# WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP (WAB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/943452/000162828024004774/wab-20231231.htm
Accession: 0001628280-24-004774
Filing date: 2024-02-14
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WAB/
All MD&A years: /company/WAB/mda/
Previous year: /company/WAB/mda/fy2022/ (FY 2022)
Next year: /company/WAB/mda/fy2024/ (FY 2024)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Wabtec is a global provider of value-added, technology-based locomotives, equipment, systems and services for the 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 2023, approximately 55% of the Company’s Net sales came from customers outside the U.S.

Wabtec’s long-term financial goals are to drive strong cash flow conversion, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, drive improved efficiencies across the business, and increase revenues through a focused growth strategy, including product innovation and new technologies, global and market expansion, aftermarket products and services, and strategic acquisitions. In addition, Management evaluates the Company’s current operational performance through measures such as safety, quality and on-time delivery.

The Company primarily serves the worldwide freight and transit rail industries. Our operating results are largely dependent on the level of activity, financial condition and capital spending plans of railroads and passenger transit agencies around the world, and transportation equipment manufacturers who serve those markets. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight carloads and passenger ridership; number of locomotives and railcars in operation; government spending on public transportation; and investment in new technologies. In general, trends such as urbanization and growth in developing markets, sustainability and environmental awareness, investment in technology solutions, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight rail and passenger transit.

The Company monitors a variety of factors and statistics to gauge market activity. Freight rail markets around the world are driven primarily by overall economic conditions and activity, while Transit markets are driven primarily by government funding and passenger ridership. Changes in these market drivers can cause fluctuations in demand for Wabtec's products and services.

Business Update

During 2023, Wabtec continued to execute on our value creation framework by signing strategic orders for locomotive modernizations in North America that will span multiple years, new locomotives with a North American railroad, new locomotives in Brazil, long-term supply and maintenance agreement for brakes in India, and mining drive systems in high altitude applications. We announced our largest certified pre-owned order for 69 locomotives for a North American customer and won a contract to supply pantograph and Passenger Information Systems for up to 504 transit cars. Wabtec completed the strategic acquisition of L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers for the mining sector, and acquired the remaining 50% ownership interest in Lokomotiv Kurastyru Zauyty (LKZ), a locomotive manufacturing and assembly plant in Kazakhstan. We delivered our 500th locomotive in Kazakhstan for the CIS region and our 500th locomotive to Indian Railways, which was a significant milestone in our 10-year contract. Our senior unsecured debt was upgraded by Moody's, which reflects resiliency of the business, our balance sheet strength and strong cash generation. Additionally, Wabtec rebranded our Digital Electronics product line to Digital Intelligence, a change that more accurately reflects the complete digital products and services portfolio offered to our customers. The Digital Intelligence portfolio was also expanded with entry into the railcar telematics market.

During the first quarter of 2022, Wabtec announced Integration 2.0, a three-year strategic initiative to target incremental run rate synergies estimated to be between $75 million and $90 million in 2025. The scope of the review includes 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 of approximately $135 million to $165 million related to this initiative, of which approximately $118 million has been incurred through December 31, 2023. Total estimated initiative charges could change based on the specific programs approved or changes to the scope of the review. During the twelve months ended December 31, 2023, the Company incurred one-time restructuring charges for programs included in the initiative of approximately $49 million which were primarily for employee-related costs and asset write downs associated with site consolidations in Europe. Programs approved to date are expected to result in approximately 15 facility closures and impact approximately 1,100 employees. Charges related to Integration 2.0 of

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$46 million were recorded during the twelve months ended December 31, 2022, primarily for employee-related costs associated with site consolidations in Europe and costs related to the restructuring of North America distribution channels.

In addition to Integration 2.0, Wabtec is focused on exiting various low margin product offerings through Portfolio Optimization to improve profitability while reducing manufacturing complexity. Wabtec expects to incur approximately $85 million in net exit charges related to Portfolio Optimization, which will be predominately non-cash asset write downs. Wabtec recorded charges of approximately $28 million in the fourth quarter of 2023 for asset write downs related to Portfolio Optimization.

Future macroeconomic volatility, supply chain disruptions and labor availability could cause component and raw material shortages resulting in an adverse effect on the timing of the Company’s revenue and cash flows. Additionally, broad-based inflation, metals, energy and other commodity costs, transportation and logistics costs, labor costs, and foreign currency exchange rate fluctuations all continue to impact our results. The Company utilizes various mitigating actions intended to lessen the impact of macroeconomic volatility. 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 through Integration 2.0.

