# WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP (WAB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/943452/000162828022002997/wab-20211231.htm
Accession: 0001628280-22-002997
Filing date: 2022-02-17
Report date: 2021-12-31
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/
Next year: /company/WAB/mda/fy2022/ (FY 2022)

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

OVERVIEW

Wabtec is one of the world’s largest providers of locomotives, value-added, technology-based equipment, systems and services for the global freight rail and passenger transit industries. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars and buses around the world. Our 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 2021, approximately 60% 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 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. As such, our operating results are largely dependent on the level of activity, financial condition and capital spending plans of railroads and passenger transit agencies around the world, and transportation equipment manufacturers who serve those markets. Many factors influence these industries, including general economic conditions; traffic volumes, as measured by freight carloads and passenger ridership; government spending on public transportation; and investment in new technologies. In general, trends such as increasing urbanization, a focus on sustainability and environmental awareness, an aging equipment fleet, and growth in global trade are expected to drive continued investment in freight and transit rail.

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

Business Update

The COVID-19 pandemic has continued to impact our sales channels, supply chain, manufacturing operations, workforce and other key aspects of our operations. The Company continues to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities; however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, impact of variants of the disease, actions that may be taken by governmental authorities and private industry, including preventing or curtailing the operations of our plants, the potential impact on global economic activity, global supply chain operations, our employees, our customers, suppliers and end-markets and other consequences that could negatively impact our business. We also face the possibility that government policies may become more restrictive especially if COVID-19 transmission rates increase in certain areas. As a result of these numerous uncertainties, we are unable to specifically predict the extent and length of time the COVID-19 pandemic will negatively impact our business.

The COVID-19 pandemic has increased the uncertainty around global economic and market conditions, which impacts our sales and operations. To the extent that these factors cause, or exacerbate, instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected, and the materially adverse impacts that we have experienced as a result of the COVID-19 pandemic could continue or worsen. In addition, we face risks associated with our growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to address changes in market conditions and risks.

Although the U.S. and other international governments deemed rail transportation as “critical infrastructure” providing essential services during the COVID-19 pandemic, the COVID-19 pandemic had a materially adverse impact on our operations and business results for the years ended December 31, 2021 and 2020, which is 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 metals and commodities costs, transportation and logistics costs and labor costs have all resulted from the COVID-19 pandemic. The Company has implemented various mitigating actions to lessen the impact of supply chain disruptions caused by the COVID-19 pandemic. These actions include price escalations in long-term contracts, implementing price surcharges, driving operational efficiencies through various cost mitigation efforts and discretionary spend management,

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strategic sourcing alignments, and accelerating integration synergies where possible. The Company expects to continue to realize these increased costs over the next few quarters.

Uncertainty around general global economic and market conditions, exacerbated by the COVID-19 pandemic, will have an impact on our sales and operations in 2022 and beyond. To the extent that these factors cause instability of capital markets, supply chain disruptions including shortages of raw materials or component parts, labor availability, longer sales cycles, deferral or delay of customer orders, or an inability to market our products effectively, our business and results of operations could be materially adversely affected.

Cybersecurity Exposure

During the third quarter 2021, one of our vendors publicly disclosed vulnerabilities in one of its operating systems that is used in a range of products across the rail sector and other industries, including in certain Wabtec products. In response, Wabtec reviewed its digital onboard locomotive products and locomotive control systems to determine which products may be affected and the potential impact to Wabtec, our customers and other relevant parties. To date, we are unaware of any exploitation of these vulnerabilities; however, we are working closely with our vendor to appropriately address potentially impacted products. Additionally, we have communicated with potentially affected customers and discussed mitigation strategies.

ACQUISITIONS

Wabtec acquired Nordco, a leading North American supplier of new, rebuilt and used maintenance of way equipment, on March 31, 2021, and GE Transportation, a former business unit of GE, on February 25, 2019. For additional information related to these acquisitions refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report.

