================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2002 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from ______ to ______ Commission file number 1-13782 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 25-1615902 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1001 AIR BRAKE AVENUE WILMERDING, PENNSYLVANIA 15148 (412) 825-1000 (Address of principal executive offices) (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes No . As of May 10, 2002, 43,311,569 shares of Common Stock of the registrant were issued and outstanding. ================================================================================
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION MARCH 31, 2002 FORM 10-Q TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> UNAUDITED MARCH 31 DECEMBER 31 In thousands, except shares and par value 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash $ 27,544 $ 53,949 Accounts receivable 104,480 106,527 Inventories 105,306 104,930 Other current assets 30,722 30,288 --------- --------- Total current assets 268,052 295,694 Property, plant and equipment 319,849 318,188 Accumulated depreciation (154,933) (150,493) --------- --------- Property, plant and equipment, net 164,916 167,695 OTHER ASSETS Goodwill, net 198,655 197,991 Other intangibles, net 44,031 45,145 Other noncurrent assets 20,786 23,427 --------- --------- Total other assets 263,472 266,563 --------- --------- Total Assets $ 696,440 $ 729,952 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 788 $ 782 Accounts payable 73,880 75,150 Accrued merger and restructuring costs 2,112 3,152 Customer deposits 11,393 10,314 Accrued income taxes 14,958 43,741 Other accrued liabilities 49,318 53,082 --------- --------- Total current liabilities 152,449 186,221 Long-term debt 240,697 241,088 Reserve for postretirement and pension benefits 27,856 27,544 Other long-term liabilities 26,308 29,828 --------- --------- Total liabilities 447,310 484,681 SHAREHOLDERS' EQUITY Common stock, $.01 par value; 100,000,000 shares authorized: 65,447,867 shares issued and 43,294,294 and 43,152,546 outstanding at March 31, 2002 and December 31, 2001, respectively 654 654 Additional paid-in capital 272,423 272,674 Treasury stock, at cost, 22,153,574 and 22,295,322 shares, respectively (275,448) (277,489) Retained earnings 280,372 278,569 Deferred compensation 278 538 Accumulated other comprehensive income (loss) (29,149) (29,675) --------- --------- Total shareholders' equity 249,130 245,271 --------- --------- Total Liabilities and Shareholders' Equity $ 696,440 $ 729,952 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> UNAUDITED THREE MONTHS ENDED MARCH 31 In thousands, except per share data 2002 2001 - ------------------------------------------------------------------------------------------------- <S> <C> <C> Net sales $ 177,325 $ 215,305 Cost of sales (132,545) (153,892) --------- --------- Gross profit 44,780 61,413 Selling, general and administrative expenses (24,723) (24,232) Restructuring charges -- (854) Engineering expenses (8,105) (8,508) Amortization expense (1,485) (3,326) --------- --------- Total operating expenses (34,313) (36,920) Income from operations 10,467 24,493 Other income and expenses Interest expense (5,310) (10,789) Other expense, net (1,113) (1,096) --------- --------- Income from continuing operations before income taxes 4,044 12,608 Income tax expense (1,415) (4,539) --------- --------- Income from continuing operations 2,629 8,069 Discontinued operations, net of tax Income from discontinued operations 124 2,292 Loss on sale of discontinued operations (529) -- --------- --------- Total discontinued operations (405) 2,292 --------- --------- Net income $ 2,224 $ 10,361 ========= ========= EARNINGS PER COMMON SHARE Basic Income from continuing operations $ 0.06 $ 0.19 Income (loss) from discontinued operations (0.01) 0.05 --------- --------- Net income $ 0.05 $ 0.24 ========= ========= Diluted Income from continuing operations $ 0.06 $ 0.19 Income (loss) from discontinued operations (0.01) 0.05 --------- --------- Net income $ 0.05 $ 0.24 ========= ========= Weighted average shares outstanding Basic 43,198 42,884 Diluted 43,512 43,144 --------- --------- </TABLE> The accompanying notes are an integral part of these statements. 4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> UNAUDITED THREE MONTHS ENDED MARCH 31 In thousands 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 2,224 $ 10,361 Adjustments to reconcile net income to net cash (used for) provided by operations: Depreciation and amortization 6,558 8,261 Discontinued operations, net of tax 405 (2,292) Other, primarily non-cash restructuring related charges -- 160 Discontinued operations 131 1,299 Changes in operating assets and liabilities, net of acquisition and disposition of product line Accounts receivable 1,516 3,816 Inventories (162) 1,695 Accounts payable 370 (4,926) Accrued income taxes (28,724) 9,324 Accrued liabilities and customer deposits (3,365) 8,165 Other assets and liabilities (2,831) 3,702 -------- -------- Net cash (used for) provided by operating activities (23,878) 39,565 INVESTING ACTIVITIES Purchase of property, plant and equipment, net (2,574) (4,432) Cash received from disposition of discontinued operations 1,400 -- Cash received from disposition of