A portion of our workers are represented by labor unions. The United Electrical, Radio and Machine Workers of America (UE), Locals 506 and 618 collective bargaining agreement, covering approximately 1,400 locomotive manufacturing workers in Erie, Pennsylvania, expired on June 9, 2023. Negotiations with UE officially began on April 27, 2023 and an agreement between the Company and the UE was not reached before the contract expired. On June 22, 2023, the UE voted against ratification of the Company's proposed agreement and authorized a strike. The Company and the UE subsequently reached an agreement that was ratified by the UE on August 31, 2023, ending the labor strike. The Company continuously monitors its labor activity.

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. 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, 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, operations or financial results. The Company maintains cyber insurance, subject to certain deductibles and policy limitations typical for its size and industry.

ACQUISITIONS

During the fourth quarter of 2023, the Company purchased the remaining ownership shares of LKZ, a locomotive manufacturing and assembly company located in Kazakhstan for $111 million, at which time it became a wholly owned subsidiary of the Company. Prior to this purchase, Wabtec owned 50% of LKZ as a joint venture partner and accounted for its interest as an equity method investment. During the second quarter of 2023, the Company acquired L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers for the mining sector, for a purchase price of approximately $245 million.

During 2022, the Company made three strategic acquisitions in the Freight Segment for a combined purchase price of $89 million. Two of the acquisitions are reported in the Digital Intelligence product line and one is reported in the Services product line. Each of the acquisitions in 2022 are individually and collectively immaterial. On March 31, 2021, the Company acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment. The Company also made acquisitions during 2021 not listed above which are individually and collectively immaterial. For additional information related to these acquisitions refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report.

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RESULTS OF OPERATIONS

Consolidated Results

2023 COMPARED TO 2022

The following table shows our Consolidated Statements of Operations for the years indicated.

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2023","","2022"],["Net sales:"],["Sales of goods","","$","7,647","","","$","6,459"],["Sales of services","","2,030","","","1,903"],["Total net sales","","9,677","","","8,362"],["Cost of sales:"],["Cost of goods","","(5,581)","","","(4,791)"],["Cost of services","","(1,152)","","","(1,031)"],["Total cost of sales","","(6,733)","","","(5,822)"],["Gross profit","","2,944","","","2,540"],["Operating expenses:"],["Selling, general and administrative expenses","","(1,139)","","","(1,029)"],["Engineering expenses","","(218)","","","(209)"],["Amortization expense","","(321)","","","(291)"],["Total operating expenses","","(1,678)","","","(1,529)"],["Income from operations","","1,266","","","1,011"],["Other income and expenses:"],["Interest expense, net","","(218)","","","(186)"],["Other income, net","","44","","","29"],["Income before income taxes","","1,092","","","854"],["Income tax expense","","(267)","","","(213)"],["Net income","","825","","","641"],["Less: Net income attributable to noncontrolling interest","","(10)","","","(8)"],["Net income attributable to Wabtec shareholders","","$","815","","","$","633"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales in 2023 from 2022:

[[GREPCENT_TABLE]]
[["In millions","","Freight Segment","","Transit Segment","","Total"],["2022 Net Sales","","$","6,012","","","$","2,350","","","$","8,362"],["Acquisitions","","109","","","\u2014","","","109"],["Foreign Exchange","","(23)","","","25","","","2"],["Organic","","864","","","340","","","1,204"],["2023 Net Sales","","$","6,962","","","$","2,715","","","$","9,677"]]
[[/GREPCENT_TABLE]]

The following discussion compares our results for the year ended December 31, 2023 to the year ended December 31, 2022. The discussion comparing our results for the year ended December 31, 2022 to the year ended December 31, 2021 is included within Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 15, 2023.

Net sales

Net sales for the year ended December 31, 2023 increased by $1.32 billion, or 15.7%, to $9.68 billion compared to the same period in 2022. Organic sales increased $1.20 billion which was attributable to both the Freight and Transit Segments. Freight Segment organic sales increased by $864 million primarily driven by Services sales from higher parts sales and higher deliveries of locomotive modernizations and overhauls, Equipment sales from higher North American and international locomotive sales and increased mining sales, and Components sales due to a higher railcar build and growth in industrial end-markets. Sales from acquisitions contributed $109 million in the Freight Segment. Transit Segment organic sales increased by

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$340 million primarily as a result of increased demand for Aftermarket and Original Equipment Manufacturing products driven by increased infrastructure investment.

