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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
Commission file number 1-13782
WESTINGHOUSE AIR BRAKE COMPANY
------------------------------
(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 X No .
----- -----
As of April 28, 1998, 33,810,118 shares of Common Stock of the
registrant were issued and outstanding, of which 8,689,291 shares were
unallocated ESOP shares.
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
3
WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31 DECEMBER 31
Dollars in thousands, except share data 1998 1997
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 4,392 $ 836
Accounts receivable 102,980 91,438
Inventories 73,874 69,297
Other 19,095 18,928
--------- ---------
Total current assets 200,341 180,499
Property, plant and equipment 191,989 186,534
Accumulated depreciation (81,999) (78,167)
--------- ---------
Property, plant and equipment, net 109,990 108,367
OTHER ASSETS
Prepaid pension costs 5,208 5,061
Goodwill 70,268 66,599
Other intangibles 41,334 42,466
Other noncurrent assets 7,198 7,887
--------- ---------
Total other assets 124,008 122,013
--------- ---------
Total Assets $ 434,339 $ 410,879
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 32,600 $ 32,600
Accounts payable 43,176 37,582
Accrued income taxes 5,570 488
Accrued interest 4,606 3,038
Advance deposits 19,477 21,210
Other 36,171 36,862
--------- ---------
Total current liabilities 141,600 131,780
Long-term debt 332,346 332,334
Reserve for postretirement benefits 15,131 14,860
Accrued pension costs 5,463 4,700
Other long-term liabilities 6,530 6,468
--------- ---------
Total liabilities 501,070 490,142
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares issued
Common stock, $.01 par value; 100,000,000 shares
authorized and 47,426,600 shares issued 474 474
Additional paid-in capital 106,210 105,522
Less-Treasury stock, at cost, 13,681,250 and 13,743,924 shares (189,853) (190,657)
Less-Unearned ESOP shares, at cost, 8,704,851 and 8,751,531 shares (130,573) (131,273)
Retained earnings 152,231 141,617
Unamortized restricted stock award (360) --
Cumulative translation adjustment (4,860) (4,946)
--------- ---------
Total shareholders' equity (66,731) (79,263)
--------- ---------
Liabilities and Shareholders' Equity $ 434,339 $ 410,879
========= =========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
Dollars in thousands, except share data 1998 1997
- -----------------------------------------------------------------------------------------
Net sales $ 158,136 $ 136,508
Cost of sales 106,340 90,948
--------- ---------
Gross profit 51,796 45,560
Selling and marketing expenses 6,914 5,626
General and administrative expenses 11,584 9,260
Engineering expenses 6,438 5,997
Amortization expense 2,105 2,135
--------- ---------
Total operating expenses 27,041 23,018
--------- ---------
Income from operations 24,755 22,542
Other income and expenses
Interest expense 7,373 6,871
Other (income) expense, net (131) (48)
--------- ---------
Income before income taxes 17,513 15,719
Income taxes 6,655 6,130
--------- ---------
Net income $ 10,858 $ 9,589
========= =========
Earnings Per Common Share
Basic $ .43 $ .34
Diluted $ .42 $ .34
========= =========
Weighted Average Shares Outstanding (in thousands)
Basic 24,962 28,552
Diluted 25,669 28,552
========= =========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 10,858 $ 9,589
Adjustments to reconcile net income to cash provided by operations
Depreciation and amortization 6,384 6,201
Provision for ESOP contribution 1,188 755
Other 100
Changes in operating assets and liabilities
Accounts receivable (11,327) (5,693)
Inventories (3,941) 2,510
Accounts payable 5,407 1,213
Accrued income taxes 5,038 4,260
Accrued liabilities (443) (1,942)
Other assets and liabilities (797) 454
-------- --------
Net cash provided by operating activities 12,467 17,347
INVESTING ACTIVITIES
Purchase of property, plant and equipment, and
cost of acquired business (9,229) (4,409)
-------- --------
Net cash used for investing activities (9,229) (4,409)
FINANCING ACTIVITIES
Net proceeds from revolving credit arrangements 120 37,020
Net repayments of other borrowings (135)
Debt issuance fees (2,017)
Purchase of treasury stock (44,000)
Cash dividends (244) (281)
Proceeds from exercise of stock options 544
-------- --------
Net cash provided by (used for) financing activities 285 (9,278)
Effect of changes in currency exchange rates 33 (292)
-------- --------
Increase in cash 3,556 3,368
