Westinghouse Air Brake Technologies(WAB) - 2022 Q4 - Annual Report

PART I Item 1. Business Wabtec provides technology-based solutions for the global freight and transit rail industries, driven by a strong aftermarket business - Wabtec is a global provider of technology-based locomotives, equipment, systems, and services for the freight rail and passenger transit industries, operating in over 50 countries[12][160][291] - The company's strategic strengths include a broad product offering with a stable mix of OEM and aftermarket business, with approximately 60% of total net sales from aftermarket[26][27][35] - Wabtec holds approximately 6,000 active patents worldwide and files for about 300 new patents annually, relying on a combination of patents, trade secrets, and other intellectual property laws[40] - The company's top five customers accounted for approximately 30% of net sales in 2022, with no single customer representing 10% or more of consolidated net sales[43] - Wabtec has a global workforce of approximately 27,000 employees as of December 31, 2022, with a portion represented by labor unions[52][53] - The company is committed to sustainability, focusing on developing responsible products, driving responsible operations, and empowering people and communities[46][49][50] 2022 Net Sales by Segment | Segment | % of Total Net Sales | % Aftermarket Sales (within segment) | | :------ | :------------------- | :---------------------------------- | | Freight | 72% | 66% | | Transit | 28% | ~50% | Backlog Summary (as of December 31, 2022) | Category | Amount (in millions) | | :------- | :------------------- | | Total Backlog | $22,441 | | Freight Segment | $18,641 | | Transit Segment | $3,800 | | Expected Delivery 2023 | $6,760 | | Expected Delivery Other Years | $15,681 | Engineering and Development Investment | Year | Investment (in millions) | | :--- | :----------------------- | | 2022 | $209 | | 2021 | $176 | | 2020 | $162 | Item 1A. Risk Factors The company faces risks from market cyclicality, international operations, macroeconomic factors, and substantial indebtedness - Dependence on key customers and the cyclical nature of the railway and passenger transit markets pose risks to revenue stability and demand for products[85][92] - The company operates in a highly competitive industry, facing challenges from established competitors and the need to continuously innovate[86][91] - International operations, which accounted for approximately 55% of consolidated net sales in 2022, expose Wabtec to risks such as currency exchange fluctuations and political instability[108][110][112] - The ongoing Russia-Ukraine conflict has impacted supply channels and caused price inflation, potentially affecting business results[115][116] - Macroeconomic conditions, including inflation, raw material shortages, and changes in international trade policies, could adversely affect operating margins[119][121] - Compliance with various laws (anti-corruption, environmental) and potential litigation represent significant legal and regulatory risks[123][125][129][132] - Cybersecurity incidents and the ability to protect intellectual property are critical risks that could lead to business disruptions and competitive disadvantages[135][137][138] - Labor shortages, potential labor disputes, and reliance on key management are human capital risks that could impact operations[139][140][142] - The company's substantial debt of $4.0 billion as of December 31, 2022, could increase vulnerability to adverse economic conditions[143] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - The company has no unresolved staff comments[146] Item 2. Properties Wabtec's principal global facilities are deemed adequate for current and projected needs - Wabtec's facilities and equipment are generally in good condition and adequate for present and immediately projected needs[147] Selected Principal Facilities (as of December 31, 2022) | Location (Country) | Primary Use | Segment | Own/Lease | Approximate Square Feet | | :----------------- | :---------- | :------ | :-------- | :---------------------- | | Erie, PA (U.S.) | Manufacturing/Warehouse/Office | Freight | Own | 3,800,000 | | Grove City, PA (U.S.) | Manufacturing/Warehouse | Freight | Own | 486,000 | | Shenyang, China | Manufacturing/Warehouse/Office | Transit | Own | 336,000 | | Doncaster, UK | Manufacturing | Transit | Own | 330,000 | | Northampton, UK | Manufacturing | Freight | Lease | 300,000 | Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from the Consolidated Financial Statements - Information on legal proceedings is detailed in Note 18 of the Consolidated Financial Statements[149] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[150] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Wabtec's common stock trades on the NYSE, with a history of quarterly dividends and an active stock repurchase program - As of February 10, 2023, 180,352,300 shares of Common Stock were issued and outstanding, held by approximately 103,420 holders of record[6][153] - The company has historically paid