Cost of sales

Cost of sales for the year ended December 31, 2023 increased by $911 million, or 15.6%, to $6.73 billion compared to the same period in 2022. The increase is primarily due to the increase in Net sales. Cost of sales as a percentage of sales was 69.6% for the years ended December 31, 2023 and 2022. Cost of sales for the years ended December 31, 2023 and 2022 included $38 million and $43 million, respectively, of restructuring costs primarily for footprint rationalization and headcount actions, primarily related to Integration 2.0.

Operating expenses

Total operating expenses increased $149 million, or 9.7%, for the year ended December 31, 2023 compared to the same period in 2022. Operating expenses as a percentage of sales was 17.3% and 18.3% for the years ended December 31, 2023 and 2022, respectively. Selling, general and administrative expenses ("SG&A") increased $110 million for the year ended December 31, 2023 compared to the same period in 2022. The increase is primarily from costs incurred to support the higher sales volume, higher employee compensation and benefit costs, and higher professional services spend. Restructuring costs included in SG&A were $18 million and $9 million for the years ended December 31, 2023 and 2022, respectively, primarily for headcount actions and footprint rationalization programs, primarily related to Integration 2.0. Engineering expense increased $9 million primarily due to investments in new technology and Amortization expense increased $30 million, due to Portfolio Optimization costs and increased expense from acquisitions.

Interest expense, net

Interest expense, net, increased $32 million to $218 million for the year ended December 31, 2023 over the same period in 2022 primarily attributable to higher effective interest rates and higher average overall debt balances in the current year.

Other income, net

Other income, net, increased $15 million to $44 million for the year ended December 31, 2023 compared to the same period in 2022. As a result of the change in ownership interest and obtaining control of LKZ, Wabtec's previously held equity interest balance was remeasured to fair value, resulting in a gain of approximately $35 million recorded to Other income, net. The gain was partially offset by lower foreign exchange gains and lower equity income in the current year compared to the prior year.

Income taxes

The effective income tax rate was 24.5% and 25.0% for the years ended December 31, 2023 and 2022, respectively. The decrease in the effective tax rate in 2023 is primarily the result of earnings mix. See Note 11 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report for additional information.

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Freight Segment

The following table shows our Consolidated Statements of Operations for our Freight Segment for the periods indicated:

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2023","","2022","","Change","","% Change"],["Net sales:"],["Sales of goods","","$","4,945","","","$","4,125","","","$","820","","","19.9","%"],["Sales of services","","2,017","","","1,887","","","130","","","6.9","%"],["Total net sales","","6,962","","","6,012","","","950","","","15.8","%"],["Cost of sales:"],["Cost of goods","","(3,630)","","","(3,098)","","","532","","","17.2","%"],["Cost of services","","(1,142)","","","(1,018)","","","124","","","12.2","%"],["Total cost of sales","","(4,772)","","","(4,116)","","","656","","","15.9","%"],["Cost of Sales (% of Net sales)","","68.5","%","","68.5","%","","\u2014"],["Gross profit","","2,190","","","1,896","","","294","","","15.5","%"],["Operating expenses","","(1,119)","","","(1,032)","","","87","","","8.4","%"],["Income from operations ($)","","$","1,071","","","$","864","","","$","207","","","24.0","%"],["Income from operations (% of Net sales)","","15.4","%","","14.4","%","","1.0"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales for the Freight Segment in 2023 from 2022:

[[GREPCENT_TABLE]]
[["In millions"],["2022 Net Sales","","$","6,012"],["Acquisitions","","109"],["Foreign Exchange","","(23)"],["Changes in Sales by Product Line:"],["Services","","444"],["Equipment","","250"],["Components","","150"],["Digital Intelligence","","20"],["2023 Net Sales","","$","6,962"]]
[[/GREPCENT_TABLE]]

Net sales

Freight Segment organic sales increased by $864 million driven primarily by:

•Services sales from higher deliveries of locomotive modernizations and overhauls and higher parts sales

•Equipment sales from higher North America and international locomotive sales and increased mining sales

•Components sales from higher original equipment railcar build and increased market share for certain products due to product availability and increased demand for industrial products

Additionally, Freight Segment sales also benefited from our strategic acquisitions, primarily from L&M Radiator Inc., by $109 million.

