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 products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in over 50 countries and our products can be found in more than 100 countries throughout the world. In 2020, approximately 58% of the Company’s net sales came from customers outside the U.S.

COVID-19 Update

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus, known as COVID-19, as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibit many employees from going to work. Our top concern is, and remains, the health and well-being of our employees around the world. To date, COVID-19 has surfaced in nearly all regions around the world and has impacted our sales channels, supply chain, manufacturing operations, workforce, and other key aspects of our operations. The outbreak and preventive measures taken to help curb the spread, including temporary plant closures in China, India, Italy and other countries where outbreaks and stay-at-home orders were most prevalent had an adverse impact on our operations and business results for the year ended December 31, 2020.

We continue to monitor the situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations; however, there are numerous uncertainties, including the duration and severity of the pandemic, availability and effectiveness of vaccines, 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, supplier 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. COVID-19 had a materially adverse impact on our operations and business results for the year-ended December 31, 2020 which is discussed in the Results of Operations section below and we expect COVID-19 to continue to have a materially adverse impact on our operations and business results into 2021. The future adverse impact may include reduced demand for our products, reduced cash from operations and a volatile effective tax rate driven by changes in earnings mix across the Company’s different jurisdictions. We continue to work with our employees, customers, and suppliers to navigate the impacts of COVID-19. We also continue to assess possible implications to our business, customers, supply chain and end-markets and to take actions in an effort to mitigate adverse consequences.

Management Review and Future Outlook

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 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.

In 2021 and beyond, general global economic and market conditions will have an impact on our sales and operations. The COVID-19 pandemic has increased the uncertainty around global economic and market conditions. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to address changes in market conditions and risks.

ACQUISITION OF GE TRANSPORTATION

Wabtec acquired GE Transportation, a former business unit of GE, on February 25, 2019. For additional information related to this acquisition refer to Note 3 of "Notes to Consolidated Financial Statements" included in Part IV, Item 15 of this report.

RESULTS OF OPERATIONS

Consolidated Results

2020 COMPARED TO 2019

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

						For the year ended December 31,
In millions						2020						2019
Net sales:
Sales of goods						$	6,233.3					$	6,907.9
Sales of services						1,322.8						1,292.1
Total net sales						7,556.1						8,200.0
Cost of sales:
Cost of goods						(4,629.4)						(5,128.4)
Cost of services						(789.6)						(793.6)
Total cost of sales						(5,419.0)						(5,922.0)
Gross profit						2,137.1						2,278.0
Operating expenses:
Selling, general and administrative expenses						(948.1)						(1,166.6)
Engineering expenses						(162.1)						(209.9)
Amortization expense						(282.4)						(238.4)
Total operating expenses						(1,392.6)						(1,614.9)
Income from operations						744.5						663.1
Other income and expenses:
Interest expense, net						(198.9)						(219.1)
Other income (expense), net						11.6						2.8
Income before income taxes						557.2						446.8
Income tax expense						(144.9)						(120.3)
Net income						412.3						326.5
Less: Net loss attributable to noncontrolling interest						2.1						0.2
Net income attributable to Wabtec shareholders						$	414.4					$	326.7

The following table shows the major components of the change in net sales in 2020 from 2019:

In millions						Freight Segment						Transit Segment						Total
2019 Net Sales						$	5,441.4					$	2,758.6					$	8,200.0
Acquisitions						543.4						3.0						546.4
Foreign Exchange						(69.1)						19.1						(50.0)
Organic						(833.4)						(306.9)						(1,140.3)
2020 Net Sales						$	5,082.3					$	2,473.8					$	7,556.1

Results of operations were negatively impacted during the year ended December 31, 2020 as a result of the COVID-19 pandemic. Management’s discussion below includes analysis as to the impact of the COVID-19 pandemic where it could be explicitly identified; however, in many instances it is difficult to quantify with a high level of certainty the negative impact the COVID-19 pandemic had on our results of operations.

