John Olin
Executive Vice President and Chief Financial Officer at Westinghouse Air Brake Technologies
Thanks, Rafael, and hello, everyone.
Turning to slide eight, I will review our fourth quarter results in more detail. We finished the year with another solid quarter of operational and financial performance. Sales for the fourth quarter were $2.53 billion, which reflects a 9.5% increase versus the prior year. Sales were driven by strong growth across both the Freight and Transit segments.
For the quarter, GAAP operating income was $308 million, driven by higher sales, improved gross margin and focus cost management. Adjusted operating margin in Q4 was 17.0%, up 1.7 percentage points versus the prior year. This increase was driven by a higher gross margin of 1.2 percentage points and 0.5 percentage points of lower SG&A and engineering expenses as a percent of sales. GAAP earnings per diluted share were $1.20, which was up 39.5% versus the fourth quarter a year ago.
During the quarter, we had pre-tax charges of $47 million, of which $19 million was for restructuring, which was primarily related to our Integration 2.0 initiative to further integrate Wabtec's operations and to drive $75 million to $90 million of run rate savings by 2025. In addition, we are exiting some small, non-strategic product lines and related assets which generated a Q4 charge of $28 million.
Finally, in the quarter, our acquisition of the remaining 50% interest in our LKZ assembly Joint Venture generated a gain of $35 million on our existing ownership interest. I will talk more about our progress on Integration 2.0 and portfolio optimization in more detail in a few minutes. In the quarter, adjusted earnings per diluted share were $1.54, up 18.5% versus prior year. Overall, Wabtec delivered another solid quarter, demonstrating the underlying strength of the business.
Turning to slide nine. Let's review our product lines in more detail. Fourth quarter consolidated sales were up 9.5%. Equipment sales were down 19.3% from last year as higher mining sales were more than offset by lower locomotive deliveries during the quarter. Recall that second half locomotive deliveries, as planned, were significantly skewed to the third quarter. Total equipment sales for the year were up a very strong 15.8%.
Component sales were up 17.4% versus last year, largely driven by the higher demand for railcar products, along with increased sales from industrial products. Sales also benefited from the acquisition of L&M earlier in the year by $32 million. Digital Intelligence sales were down 6.7% from last year, which was driven by lower revenues in our North American market, partially offset by higher demand for international PTC, next-gen onboard locomotive products, and digital mining. Our services sales grew 23.9%. Sales growth was driven by significantly higher modernization deliveries. In contrast to new locomotive sales, our planned second half mods deliveries were significantly skewed to the fourth quarter. Additionally, parts sales continued to show strength as our customers continue to recognize the superior performance, reliability, efficiency, and availability across their Wabtec locomotive fleets.
Across our Transit segment, OE and aftermarket sales increased versus last year. Segment sales were up 14.3% to $728 million, behind execution of our growing backlog. The momentum in this segment is strong across our core markets as secular drivers such as urbanization and decarbonization accelerate the need for global investments in sustainable infrastructure.
Moving to slide 10. GAAP gross margin was 30.3%, which was up 2.0 percentage points from Q4 last year. Adjusted gross profit margin was up 1.2 percentage points driven by higher sales, favorable price/mix, and foreign currency exchange, as well as improved productivity. Our team continues to execute well to mitigate the impact of continued cost pressures by driving operational productivity and lean initiatives.
Now turning to slide 11. For the fourth quarter, GAAP operating margin was 12.2%, which was up 1.5 percentage points versus last year, while adjusted operating margin improved 1.7 percentage points to 17.0%. GAAP and adjusted SG&A expenses were down as a percentage of revenue as we leveraged higher sales with a strong focus on managing costs. Engineering expense was $61 million, about flat with Q4 last year. We continue to invest engineering resources in current business opportunities, but more importantly, we are investing in our future as an industry leader in decarbonization and digital technologies that improve our customers' productivity, capacity utilization, and safety.
Now let's take a look at segment results on slide 12, starting with the Freight segment. As I already discussed, Freight segment sales were up 7.7% during the quarter. GAAP segment operating income was $246 million for an operating margin of 13.7%, up 1.2 percentage points versus last year. GAAP operating income includes $28 million of portfolio optimization costs. Adjusted operating income for the Freight segment was $347 million, up 22.2% versus the prior year. Adjusted operating margin in the Freight segment was up 2.3 percentage points from the prior year at 19.3%. The increase was driven by significantly higher gross margin, which benefited from higher sales, favorable price mix, and improved productivity and absorption. At the same time, SG&A and engineering expenses were lower as a percentage of revenue. Finally, segment 12-month backlog was $5.45 billion, up 11.2% from the same period a year ago. The multi-year backlog was $17.83 billion, down 4.3% from the prior year. Both our 12-month and multi-year backlogs demonstrate good visibility into 2024 and beyond.