Cost of sales

Freight Segment Cost of sales increased $656 million and Cost of sales as a percentage of sales remained consistent at 68.5%. The increase in Cost of sales was primarily driven by:

•Higher sales volume

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•Manufacturing inefficiencies primarily related to the strike at our Erie facility

•Higher next generation product development costs in Digital Intelligence and Equipment

Partially offset by:

•Favorable mix within the Freight Segment product lines

•Benefits from structured cost actions

Cost of sales for the years ended December 31, 2023 and 2022 included $13 million and $15 million, respectively, of restructuring costs, primarily related to Integration 2.0 and Portfolio Optimization costs.

Operating expenses

Operating expenses as a percentage of sales for the Freight Segment were 16.1% and 17.2% for the years ended December 31, 2023 and 2022, respectively. Freight Segment operating expenses increased by $87 million primarily driven by:

•Higher SG&A expenses of $56 million resulting from higher costs to support increased sales volume, higher employee compensation and benefit costs and incremental expense from acquisitions

•Higher amortization expense of $28 million, due to Portfolio Optimization costs and increased expense from acquisitions

Freight Operating expenses for the year ended December 31, 2023 includes $28 million of restructuring costs related to Integration 2.0 and Portfolio Optimization.

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Transit Segment

The following table shows our Consolidated Statements of Operations for our Transit Segment for the periods indicated:

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2023","","2022","","Change","","% Change"],["Net sales","","$","2,715","","","$","2,350","","","$","365","","","15.5","%"],["Cost of sales","","(1,961)","","","(1,706)","","","255","","","14.9","%"],["Cost of sales (% of Net sales)","","72.2","%","","72.6","%","","(0.4)"],["Gross profit","","754","","","644","","","110","","","17.1","%"],["Operating expenses","","(465)","","","(413)","","","52","","","12.6","%"],["Income from operations ($)","","$","289","","","$","231","","","$","58","","","25.1","%"],["Income from operations (% of net sales)","","10.7","%","","9.8","%","","0.9"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales for the Transit Segment in 2023 from 2022:

[[GREPCENT_TABLE]]
[["In millions"],["2022 Net Sales","","$","2,350"],["Foreign Exchange","","25"],["Changes in Sales by Product Line:"],["Original Equipment Manufacturing","","132"],["Aftermarket","","208"],["2023 Net Sales","","$","2,715"]]
[[/GREPCENT_TABLE]]

Net sales

Transit segment organic sales increased $340 million driven by strong Aftermarket and Original Equipment Manufacturing sales primarily as a result of increased demand for heating, ventilation and air conditioning (HVAC) and brake systems, increased infrastructure investment, and the easing of supply chain disruptions. Additionally, Transit sales in 2022 were unfavorably impacted by the previously disclosed cyber incident. Favorable changes in foreign exchange rates also increased sales by $25 million.

Cost of sales

Transit Segment Cost of sales increased by $255 million and Cost of sales as a percentage of sales decreased by 0.4 percentage points primarily due to higher sales volume partially offset by benefits from structured cost actions taken through prior years' restructuring and integration projects, including Integration 2.0.

Cost of sales for the years ended December 31, 2023 and 2022 included $25 million and $28 million, respectively, of restructuring costs, primarily related to Integration 2.0 for headcount actions and footprint rationalization in Europe.

Operating expenses

Operating expenses as a percentage of sales for the Transit Segment were 17.1% and 17.6% for the years ended December 31, 2023 and 2022, respectively. Transit Segment operating expenses increased by $52 million primarily driven by:

•Higher SG&A expenses of $44 million to support higher sales volume and higher employee compensation and benefit costs, partially offset by benefits from structured cost actions taken through prior years' restructuring and integration projects, including Integration 2.0

•An increase in engineering expense of $6 million due to investments in new technology

Transit Operating expenses for the years ended December 31, 2023 and 2022, includes $15 million and $9 million, respectively, of restructuring costs primarily related to Integration 2.0 for footprint rationalization and headcount actions in Europe.

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Liquidity and Capital Resources

Liquidity is provided by operating cash flows 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, as well as other short-term financing agreements with certain banks, for added flexibility as part of our liquidity management strategy. The following is a summary of selected cash flow information and other relevant data:

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2023","","2022"],["Cash provided by (used for):"],["Operating activities","","$","1,201","","","$","1,038"],["Investing activities","","$","(492)","","","$","(235)"],["Financing activities","","$","(633)","","","$","(708)"]]
[[/GREPCENT_TABLE]]

 Operating activities In 2023, cash provided by operating activities was $1,201 million, primarily from $1,298 million attributable to Net income and other changes in the related statements of income amounts. This was partially offset by $(97) million of net cash used from increases in receivables due to higher sales, increases in inventory and accounts payable to support higher sales and timing of payments for expenses and receipts from customer deposits.