The following discussion compares our results for the year ended December 31, 2020, to the year ended December 31, 2019. The discussion comparing our results for the year ended December 31, 2019 to the year ended December 31, 2018 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, 2019, filed with the SEC on February 24, 2020.

Net sales

Net sales decreased by $644 million, or 7.9%, to $7,556 million. The decrease is primarily attributable to an organic decrease of $833 million in the Freight Segment, due to lower locomotive Equipment sales, lower sales in Components from a

reduction of freight carbuilds in 2020 compared to 2019, a decrease in Services sales due to lower freight rail volumes and an increase in parking of locomotives, particularly in North America. The lower freight rail volumes and increased parking of locomotives is partially due to the COVID-19 pandemic and its impact on the economy. The Transit Segment experienced an organic decrease in sales of $307 million, primarily due to COVID-19 related production delays and reduced passenger traffic. The decrease is partially offset by sales from acquisitions of $546 million, mainly, the acquisition of GE Transportation. Unfavorable changes in foreign currency exchange rates reduced net sales by $50 million.

Cost of sales

Cost of sales decreased by $503 million to $5,419 million in 2020 compared to $5,922 million in 2019. The decrease is primarily due to the sales decreases discussed above. Cost of sales in 2020 includes $44 million of restructuring costs, primarily for footprint rationalization and related headcount reductions as part of the ongoing integration actions related to the GE Transportation acquisition and in response to the COVID-19 pandemic. Cost of sales in 2019 included a $185 million charge related to purchase price accounting for the step-up of GE Transportation inventory and $38 million of restructuring costs, primarily for footprint rationalization and related headcount actions. Excluding these charges in both years, cost of sales as a percentage of sales was 71.1% in 2020 and 69.5% in 2019, representing a 1.6% increase. The increase can be attributed to an unfavorable sales mix, lower absorption of overhead costs due to the decrease in sales volumes, increased parking of locomotives, and lower rail passenger traffic. This was partially offset by increased synergy savings related to the GE Transportation acquisition and actions taken to reduce costs in response to the COVID-19 pandemic.

Operating expenses

Total operating expenses decreased $222 million to 18.4% of net sales in 2020 compared to 19.7% in 2019. Restructuring and transaction costs, primarily for headcount actions and costs related to acquisition of GE Transportation, included in SG&A were $71 million and $192 million for the year ended December 31, 2020 and 2019, respectively. Additionally, SG&A expenses decreased $155 million related to the acquisition synergy savings, reduced employee benefit costs, cost reduction initiatives and lower sales volumes, partially offset by $57 million of incremental expense from acquisitions. Engineering expense decreased $48 million due to cost control measures on research and development projects partially offset by incremental expense from acquisitions. Amortization expense increased $44 million, due to the acquisition of GE Transportation.

Interest expense, net

Interest expense, net, decreased $20 million in the 2020 over the same period in 2019 attributable to lower variable interest rates and lower overall average debt balances in 2020.

Other income (expense), net

Other expense, net, was $12 million of income in 2020 compared to $3 million of income in the same period of 2019. The variance is primarily driven by lower foreign exchange losses in the current year and an increase in income from equity method investments.

Income taxes

The effective income tax rate was 26.0% and 26.9% in 2020 and 2019, respectively. The decrease in the effective tax rate in 2020 is primarily the result of non-deductible transaction related expenses incurred during 2019 as a result of the GE Transportation acquisition that did not recur in 2020 and a decrease in the estimated liabilities resulting from provisions of the Tax Cuts and Jobs Act that were recognized in 2019.