product line -- 500 Cash paid for acquisition of product line (1,654) -- Discontinued operations (4) (556) -------- -------- Net cash used for investing activities (2,832) (4,488) FINANCING ACTIVITIES Repayments of credit agreement -- (32,000) Repayments of other borrowings (411) (218) Purchase of treasury stock -- (232) Proceeds from the issuance of treasury stock from stock options and other benefit plans 1,530 802 Cash dividends (421) (420) -------- -------- Net cash provided by (used for) financing activities 698 (32,068) Effect of changes in currency exchange rates (393) (1,130) -------- -------- (Decrease) increase in cash (26,405) 1,879 Cash, beginning of year 53,949 6,071 -------- -------- Cash, end of period $ 27,544 $ 7,950 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 (UNAUDITED) 1. BUSINESS Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is one of North America's largest manufacturers of value-added equipment for locomotives, railway freight cars and passenger transit vehicles. Our major products are intended to enhance safety, improve productivity and reduce maintenance costs for our customers. Our major product offerings include electronic controls and monitors, air brakes, cooling equipment, switcher and commuter locomotives, couplers, door controls, draft gears and brake shoes. The Company aggressively pursues technological advances with respect to both new product development and product enhancements. The Company has two reporting segments: Freight Group and Transit Group. Although approximately 52% of the Company's sales are to the aftermarket, a significant portion of the Freight Group's operations and revenue base is generally dependent on the capital replacement cycles of the large North American-based railroad companies for locomotives and freight cars. The Transit Group's operations are dependent on the budgeting and expenditure appropriation process of federal, state and local governmental units for mass transit needs established by public policy. 2. ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. These condensed interim financial statements do not include all of the information and footnotes required for complete financial statements. In management's opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year. Certain prior period amounts have been reclassified, where necessary, to conform to the current period presentation. The Company operates on a four-four-five week accounting quarter, and accordingly, the quarters end on or about March 31, June 30, September 30 and December 31. The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec's Annual Report on Form 10-K for the year ended December 31, 2001. REVENUE RECOGNITION Revenue is recognized in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Wabtec recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as known. Provisions are made currently for estimated losses on uncompleted contracts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. FINANCIAL DERIVATIVES AND HEDGES ACTIVITY The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 133, and as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. In the application, the Company has concluded its interest rate swap contracts qualify for "special cash flow hedge accounting" which permit recording the fair value of the swap and corresponding adjustment to other comprehensive income (loss) on the balance sheet while creating some volatility in future earnings, due to market sensitivity and ineffectiveness in offsetting changes in interest rates of the Company's variable rate borrowings. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under its provisions, all tangible long-lived assets, whether to be held and used or to be disposed of by sale or other means, will be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company early adopted SFAS 144 in the third quarter of 2001. 6
OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as net income and all nonowner changes in shareholders' equity. The Company's accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, unrealized losses on derivatives designated and qualified as cash flow hedges and pension related adjustments. Total comprehensive income (loss) for the three months ended March 31 was: THREE MONTHS ENDED MARCH 31 In thousands 2002 2001 - -------------------------------------------------------------- Net Income $ 2,224 $ 10,361 Foreign Currency Translation (3) (5,164) Unrealized gain/(loss) on hedges, net of tax 529 (2,821) ---------------------- Total Comprehensive Income $2,750 $ 2,376 - -------------------------------------------------------------- The components of accumulated other comprehensive income (loss) consisted of the following at March 31, 2002 and December 31, 2001 were: MARCH 31 DECEMBER 31 In thousands 2002 2001 - ---------------------------------------------------------------- Foreign currency translation $(20,655) $(20,652) Unrealized loss on hedges, net of tax (2,015) (2,544) Additional minimum pension liability, net of tax (6,479) (6,479) --------------------------- Total Comprehensive Loss $(29,149) $(29,675) - ---------------------------------------------------------------- 3. DISCONTINUED OPERATIONS On November 1, 2001, the Company completed the sale of certain assets to GE Transportation Systems (GETS) for $240 million