In 2022, cash provided by operating activities was $1,038 million, primarily from $1,147 million attributable to Net income and other changes in the related statements of income amounts, partially offset by $(109) million of net cash used from changes in working capital accounts to support increased demand.

Investing activities In 2023 and 2022, cash used for investing activities was $(492) million and $(235) million, respectively. During 2023, Wabtec acquired L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers, for net cash of approximately $(229) million and the remaining ownership shares of LKZ for net cash of approximately $(81) million. During 2023, Wabtec also used $(186) million for additions to property, plant and equipment for investments in our facilities and manufacturing processes. During 2022, Wabtec made three strategic acquisitions for a combined purchase price of $(89) million and used $(149) million for additions to property, plant and equipment.

Financing activities In 2023, cash used for financing activities was $(633) million, which included $42 million from net changes in debt, $(409) million of stock repurchases, $(123) million of dividend payments, $(112) million of contingent consideration payments related to the GE Transportation acquisition, $(17) million of distributions to noncontrolling interest, and $(16) million of payments for income tax withholding on share-based compensation. In 2022, cash used for financing activities was $(708) million which included $(30) million from net changes in debt, $(473) million of stock repurchases, $(111) million of dividend payments, and $(101) million of contingent consideration payments related to the GE Transportation acquisition.

During the third quarter of 2023, the Company borrowed the full $250 million of availability under the Delayed Draw Term Loan and subsequently utilized the proceeds to redeem the outstanding 2023 Notes. Beginning September 15, 2023, the effective interest rates for the 2024 Notes and the 2028 Notes were each reduced by 0.25% due to a favorable change in Wabtec's corporate credit rating and the rating of the aforementioned notes. Additionally, during 2023, the Company has also entered into $250 million of interest rate contracts to manage its net exposure to interest rate changes and its overall cost of borrowing. These contracts may be utilized for future debt financing.

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.

The Company borrows and repays against the revolving credit facility for added flexibility in liquidity to manage cash during the operating cycle. The proceeds from borrowing and the repayments are shown within the "Proceeds from debt, net of issuance costs" and "Payments of debt" lines, respectively, presented in the Consolidated Statements of Cash Flows. Additional information with respect to credit facilities and long-term debt is included in Note 9 of "Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report.

As of December 31, 2023, the Company held approximately $620 million of cash, cash equivalents, and restricted cash, of which approximately $190 million was held within the United States and approximately $430 million was held outside of the United States, primarily in India, Europe, Brazil, and Kazakhstan. 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

35

tax impacts. As of December 31, 2023, approximately $5 million of the Company's $620 million cash balance was classified as restricted cash.

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.

Revolving Receivables Program

The Company utilizes a revolving receivables facility to sell up to $350 million of certain receivables through our bankruptcy-remote subsidiary 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 could result in our gross receivables sold being higher or lower than customer collections remitted to the financial institution for any applicable period. Net cash (remitted)/received from the revolving receivables program was $(60) million and $60 million for the years ended December 31, 2023 and 2022, respectively. Additional information with respect to the Revolving Receivables Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 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, does not receive an economic benefit from the financial institutions, and no assets are pledged under the arrangements. 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. Additional information with respect to the Supply Chain Financing Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this report.

Guarantor Summarized Financial Information

The obligations under the US Notes issued by Westinghouse Air Brake Technologies Corporation (the "Parent Company") have been fully and unconditionally guaranteed by certain of the Parent Company's U.S. subsidiaries ("Guarantor 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 Parent Company.

The following tables present summarized financial information of the Parent Company and the guarantor subsidiaries on a combined basis. The combined summarized financial information eliminates intercompany balances and transactions among the Parent Company 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

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Parent Company and Guarantor Subsidiaries"],["In millions","","Year Ended December 31, 2023"],["Net sales","","$","5,742"],["Gross profit","","$","1,454"],["Net income attributable to Wabtec shareholders","","$","481"]]
[[/GREPCENT_TABLE]]

36

Summarized Balance Sheet

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Parent Company and Guarantor Subsidiaries"],["In millions","","December 31, 2023","","December 31, 2022"],["Current assets","","$","1,513","","","$","1,328"],["Noncurrent assets","","$","2,196","","","$","2,384"],["Current liabilities","","$","2,443","","","$","1,881"],["Long-term debt","","$","2,739","","","$","3,209"],["Other non-current liabilities","","$","662","","","$","551"]]
[[/GREPCENT_TABLE]]

The following is a description of the transactions between the combined Parent Company and guarantor subsidiaries with non-guarantor subsidiaries.