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RESULTS OF OPERATIONS

Consolidated Results

2021 COMPARED TO 2020

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

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2021","","2020"],["Net sales:"],["Sales of goods","","$","6,205","","","$","6,233"],["Sales of services","","1,617","","","1,323"],["Total net sales","","7,822","","","7,556"],["Cost of sales:"],["Cost of goods","","(4,545)","","","(4,629)"],["Cost of services","","(908)","","","(790)"],["Total cost of sales","","(5,453)","","","(5,419)"],["Gross profit","","2,369","","","2,137"],["Operating expenses:"],["Selling, general and administrative expenses","","(1,030)","","","(948)"],["Engineering expenses","","(176)","","","(162)"],["Amortization expense","","(287)","","","(282)"],["Total operating expenses","","(1,493)","","","(1,392)"],["Income from operations","","876","","","745"],["Other income and expenses:"],["Interest expense, net","","(177)","","","(199)"],["Other income, net","","38","","","11"],["Income before income taxes","","737","","","557"],["Income tax expense","","(172)","","","(145)"],["Net income","","565","","","412"],["Less: Net (income) loss attributable to noncontrolling interest","","(7)","","","2"],["Net income attributable to Wabtec shareholders","","$","558","","","$","414"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales in 2021 from 2020:

[[GREPCENT_TABLE]]
[["In millions","","Freight Segment","","Transit Segment","","Total"],["2020 Net Sales","","$","5,082","","","$","2,474","","","$","7,556"],["Acquisitions","","138","","","\u2014","","","138"],["Foreign Exchange","","23","","","111","","","134"],["Organic","","(4)","","","(2)","","","(6)"],["2021 Net Sales","","$","5,239","","","$","2,583","","","$","7,822"]]
[[/GREPCENT_TABLE]]

The following discussion compares our results for the year ended December 31, 2021 to the year ended December 31, 2020. The discussion comparing our results for the year ended December 31, 2020 to the year ended December 31, 2019 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, 2020, filed with the SEC on February 19, 2021.

Net sales

Net sales for the year ended December 31, 2021 increased by $266 million, or 3.5%, to $7.82 billion compared to the same period in 2020. Organic sales decreased $6 million which is primarily attributable to a net organic decrease of $4 million in the Freight Segment. Services sales increased from higher locomotive modernizations and overhauls and a decrease in locomotive parkings while Components sales increased due to a higher railcar build and lower railcar parkings. These increases were offset by lower Equipment sales due to lower locomotive sales, particularly in North America and Egypt, and lower Digital Electronics sales primarily due to chip shortages caused by supply chain disruptions. These decreases in Freight were

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offset by an increase in sales from acquisitions, which contributed $138 million, and favorable changes in foreign exchange rates increased sales by $134 million, primarily in the Transit segment.

Cost of sales

Cost of sales for the year ended December 31, 2021 increased by $34 million, or 0.6%, to $5.45 billion compared to the same period in 2020. The increase is primarily due to the increase in sales, increased metals, transportation and labor costs and higher restructuring costs. Cost of sales as a percentage of sales was 69.7% and 71.7% for the years ended December 31, 2021 and 2020, respectively, representing a 2.0 percentage point decrease. The decrease as a percentage of sales is primarily due to favorable product mix, improved productivity, synergy savings and the structural cost actions taken in the prior year, partially offset by the increase in the costs described above. Cost of sales for the year ended December 31, 2021 included $53 million of restructuring costs, primarily for footprint rationalization and headcount actions in Europe. Cost of sales for the year ended December 31, 2020 included $45 million of restructuring costs, primarily for footprint rationalization and related headcount actions as part of the acquisition of GE Transportation and in response to the COVID-19 pandemic.

Operating expenses

Total operating expenses increased $101 million, or 7.3%, for the year ended December 31, 2021 compared to the same period in 2020. Operating expenses as a percentage of sales was 19.1% and 18.4% for the year ended December 31, 2021 and 2020, respectively. Selling, general and administrative expenses ("SG&A") increased $82 million for the year ended December 31, 2021 compared to the same period in 2020. The increase is primarily due to higher employee compensation and benefit costs, costs incurred to support the higher sales volume and incremental expense from the acquisition of Nordco, partially offset by a decrease in restructuring and transaction costs. Restructuring and transaction costs included in SG&A were $25 million and $71 million for the year ended December 31, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization programs. Engineering expense increased $14 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco. Amortization expense increased $5 million, due to the acquisition of Nordco.

Interest expense, net

Interest expense, net, decreased $22 million for the year ended December 31, 2021 over the same period in 2020 attributable to lower overall average debt balances and lower interest rates.

Other income, net

Other income, net, was $38 million of income in 2021 compared to $11 million of income in the same period of 2020. The increase is primarily attributable to foreign exchange gains in the current year compared to losses in the prior year as well as higher equity income in the current year.