quarterly dividends, currently at an annual rate of approximately $123 million, subject to Board approval[154][220] - As of December 31, 2022, approximately $322 million remained under the stock repurchase plan, which was reauthorized to $750 million on February 14, 2023[158] Issuer Purchases of Common Stock (Q4 2022) | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :------------ | :------------------------------- | :--------------------------- | | October 2022 | — | $— | | November 2022 | 578,667 | $95.32 | | December 2022 | 181,568 | $100.18 | | Total Q4 2022 | 760,235 | $96.48 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 6.9% to $8.36 billion in 2022 despite market volatility, supported by strong liquidity and operational initiatives Overview Wabtec secured major contracts and launched Integration 2.0 in 2022, though operations were impacted by global economic volatility - Wabtec's long-term financial goals include driving strong cash flow conversion, increasing margins, and growing revenues through innovation and strategic acquisitions[161] - In 2022, Wabtec secured key contracts, including the largest locomotive modernization deal in rail industry history and orders for FLXdrive battery-electric locomotives[164] - Wabtec launched 'Integration 2.0' in Q1 2022, a three-year initiative targeting $75-$90 million in incremental run rate synergies by 2025[165] - Global economic conditions, including supply chain disruptions, inflation, and the Russia-Ukraine conflict, adversely affected operations and business results in 2022[166][167] - Wabtec implemented mitigating actions such as price escalations, operational efficiencies, and strategic sourcing to counter unfavorable economic conditions[169] - A cyber security incident detected on June 26, 2022, did not have a material financial impact on the company's business, operations, or financial results[171][172] Acquisitions The Freight Segment completed three strategic acquisitions totaling $89 million in 2022 - During 2022, the Freight Segment made three strategic acquisitions for a combined purchase price of $89 million, primarily in the Digital Electronics and Services product lines[173][326] - On March 31, 2021, Wabtec acquired Nordco, a North American supplier of maintenance of way equipment, for approximately $410 million[173][327][328] Results of Operations Consolidated net sales increased 6.9% to $8.36 billion in 2022, driven by organic growth in the Freight Segment - Consolidated cost of sales as a percentage of sales slightly decreased from 69.7% in 2021 to 69.6% in 2022[179] - The effective income tax rate increased from 23.2% in 2021 to 25.0% in 2022, primarily due to the absence of a prior-year tax benefit[183][378] - Freight Segment sales growth was primarily driven by increased Services sales, Equipment sales, Components sales, and Digital Electronics sales[186] - Transit Segment sales decreased primarily due to unfavorable foreign exchange rates ($242 million impact), despite a $5 million increase in organic sales[191] Consolidated Statements of Income (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Total Net Sales | $8,362 | $7,822 | $540 | 6.9% | | Cost of Sales | $(5,822)| $(5,453)| $(369) | 6.8% | | Gross Profit | $2,540 | $2,369 | $171 | 7.2% | | Operating Expenses | $(1,529)| $(1,493)| $(36) | 2.4% | | Income from Operations | $1,011 | $876 | $135 | 15.4% | | Net Income Attributable to Wabtec Shareholders | $633 | $558 | $75 | 13.4% | Net Sales Change Components (2022 vs 2021) | Component (in millions) | Freight Segment | Transit Segment | Total | | :---------------------- | :-------------- | :-------------- | :------ | | 2021 Net Sales | $5,239 | $2,583 | $7,822 | | Acquisitions | $83 | $4 | $87 | | Foreign Exchange | $(62) | $(242) | $(304) | | Organic Growth | $752 | $5 | $757 | | 2022 Net Sales | $6,012 | $2,350 | $8,362| Freight Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Total Net Sales | $6,012 | $5,239 | $773 | 14.8% | | Income from Operations | $864 | $717 | $147 | 20.5% | | Operating Income (% of Net Sales) | 14.4% | 13.7% | 0.7 pp | | Transit Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Total Net Sales | $2,350 | $2,583 | $(233) | (9.0%) | | Income from Operations | $231 | $238 | $(7) | (2.9%) | | Operating Income (% of Net Sales) | 9.8% | 9.2% | 0.6 pp | | Liquidity and Capital Resources Wabtec maintains strong liquidity through operating cash flows and debt facilities, ending 2022 with $4.0 billion in total debt - The decrease in cash from operating activities in 2022 was primarily due to a $106 million unfavorable change in working capital, driven by a proactive inventory build-up[201] - Cash used for investing activities decreased in 2022 due to lower net cash paid for acquisitions ($89 million in 2022 vs $435 million in 2021)[196] - Cash used for financing activities in 2022 included $473 million for share repurchases and $111 million for dividend payments[197] - As of December 31, 2022, the company held $541 million in cash, cash equivalents, and restricted cash, with approximately $453 