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Parent Company and Guarantor Subsidiaries"],["In millions","","Year Ended December 31, 2023"],["Net sales to non-guarantor subsidiaries","","$","956"],["Purchases from non-guarantor subsidiaries","","$","1,571"],["","","Unaudited"],["","","Parent Company and Guarantor Subsidiaries"],["In millions","","December 31, 2023"],["Amount due to non-guarantor subsidiaries","","$","10,208"]]
[[/GREPCENT_TABLE]]

Summarized Financial Information—Euro Notes

The obligations under Wabtec Netherlands’ Euro Notes are fully and unconditionally guaranteed by the Parent Company. Wabtec Netherlands is a wholly-owned, indirect subsidiary of the Parent Company. Wabtec Netherlands is a holding company and does not have any independent operations. Its assets consist of its investments in subsidiaries, which are separate and distinct legal entities that are not guarantors of the Euro Notes and have no obligations to pay amounts due under Wabtec Netherlands’ obligations.

The following tables present summarized financial information of Wabtec Netherlands, as the Issuer of the Euro Notes, and the Parent 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 Parent Company as well as all equity in earnings from and investments in any subsidiary of the Parent 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 Company guarantor.

Summarized Statement of Income

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","Year Ended December 31, 2023"],["Net sales","","$","562"],["Gross profit","","$","104"],["Net loss attributable to Wabtec shareholders","","$","(370)"]]
[[/GREPCENT_TABLE]]

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Summarized Balance Sheet

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","December 31, 2023","","December 31, 2022"],["Current assets","","$","493","","","$","264"],["Noncurrent assets","","$","651","","","$","770"],["Current liabilities","","$","1,272","","","$","733"],["Long-term debt","","$","3,287","","","$","3,740"],["Other non-current liabilities","","$","84","","","$","128"]]
[[/GREPCENT_TABLE]]

The following is a description of the transactions between the combined Wabtec Netherlands, as the Issuer of the Euro Notes, and the Parent Company, as the parent Guarantor, with the subsidiaries of Westinghouse Air Brake Technologies Corp., other than Wabtec Netherlands, none of which are guarantors of the Euro Notes.

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","Year Ended December 31, 2023"],["Net sales to non-guarantor subsidiaries","","$","38"],["Purchases from non-guarantor subsidiaries","","153"],["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","December 31, 2023"],["Amount due to non-guarantor subsidiaries","","$","11,112"]]
[[/GREPCENT_TABLE]]

Contractual Obligations and Off-Balance Sheet Arrangements

The Company is obligated to make future payments under various contracts such as purchase, debt and lease agreements and has certain contingent commitments. The Company has grouped these contractual obligations and off-balance sheet arrangements into operating activities, financing activities, and investing activities in the same manner as they are classified in the Statement of Consolidated Cash Flows to provide a better understanding of the nature of the obligations and arrangements and to provide a basis for comparison to historical information. The table below provides a summary of contractual obligations and off-balance sheet arrangements as of December 31, 2023:

[[GREPCENT_TABLE]]
[["In millions","","Total","","2024","","2025-26","","2027-28","","2029+"],["Operating activities:"],["Purchase obligations (1)","","$","157","","","$","137","","","$","19","","","$","1","","","$","\u2014"],["Operating leases (2)","","341","","61","","102","","64","","114"],["Pension and postretirement benefit payments (3)","","218","","","20","","","40","","","43","","","115"],["Interest payments (4)","","501","","","140","","","225","","","136","","","\u2014"],["Financing activities:"],["Long-term debt","","4,084","","","781","","","1,250","","","2,053","","","\u2014"],["Dividends to shareholders (5)","","142","","","142","","","\u2014","","","\u2014","","","\u2014"],["Contingent consideration (6)","","42","","","42","","","\u2014","","","\u2014","","","\u2014"],["Total","","$","5,485","","","$","1,323","","","$","1,636","","","$","2,297","","","$","229"]]
[[/GREPCENT_TABLE]]

(1)Purchase obligations represent non-cancelable contractual obligations at December 31, 2023. In addition, the Company had approximately $1.3 billion of open purchase orders for which the related goods or services had not been received. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

(2)Operating leases represent multi-year obligations for rental of facilities and equipment.