in cash, subject to adjustment for the finalization of the value of the net assets sold. The assets sold primarily include locomotive aftermarket products and services for which Wabtec is not the original equipment manufacturer. In accordance with SFAS 144, the operating results of these businesses, along with other small non-core businesses that the Company decided to exit in the fourth quarter of 2001, have been classified as discontinued operations for all years presented and are summarized as of March 31, as follows: THREE MONTHS ENDED MARCH 31 In thousands 2002 2001 - ---------------------------------------------------------------- Net sales $4,339 $51,240 Income before income taxes 191 3,582 Income tax expense 67 1,290 -------------------- Income from discontinued operations $124 $2,292 - ---------------------------------------------------------------- 4. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The components of inventory, net of reserves, were: MARCH 31 DECEMBER 31 In thousands 2002 2001 - ---------------------------------------------------------------- Raw materials $61,226 $60,013 Work-in-process 33,859 34,265 Finished goods 10,221 10,652 --------------------------- Total inventory $105,306 $104,930 - ---------------------------------------------------------------- 5. INTANGIBLES The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under its provisions, all goodwill and other intangible assets with indefinite lives are no longer amortized under a straight-line basis of estimated useful life. Instead, they will be subject to assessments for impairment by applying a fair-value-based test. While the Company has not completed the assessment process, it does anticipate that the process will result in an impairment recognition. We anticipate completing the Phase I analysis by the end of May. Intangible assets of the Company, other than goodwill, consist of the following: MARCH 31 DECEMBER 31 In thousands 2002 2001 - ----------------------------------------------------------------------- Patents, tradenames/trademarks and other, net of accumulated amortization of $41,345 and $40,571 (3-40 years) $38,071 $38,845 Covenants not to compete, net of accumulated amortization of $15,666 and $15,326 (5 years) 2,487 2,827 Intangible pension asset 3,473 3,473 --------------------- Total $44,031 $45,145 - ----------------------------------------------------------------------- Amortization expense for intangible assets was $1.5 million for the three months ended March 31, 2002. Estimated amortization expense for the remainder of 2002 and the five succeeding years are as follows (in thousands): 2002 (remainder) $4,152 2003 5,239 2004 3,903 2005 2,962 2006 2,297 2007 2,084 The changes in the carrying amount of goodwill by segment for the quarter ended March 31, 2002 are as follows: FREIGHT TRANSIT In thousands GROUP GROUP TOTAL - ----------------------------------------------------------------- Balance at December 31, 2001 $174,288 $23,703 $197,991 Goodwill acquired 664 - 664 --------------------------------- Balance at March 31, 2002 $174,952 $23,703 $198,655 - ----------------------------------------------------------------- 7
Actual results of operations for the three months ended March 31, 2002 and pro forma results of operations for the three months ended March 31, 2001 had we applied the non-amortization provisions of SFAS No. 142 in these periods are as follows: THREE MONTHS ENDED MARCH 31 In thousands, except per share amounts 2002 2001 - ----------------------------------------------------------------- Reported net income $2,224 $10,361 Add: goodwill amortization, net of tax - 1,081 --------------------- Adjusted net income $2,224 $11,442 Basic earnings per share Reported net income $0.05 $0.24 Goodwill amortization - 0.03 --------------------- Adjusted net income $0.05 $0.27 Diluted earnings per share Reported net income $0.05 $0.24 Goodwill amortization - 0.03 --------------------- Adjusted net income $0.05 $0.27 - ----------------------------------------------------------------- 6. EARNINGS PER SHARE The computation of earnings per share is as follows: THREE MONTHS ENDED MARCH 31 In thousands, except per share 2002 2001 - ----------------------------------------------------------------- BASIC EARNINGS PER SHARE Income applicable to common shareholders $2,224 $10,361 Divided by Weighted average shares outstanding 43,198 42,884 Basic earnings per share $0.05 $0.24 - ----------------------------------------------------------------- DILUTED EARNINGS PER SHARE Income applicable to common shareholders $2,224 $10,361 Divided by sum of the Weighted average shares outstanding 43,198 42,884 Conversion of dilutive stock options 314 260 --------------------- Diluted shares outstanding 43,512 43,144 Diluted earnings per share $0.05 $0.24 - ----------------------------------------------------------------- 7. COMMITMENTS AND CONTINGENCIES Under the terms of the purchase agreement and related documents for the 1990 Acquisition, American Standard, Inc. ("ASI"), has indemnified the Company for certain items including, among others, environmental claims. The indemnification provisions of the agreement expired at various dates through 2000, except for those claims, which were timely asserted, which continue until resolved. If ASI was unable to honor or meet these