million held outside the United States[201][202] - The Revolving Receivables Program generated $60 million in net cash proceeds in 2022, compared to $(53) million remitted in 2021[203][318] - The company amended its credit agreement on August 15, 2022, increasing the multi-currency revolving credit facility to $1.5 billion and adding a new $250 million delayed draw term loan facility[199][347][351] - Wabtec was in compliance with all financial covenants in the Restated Credit Agreement as of December 31, 2022[350][351] Cash Flow Summary (in millions) | Activity | 2022 | 2021 | Change ($) | | :----------------- | :------ | :------ | :--------- | | Operating Activities | $1,038 | $1,073 | $(35) | | Investing Activities | $(235) | $(540) | $305 | | Financing Activities | $(708) | $(653) | $(55) | Long-Term Debt (as of December 31, 2022) | Debt Type | Face Value (in millions) | Book Value (in millions) | | :-------------------- | :----------------------- | :----------------------- | | 4.375% Senior Notes, due 2023 | $250 | $250 | | 4.15% Senior Notes, due 2024 | $725 | $723 | | 3.20% Senior Notes, due 2025 | $500 | $498 | | 3.45% Senior Notes, due 2026 | $750 | $749 | | 1.25% Senior Notes (EUR), due 2027 | €500 | $529 | | 4.70% Senior Notes, due 2028 | $1,250 | $1,244 | | Other Borrowings | | $9 | | Total Debt | | $4,002 | Contractual Obligations and Off-Balance Sheet Arrangements (as of December 31, 2022, in millions) | Category | Total | 2023 | 2024-25 | 2026-27 | 2028+ | | :----------------------------- | :------ | :---- | :------ | :------ | :---- | | Purchase obligations | $168 | $157 | $10 | $1 | $— | | Operating leases | $357 | $61 | $99 | $68 | $129 | | Pension and postretirement benefit payments | $189 | $17 | $35 | $38 | $99 | | Interest payments | $607 | $153 | $229 | $163 | $62 | | Long-term debt | $4,023 | $251 | $1,237 | $1,285 | $1,250| | Dividends to shareholders | $123 | $123 | $— | $— | $— | | Contingent consideration | $154 | $105 | $49 | $— | $— | | Total | $5,621| $867| $1,659| $1,555| $1,540| Forward Looking Statements The report contains forward-looking statements subject to various risks and uncertainties - Forward-looking statements are based on current expectations but are subject to various risks, including economic, operating, competitive, and political factors[220][221][222][223][224] - The company does not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances[225] Critical Accounting Estimates Financial statements rely on critical accounting estimates for areas like long-term contracts, goodwill, and income taxes - Critical accounting estimates involve significant judgments in areas such as allowance for doubtful accounts, inventories, business combinations, and warranty reserves[226] - Revenue recognition for long-term contracts, a critical audit matter, involves subjective management assumptions regarding estimated remaining costs[246][264] - Impairment testing for goodwill and indefinite-lived intangibles requires significant assumptions about future sales growth, profit margins, and discount rates[238][239] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Wabtec is exposed to market risks from interest rate and foreign currency exchange rate fluctuations - Wabtec is exposed to interest rate risk from variable-rate debt, though none was outstanding as of December 31, 2022[249] - The company faces foreign currency exchange rate risk due to international operations, which can impact financial results reported in U.S. dollars[250][405] - Wabtec uses foreign currency forward contracts and other derivatives for hedging purposes to mitigate foreign currency exchange rate volatility[250][403][405] Item 8. Financial Statements and Supplementary Data This section presents Wabtec's audited consolidated financial statements and supplementary data for the years ended December 31, 2022, 2021, and 2020 Management's Reports to Wabtec Shareholders Management is responsible for the integrity of the financial statements and the effectiveness of internal controls - Management is responsible for the integrity of the consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting[251][253] - Based on its assessment using the COSO framework, management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022[253][254] Report Of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements, identifying revenue recognition on long-term contracts as a critical audit matter - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2022[257] - The critical audit matter identified was the measurement of revenue recognized over time on long-term contracts, which involves subjective management assumptions[263][264] Report Of Independent Registered Public Accounting Firm (Internal Control) Ernst & Young LLP issued an unqualified opinion on the effectiveness of Wabtec's internal control over financial reporting - Ernst & Young LLP issued an unqualified opinion on Westinghouse Air Brake Technologies Corporation's internal control over financial reporting as of December 31, 2022[269] Consolidated Balance Sheets