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(3)Pension and postretirement benefit payments includes expected payments to participants out of plan assets and corporate assets. The benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets and rate of compensation increases. The Company expects to contribute $2 million to pension plan investments in 2024.

(4)Interest payments on the Senior Notes and the amount borrowed under the Delayed Draw Term Loan as of December 31, 2023 are based on interest rates in effect as of December 31, 2023 and are calculated on debt with maturities that extend to 2028.

(5)Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $142 million beginning in 2024.

(6)Contingent consideration represents the total remaining payable to General Electric (GE) resulting from the 2019 acquisition of GE Transportation. The timing of the cash payments to GE is directly related to the future timing of tax benefits received by the Company and could change.

The above table does not reflect uncertain tax positions of $40 million, the timing of which are uncertain. Refer to Note 11 of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report for additional information on uncertain tax positions. Additionally, the Company arranges for certain types of bank guarantees and letters of credit, such as performance bonds, bid bonds and financial guarantees, that are issued by certain banks and insurance companies to support customer contracts. At December 31, 2023, the total value of these bank guarantees and letters of credit were $855 million and expire on various dates through 2034. Amounts include interest payments based on contractual terms and the Company’s current interest rate.

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 being reduced, and/or economic conditions affecting the ability of our customers to pay timely for goods and services delivered;

•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 difficulty in obtaining debt or equity financing;

•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 or ESG strategy; or

•changes in the ESG topics that have the highest relative priority for Wabtec's external stakeholders;

Operating factors

•supply disruptions;

•technical difficulties;

•changes in operating conditions and costs;

•increases in raw material costs;

•successful introduction of new products;

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•performance under material long-term contracts;

•labor availability and relations;

•the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental matters, asbestos-related matters, pension liabilities, warranties, product liabilities, 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, conflicts, global military action, and acts of terrorism;

•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;

Natural hazards / health crises

•impacts of climate change, including evolving climate change policy;

•disruptive natural hazards, including earthquakes, fires, floods, tornadoes, hurricanes or weather conditions;

•epidemics, pandemics, or similar public health crises;

•deterioration of general economic conditions as a result of natural hazards or health crises;

•shutdown of one or more of our operating facilities as a result of natural hazards and health crises; or

•supply chain and sourcing disruptions as a result of natural hazards and health crises;

Statements in this Form 10-K apply only as of the date on which such statements are made, and except as required by law, 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.

Critical Accounting Estimates

The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include the accounting for allowance for doubtful accounts, inventories, business combinations, goodwill and indefinite-lived intangible assets, warranty reserves, income taxes, and revenue recognition. Management uses historical experience and all available information to make these judgments and estimates, and actual results may differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company.

A summary of the Company’s significant accounting policies is included in Note 2 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

Accounts Receivable and Allowance for Doubtful Accounts:

Description The Company provides an allowance for doubtful accounts to cover anticipated losses on uncollectible accounts receivable.

Judgments and Uncertainties  The allowance for doubtful accounts receivable reflects our best estimate of expected losses inherent in our receivable portfolio determined on the basis of historical experience, relevant credit forecast information, changes to customer's solvency and other currently available evidence.

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Effect if Actual Results Differ From Assumptions  If our estimates regarding the collectability of troubled accounts, and/or our actual losses within our receivable portfolio exceed our estimated losses, we may be exposed to the expense of increasing our allowance for doubtful accounts and loss of cash flows.

Inventories:

Description Inventories are stated at the lower of cost or net realizable value and are reviewed to ensure that an adequate provision is recognized for excess, slow moving and obsolete inventories, and net realizable value reserves.

Judgments and Uncertainties Cost is determined primarily using the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The Company compares inventory components to prior year sales history, current backlog and anticipated future requirements. To the extent that inventory parts exceed estimated usage and demand, a reserve is recognized to reduce the carrying value of inventory. Also, specific reserves are established for known inventory obsolescence, a decline in market value, or loss of a customer with specific inventory.