indemnifications, the Company would be responsible for such items. In the opinion of management, ASI currently has the ability to meet its indemnification obligations. The Company's and its affiliates' operations do not use and their products do not contain any asbestos. Asbestos actions have been filed against the Company and certain of its affiliates. Consistent with the experience of others, the number of claims have increased in recent years. However, it is important to note that these asbestos claims involve products sold prior to the 1990 formation of the Company. The Company and its affiliates have not incurred any significant costs related to these asbestos claims. The claims are covered by insurance or are subject to indemnity from the companies who manufactured or sold the products in question. Management believes that these claims will not be material; and accordingly, the financial statements do not reflect any costs or reserves for such claims. The Company is subject to a number of other commitments and contingencies as described in its Annual Report on Form 10-K for the Year Ended December 31, 2001. During the first quarter, there were no material changes to the information described in Note 18 therein. Also, as described in Note 18 of the Form 10-K, the Company is subject to a RCRA Part B Closure Permit ("the Permit") issued by the Environmental Protection Agency (EPA) and the Idaho Department of Health and Welfare, Division of Environmental Quality relating to the monitoring and treatment of groundwater contamination on, and adjacent to, the Boise Locomotive Company facility. In compliance with the Permit, the Company has completed the first phase of an accelerated plan for the treatment of contaminated groundwater, and continues onsite and offsite monitoring for the amount of hazardous constituents. At March 31, 2002, the Company has accrued $997,000 representing the estimated remaining costs for remediation. The Company was in compliance with the Permit at March 31, 2002. 8. SEGMENT INFORMATION Wabtec has two reportable segments - the Freight Group and the Transit Group. The key factors used to identify these reportable segments are the organization and alignment of the Company's internal operations, the nature of the products and services, and customer type. The business segments are: FREIGHT GROUP manufactures products and provides services geared to the production and operation of freight cars and locomotives, including braking control equipment, engines, on-board electronic components and train coupler equipment. 8
Revenues are derived from OEM sales and locomotive overhauls, aftermarket sales and from freight car repairs and services. TRANSIT GROUP consists of products for passenger transit vehicles (typically subways, commuter rail and buses) that include braking and monitoring systems, climate control and door equipment that are engineered to meet individual customer specifications. Revenues are derived from OEM and aftermarket sales as well as from repairs and services. The Company evaluates its business segments' operating results based on income from operations before merger and restructuring charges. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies. Segment financial information for the three months ended March 31, 2002 is as follows: <TABLE> <CAPTION> FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Sales to external customers $108,607 $68,718 - - $177,325 Intersegment sales/(elimination) 2,896 107 (3,003) - - -------------------------------------------------------------------- Total sales $111,503 $68,825 $ (3,003) - $177,325 ==================================================================== Income from operations $ 9,859 $ 5,849 $ (5,241) - $ 10,467 Interest expense and other - - (6,423) - (6,423) -------------------------------------------------------------------- Income before income taxes $ 9,859 $ 5,849 $(11,664) - $ 4,044 ==================================================================== </TABLE> Segment financial information for the three months ended March 31, 2001 is as follows: <TABLE> <CAPTION> FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Sales to external customers $139,595 $75,710 - - $215,305 Intersegment sales/(elimination) 3,255 151 (3,406) - - -------------------------------------------------------------------- Total sales $142,850 $75,861 $(3,406) - $215,305 ==================================================================== Income from operations $22,528 $7,743 $(4,924) $(854) $24,493 Interest expense and other - - (11,885) - (11,885) -------------------------------------------------------------------- Income before income taxes $22,528 $7,743 $(16,809) $(854) $12,608 ==================================================================== </TABLE> 9. RESTRUCTURING CHARGES In 2001, the Company completed a merger and restructuring plan with charges totaling $71 million pre-tax, with approximately $49 million of the charge expensed in 1999, $20 million in 2000 and $2 million in 2001. The plan involved the elimination of duplicate facilities and excess capacity, operational realignment and related workforce reductions, and the evaluation of certain assets as to their perceived ongoing benefit to the Company. As of March 31, 2002, $2.1 million of the merger and restructuring charge was still remaining as accrued on the balance sheet. The table below identifies the significant components of the charge and reflects the accrual balance at that date. <TABLE> <CAPTION> LEASE IMPAIRMENTS AND ASSET In thousands WRITEDOWNS SEVERANCE OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Beginning balance, January 1, 2002 $2,458 $525 $169 $3,152 Amounts paid (515) (525) - (1,040) ------------------------------------------------------ Balance at March 31, 2002 $1,943 $- $169 $2,112 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> 9