Total assets were $18.52 billion as of December 31, 2022, with total equity at $10.15 billion Consolidated Balance Sheet Highlights (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | Change ($) | Change (%) | | :------------------------- | :----------- | :----------- | :--------- | :--------- | | Cash, cash equivalents and restricted cash | $541 | $473 | $68 | 14.4% | | Accounts receivable | $975 | $1,085 | $(110) | (10.1%) | | Unbilled accounts receivable | $544 | $392 | $152 | 38.8% | | Inventories, net | $2,034 | $1,689 | $345 | 20.4% | | Total current assets | $4,327 | $3,832 | $495 | 12.9% | | Property, plant and equipment, net | $1,429 | $1,497 | $(68) | (4.5%) | | Goodwill | $8,508 | $8,587 | $(79) | (0.9%) | | Other intangible assets, net | $3,402 | $3,705 | $(303) | (8.2%) | | Total Assets | $18,516 | $18,454 | $62 | 0.3% | | Accounts payable | $1,301 | $1,012 | $289 | 28.6% | | Customer deposits | $772 | $629 | $143 | 22.7% | | Current portion of long-term debt | $251 | $2 | $249 | 12450.0% | | Total current liabilities | $3,467 | $2,910 | $557 | 19.1% | | Long-term debt | $3,751 | $4,056 | $(305) | (7.5%) | | Total Liabilities | $8,369 | $8,215 | $154 | 1.9% | | Total Equity | $10,147 | $10,239 | $(92) | (0.9%) | Consolidated Statements of Income Net sales increased 6.9% to $8.36 billion in 2022, resulting in net income of $633 million and diluted EPS of $3.46 Consolidated Statements of Income (in millions, except per share data) | Metric | 2022 | 2021 | 2020 | | :------------------------- | :------ | :------ | :------ | | Sales of goods | $6,459 | $6,205 | $6,233 | | Sales of services | $1,903 | $1,617 | $1,323 | | Total net sales | $8,362| $7,822| $7,556| | Cost of sales | $(5,822)| $(5,453)| $(5,419)| | Gross profit | $2,540| $2,369| $2,137| | Total operating expenses | $(1,529)| $(1,493)| $(1,392)| | Income from operations | $1,011| $876 | $745 | | Interest expense, net | $(186) | $(177) | $(199) | | Other income, net | $29 | $38 | $11 | | Income before income taxes | $854 | $737 | $557 | | Income tax expense | $(213) | $(172) | $(145) | | Net income | $641 | $565 | $412 | | Net income attributable to Wabtec shareholders | $633 | $558 | $414 | | Diluted EPS | $3.46 | $2.96 | $2.17 | Consolidated Statements of Comprehensive Income Comprehensive income was $438 million in 2022, impacted by a $200 million foreign currency translation loss Consolidated Statements of Comprehensive Income (in millions) | Metric | 2022 | 2021 | 2020 | | :----------------------------------------- | :------ | :------ | :------ | | Net income attributable to Wabtec shareholders | $633 | $558 | $414 | | Foreign currency translation (loss) gain | $(200) | $(136) | $48 | | Unrealized (loss) gain on derivative contracts | $(5) | $(10) | $8 | | Unrealized gain (loss) on pension benefit plans and post-retirement benefit plans | $11 | $21 | $(14) | | Other comprehensive (loss) income, net of tax | $(195) | $(127) | $44 | | Comprehensive income attributable to Wabtec shareholders | $438 | $431 | $458 | Consolidated Statements of Cash Flows Operating cash flow was $1.04 billion in 2022, with significant cash used for stock repurchases and dividends - The decrease in operating cash flow was significantly influenced by a $368 million increase in inventories in 2022, reflecting proactive build-ups[285] - Cash used for investing activities decreased due to lower acquisitions of businesses, net of cash acquired ($89 million in 2022 vs $435 million in 2021)[285] - Financing activities in 2022 included $473 million for stock repurchases and $111 million for cash dividends[285] Consolidated Statements of Cash Flows (in millions) | Activity | 2022 | 2021 | 2020 | | :----------------------------------------- | :------ | :------ | :------ | | Net cash provided by operating activities | $1,038 | $1,073 | $784 | | Net cash used for investing activities | $(235) | $(540) | $(155) | | Net cash used for financing activities | $(708) | $(653) | $(619) | | Effect of changes in currency exchange rates | $(27) | $(6) | $(15) | | Increase (decrease) in cash, cash equivalents and restricted cash | $68 | $(126) | $(5) | | Cash, cash equivalents and restricted cash, end of year | $541 | $473 | $599 | Consolidated Statements of Shareholders' Equity Total equity decreased slightly to $10.15 billion in 2022, primarily due to stock repurchases and other comprehensive loss - Stock repurchases amounted to $473 million in 2022, increasing treasury stock shares by 5.0 million[288] - Accumulated other comprehensive loss increased by $195 million in 2022, primarily due to foreign currency translation losses[288][395] Consolidated Statements of Shareholders' Equity Highlights (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :----------------------------------------- | :----------- | :----------- | :----------- | | Common Stock Shares (issued) | 226.9 | 226.9 | 226.9 | | Common Stock Amount | $2 | $2 | $2 | | Additional Paid-in Capital | $7,953 | $7,916 | $7,881 | | Treasury Stock Shares | (45.7) | (41.1) | (38.0) | | Treasury Stock Amount | $(1,769) | $(1,306) | $(1,010) | | Retained Earnings | $4,577 | $4,055 | $3,589 | | Accumulated Other Comprehensive Loss | $(661) | $(466) | $(339) | | Total Wabtec Shareholders' Equity | $10,102 | $10,201 | $10,153 | | Noncontrolling Interest | $45 | $38 | $30 | | Total Equity | $10,147 | $10,239 | $10,183 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on Wabtec's accounting policies and specific financial items 1. Business Wabtec's global operations continue to be impacted by economic volatility, supply chain disruptions, and the Russia-Ukraine conflict - In 2022, approximately 55% of Wabtec's net sales came from customers outside the United States[291] - Wabtec's operations and business results continue to be adversely impacted by global economic conditions, supply chain disruptions, and inflation[292] - As of December 31, 2022, assets related to Russian operations were approximately $14 million and are expected to be recoverable[293] 2. Summary of Significant Accounting Policies Key accounting policies include inventory valuation, goodwill impairment testing, and revenue recognition for long-term contracts - Inventories are stated at the lower of cost or net realizable value, predominantly using the first-in, first-out (FIFO) method[297] - Goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment at least annually[300] - A majority of revenues are recognized at a point in time, while revenues from long-term contracts are recognized over time using an input method[309][311] - The company utilizes a revolving receivables facility to sell up to $350 million of certain receivables, with net cash received of $60 million in 2022[203][316][318] - New accounting standards ASU 2022-04 (Supplier Finance Programs) and ASU 2021-08 (Business Combinations) will be effective for Wabtec in 2023[323][324] 3. Acquisitions The Freight Segment completed three strategic acquisitions for a combined $89 million in 2022 - In 2022, the Freight Segment made three strategic acquisitions for a combined purchase price of $89 million[326] - On March 31, 2021, Wabtec acquired Nordco for approximately $410 million, recognizing $215 million in goodwill and $168 million in other intangible assets[327] 4. Supplemental Cash Flow Disclosures Supplemental disclosures show interest paid was $179 million and income taxes paid were $157 million in 2022 - As of December 31, 2022, restricted cash was $7 million, primarily from cash in escrow related to a 2022 acquisition[330] Supplemental Cash Flow Data (in millions) | Metric | 2022 | 2021 | 2020 | | :------------------------- | :--- | :--- | :--- | | Interest paid | $179 | $164 | $174 | | Income taxes paid, net | $157 | $123 | $129 | | Net cash paid for acquisitions | $89 | $435 | $40 | 5. Inventories Total net inventories increased by 20.4% to $2.03 billion in 2022, driven by a rise in raw materials and work-in-progress Inventory Components (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | | :-------------- | :----------- | :----------- | | Raw materials | $878 | $757 | | Work-in-progress| $515 | $316 | | Finished goods | $641 | $616 | | Total inventories | $2,034 | $1,689 | 6. Property, Plant & Equipment Net property, plant and equipment decreased by 4.5% to $1.43 billion in 2022 - Depreciation expense was $182 million in 2022, compared to $198 million in 2021 and $183 million in 2020[332] Property, Plant & Equipment (in millions) | Category | Dec 31, 2022 | Dec 31, 2021 | | :------------------------- | :----------- | :----------- | | Machinery and equipment | $1,474 | $1,433 | | Buildings and improvements | $783 | $785 | | Land and improvements | $100 | $96 | | Construction in progress | $122 | $89 | | Total | $2,479 | $2,403 | | Less: accumulated depreciation | $(1,050) | $(906) | | Property, plant and equipment, net | $1,429 | $1,497 | 7. Goodwill and Intangible Assets Total goodwill was $8.51 billion at year-end 2022, with no impairment found during annual testing - No impairment was found for goodwill or indefinite-lived intangible assets in 2022[334][335] - Amortization expense for intangible assets was $291 million in 2022, with an estimated $292 million for 2023[337][339] Goodwill by Segment (in millions) | Segment | Dec 31, 2022 | Dec 31, 2021 | | :------ | :----------- | :----------- | | Freight | $7,085 | $7,073 | | Transit | $1,423 | $1,514 | | Total | $8,508 | $8,587 | Other Intangible Assets (Net Carrying Amount, in millions) | Category | Dec 31, 2022 | Dec 31, 2021 | | :------------------- | :----------- | :----------- | | Backlog | $1,010 | $1,114 | | Customer relationships | $912 | $979 | | Acquired technology | $878 | $977 | | Total | $2,800 | $3,070 | 8. Contract Assets and Contract Liabilities Remaining performance obligations totaled approximately $22 billion as of December 31, 2022 - As of December 31, 2022, remaining performance obligations were approximately $22 billion, with about 30% expected to be recognized as revenue over the next 12 months[314] Changes in Contract Assets (in millions) | Metric | 2022 | 2021 | | :------------------------- | :--- | :--- | | Balance