Effect if Actual Results Differ From Assumptions If the market value or demand for our products were to decrease due to changing market conditions, the Company could be at risk of incurring write-downs to adjust inventory value to a net realizable value lower than stated cost. If our estimates regarding sales and backlog requirements are inaccurate, we may be exposed to the expense of increasing our reserves for slow moving and obsolete inventory.

Business Combinations:

Description The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations, which requires the purchase price of the acquired business to be allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. The amount of purchase price which is in excess of the fair values of assets acquired and liabilities assumed is recognized as goodwill.

Judgments and Uncertainties Discounted cash flow models are used to estimate the fair values of acquired contract backlog, customer relationships, intellectual property intangibles and trade names. The significant assumptions used to estimate the value of the intangible assets include revenue growth rates, projected profit margins, discount rates, royalty rates, customer attrition rates, revenue obsolescence rates and market participant profit margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions.

Effect if Actual Results Differ From Assumptions Different assumptions may result in materially different values for assets acquired and liabilities assumed, which may impact the Company's financial position and future results of operations, including potential future impairment charges.

Goodwill and Indefinite-Lived Intangible Assets:

Description Goodwill represents the excess of cost over the fair value of the net assets acquired in a business combination. Indefinite-lived intangible assets primarily represent certain trade names acquired in a business combination that were determined to have indefinite useful lives. Goodwill and indefinite-lived intangibles are required to be tested for impairment at least annually. The Company performs its annual impairment tests during the fourth quarter and more frequently when indicators of impairment are present. The Company reviews goodwill for impairment at the reporting unit level. The Company has identified three reporting units for purposes of testing goodwill for impairment. Two reporting units exist within the Freight segment and the Transit segment is also a reporting unit. The evaluation of impairment involves comparing the current fair value of the business to the recorded value including goodwill.

Judgments and Uncertainties A number of significant assumptions and estimates are involved in the application of the impairment test, including the identification of macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. We also consider Wabtec-specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such amount.

Effect if Actual Results Differ From Assumptions Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill and indefinite lived intangible assets. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.

Warranty Reserves:

Description The Company provides warranty reserves to cover expected costs from repairing or replacing products with durability, quality or workmanship issues occurring during established warranty periods.

Judgments and Uncertainties In general, reserves are provided for as a percentage of sales, based on historical experience. In addition, specific reserves are established for known warranty issues and their estimable losses.

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Effect if Actual Results Differ From Assumptions If actual results are not consistent with the assumptions and judgments used to calculate our warranty liability, the Company may be exposed to the expense of increasing our reserves for warranty expense.

Income Taxes:

Description Wabtec records an estimated liability for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates in accordance with ASC 740-10 Accounting for Income Taxes and Accounting for Uncertainty in Income Taxes.

Judgments and Uncertainties The estimate of our tax obligations are uncertain because management must use judgment to estimate the exposures associated with our various filing positions, as well as realization of our deferred tax assets. ASC 740-10 establishes a recognition and measurement threshold to determine the amount of tax benefit that should be recognized related to uncertain tax positions.

Effect if Actual Results Differ From Assumptions Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which new information changes the expected outcome of an uncertain tax position. A deferred tax valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Revenue Recognition:

Description Revenue is recognized in accordance with ASC 606 Revenue from Contracts with Customers. The Company recognizes a portion of its revenues on 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. 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 method used for these agreements recognizes revenue based on our efforts to satisfy the performance obligation and includes costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. The Company may also use the output method which recognizes revenue based on direct measurements of the value transferred to the customer.

Judgments and Uncertainties Accounting for long-term customer agreements involves a judgmental process of estimating the total sales and costs for each contract, which results in the development of estimated profit margin percentages. 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. Factors that influence these estimates include inflationary trends, foreign exchange rates, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Generally, pricing is defined in our contracts but may include an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration that the Company typically has include volume discounts, prompt payment discounts, price escalation clauses, liquidating damages, and performance bonuses.

Effect if Actual Results Differ From Assumptions Should market conditions and customer demands dictate changes to our standard shipping terms, the Company may be impacted by longer than typical revenue recognition cycles. The development of expected contract costs and contract profit margin percentages involves procedures and personnel in all areas that provide financial or production information on the status of contracts. Due to the significance of judgments in the estimation process, it is likely that materially different revenue and cost amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, inflation or deflation, foreign currency exchange rates, supplier performance, or other circumstances may adversely or positively affect financial performance in future periods. Some of our contracts are expected to be completed in a loss position. Provisions are made currently for estimated losses on uncompleted contracts and are updated as necessary.