The lease impairment charges and asset writedowns are associated with the Company's closing of several plants, the relocation of the corporate headquarters, and the Company's evaluation of certain assets where projected cash flows from such assets over their remaining lives are estimated to be less than their carrying values. The other category represents other related costs that have been incurred and not yet paid as of March 31, 2002. The Company began and completed a new restructuring plan for the Transit rail business in 2001. The Company estimates synergies from the plan will yield approximately $3 million of pre-tax cost savings in 2002 and beyond, with such benefits realized through reduced cost of sales and reduced selling, general and administrative expenses. The restructuring plan involved operational realignment and related workforce reductions. The charges to complete the restructuring plan totaled $2 million pre-tax. The $2 million charge included costs associated with relocating several production operations from Chicago to Montreal. 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 2001 Annual Report on Form 10-K. OVERVIEW In November 2001, Wabtec sold certain assets to GE Transportation Systems (GETS) for $240 million in cash. The assets sold primarily include locomotive aftermarket products and services for which Wabtec is not the original equipment manufacturer. The results for these businesses, along with other small non-core businesses that the Company has decided to exit, are classified as discontinued operations throughout this report. Prior period results were restated for the discontinued operations format. Net income for the first three months of 2002 was $2.2 million, or $0.05 per diluted share, as compared to $10.4 million, or $0.24 per diluted share in the same period in 2001. The results for the first three months of 2002 included a $405,000 net of tax loss from discontinued operations, while 2001 included $2.3 million net of tax of income from discontinued operations and an $854,000 restructuring-related charge. Without the effect of the aforementioned items, net income from continuing operations for the first three months of 2002 and 2001 would have been $2.6 million or $0.06 per diluted share and $8.6 million or $0.20 per diluted share. Net sales of continuing operations decreased to $177.3 million in the first three months of 2002 as compared to $215.3 million in the same period in 2001. Operating margins of continuing operations for the first three months of 2002 decreased to 5.9% as compared to 11.4% in the same period in 2001. The drop in net income was essentially volume and mix related. FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001 The following table sets forth the Company's net sales by business segment: THREE MONTHS ENDED MARCH 31 -------------------------- In thousands 2002 2001 - --------------------------------------------------------------- Freight Group $108,607 $139,595 Transit Group 68,718 75,710 -------------------------- Net sales $177,325 $215,305 - --------------------------------------------------------------- Net sales for the first quarter of 2002 decreased $38 million, or 17.6%, to $177.3 million as compared to the prior year period. Both the Freight Group and Transit Group had lower sales. The Freight Group's decreased sales reflected lower sales of components for new freight cars. In the quarter, industry deliveries of new freight cars decreased to 3,855 units as compared to 11,070 in the same period in 2001. The Transit Group's decreased sales were primarily due to lower sales of doors for buses and air conditioning units for rail transit vehicles. Gross profit decreased to $44.8 million in the first quarter of 2002 compared to $61.4 million in the same period of 2001. Gross profit is dependent on a number of factors including pricing, sales volume and product mix. Gross profit, as a percentage of sales, was 25.3% compared to 28.5% in the same period of 2001. (Gross profit was 25% in the fourth quarter of 2001.) The decrease in gross profit is primarily attributed to the decrease in sales volumes, an unfavorable product mix and pricing pressures, along with increased warranty costs. After excluding goodwill amortization (due to the required adoption of Financial Accounting Standard 142, goodwill is no longer amortized) of $1.7 million and restructuring charges of $854,000 in the first quarter of 2001, operating expenses were virtually unchanged in the first quarter of 2002 as compared to the same period of 2001. Operating income totaled $4 million (or 2.3% of sales) in the first quarter of 2002 compared with $12.6 million (or 5.9% of sales) in the same period in 2001. Lower operating income resulted from $38 million less in sales volumes and overall changes to product mix. (See Note 8 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest expense decreased 50.8% in the first quarter of 2002 as compared to the prior year quarter primarily due to a substantial decrease in debt. Other expense includes approximately $373,000 recorded in the first quarter of 2002 representing a foreign exchange loss as compared to a $105,000 foreign exchange loss in the prior year period. The effective income tax rate dropped from 36% in the first quarter of 2001 to 35% in the first quarter of 2002. In March 2002, the Company completed the planned disposal of its Lokring product line for $1.4 million in cash and a note receivable. In January 2002, the Company acquired the 49% of Pioneer Friction Products that it did not already own for $1.7 million in cash. 11