Freight Segment

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

						For the year ended December 31,
In millions						2020						2019
Net sales:
Sales of goods						$	3,790.1					$	4,186.5
Sales of services						1,292.2						1,254.9
Total net sales						5,082.3						5,441.4
Cost of sales:
Cost of goods						(2,829.5)						(3,096.5)
Cost of services						(764.8)						(763.5)
Total cost of sales						(3,594.3)						(3,860.0)
Gross profit						1,488.0						1,581.4
Operating expenses						(904.1)						(938.5)
Income from operations ($)						583.9						642.9
Income from operations (%)						11.5		%				11.8		%

The following table shows the major components of the change in net sales for the Freight Segment in 2020 from 2019:

In millions
2019 Net Sales						$	5,441.4
Acquisitions						543.4
Changes in Sales by Product Line
Equipment						(333.9)
Components						(258.7)
Digital Electronics						(51.8)
Services						(189.0)
Foreign Exchange						(69.1)
2020 Net Sales						$	5,082.3

Net sales

Freight Segment sales decreased by $359 million, or 6.6%, to $5,082 million, primarily due to an organic decrease of $833 million due to lower locomotive Equipment Sales, lower sales in Components from a reduction of freight carbuilds in 2020 compared to 2019, and a decrease in Services sales due to lower freight rail volumes and an increase in parking of locomotives, particularly in North America. The lower freight rail volumes and increased parking of locomotives is partially due to the COVID-19 pandemic and its impact on the economy. These decreases were partially offset by sales from acquisitions of $543 million, primarily related to GE Transportation. Unfavorable foreign currency exchange rates decreased sales by $69 million.

Cost of sales

Freight Segment cost of sales decreased by $266 million to $3,594 million in 2020. The decrease is attributable to the organic sales decrease discussed above, partially offset by $391 million of incremental cost of sales from acquisitions, mainly the acquisition of GE Transportation. Included in cost of sales in 2020 is $30 million of restructuring costs, primarily for costs for footprint rationalization, and related headcount actions as part of the ongoing integration actions related to the GE Transportation acquisition and in response to the COVID-19 pandemic. Cost of sales in 2019 includes a $185 million charge related to purchase price accounting for the step-up of GE Transportation inventory and $34 million of restructuring costs, primarily for costs for footprint rationalization and related headcount reductions to integrate our combined businesses. Excluding these charges, cost of sales as a percentage of sales was 70.1% in 2020 and 66.9% in 2019, representing a 3.2 percentage point increase. The increase can be attributed to an unfavorable sales mix and lower absorption of overhead costs due to the decrease in organic sales volumes partially offset by increased synergy savings related to the GE Transportation acquisition and efforts to reduce costs in response to the COVID-19 pandemic.

Operating expenses

Freight Segment operating expenses decreased $34 million, or 3.6%, in 2020 to 17.8% of sales. Restructuring and transaction costs, primarily for headcount actions and costs related to acquisition of GE Transportation, included in SG&A were $46 million and $33 million for the years ended December 31, 2020 and 2019, respectively. SG&A expenses, excluding restructuring and transaction costs in both years, decreased $116 million primarily due to synergy savings, a reduction in employee benefit costs, and lower sales volumes partially offset by $56 million in incremental expense from acquisitions, primarily GE Transportation. Additionally, engineering expense decreased $32 million due to cost control measures on research and development projects partially offset by incremental expense from acquisitions. Amortization expense increased $44 million, due to the acquisition of GE Transportation

Transit Segment

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

						For the year ended December 31,
In millions						2020						2019
Net sales						$	2,473.8					$	2,758.6
Cost of sales						(1,824.7)						(2,062.0)
Gross profit						649.1						696.6
Operating expenses						(419.4)						(482.2)
Income from operations ($)						229.7						214.4
Income from operations (%)						9.3		%				7.8		%

The following table shows the major components of the change in net sales for the Transit Segment in 2020 from 2019:

In millions
2019 Net Sales						$	2,758.6
Acquisitions						3.0
Changes in Sales by Product Line
Original Equipment Manufacturing						(158.7)
Aftermarket						(148.2)
Foreign Exchange						19.1
2020 Net Sales						$	2,473.8

Net sales

Transit Segment net sales decreased by $285 million, or 10.3%, primarily due to disruptions to our operations caused by the COVID-19 pandemic, particularly in Asia and Europe. This impact was felt in both the Original Equipment Manufacturing and Aftermarket product lines as the pandemic lead to shutdowns that affected factory output and ridership levels. Favorable foreign currency exchange rate changes increased net sales by $19 million.

