%, for the nine months ended September 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 ended September 30, 2022 and 2021 included $5 million and $12 million, respectively, of restructuring costs, primarily for headcount actions in Europe. 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 $25 million of principal from the 2024 Notes plus a premium and the related accrued interest.
On
August 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 of September 30, 2022, the Company held approximately $514 million of cash and cash equivalents, of which approximately $1 million was held within the United States and approximately
$513 million was held outside of the United States, primarily in India, Europe, China, and Brazil. While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash could be repatriated to the United States net of any tax impacts.
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 ended September 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's U.S. subsidiaries. Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, a Wabtec Company, which has 15,000 shares outstanding of Class A Non-Voting Preferred Stock held by General Electric Company. The Euro Notes are issued by Wabtec Transportation
Netherlands B.V. ("Wabtec Netherlands") and are fully and unconditionally guaranteed by the Company.
On January 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
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
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.
On January 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 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-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.
The
following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp. and Wabtec Netherlands, with the subsidiaries of Westinghouse Air Brake Technologies Corp., other than Wabtec Netherlands, none of which are guarantors of the Euro Notes.
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 North 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;
•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;
•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 ended December 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 ended December 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 since December 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
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31,
2021. Our exposure to market risk has not changed materially since December 31, 2021. Refer to Note 13 - Fair Value Measurement and Derivative Instruments of "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this report for additional information regarding interest rate and foreign currency exchange risk.
Item 4. CONTROLS AND PROCEDURES
Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2022. Based upon their
evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30,
2022, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.
42
PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Additional information with respect to legal proceedings is included in Note 14 of “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report.
Item
1A. RISK FACTORS
In response to the Russian invasion of Ukraine and the impact of the conflict on the Company and the global markets, the Company is providing the below additional risk factor. Other than the below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
The ongoing conflict between Russia and Ukraine may adversely affect our business and results of operations.
Given the nature of our business and our global operations, political, economic, and other conditions in foreign countries and regions, including geopolitical
risks such as those arising from the current conflict between Russia and Ukraine, may adversely affect our business and results of operations. The broader consequences of this conflict, which may include further sanctions, embargoes, regional instability, and geopolitical shifts; disruptions to transportation and distribution routes, or strategic decisions to alter certain routes; potential retaliatory action by the Russian government against companies, including us, including nationalization of foreign businesses and/or assets in Russia; increased tensions between the United States and countries in which we operate; and the extent of the conflict’s effect on our business and results of operations as well as the global economy, cannot be predicted.
Additionally, Wabtec has operations and a strategic joint venture in Kazakhstan that have continued operating but have incurred supply, distribution and currency impacts as an indirect
result from the Russian invasion of Ukraine. To date, the operations in Kazakhstan have not been significantly impacted by the ongoing conflict outside of the overall unfavorable impact to economic conditions; however, the future impact to these operations cannot be predicted.
To the extent the current conflict between Russia and Ukraine adversely affects our business, particularly in Russia and Kazakhstan, it may also have the effect of heightening many other risks disclosed in our Annual Report, any of which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including inflation and business spending; disruptions to our global technology infrastructure, including through cyberattack, ransom attack, or cyber-intrusion; adverse changes in international trade policies and relations; our ability to maintain or increase
our prices, our ability to implement and execute our business strategy, disruptions in global supply chains, our exposure to foreign currency fluctuations, and constraints, volatility, or disruption in the capital markets, difficulty staffing and managing impacted operations, and the recoverability of assets in the region.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's stock repurchase activity for the three months ended September 30, 2022:
Issuer
Purchases of Common Stock
In millions, except shares and price per share
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs (1)
(1) 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 at the reauthorization date. 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.
43
Item
4. MINE SAFETY DISCLOSURES
Not Applicable
Item 6. EXHIBITS
The following exhibits are being filed with this report:
Cover Page Interactive Data File (embedded within the Inline XBRL document)
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.