Income taxes

The effective income tax rate was 23.2% and 26.0% in 2021 and 2020, respectively. The change in effective tax rate in 2021 is primarily the result of filing amended federal and state income tax returns in 2021. The Company amended the 2019 federal tax return to incorporate changes in tax regulations which generated a net operating loss that was carried back to tax years 2014 to 2016, which were at a higher federal tax rate. See Note 11 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 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:

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2021","","2020"],["Net sales:"],["Sales of goods","","$","3,646","","","$","3,790"],["Sales of services","","1,593","","","1,292"],["Total net sales","","5,239","","","5,082"],["Cost of sales:"],["Cost of goods","","(2,682)","","","(2,829)"],["Cost of services","","(890)","","","(765)"],["Total cost of sales","","(3,572)","","","(3,594)"],["Gross profit","","1,667","","","1,488"],["Operating expenses","","(950)","","","(904)"],["Income from operations ($)","","$","717","","","$","584"],["Income from operations (%)","","13.7","%","","11.5","%"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales for the Freight Segment in 2021 from 2020:

[[GREPCENT_TABLE]]
[["In millions"],["2020 Net Sales","","$","5,082"],["Acquisitions","","138"],["Foreign Exchange","","23"],["Changes in Sales by Product Line:"],["Equipment","","(229)"],["Components","","31"],["Digital Electronics","","(33)"],["Services","","227"],["2021 Net Sales","","$","5,239"]]
[[/GREPCENT_TABLE]]

Net sales

Freight Segment sales increased by $157 million, or 3.1%, to $5.24 billion, compared to the same period in 2020, however, net organic sales decreased $4 million. Services sales increased from higher locomotive modernizations and overhauls and a decrease in locomotive parkings while Components sales increased due to a higher railcar build and lower railcar parkings. These increases were offset by lower Equipment Sales due to lower locomotive sales, particularly in North America and Egypt, and lower Digital Electronics sales primarily due to chip shortages caused by supply chain disruptions that have caused order delays but have not resulted in order cancellations. The organic sales decrease was more than offset by sales from acquisitions of $138 million and the effects of favorable foreign exchange rates of $23 million.

Cost of sales

Freight Segment cost of sales decreased by $22 million, to $3.57 billion, compared to the same period in 2020. The decrease is primarily due to favorable product mix, productivity and synergies and lower restructuring costs partially offset by increased metals, transportation and labor costs. Cost of sales as a percentage of sales was 68.2% and 70.7% for the years ended December 31, 2021 and 2020, respectively, representing a 2.5 percentage point decrease which also benefited from improved absorption of fixed costs. Cost of sales for the year ended December 31, 2021 includes $8 million of restructuring and transaction costs, primarily for amortization of the inventory step-up recorded in purchase accounting for the acquisition of Nordco and headcount actions as part of the ongoing integration of GE Transportation. Cost of sales for the year ended December 31, 2020 included $30 million of restructuring costs, primarily for costs for footprint rationalization and related headcount actions as part of the integration of GE Transportation and in response to the COVID-19 pandemic.

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Operating expenses

Freight Segment operating expenses increased $46 million, or 5.1%, for the year ended December 31, 2021 compared to the same period in 2020. SG&A increased $31 million for the year ended December 31, 2021 compared to the same period in 2020. The increase is primarily due to higher employee compensation and benefit costs and incremental expense from the acquisition of Nordco, partially offset by a decrease in restructuring and transaction costs. Restructuring and transaction costs included in SG&A were $1 million and $46 million for the years ended December 31, 2021 and 2020, respectively, and were primarily for headcount actions and footprint rationalization as part of the integration of GE Transportation. Engineering expense increased $10 million primarily due to investments in new technology and incremental expense from the acquisition of Nordco. Amortization expense increased $5 million due to the acquisition of Nordco.

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Transit Segment

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

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2021","","2020"],["Net sales","","$","2,583","","","$","2,474"],["Cost of sales","","(1,881)","","","(1,825)"],["Gross profit","","702","","","649"],["Operating expenses","","(464)","","","(419)"],["Income from operations ($)","","$","238","","","$","230"],["Income from operations (%)","","9.2","%","","9.3","%"]]
[[/GREPCENT_TABLE]]

The following table shows the major components of the change in net sales for the Transit Segment in 2021 from 2020:

[[GREPCENT_TABLE]]
[["In millions"],["2020 Net Sales","","$","2,474"],["Foreign Exchange","","111"],["Changes in Sales by Product Line:"],["Original Equipment Manufacturing","","6"],["Aftermarket","","(8)"],["2021 Net Sales","","$","2,583"]]
[[/GREPCENT_TABLE]]

Net sales

Transit Segment sales for the year ended December 31, 2021 increased by $109 million, or 4.4%, to $2.58 billion compared to the same period in 2020, with foreign exchange rates being the primary driver of the increase. Transit segment organic sales decreased $2 million due to supply chain issues and disruptions caused by the COVID-19 pandemic.