Cost of sales

Transit Segment cost of sales decreased by $237 million to $1,825 million in 2020 primarily due to the reduction in sales. Cost of sales in 2020 includes $14 million of restructuring costs primarily for footprint rationalization in the UK. Cost of Sales in 2019 included $5 million of restructuring costs primarily related to headcount actions and footprint rationalization. Excluding these costs, cost of sales as a percentage of sales was 73.2%, a 1.4 percentage point decrease over the comparable period in 2019, attributable to improved operational performance.

Operating expenses

Transit Segment operating expenses decreased $63 million to $419 million, or 12.9% in 2020 to 17.0% of net sales. SG&A expenses decreased $47 million in 2020, primarily due to lower sales and cost saving initiatives put in place to offset the adverse impact of COVID-19 and reduced employee benefit costs. SG&A included restructuring charges, mainly for severance, of $14 million and $13 million for the year ended December 31, 2020 and 2019, respectively. Engineering expense decreased $16 million due to cost savings measures put in place as a result of the COVID-19 pandemic and amortization expense remained consistent year over year. The combination of improved operational performance and cost saving initiatives mentioned above have resulted in a 200 basis point operating margin improvement in 2020 from 2019.

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. The following is a summary of selected cash flow information and other relevant data:

						For the year ended December 31,
In millions						2020						2019						2018
Cash provided by (used for):
Operating activities						$	783.7					$	1,015.5					$	314.7
Investing activities						(155.4)						(3,177.8)						(147.3)
Financing activities:
Proceeds from debt						3,878.0						3,982.4						3,480.7
Payments of debt						(4,077.3)						(3,423.6)						(1,454.0)
Cash dividends						(92.5)						(81.7)						(46.3)

Operating activities**.** Cash provided by operations in 2020 was $784 million compared with $1,016 million in 2019. In comparison to 2019, cash provided by operations decreased due to an unfavorable change in other assets and liabilities of $492 million primarily due to the timing of payments related to accrued expenses including litigation settlements, unfavorable change in accounts payable of $125 million due to the timing of payments to suppliers, an unfavorable change in accrued liabilities and customer deposits of $80 million primarily related to the timing of accrued compensation payments and an unfavorable change in inventory of $75 million . These unfavorable changes were offset by higher net income of $86 million, a favorable change in non-cash items of $35 million related primarily to increased depreciation and amortization as a result of the acquisition of GE Transportation, and a favorable change in accounts receivable of $321 million due to improved collections and the acceleration of collections due to the newly implemented Revolving Receivable Program.

Investing activities. In 2020 and 2019, cash used in investing activities was $155 million and $3,178 million, respectively. The major components of the cash outflow in 2020 was planned additions to property, plant, and equipment of $136 million for continued investments in our facilities and manufacturing processes, and $40 million in net cash paid for various small acquisitions. The major components of the cash outflow in 2019 was $185 million for additions to property, plant, and equipment and $2,996 million in net cash paid for various acquisitions, primarily GE Transportation.

Financing activities*.* In 2020, cash used for financing activities was $619 million, which included net debt payments of $199 million, $115 million of contingent consideration payments, $93 million of dividend payments, and $207 million for share repurchases. In 2019, cash provided by financing activities was $462 million, which included net proceeds from debt of $559 million and dividend payments of $82 million.

The COVID-19 pandemic had an adverse impact on cash from operating activities for the year ended December 31, 2020, and management expects the COVID-19 pandemic to negatively impact cash from operations into 2021. The extent and length of time in which the Company’s cash from operations will be negatively impacted is uncertain. Because of this uncertainty, the Company took prudent measures to decrease cash used for investing activities in 2020. Additionally, the Company implemented new debt arrangements and a receivables securitization program (described below) as part of its liquidity planning. These measures further strengthen our liquidity position as we address the impacts of the COVID-19 pandemic. Management continues to monitor the rapidly evolving situation and will periodically reassess and adjust the Company’s cash management strategy as circumstances dictate.