at beginning of year | $545 | $544 | | Acquisitions | $28 | $— | | Recognized in current year | $730 | $617 | | Reclassified to accounts receivable | $(581)| $(602)| | Foreign currency impact | $(16)| $(14)| | Balance at end of year | $706| $545| Changes in Contract Liabilities (in millions) | Metric | 2022 | 2021 | | :------------------------- | :--- | :--- | | Balance at beginning of year | $824 | $832 | | Acquisitions | $13 | $2 | | Recognized in current year | $1,067| $740 | | Amounts in beginning balance reclassified to revenue | $(410)| $(463)| | Current year amounts reclassified to revenue | $(528)| $(273)| | Foreign currency impact | $(10)| $(14)| | Balance at end of year | $956| $824| 9. Long-Term Debt Total long-term debt was $4.00 billion at year-end 2022, with the company in compliance with all financial covenants - During Q2 2022, the company redeemed $25 million of principal from the 2024 Notes[198][354] - The Restated Credit Agreement, effective August 15, 2022, provides a $1.5 billion multi-currency revolving credit facility and a new $250 million delayed draw term loan facility[199][347][349] - As of December 31, 2022, the company was in compliance with all financial covenants under the Restated Credit Agreement[350][351] Long-Term Debt Composition (in millions) | Debt Type | Dec 31, 2022 Book Value | Dec 31, 2021 Book Value | | :-------------------- | :---------------------- | :---------------------- | | 4.375% Senior Notes, due 2023 | $250 | $250 | | 4.15% Senior Notes, due 2024 | $723 | $747 | | 3.20% Senior Notes, due 2025 | $498 | $497 | | 3.45% Senior Notes, due 2026 | $749 | $749 | | 1.25% Senior Notes (EUR), due 2027 | $529 | $560 | | 4.70% Senior Notes, due 2028 | $1,244 | $1,243 | | Other Borrowings | $9 | $12 | | Total | $4,002 | $4,058 | Annual Debt Repayment Requirements (in millions) | Year | Amount | | :-------- | :----- | | 2023 | $251 | | 2024 | $737 | | 2025 | $500 | | 2026 | $750 | | 2027 | $535 | | Thereafter| $1,250 | | Total | $4,023| 10. Employee Benefit Plans Wabtec sponsors defined benefit pension plans, with U.S. plans having a funded status of $2 million and international plans a deficit of $35 million - The company expects to contribute $2 million to the international pension plan in 2023 and no contribution to the U.S. pension plan[375] - Costs for defined contribution plans were approximately $55 million for each of the years 2022, 2021, and 2020[376] Defined Benefit Pension Plans Funded Status (in millions) | Category | U.S. (2022) | U.S. (2021) | International (2022) | International (2021) | | :-------------- | :---------- | :---------- | :------------------- | :------------------- | | Fair value of plan assets | $31 | $40 | $201 | $307 | | Benefit obligations | $(29) | $(39) | $(236) | $(356) | | Funded status | $2 | $1 | $(35) | $(49) | Net Periodic Benefit Costs (in millions) | Component | U.S. (2022) | International (2022) | | :------------------------ | :---------- | :------------------- | | Service cost | $— | $3 | | Interest cost | $1 | $6 | | Expected return on plan assets | $(1) | $(12) | | Amortization of net loss | $1 | $2 | | Settlement and curtailment losses recognized | $— | $(1) | | Net periodic benefit cost (income) | $1 | $(2) | Pension Plan Assets by Category (in millions, 2022) | Asset Category | U.S. | International | | :------------------------ | :--- | :------------ | | Equity security funds | $4 | $44 | | Debt security funds | $25 | $131 | | Insurance contracts | $— | $11 | | Cash and cash equivalents and other | $2 | $15 | | Fair value of plan assets | $31| $201 | 11. Income Taxes The effective income tax rate increased to 25.0% in 2022 from 23.2% in 2021 - The company has net operating loss carry-forwards of $351 million, with $203 million being indefinite-lived[382] - The liability for unrecognized tax benefits was $33 million as of December 31, 2022[383] Income Before Income Taxes (in millions) | Category | 2022 | 2021 | 2020 | | :------- | :--- | :--- | :--- | | Domestic | $372 | $253 | $78 | | Foreign | $482 | $484 | $479 | | Total| $854| $737| $557| Consolidated Provision for Income Taxes (in millions) | Category | 2022 | 2021 | 2020 | | :----------------- | :--- | :--- | :--- | | Current tax expense| $177 | $84 | $116 | | Deferred tax expense| $36 | $88 | $29 | | Total provision| $213| $172| $145| Effective Income Tax Rate Reconciliation | Component | 2022 | 2021 | 2020 | | :------------------------- | :----- | :----- | :----- | | U.S. federal statutory rate | 21.0% | 21.0% | 21.0% | | State taxes | 2.0% | 0.3% | 2.6% | | Foreign | 3.8% | 3.3% | 4.4% | | Research and development credit | (0.8%) | (0.8%) | (1.3%) | | U.S. net operating loss carryback | — | (3.4%) | — | | Changes in valuation allowance | (2.0%) | 3.0% | (2.0%) | | U.S. tax reform provision | 0.1% | 0.7% | 1.3% | | Other, net | 0.9% | (0.9%) | — | | Effective rate | 25.0%| 23.2%| 26.0%| Deferred Tax Assets and Liabilities (in millions) | Category | Dec 31, 2022 | Dec 31, 2021 | | :------------------------- | :----------- | :----------- | | Total deferred