In March 2001, the Company disposed of its Vapor Power product line for $0.5 million in cash and a note receivable. LIQUIDITY AND CAPITAL RESOURCES Liquidity is provided primarily by operating cash flow and borrowings under the Company's credit facility with a consortium of commercial banks ("credit agreement"). The following is a summary of selected cash flow information and other relevant data. THREE MONTHS ENDED MARCH 31 ------------------------- In thousands 2002 2001 - --------------------------------------------------------------- Cash provided (used) by: Operating activities: Income taxes $(28,724) $9,324 Other operating activities 4,846 30,241 Investing activities (2,832) (4,488) Financing activities 698 (32,068) Earnings before interest, taxes, depreciation and amortization (EBITDA) 17,025 32,754 Operating cash flow in the first three months of 2002 was a use of $23.9 million compared to cash provided of $39.6 million in the same period a year ago. Planned income tax payments of approximately $30 million due primarily to the fourth quarter 2001 net gain from the sale of certain businesses to GETS were the primary use of cash for the first quarter of 2002. Cash used for investing activities was only $2.8 million in the first three months of 2002 as compared to $4.5 million a year ago. In the first three months of 2002, cash received from the sale of a product line was $1.4 million, compared to $500,000 in the first three months of 2001. In the first three months of 2002, $1.7 million was paid for the portion of a business that the Company did not already own. Capital expenditures in the first three months of 2002 were $3.1 million compared to $5.3 million in the same period a year ago. The majority of capital expenditures for these periods relates to upgrades to existing equipment and replacement of existing equipment to improve the overall cost savings through efficiencies. Cash provided by financing activities was $698,000 in the first three months of 2002 versus cash used of $32.1 million in the same period a year ago. In the first three months of 2002, the Company reduced long-term debt by approximately $411,000 in the first three months of 2002 compared to $32.2 million in the same period a year ago. The following table sets forth the Company's outstanding indebtedness at March 31, 2002. The revolving credit note and other term loan interest rates are variable and dependent on market conditions. MARCH 30 DECEMBER 31 In thousands 2002 2001 - ----------------------------------------------------------------- Revolving credit agreement $ 60,000 $ 60,000 9.375% Senior notes due 2005 175,000 175,000 5.5% Industrial revenue bond due 2008 5,398 5,556 Other 1,087 1,314 ------------------------- Total $241,485 $241,870 Less-current portion 788 782 ------------------------- Long-term portion $240,697 $241,088 - ----------------------------------------------------------------- Credit Agreement The company currently has an unsecured credit agreement that provides a $275 million five-year revolving credit facility expiring in 2004 and a 364-day $100 million convertible revolving credit facility through 2004 which is to be reconfirmed in November 2002. At March 31, 2002, the Company had available borrowing capacity, net of letters of credit, of approximately $289 million. 9 3/8% Senior Notes Due June 2005 In June 1995, the Company issued $100 million of 9.375% Senior Notes due in 2005 (the "1995 Notes"). In January 1999, the Company issued an additional $75 million of 9.375% Senior Notes which are due in 2005 (the "1999 Notes"; the 1995 Notes and the 1999 Notes are collectively, the "Notes"). The 1999 Notes were issued at a premium resulting in an effective rate of 8.5%. The terms of the 1995 Notes and the 1999 Notes are substantially the same, and the 1995 Notes and the 1999 Notes were issued pursuant to indentures that are substantially the same. The Company can redeem the Senior Notes at par (face) beginning in June 2002. Principal repayments of outstanding loan balances are due at various intervals until maturity, with 2004 as the primary repayment date. The Company believes, based on current levels of operations and forecasted earnings, that cash flow and liquidity will be sufficient to fund its working capital and capital equipment needs as well as meeting the debt service requirements. If the Company's sources of funds were to fail to satisfy the Company's cash requirements, the Company may need to refinance its existing debt or obtain additional financing. There is no assurance that such new financing alternatives would be available, and, in any case, such new financing, if available, would be expected to be more costly and burdensome than the debt agreements currently in place. 12