As of December 31, 2020, the Company held approximately $599 million of cash and cash equivalents. Of this amount, approximately $108 million was held within the United States and approximately $491 million was held outside of the United States, primarily in Europe, India and China. 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.

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.

Revolving Receivables Program

In May 2020, the Company entered into a revolving agreement to transfer up to $150.0 million of certain receivables of certain subsidiaries of the Company (the "Originators") through our bankruptcy-remote subsidiary to a financial institution on a recurring basis in exchange for cash equal to the gross receivables transferred. 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 referenced 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. This arrangement does not change the payable terms negotiated by the Company and our vendors and does not result in a change in the classification of amounts due as accounts payable in the Consolidated Balance Sheet.

Guarantor Summarized Financial Information

The obligations under the Company's Senior Notes, Senior Credit Facility and 364 Day Facility have been fully and unconditionally guaranteed by certain of the Company's U.S. subsidiaries. Each guarantor is 100% owned by the parent company, with the exception of GE Transportation, a Wabtec Company, which has 15,000 shares outstanding of Class A Non-Voting Preferred Stock held by General Electric Company.

The 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

						Unaudited
						Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries
In millions						Year Ended December 31, 2020
Net sales						$	4,047.9
Gross profit						930.4
Net income attributable to Wabtec shareholders						437.4

Summarized Balance Sheet

						Unaudited
						Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries
In millions						December 31, 2020						December 31, 2019
Current assets						$	1,092.3					$	1,360.1
Noncurrent assets						1,835.7						1,974.3
Current liabilities						1,408.8						1,695.6
Long-term debt						3,779.6						4,321.8
Other non-current liabilities						373.9						539.2

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

						Unaudited
						Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries
In millions						Year Ended December 31, 2020
Net sales to Non-Guarantor Subsidiaries						$	674.7
Purchases from Non-Guarantor Subsidiaries						1,895.9
						Unaudited
						Westinghouse Air Brake Technologies Corp. and Guarantor Subsidiaries
In millions						December 31, 2020
Amount due from/(to) Non-Guarantor Subsidiaries						$	(469.6)

Contractual Obligations and Off-Balance Sheet Arrangements

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and has certain contingent commitments such as debt guarantees. 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, 2020:

												Less than						1 - 3						3 - 5						More than
In millions						Total						1 year						years						years						5 years
Operating activities:
Purchase obligations (1)						$	98.5					$	57.4					$	14.7					$	6.2					$	20.2
Operating leases (2)						323.8						56.4						93.5						70.3						103.6
Pension benefit payments (3)						185.8						16.7						35.1						36.7						97.3
Postretirement benefit payments (4)						9.4						1.1						2.1						2.0						4.2
Financing activities:
Interest payments (5)						846.6						152.0						286.0						207.7						200.9
Long-term debt (6)						4,239.4						447.2						560.4						1,241.3						1,990.5
Dividends to shareholders (7)						90.7						90.7						—						—						—
Other:
Standby letters of credit (8)						736.6						162.9						184.6						217.9						171.2
Total						$	6,530.8					$	984.4					$	1,176.4					$	1,782.1					$	2,587.9

(1)Purchase obligations represent non-cancelable contractual obligations at December 31, 2020. In addition, the Company had $1.1 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)Future minimum payments for operating leases are disclosed by year in Note 15 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(3)Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted. Pension 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 about $7.3 million to pension plan investments in 2021. See further disclosure in Note 10 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(4)Annual payments to participants are expected to continue into the foreseeable future at the amounts or ranges noted. Postretirement payments are based on actuarial estimates using current assumptions for discount rates and health care costs.

(5)Interest payments are payable February and August of each year at 4.375% of $250 million Senior Notes due in 2023. Interest payments are payable May and September of each year at 4.15% of $750 million Senior Notes due 2024. Interest payments are payable June and December of each year at 3.20% of the $500 million Senior Notes due in 2025. Interest payments are payable May and November of each year at 3.45% of $750 million Senior Notes due in 2026. Interest payments are payable March and September of each year at 4.7% of $1,250 million Senior Note due 2028. Interest payments for the Revolving Credit Facility and Other Borrowings are based on contractual terms and the Company’s current interest rates.