Cost of sales

Transit Segment cost of sales for the year ended December 31, 2021 increased by $56 million, or 3.1%, to $1.88 billion compared to the same period in 2020. The increase is primarily due to higher restructuring costs, increased metals, transportation and labor costs and the effect of foreign exchange rates. Cost of sales as a percentage of sales was 72.8% and 73.8% for the years ended December 31, 2021 and 2020, respectively, representing a 1.0 percentage point decrease which also benefited from improved operational efficiency and the impact that the COVID-19 pandemic had on margins in 2020. Cost of sales for the years ended December 31, 2021 and 2020 included $45 million and $14 million of restructuring costs, respectively, primarily for footprint rationalization in Europe.

Operating expenses

Transit Segment operating expenses increased $45 million, or 10.7%, in 2021 compared to the same period in 2020. SG&A increased $41 million for the year ended December 31, 2021 compared to the same period in 2020. The increase is primarily due to higher employee compensation and benefit costs and the effect of foreign exchange rates. Restructuring and transaction costs included within SG&A were $14 million for both years ended December 31, 2021 and 2020 and were primarily for headcount actions and footprint rationalization in Europe. Engineering expense increased $4 million due to investments in new technology, and amortization expense remained consistent year over year.

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Liquidity and Capital Resources

Liquidity is provided 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:

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["In millions","","2021","","2020"],["Cash provided by (used for):"],["Operating activities","","$","1,073","","","$","784"],["Investing activities","","$","(540)","","","$","(155)"],["Financing activities","","$","(653)","","","$","(619)"]]
[[/GREPCENT_TABLE]]

 Operating activities. Cash provided by operations increased $289 million in 2021 to $1,073 million compared with $784 million in 2020. Significant changes to the sources and (uses) of cash for the twelve month periods include the following:

•$280 million attributable to higher Net income and other favorable changes in the related statement of income;

•$(235) million from net changes in working capital driven by: $(266) million from changes in receivables due to timing and volume of sales and $(125) million from the pay down of the Revolving Receivables Program; $(222) million unfavorable change in inventory primarily from inventory build-ups in response to supply chain challenges; $378 million improvement from accounts payable, primarily due to the timing of payments to suppliers and the COVID-19 related impacts on expenditures in 2020;

•favorable change in accrued liabilities and customer deposits of $175 million, which related to approximately $120 million of cash payments made during 2020 for costs related to the GE Transportation acquisition, higher incentive compensation accruals and timing of severance accruals related to site rationalization; and,

•approximately $40 million related to settlement of litigation in 2020 that did not recur in 2021.

Investing activities. In 2021 and 2020, cash used in investing activities was $(540) million and $(155) million, respectively. The major components of the cash outflow in 2021 was planned additions to property, plant, and equipment of $(130) million for continued investments in our facilities and manufacturing processes, and $(435) million in net cash paid for acquisitions, primarily for Nordco. The major components of the cash outflow in 2020 was $(136) million for additions to property, plant, and equipment and $(40) million in net cash paid for various small acquisitions.

Financing activities. In 2021, cash used for financing activities was $(653) million, which included net debt payments of $(161) million, $(99) million of contingent consideration payments related to the GE Transportation acquisition, $(92) million of dividend payments, and $(300) million for share repurchases. In 2020, cash used for financing activities was $(619) million, which included net debt payments of $(199) million, $(115) million of contingent consideration payments related to the GE Transportation acquisition, $(93) million of dividend payments, and $(207) million for share repurchases.

On June 3, 2021, Wabtec Transportation Netherlands B.V. ("Wabtec Netherlands") issued €500 million of 1.25% Senior Notes due in 2027, which are fully and unconditionally guaranteed by the Company. Also on June 3, 2021, the Company repaid all outstanding borrowings and interest related to the 364 Day Facility, effectively retiring the facility. Additional information with respect to Senior Notes, credit facilities and long-term debt is included in Note 8 of "Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

The Company borrows and repays against the Multi-Currency Revolving loan 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.