Cash, beginning of period 836 618
-------- --------
Cash, end of period $ 4,392 $ 3,986
======== ========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Company (the "Company") is North America's largest
manufacturer of value-added equipment for locomotives, railway freight cars and
passenger transit vehicles. The Company's products, which are sold to both the
original equipment manufacturer market and the aftermarket, are intended to
enhance safety, improve productivity and reduce maintenance costs for its
customers. The Company's products include electronic controls and monitors, air
brakes, couplers, door controls, draft gears and brake shoes. The Company's
primary manufacturing operations are in the United States and Canada, and the
Company's revenues have been primarily from North America. The Company's
customer base consists of freight transportation (railroad) companies,
locomotive and freight car original equipment manufacturers, transit car
builders and public transit systems.
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 Westinghouse Air Brake Company and its majority owned subsidiaries
("WABCO"). 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, which
are 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 notes included herein should be read in conjunction with the audited
consolidated financial statements included in WABCO's Annual Report on Form 10-K
for the year ended December 31, 1997.
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.
EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income applicable
to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share are computed by
dividing net income applicable to common shareholders by the weighted average
number of shares of common stock outstanding adjusted for the assumed conversion
of all dilutive securities (such as employee stock options).
OTHER COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
established standards for reporting and displaying comprehensive income and its
components in financial statements. Comprehensive income is defined as net
income and all nonowner changes in shareholders' equity. Accumulated other
comprehensive income consists entirely of foreign currency translation
adjustments. Total comprehensive income for the quarters ending March 31, 1998
and 1997 was $10.9 million and $9.1 million, respectively.
3. ACQUISITIONS
Effective July 31, 1997, the Company acquired 100% of the stock of H.P. s.r.l.
("HP"), an Italian company, for a total purchase price of $5.8 million, that
included the assumption of $2.3 million in debt. HP is located in Sassuolo,
Italy and is a leading supplier of door controls for transit rail cars and buses
in the Italian market. The acquisition was accounted for under the purchase
method.
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Effective May 1, 1997, the Company purchased Stone Safety Service Corporation
and Stone U.K. Limited ("Stone"), a supplier of transit air conditioning
equipment, from Enprotech Corporation, a subsidiary of Itochu International.
Stone is located in New Jersey and England. On June 27, 1997, the Company
acquired the heavy rail air conditioning business of Thermo King Corporation
("Thermo King"), a subsidiary of Westinghouse Electric. The Thermo King purchase
included certain inventory, equipment and drawings. The aggregate purchase price
for the Stone and Thermo King acquisitions was approximately $7.7 million. The
acquisitions were accounted for under the purchase method.
The results of operations for these acquisitions are included in the Company's
financial statements since the date of the applicable transaction. The effect of
the acquisitions is not material to the consolidated financial position or
results of operations of the Company.
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
Dollars in thousands 1998 1997
- --------------------------------------------------------------
Raw materials $28,744 $27,395
Work-in-process 29,267 26,640
Finished goods 15,863 15,262
------- --------
Total inventory $73,874 $69,297
- --------------------------------------------------------------
5. RESTRICTED STOCK AWARD
In February 1998, the Company granted 15,000 shares of restricted common stock
to an officer. The shares vest according to a vesting schedule over the next
three years. The grant date market value totaled $372,000 and is being amortized
to expense over the vesting period. Unamortized compensation is recorded as a
separate component of shareholders' equity.
6. EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS
ENDED MARCH 31
In thousands, except per share 1998 1997
- ---------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net income applicable
to common shareholders $10,858 $9,589
Divided by
Weighted average shares 24,962 28,552
outstanding
Basic earnings per share $.43 $.34
- ---------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net income applicable
to common shareholders $10,858 $9,589
Divided by sum of
Weighted average shares
Outstanding 24,962 28,552
Conversion of dilutive
stock options 707
------- -------
Diluted shares outstanding 25,669 28,552
Diluted earnings per share $.42 $.34
- ---------------------------------------------------------------
Options to purchase 2.3 million shares of common stock were outstanding in the
first three months of 1997, but were not included in the computation of diluted
earnings per share because the options' exercise price exceeded the average
market price of the common shares.
7. SUBSEQUENT EVENT
In April 1998, the Company acquired 100% of the stock of RFS(E) Limited ("RFS")
of Doncaster, South Yorkshire, England, for $10.0 million. RFS is a leading
provider of vehicle overhaul, conversion and maintenance services to Britain's
railway industry. RFS had revenue of approximately $27.5 million for its most
recent fiscal year.
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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 Company's Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its 1997 Annual Report on Form 10-K.
OVERVIEW
Westinghouse Air Brake Company ("WABCO") is North America's largest manufacturer
of value-added equipment for locomotives, railway freight cars and passenger
transit vehicles. The Company's primary manufacturing operations are in the
United States and Canada and revenues have historically been predominantly from
North America. In recent years, the proportion of international sales has
increased significantly, in line with the Company's strategy to expand its
business outside North America.
The Company's customer base consists of freight transportation companies,
locomotive and freight car original equipment manufacturers, transit car
builders and public transit systems.
WABCO's strategy for growth is focused on using technological advancements to
develop new products, expanding the range of after-market products and services,
and penetrating international markets. In addition, management continually
evaluates acquisition opportunities that meet the Company's criteria and
complement WABCO's operating strategies and product offerings.
FIRST QUARTER 1998 VERSUS FIRST QUARTER 1997
SUMMARY RESULTS OF OPERATIONS
THREE MONTHS ENDED
Dollars in thousands, MARCH 31
--------------------- PERCENT
except per share 1998 1997 CHANGE
- --------------------------------------------------------------
Net income $10,858 $9,589 13.2
Diluted earnings per share .42 .34 23.5
Net sales 158,136 136,508 15.8
Income from operations 24,755 22,542 9.8
Earnings before interest,
taxes, depreciation
and amortization 31,270 28,791 8.6
Gross margin 32.8% 33.4% nm
- --------------------------------------------------------------
nm - not meaningful
Net income for the first three months of 1998 increased $1.3 million, or 13.2%,
compared with the same period a year ago. Earnings per share increased 23.5% to
$.42 per diluted share. Net sales were $158.1 million for the first quarter of
1998, reflecting a 15.8% increase compared to the year-earlier period. The
higher revenue base reflects the benefits associated with acquisitions and a
strong original equipment manufacturer market. Operating income and earnings
before interest, taxes, depreciation and amortization increased in the
comparison primarily due to revenue growth and related gross margins.
A number of significant events occurred in the past twelve months that impacted
the Company's results of operations and financial condition including:
o The Company completed several acquisitions that complement and enhance the
mix of existing products and markets. Acquisitions completed during the
second half of 1997 were Stone Safety Service Corporation, Stone U.K.
Limited, Thermo King Corporation's heavy rail business, H.P. s.r.l. and the
rail products division of Sloan Valve. Revenues from those operations
totaled $10.1 million in the first three months of 1998 and accounted for
47% of the overall sales increase in the period-to-period comparison.
o In March 1997, an agreement was reached with one of the Company's major
shareholders, Scandinavian Incentive Holding B.V. ("SIH"), whereby the
Company repurchased 4 million shares of its common stock held by SIH for
$44 million, or $11 per share, plus $2 million in fees.