(6)Scheduled principal repayments of outstanding loan balances are disclosed in Note 9 of the “Notes to Consolidated Financial Statements” included in Part IV, Item 15 of this report.

(7)Shareholder dividends are subject to approval by the Company’s Board of Directors, currently at an annual rate of approximately $90.7 million.

(8)The $736.6 million of standby letters of credit is comprised of outstanding letters of credit for performance and bid bond purposes, which expire in various dates through 2039. Amounts include interest payments based on contractual terms and the Company’s current interest rate.

The above table does not reflect uncertain tax positions of $16.4 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.

Obligations for operating activities. The Company has entered into $98.5 million of material long-term non-cancelable materials and supply purchase obligations. Operating leases represent multi-year obligations for rental of facilities and equipment. Estimated pension funding and post-retirement benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets, rate of compensation increases and health care cost trend rates. Benefits paid for pension obligations were $17.3 million and $16.0 million in 2020 and 2019, respectively. Benefits paid for post-retirement plans were $0.9 million and $1.0 million in 2020 and in 2019, respectively.

Obligations for financing activities. Cash requirements for financing activities consist primarily of long-term debt repayments, interest payments and dividend payments to shareholders. The Company has historically paid quarterly dividends to shareholders, subject to quarterly approval by our Board of Directors, currently at a rate of approximately $90.7 million annually.

The Company arranges for performance bonds to be issued by third party insurance companies to support certain long term customer contracts. At December 31, 2020, the initial value of performance bonds issued on the Company’s behalf is about $878 million.

Forward Looking Statements

We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.

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

Economic and industry conditions

• prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and South Africa;

• decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;

• reliance on major original equipment manufacturer customers;

• original equipment manufacturers’ program delays;

• demand for services in the freight and passenger rail industry;

• demand for our products and services;

• orders either being delayed, canceled, not returning to historical levels, or reduced or any combination of the foregoing;

• consolidations in the rail industry;

• continued outsourcing by our customers;

• industry demand for faster and more efficient braking equipment;

• fluctuations in interest rates and foreign currency exchange rates; or

• availability of credit;

Operating factors

• supply disruptions including but not limited to disease outbreak, fires, earthquakes, explosions, floods, tornadoes, hurricanes or weather conditions;

• 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, including the acquisition of GE Transportation;

• the development and use of new technology;

• unexpected costs, charges or expenses resulting from the GE Transportation acquisition;

• failure to realize the anticipated benefits of the GE Transportation acquisition, including as a result of integrating GE Transportation into Wabtec; or

• the severity and duration of the evolving COVID-19 pandemic and the resulting impact on the global economy;

Competitive factors

• the actions of competitors; or

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

Political/governmental factors

• political stability in relevant areas of the world;

• future regulation/deregulation of our customers and/or the rail industry;

• levels of governmental funding on transit projects, including for some of our customers;

• political developments and laws and regulations, including those related to Positive Train Control; or

• federal and state income tax legislation; and

• the outcome of negotiations with governments.

Statements in this 10-K apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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.

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

Business Combinations:

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

Judgments and Uncertainties Discounted cash flow models are used to estimate the fair values of acquired contract backlog, customer relationships, intellectual property intangibles, and 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. For example, based on the quantitative analysis performed as of October 1, 2020, a decline in the terminal growth rate by 100 basis points would decrease fair market value by $1,218 million, or an increase in the weighted-average cost of capital by 100 basis points would result in a decrease in fair market value by $2,031 million. Even with such changes the fair value of the reporting units would be greater than their net book values. At December 31, 2020, 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 2018-2020. 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.

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. For example, a 10% decrease or increase in the estimated vesting percentage for incentive stock awards would decrease or increase stock-based compensation expense by approximately $2.5 million.

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.