income tax assets | $436 | $445 | | Total deferred income tax liabilities | $692 | $666 | | Net deferred income tax liability | $256 | $221 | 12. Earnings Per Share Diluted earnings per common share increased to $3.46 in 2022 from $2.96 in 2021 Earnings Per Common Share (in millions, except per share data) | Metric | 2022 | 2021 | 2020 | | :----------------------------------------- | :---- | :---- | :---- | | Net income attributable to Wabtec shareholders | $633 | $558 | $414 | | Weighted average shares outstanding - basic | 182.2 | 187.7 | 189.9 | | Weighted average shares outstanding - diluted | 182.8 | 188.1 | 190.4 | | Basic EPS | $3.46 | $2.96 | $2.18 | | Diluted EPS | $3.46 | $2.96 | $2.17 | 13. Stock-Based Compensation Plans Total stock-based compensation expense was $49 million in 2022, with $47 million in unamortized expense remaining - Stock-based compensation expense for all plans was $49 million in 2022, compared to $46 million in 2021 and $20 million in 2020[387] - As of December 31, 2022, unamortized compensation expense totaled $47 million, to be recognized over a weighted period of 1.4 years[387] - The company estimates achieving 132%, 125%, and 110% for incentive stock awards expected to vest for periods ending 2022, 2023, and 2024, respectively[392] Stock Option Activity (2022) | Metric | Number of Options | | :----------------------------------- | :---------------- | | Outstanding at December 31, 2021 | 531,915 | | Exercised | (116,590) | | Canceled | (15,387) | | Outstanding at December 31, 2022 | 399,938 | | Exercisable at December 31, 2022 | 293,952 | Restricted Stock and Incentive Stock Units Activity (2022) | Metric | Restricted Stock and Units | Incentive Stock Awards | | :----------------------------------- | :------------------------- | :--------------------- | | Outstanding at December 31, 2021 | 507,698 | 607,101 | | Granted | 460,841 | 176,657 | | Vested | (234,597) | (43,039) | | Adjustment for incentive stock awards expected to vest | — | 45,301 | | Canceled | (44,522) | (41,176) | | Outstanding at December 31, 2022 | 689,420 | 744,844 | 14. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $661 million, driven by a $200 million foreign currency translation loss - Foreign currency translation loss was $200 million in 2022, contributing significantly to the other comprehensive loss[395] Changes in Accumulated Other Comprehensive Loss (in millions) | Component | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Balance at beginning of year | $(466) | $(339) | $(383) | | Other comprehensive (loss) income, net | $(195) | $(127) | $44 | | Balance at end of year | $(661) | $(466) | $(339) | 15. Leases Operating lease expense was $60 million in 2022, with total present value lease liabilities of $334 million - Operating lease expense was $60 million in 2022, $59 million in 2021, and $57 million in 2020[396] - New operating leases of $80 million were added during 2022[396] - As of December 31, 2022, the weighted-average remaining lease term was 8.3 years, and the weighted-average discount rate was 2.3%[398] Scheduled Payments of Operating Lease Liabilities (in millions) | Year | Amount | | :---------- | :----- | | 2023 | $61 | | 2024 | $53 | | 2025 | $46 | | 2026 | $39 | | 2027 | $29 | | Thereafter | $129 | | Total lease payments | $357 | | Less: Present value discount | $(23) | | Present value lease liabilities | $334| 16. Warranties The product warranty reserve decreased to $242 million at year-end 2022 Product Warranty Reserve Reconciliation (in millions) | Metric | 2022 | 2021 | | :------------------------- | :--- | :--- | | Balance at beginning of year | $259 | $279 | | Acquisitions | $3 | $2 | | Warranty expense | $79 | $116 | | Warranty claim payments | $(91)| $(124)| | Foreign currency impact | $(8) | $(14)| | Balance at end of year | $242| $259| 17. Fair Value Measurement and Derivative Instruments Wabtec uses derivatives to hedge foreign currency, interest rate, and commodity price risks - The company classifies assets and liabilities into a three-level fair value hierarchy, with contingent consideration as Level 3[402] - Wabtec uses foreign currency forward contracts to hedge forecasted foreign currency denominated sales and balance sheet exposures[404] - Non-designated foreign exchange contracts resulted in a net gain of $1 million in 2022, compared to a net loss of $5 million in 2021[406] Foreign Exchange Contracts (Fair Value and Notional Amount, Dec 31, 2022, in millions) | Category | Level | Fair Value | Gross Notional Amount | | :----------------------- | :---- | :--------- | :-------------------- | | Designated (Other current assets) | 2 | $8 | $278 | | Designated (Other current liabilities) | 2 | $(11) | $769 | | Non-Designated (Other current assets) | 2 | $3 | $156 | | Non-Designated (Other current liabilities) | 2 | $(3) | $152 | | Total | | $(3) | $1,047 (Designated), $308 (Non-Designated) | 18. Commitments and Contingencies The company is not involved in any litigation believed to have a material adverse effect on its financial condition - Wabtec's