NET SALES
The following table sets forth, for the period indicated, the Company's net
sales by market:
THREE MONTHS ENDED
MARCH 31
-----------------------
Dollars in thousands 1998 1997
- ---------------------------------------------------------------
Electronics $10,584 $23,093
Freight Car 64,667 44,910
Transit 49,983 37,345
Locomotive 12,135 11,598
Friction & Other 20,767 19,562
-------- --------
Net sales $158,136 $136,508
- ---------------------------------------------------------------
Net sales for the first quarter of 1998 increased $21.6 million, or 15.8%, to
$158.1 million. Increased volumes in the Freight Car business, reflecting a
strong original equipment manufacturer market that benefited from 17,000 new
freight car deliveries compared with 14,000 a year ago, and in the Transit
business, primarily as a result of acquisitions completed in the past year that
generated $10.1 million in sales, were partially offset by lower sales in the
Electronics business. In the prior year period, Electronics sales benefited
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from a federal mandate that certain monitoring equipment be installed in
trains by July 1997.
GROSS PROFIT
Gross profit increased 13.6% to $51.8 million in the first three months of 1998
compared to $45.6 million in the year-earlier period. Gross margin, as a
percentage of sales, was 32.8% and 33.4% in the comparison. Gross margin is
dependent on a number of factors including sales volume and product mix.
Incremental revenue from acquisitions within the Transit business at lower
margins contributed to the lower margins in the quarter-to-quarter comparison.
OPERATING EXPENSES
THREE MONTHS ENDED
MARCH 31
--------------------- PERCENT
Dollars in thousands 1998 1997 CHANGE
- --------------------------------------------------------------
Selling and marketing $6,914 $5,626 22.9
General and administrative 11,584 9,260 25.1
Engineering 6,438 5,997 7.4
Amortization 2,105 2,135 (1.4)
------- -------
Total operating expenses $27,041 $23,018 17.5
- --------------------------------------------------------------
nm - not meaningful
Total operating expenses as percentage of net sales were 17.1% in the first
quarter of 1998 compared with 16.9% a year ago. Total operating expenses
increased $4.0 million in the period-to-period comparison primarily reflecting
the effect of acquisitions completed in 1997. Incremental expenses from acquired
businesses totaled $1.5 million. In addition, higher operating expenses reflect
costs associated with Year 2000 compliant computer software and other computer
system upgrades, overall tax improvement studies and certain strategic
initiatives including expanded international marketing activities and additional
engineering efforts associated with new product development.
INCOME FROM OPERATIONS
Operating income totaled $24.8 million in first three months of 1998 compared
with $22.5 million a year ago. Higher operating income reflects higher sales
volume and related gross profit.
INTEREST EXPENSE
Interest expense increased $.5 million to $7.4 million for the first quarter of
1998, primarily due to funding costs associated with repurchases of common stock
and acquisitions, principally offset by debt repayments.
INCOME TAXES
The provision for income taxes increased $.5 million to $6.7 million in the
first three months of 1998 compared with the same period of 1997. The effective
tax rate declined to 38.0% in the first quarter of 1998 from 39.0% a year ago,
resulting from additional benefits of a Foreign Sales Corporation due to
increased export sales and lower overall state taxes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and long-term borrowings.
WABCO's operations generated cash flow totaling $12.5 million in the first
quarter of 1998 and $17.3 million a year ago. The decline in operating cash flow
was primarily due to higher accounts receivable associated with increased sales
growth. Gross capital expenditures were $5.3 million and $4.4 million in the
first three months of 1998 and 1997, respectively. The majority of capital
expenditures reflect spending for replacement equipment and as well as increased
capacity and efficiency. The Company expects capital expenditures in 1998,
exclusive of acquisitions, to approximate $28 million.