As of December 31, 2021, the Company held approximately $473 million of cash and cash equivalents. Of this amount, approximately $91 million was held within the United States and approximately $382 million was held outside of the United States, primarily in Europe, India, 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.

Revolving Receivables Program

In May 2020, the Company entered into a revolving agreement to transfer up to $150 million of certain receivables of certain subsidiaries of the Company (the "Originators") through our bankruptcy-remote subsidiary to a financial institution on a

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recurring basis in exchange for cash equal to the gross receivables transferred. During the first quarter of 2021, the Company amended its revolving agreement to increase the amount of certain receivables that can be transferred from $150 million to $200 million. Additional information with respect to the Revolving Receivables Program is included in Note 2 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report and incorporated by reference herein.

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 of Westinghouse Air Brake Technologies Corporation under the Senior Notes, Senior Credit Facility and 364 Day Facility have been fully and unconditionally guaranteed by certain of the parent 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 following tables present summarized financial information of the parent and the guarantor subsidiaries on a combined basis. 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

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries"],["In millions","","Year Ended December 31, 2021"],["Net sales","","$","3,750"],["Gross profit","","820"],["Net income attributable to Wabtec shareholders","","175"]]
[[/GREPCENT_TABLE]]

Summarized Balance Sheets

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries"],["In millions","","December 31, 2021","","December 31, 2020"],["Current assets","","$","999","","","$","1,092"],["Noncurrent assets","","$","2,087","","","$","1,836"],["Current liabilities","","$","1,382","","","$","1,409"],["Long-term debt","","$","3,483","","","$","3,780"],["Other non-current liabilities","","$","552","","","$","374"]]
[[/GREPCENT_TABLE]]

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The following is a description of the transactions between the combined Westinghouse Air Brake Technologies Corp. and guarantor subsidiaries with non-guarantor subsidiaries.

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries"],["In millions","","Year Ended December 31, 2021"],["Net sales to Non-Guarantor Subsidiaries","","$","643"],["Purchases from Non-Guarantor Subsidiaries","","1,151"],["","","Unaudited"],["","","Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries"],["In millions","","December 31, 2021"],["Amount due from/(to) Non-Guarantor Subsidiaries","","$","(6,428)"]]
[[/GREPCENT_TABLE]]

Summarized Financial Information—Euro Notes

The obligations under Wabtec Netherlands’ Euro Notes are fully and unconditionally guaranteed by Westinghouse Air Brake Technologies Corporation. 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 Westinghouse Air Brake Technologies Corporation, as the parent guarantor, on a combined basis. The combined summarized financial information eliminates all intercompany balances and transactions among Wabtec Netherlands and Westinghouse Air Brake Technologies Corporation as well as all equity in earnings from and investments in any subsidiary of Westinghouse Air Brake Technologies Corporation, other than Wabtec Netherlands, which we refer to below as the Non-Issuer and Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and parent guarantor.

Summarized Statement of Income

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","Twelve Months Ended December 31, 2021"],["Net sales","","$","540"],["Gross profit","","97"],["Net loss attributable to Wabtec shareholders","","(267)"]]
[[/GREPCENT_TABLE]]

Summarized Balance Sheets

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","December 31, 2021","","December 31, 2020"],["Current assets","","$","252","","","$","408"],["Noncurrent assets","","$","805","","","$","710"],["Current liabilities","","$","499","","","$","824"],["Long-term debt","","$","4,044","","","$","3,780"],["Other non-current liabilities","","$","209","","","$","314"]]
[[/GREPCENT_TABLE]]

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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.

[[GREPCENT_TABLE]]
[["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","Twelve Months Ended December 31, 2021"],["Net sales to non-issuer and non-guarantor subsidiaries","","$","69"],["Purchases from non-issuer and non-guarantor subsidiaries","","109"],["","","Unaudited"],["","","Issuer and Guarantor"],["In millions","","December 31, 2021"],["Amount due from/(to) non-issuer and non-guarantor subsidiaries","","$","(6,262)"]]
[[/GREPCENT_TABLE]]

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Contractual Obligations and Off-Balance Sheet Arrangements

The Company is obligated to make future payments under various contracts such as 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, 2021:

[[GREPCENT_TABLE]]
[["In millions","","Total","","2022","","2023-24","","2025-26","","2027+"],["Operating activities:"],["Purchase obligations (1)","","$","117","","","$","73","","","$","40","","","$","4","","","$","\u2014"],["Operating leases (2)","","345","","","60","","99","","73","","113"],["Pension and postretirement benefit payments (3)","","202","","","18","","","38","","","40","","","106"],["Interest payments (4)","","765","","","155","","","282","","","198","","","130"],["Financing activities:"],["Long-term debt","","4,081","","","2","","","1,012","","","1,250","","","1,817"],["Dividends to shareholders (5)","","111","","","111","","","\u2014","","","\u2014","","","\u2014"],["Contingent consideration (6)","","256","","","110","","","146","","","\u2014","","","\u2014"],["Total","","$","5,877","","","$","529","","","$","1,617","","","$","1,565","","","$","2,166"]]
[[/GREPCENT_TABLE]]

(1)Purchase obligations represent non-cancelable contractual obligations at December 31, 2021.  In addition, the Company had approximately $1 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.

(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 $3 million to pension plan investments in 2022.

(4)Interest payments on the Senior Notes are based on interest rates in effect as of December 31, 2021 and are calculated on debt with maturities that extend to 2028. Interest payments for the Revolving Credit Facility and Other Borrowings are based on contractual terms and the Company’s current interest rates.

(5)Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $111 million.

(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 $32 million, the timing of which are uncertain. Refer to Note 11 of the “Notes to Consolidated Financial Statements” 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, 2021, the total value of these bank guarantees and letters of credit were $791 million and expire on various dates through 2039. 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.

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These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:

Economic and industry conditions

•prolonged unfavorable economic and industry conditions in the markets served by us, 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

•changes in market consensus as to what attributes are required for projects to be considered "green" or "sustainable" or negative perceptions regarding determinations in such regard with respect to our Green Finance Framework;

Operating factors

•supply disruptions;

•technical difficulties;

•changes in operating conditions and costs;

•increases in raw material costs;

•successful introduction of new products;

•performance under material long-term contracts;

•labor 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; or

•the development and use of new technology;

Competitive factors

•the actions of competitors; or

•the outcome of negotiations with partners, suppliers, customers or others;

Political/governmental factors

•political stability in relevant areas of the world, 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; or

•the outcome of negotiations with governments;

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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 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, the testing of goodwill and other intangibles for impairment, warranty reserves, stock based compensation, income taxes, and revenue recognition. Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably 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 IV, Item 15 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.

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 under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The Company compares inventory components to prior year sales history and 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.

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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, and below-market customer contract liabilities. The significant assumptions used to estimate the value of the intangible assets and below-market customer contract liabilities included 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.

Goodwill and Indefinite-Lived Intangibles:

Description Goodwill and indefinite-lived intangibles are required to be tested for impairment at least annually. The Company performs its annual impairment test 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, overall financial performance, 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. 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. At December 31, 2021, all three of the Company’s reporting units had fair values which were substantially in excess of their carrying values. See Note 2 in the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report for additional discussion regarding impairment testing.

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.

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.

Stock-based Compensation:

Description The Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. The program is structured as a rolling three-year plan; each year starts a new three-year performance cycle with the most recently completed cycle being 2019-2021. No incentive stock units will vest for performance below the three-year cumulative threshold.  The Company utilizes an economic profit measure for this performance goal.  Economic profit is a measure of the extent to which the Company produces financial results in excess of its cost of capital.  Based on the Company’s achievement of the threshold and three-year cumulative performance, the stock units vested can range from 0% to 200% of the shares granted.

Judgments and Uncertainties Significant judgments and estimates are used in determining the estimated three-year performance, which is then used to estimate the total shares expected to vest over the three year vesting cycle and corresponding expense based on the grant date fair value of the award.  When determining the estimated three-year performance, the Company utilizes a combination of historical actual results, budgeted results and forecasts. Upon the initial grant of a performance cycle, the Company estimates the three-year performance at 100%.  As actual performance results for a cycle begin to accumulate and the Company completes its budgeting and forecasting cycles the performance estimates are updated.  These judgments and estimates are reviewed and updated on a quarterly basis.

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Effect if Actual Results Differ From Assumptions If assumptions used in determining the estimated three-year performance change significantly, stock-based compensation expense related to the unvested incentive stock awards can fluctuate from period to period.  

Income Taxes:

Description Wabtec records an estimated liability or benefit 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. 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 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.

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 subcontracts that may be associated with the contract. Factors that influence these estimates include inflationary trends, 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, 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 amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or 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.