John Olin
Executive Vice President and Chief Financial Officer at Westinghouse Air Brake Technologies
Thanks, Rafael, and hello, everyone. Turning to slide seven, I will review our third-quarter results in more detail. Our third-quarter results played out largely as we planned with revenue and better than expected with our operating margins.
As we discussed in the last-quarter call, we expected both revenue and margin growth to be higher in the first half than in the second half, with the second-half growth to be at a much more tempered pace than we experienced in the first half.
We also noted during the last call that within the second half of this year, we expected the third quarter's growth to be greater than the fourth quarter's growth. This is still the case. Sequentially, we expect margins in Q4 to come down from Q3, driven by the reverse of what we saw in Q3 regarding business group revenue mix.
In Q3, we saw robust Services growth, which comes at a higher margin, while the Equipment business, which comes at a lower margin, was down versus prior year. This was largely a result of the timing of our production between new locomotives, modernizations and engine overhauls.
In Q4, we expect a significant mix headwind, which will temper Q4 adjusted operating margins to be modestly higher than year-ago levels. We expect double-digit sales growth in our Equipment group due to increased locomotive deliveries, while Services sales are expected to be down double-digit on a year-over-year basis, basically the reverse of our production timing in Q3.
Sales for the third quarter were $2.66 billion, which reflects a 4.4% increase versus the prior year. Sales growth in the quarter was driven by both the Freight and Transit segments. For the quarter, GAAP operating income was $433 million. The increase was driven by higher sales, improved gross margin and an unrelenting focus on continuous improvement and productivity. Adjusted operating margin in Q3 was 19.7%, up 1.8 percentage points versus the prior year. This increase was driven by improved gross margin of 1.8 percentage points.
GAAP earnings per diluted share were $1.63, which was up 22.6% versus the year-ago quarter. During the quarter, we had net pre-tax charges of $18 million for restructuring, which were primarily related to our Integration 2.0 and our portfolio optimization initiative, to further integrate and streamline Wabtec's operations. As you may recall, Integration 2.0 is expected to drive $75 million to $90 million of run-rate savings by 2025 and our portfolio optimization initiative will eliminate roughly $110 million of low-margin, non-strategic revenue while reducing manufacturing complexity.
In the quarter, adjusted earnings per diluted share was $2, up 17.6% versus the prior year. Overall, Wabtec delivered another solid quarter, demonstrating the underlying strength of the business.
Turning to slide eight, let's review our product lines in more detail. Third quarter consolidated sales were up 4.4%. Our quarter results were driven by growth in our Services, Digital Intelligence and Transit businesses, partially offset by our Equipment business.
Equipment sales were down 17.3% from last year's third-quarter. This decline was planned and driven by the timing of new locomotive deliveries. As mentioned earlier, we expect this to reverse in Q4, with Equipment sales expected to be up double digit.
Component sales were up 1.0% versus last year, due to higher international freight car sales and industrial product growth, which was offset by lower North American freight car build. The industry is forecasting 2024 freight car build to be down 9% from last year.
Digital Intelligence sales were up 12.7% from last year. This was driven by growth in our international sales of PTC, next-generation onboard products and digital mining products. Our Services sales grew 16.5%. Sales growth was driven primarily by higher year-over-year modernizations and overhauls. As mentioned earlier, we expect the timing of our mods and overhaul production and deliveries to reverse in Q4, resulting in our year-over-year Services revenue to be down double-digits.
In our Transit segment, sales were up 9.6%. During the quarter, we saw our OE revenue grow 13.3%. On a constant-currency basis, sales grew 8.4%. The momentum in the Transit segment continues to remain positive, as secular drivers such as urbanization and decarbonization accelerate the need for investments in sustainable infrastructure.
Moving to slide nine, GAAP gross margin was 33.0%, which was up 2.0 percentage points from the third quarter last year. Adjusted gross margin was also up 1.8 percentage points during the quarter. In addition to the higher sales, gross margin benefited from favorable mix between business groups. Mix within the Freight segment was better than expected due to growth in our Services business behind the timing of mods and overhauls in the quarter, partially offset by a planned decline in locomotive production and deliveries.
Foreign currency exchange was a slight headwind to revenue as well as gross profit and operating margin in the quarter. During the quarter, we also benefited from increased productivity and the benefits of our Integration 2.0 and portfolio optimization efforts, as well as lapping last year's Erie strike that ran through a portion of the third quarter of 2023. Our team continues to execute well by driving operational productivity and lean benefits.
Now, turning to slide 10, for the third quarter, GAAP operating margin was 16.3%, which was up 1.8 percentage points versus last year. Adjusted operating margin improved 1.8 percentage points to 19.7%.
GAAP and adjusted SG&A and engineering expenses were up versus prior year, but largely flat as a percentage of revenues. Engineering expense was $50 million, slightly lower than Q3 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 the segment results on slide 11, starting with the Freight segment. As I already discussed, Freight segment sales were up 2.6% during the quarter. GAAP segment operating income was $390 million for an operating margin of 20.2%, up 2.9 percentage points versus last year. GAAP operating income included $10 million of restructuring costs, primarily related to Integration 2.0 and portfolio optimization.
Adjusted operating income for the Freight segment was $467 million, up 17.6% versus the prior year. Adjusted operating margin in the Freight segment was 24.1%, up 2.9 percentage points from the prior year. The increase was driven by improved gross margin behind favorable business mix, strong operational execution, Integration 2.0 savings and as we lap last year's manufacturing inefficiencies caused by the strike in Erie. At the same time, SG&A and engineering expense were slightly lower as a percentage of revenue.
Finally, segment 12-month backlog was $5.59 billion, up 6.4% from the same-period a year ago. The multi-year backlog was $17.76 billion, up 1.1% from prior year.
Turning to slide 12, Transit segment sales were up 9.6% at $733 million. When adjusting for foreign currency, Transit sales were up 8.4%. GAAP operating income was $79 million. Restructuring costs related to Integration 2.0 were $8 million in Q3.
Adjusted segment operating income was $93 million. Adjusted operating income as a percent of revenue was 12.8%, up 0.3 percentage points. During the quarter, adjusted gross margin was down modestly behind unfavorable mix, partially offset by Integration 2.0 savings. Margins also benefited from SG&A and engineering expenses being lower as a percent of revenue. Finally, Transit segment 12-month backlog for the quarter was $2.04 billion, up 10.8% versus a year ago.
Now, let's turn to our financial position on slide 13. Third-quarter cash flow was another highlight for the quarter, with operating cash coming in at $542 million. During the quarter, cash flow benefited from higher earnings and $95 million of higher securitization borrowings. We continue to expect greater than 90% cash conversion for the full year.
Our balance sheet and financial position continue to be very strong as evidenced by, first, our liquidity position, which ended the quarter at $1.9 billion and our net-debt leverage ratio which ended the 3rd-quarter at 1.7 times, which was lower versus the same quarter a year ago at 2.1 times debt leverage.
We continue to allocate capital to maximize returns for our shareholders. During the quarter, we repurchased $599 million of our shares and paid $35 million in dividends.
With that, I'd like to turn the call back over to Rafael to talk about our 2024 financial guidance.