The following table sets forth outstanding indebtedness and average interest
rates at March 31, 1998. The revolving credit note and term loan interest rates
are variable and dependent on market conditions. Interest on the note payable
related to the Pulse acquisition has clauses which can vary the interest rate
paid.
MARCH 31
Dollars in thousands 1998
- ----------------------------------------------------------------
Revolving credit notes, 7.51%, due
January 2001 $101,000
Term loan, 7.71% 145,500
Senior notes, 9.375%, due June 2005 100,000
Note payable-Pulse acquisition, 9.5%, due January
2004 16,990
Other 1,456
--------
364,946
Less--current portion 32,600
--------
$332,346
- ---------------------------------------------------------------
The Company's revolving credit and term loan borrowings have been made pursuant
to a credit agreement, as amended (the Credit Agreement), with a consortium of
commercial banks. The Credit Agreement provides for up to $140 million of
revolving credit loans, including letters of credit, and provided $170.6 million
of term loans, of which $145.5 million was outstanding at March 31, 1998.
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Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Credit Agreement, will be adequate to make payments of principal and interest on
debt, including the Notes, to make required contributions to the ESOP, to permit
anticipated capital expenditures, and to fund working capital requirements and
other cash needs. Nevertheless, the Company will remain leveraged to a
significant extent and its debt service obligations will continue to be
substantial. If the Company's sources of funds were insufficient 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.
EFFECT OF YEAR 2000
The Company has information system improvement initiatives under way which
include both new computer hardware and software applications. The new system is
expected to be operational by late 1998 and will be Year 2000 compliant. The
majority of the expenditures incurred for hardware and purchased software
related to this project are capitalized and amortized over their estimated
useful lives. Other costs are expensed as incurred. These expenditures are not
expected to have a significant impact on the Company's future results of
operations or financial position.
FORWARD-LOOKING STATEMENTS
From time to time, in this report and in other written reports and oral
statements, references are made to expectations regarding future performance of
the Company. Examples include, but are not limited to, statements as to
expectations, beliefs and strategies, future earnings, revenue growth, and sales
expansion opportunities. These "forward-looking statements," are based on
currently available competitive, financial and economic data and the Company's
operating plans, but they are inherently uncertain. Investors must recognize
that events could turn out to be significantly different from what is expected.
Differences from expectations in the factors listed below, among others, could
affect the Company's financial performance in the future and could cause actual
results to differ materially from those expressed or implied in such
forward-looking statements. These factors, which include changes in both
domestic and global assumptions and expectations are, among others: overall
economic conditions; interest rates; demand for services in the freight and
passenger rail industry; consolidations in the rail industry; demand for the
Company's products and services; product mix; gains and losses in market share;
demand for freight cars, locomotives, passenger transit cars and buses; industry
demand for faster and more efficient braking equipment; continued outsourcing by
the Company's customers; governmental funding for some of the Company's
customers; future regulation/deregulation of the Company's customers and/or the
rail industry; successful research and development; success in developing,
marketing and delivering new products; the Company's ability to complete
expected sales; cancellation of orders; labor stability; integration of recent
acquisitions; completion of additional acquisitions; changes in expected level
of capital expenditures; continued bank financing; warranty claims;
environmental laws; lawsuits; and other factors identified within this Form 10-Q
and other filings with the Securities and Exchange Commission. Such statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 27 "Financial Data Schedule" as of and for the three months ended
March 31, 1998 is filed herewith.
There were no Current Reports on Form 8-K filed during the quarter ended March
31, 1998.
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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 COMPANY
By: /s/ ROBERT J. BROOKS
------------------------------------
Robert J. Brooks
Chief Financial Officer
Date: May 8, 1998
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
4,392
0
102,980
0
73,874
200,341
191,989
(81,999)
434,339
141,600
0
0
0
474
(67,205)
434,339
158,136
158,136
106,340
106,340
27,041
0
7,373
17,513
6,655
10,858
0
0
0
10,858
.43
.42