Turning to slide 13. Transit segment sales were up 14.3% to $728 million. When adjusting for foreign currency, Transit sales were up 9.9%. GAAP operating income was $86 million, up 36.5%. Restructuring costs related to Integration 2.0 activities were $17 million in Q4. Adjusted segment operating income was $108 million, which was up 13.7%. Adjusted operating margin of 14.9% was up 0.1 percentage points from last year, driven by the benefits of volume growth and Integration 2.0 savings. Finally, Transit segment 12-month backlog for the quarter was $2.01 billion, up 8.0% versus a year ago. The multi-year backlog was also up 9.7% to $4.17 billion.
Moving to slide 14. Over the next two slides, I would like to touch on both our progress against our Integration 2.0 initiative, as well as provide details on our portfolio optimization. The efforts of both these programs in 2024 will unlock greater profitability and margin expansion across the portfolio. With regards to Integration 2.0, recall that during our Investor Day in 2022, we announced a restructuring program comprised of estimated one-time expenses between $135 million and $165 million. That would yield an incremental $75 million to $90 million of run rate savings by 2025. These savings are to be achieved through a combination of actions, which simplify, streamline, and consolidate parts of our operations. With program-to-date restructuring expenses of $118 million, we achieved $22 million of run rate savings as we exited 2023. We expect savings to ramp more meaningfully in 2024, and we remain on track to meet our 2025 goals.
Now turning to slide 15. As you are aware, we are very focused on driving improved shareholder value through the addition of strategic bolt-on acquisitions with the accretive earnings, margins, and return on invested capital. In the second quarter of 2023, we acquired L&M, a business that is very complementary to our heat transfer portfolio and enhances our mining installed base. In the short time that we have owned this business, we are pleased with its performance, and more importantly, we are excited about its future potential for driving long-term profitable growth for Wabtec.
Also, as Rafael stated, late in the fourth quarter, we acquired the remaining 50% stake of our unconsolidated LKZ assembly joint venture in Kazakhstan for $81 million net of cash received. As a result of the transaction, we recorded a $35 million non-cash gain in the quarter, which is excluded from adjusted earnings. Going forward, this business will be 100% owned by Wabtec and consolidated in our financial results. We would expect virtually no impact to sales and limited benefit to earnings in 2024.
We are also announcing today the exit of some non-strategic product lines in 2024. Pruning of these product lines will improve focus and profitability while reducing manufacturing complexity. Sales from these product lines totaled about $110 million of sales in 2023 and represented a lower-than-average margin profile. The expected net exit charges of roughly $85 million are largely non-cash, of which we recognize $28 million of non-cash charges in our Q4 GAAP results. Both our progress against our Integration 2.0 initiative and the announced portfolio moves will help position Wabtec to drive multi-year margin expansion.
Now let's turn to our financial position on slide 16. Fourth quarter cash generation was strong at $686 million, resulting in total cash from operations of $1.2 billion versus $1.04 billion in the prior year, an increase of 15.7%. Cash flow benefited from higher earnings and improved working capital. Our balance sheet and financial position continued to be strong. We ended the quarter with liquidity of $2.12 billion. And our net debt leverage ratio was 1.9 times at the end of the fourth quarter, which was favorable versus the prior year's 2.2 times debt leverage. During 2023, we invested $308 million on the strategic acquisitions of L&M and the LKZ joint venture and returned $532 million to shareholders through share repurchases and dividends. Finally, we improved ROIC during the year by 1.2 percentage points. We continue to allocate capital in a disciplined and balanced way to maximize returns for our shareholders.
Moving to slide 17, quickly recapping the year. Overall, the team delivered a strong year for all our stakeholders. Despite macro challenges, we drove strong revenue growth, expanded our operating margins, and generated robust cash flows. The resiliency of the business and strong execution provides us with a solid foundation for profitable growth as we enter 2024.
With that, I'd like to turn the call back over to Rafael to provide our 2024 financial guidance.