operations comply in all material respects with environmental laws and regulations[410] - The company faces asbestos-related claims, with the majority submitted to insurance carriers or non-affiliated indemnitors[411] - On February 10, 2023, a court decision was issued in favor of RTD, denying DTC's $37 million damages claim against Xorail[412] - As of the report date, the company is not involved in any litigation believed to have a material adverse effect on its financial condition, results of operations, or liquidity[413] 19. Segment Information Wabtec operates through two reportable segments, Freight and Transit, with geographically diverse net sales - Wabtec's two reportable segments are Freight and Transit, with operating results evaluated based on income from operations[414][415][416] Segment Financial Information (2022, in millions) | Metric | Freight Segment | Transit Segment | Corporate Activities and Elimination | Total | | :------------------------- | :-------------- | :-------------- | :----------------------------------- | :---- | | Sales to external customers | $6,012 | $2,350 | $— | $8,362| | Income (loss) from operations | $864 | $231 | $(84) | $1,011| | Depreciation and amortization | $399 | $60 | $20 | $479 | | Capital expenditures | $87 | $54 | $8 | $149 | | Segment assets | $21,118 | $5,116 | $(7,718) | $18,516| Net Sales by Geographic Area (2022, in millions) | Region | Net Sales | | :---------------- | :-------- | | North America | $4,475 | | South America | $336 | | Europe | $1,446 | | India | $531 | | Australia / New Zealand | $465 | | China | $244 | | Other Asia / Middle East | $183 | | Egypt | $164 | | Other Africa | $119 | | Kazakhstan / Russia / CIS | $399 | | Total | $8,362| Net Sales by Product Line (2022, in millions) | Product Line | 2022 Sales | | :----------------------- | :--------- | | Freight Segment: | | | Services | $2,819 | | Equipment | $1,528 | | Components | $936 | | Digital Electronics | $729 | | Transit Segment: | | | Original Equipment Manufacturer | $1,095 | | Aftermarket | $1,255 | 20. Other Income, Net Other income, net, decreased to $29 million in 2022 from $38 million in 2021 Components of Other Income, Net (in millions) | Component | 2022 | 2021 | 2020 | | :----------------------------- | :--- | :--- | :--- | | Foreign currency gain (loss) | $6 | $8 | $(8) | | Equity income | $17 | $20 | $10 | | Expected return on pension assets/amortization | $7 | $9 | $10 | | Other miscellaneous (expense) income | $(1) | $1 | $(1) | | Total Other income, net | $29| $38| $11| 21. Restructuring The 'Integration 2.0' initiative incurred $46 million in charges in 2022 - Wabtec announced 'Integration 2.0' in Q1 2022, a three-year strategic initiative targeting $135-$165 million in one-time charges[421] - In 2022, the company incurred approximately $46 million in one-time charges related to Integration 2.0[422] - Of the 2022 charges, approximately $32 million was related to the Transit segment and $14 million to the Freight segment[422] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with the independent accountants - There have been no disagreements with the independent registered public accountants[425] Item 9A. Controls and Procedures Disclosure controls and procedures were deemed effective as of December 31, 2022 - Wabtec's principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[426] - There was no change in internal control over financial reporting during the quarter ended December 31, 2022, that materially affected internal controls[427] Item 9B. Other Information This item reports that there is no other information to disclose - There is no other information to disclose under this item[430] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[431] PART III Items 10 through 14. (Incorporated by Reference) Information for these items is incorporated by reference from the company's 2023 Proxy Statement - Information for Items 10-14 is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Stockholders on May 17, 2023[434] - Wabtec has adopted a Code of Business Conduct and Ethics applicable to all employees, which is posted on its website[435] Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :--------------------------------------------- | :------------------------------------------------------------------------ | :----------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by shareholders | 1,100,000 | $77.32 | 5,500,000 | | Equity compensation plans not approved by shareholders | — | — | — | | Total | 1,100,000 | $77.32 | 5,500,000 | PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the report - The report includes consolidated financial statements, management's reports, and independent auditor's reports[440] - Schedule II—Valuation and Qualifying Accounts is included as a financial statement schedule[440] - A comprehensive list of exhibits, including shareholder agreements, corporate governance documents, and debt indentures, is provided[440][441][442] Item 16. Form 10-K Summary This item is not applicable to the company - This item is not applicable[448]