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 you 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 - materially adverse changes in economic or industry conditions generally or in the markets served by us, including North America, South America, Europe, Australia and Asia; - demand for services in the freight and passenger rail industry; - consolidations in the rail industry; - demand for our products and services; - continued outsourcing by our customers; - demand for freight cars, locomotives, passenger transit cars and buses; - industry demand for faster and more efficient braking equipment; - fluctuations in interest rates; Operating Factors - supply disruptions; - technical difficulties; - changes in operating conditions and costs; - successful introduction of new products; - labor relations; - completion and integration of additional acquisitions; - the development and use of new technology ; Competitive Factors - the actions of competitors; Political/Governmental Factors - political stability in relevant areas of the world; - future regulation/deregulation of our customers and/or the rail industry; - governmental funding for some of our customers; - political developments and laws and regulations, such as forced divestiture of assets, restrictions on production, imports or exports, price controls, tax increases and retroactive tax claims, expropriation of property, cancellation of contract rights, and environmental regulations; and Transaction or Commercial Factors - the outcome of negotiations with partners, governments, suppliers, customers or others. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RECENT ACCOUNTING PRONOUNCEMENTS The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under its provisions, all goodwill and other intangible assets with indefinite lives are no longer amortized under a straight-line basis of estimated useful life. Instead, they will be subject to assessments for impairment by applying a fair-value-based test. While the Company has not completed the assessment process, it does anticipate that the process will result in an impairment recognition. We anticipate completing the Phase I analysis by the end of May. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under its provisions, all tangible long-lived assets, whether to be held and used or to be disposed of by sale or other means, will be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company early adopted SFAS 144 in the third quarter of 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. After considering the effects of interest rate swaps, further described below, the Company's variable-rate debt represents 1% of total long-term debt at March 31, 2002. The variable portion is so low because management has entered into pay-fixed, receive-variable interest rate swap contracts that partially mitigate the impact of variable-rate debt interest rate increases. At March 31, 2002, an instantaneous 100 basis point increase in interest rates would have minimal impact on the Company's annual earnings, assuming no additional intervention strategies by management. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 133, and as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. In the application, the Company has concluded that its swap contracts qualify for "special cash flow hedge accounting" which permit recording the fair value of the swap and corresponding adjustment to other comprehensive income on the balance sheet while creating some volatility in future earnings, due to market sensitivity and ineffectiveness in offsetting changes in interest rates of Wabtec's variable rate 13
borrowings. This fluctuation is not expected to have a material effect on the Company's financial condition, results of operations or liquidity. FOREIGN CURRENCY EXCHANGE RISK The Company occasionally enters into several types of financial instruments for the purpose of managing its exposure to foreign currency exchange rate fluctuations in countries in which the Company has significant operations. As of March 31, 2002, the Company had no such instruments outstanding. Wabtec is also subject to certain risks associated with changes in foreign currency exchange rates to the extent its operations are conducted in currencies other than the U.S. dollar. For the first three months of 2002, approximately 75% of Wabtec's net sales are in the United States, 7% in Canada, 2% in Mexico, and 16% in other international locations, primarily Europe. At March 31, 2002, the Company does not believe changes in foreign currency exchange rates represent a material risk to results of operations, financial position, or liquidity. LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES There have been no material changes to report regarding the Company's commitments and contingencies as described in Note 18 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 2001. EXHIBITS AND REPORTS ON FORM 8-K None. 14
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION By: /s/ ROBERT J. BROOKS ----------------------------------- Robert J. Brooks Chief Financial Officer Date: May 13, 2002 15