SEC Filing | Wabtec Corporation

1 ================================================================================ 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 JUNE 30, 1999 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 July 19, 1999, 34,092,335 shares of Common Stock of the registrant were issued and outstanding, of which 8,443,876 shares were unallocated ESOP shares. ================================================================================

2 TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statement of Operations for the three and six months ended June 30, 1999 and 1998 4 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations 10-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15-16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2

3 WESTINGHOUSE AIR BRAKE COMPANY CONDENSED CONSOLIDATED BALANCE SHEET UNAUDITED JUNE 30 DECEMBER 31 Dollars in thousands, except par value 1999 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash $ 6,487 $ 3,323 Accounts receivable 127,964 132,901 Inventories 111,444 103,560 Other 22,610 23,177 ----------------------- Total current assets 268,505 262,961 Property, plant and equipment 229,987 214,461 Accumulated depreciation (99,502) (89,480) ----------------------- Property, plant and equipment, net 130,485 124,981 OTHER ASSETS Prepaid pension costs 6,699 5,724 Goodwill 151,113 151,658 Other intangibles 43,434 46,021 Other noncurrent assets 6,206 4,839 ----------------------- Total other assets 207,452 208,242 ----------------------- Total Assets $606,442 $596,184 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $27,659 $30,579 Accounts payable 53,259 62,974 Accrued income taxes 9,377 8,352 Accrued interest 2,181 1,616 Customer deposits 18,402 20,426 Other accrued liabilities 47,234 43,603 ----------------------- Total current liabilities 158,112 167,550 Long-term debt 422,560 437,238 Reserve for postretirement benefits 16,848 16,238 Accrued pension costs 3,996 3,631 Other long-term liabilities 7,420 5,380 ----------------------- Total liabilities 608,936 630,037 SHAREHOLDERS' EQUITY Preferred stock, 1,000,000 shares authorized, no shares issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized: 47,426,600 shares issued 474 474 Additional paid-in capital 108,709 107,720 Treasury stock, at cost, 13,401,822 and 13,532,092 shares (186,028) (187,654) Unearned ESOP shares, at cost, 8,459,436 and 8,564,811 shares (126,892) (128,472) Retained earnings 206,928 182,291 Unamortized restricted stock award (85) (162) Accumulated other comprehensive income (loss) (5,600) (8,050) ----------------------- Total shareholders' equity (2,494) (33,853) ======================= Liabilities and Shareholders' Equity $606,442 $596,184 ======================= The accompanying notes are an integral part of this statement. 3

4 WESTINGHOUSE AIR BRAKE COMPANY CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands, except per share data 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $193,981 $172,052 $385,185 $330,188 Cost of sales 130,649 117,005 260,308 223,345 ---------------------- ---------------------- Gross profit 63,332 55,047 124,877 106,843 Selling and marketing expenses 7,607 7,154 16,110 14,068 General and administrative expenses 13,422 12,719 26,250 24,303 Engineering expenses 9,629 7,016 18,536 13,454 Amortization expense 2,427 2,074 4,837 4,179 ---------------------- ---------------------- Total operating expenses 33,085 28,963 65,733 56,004 ---------------------- ---------------------- Income from operations 30,247 26,084 59,144 50,839 Other income and expense Interest expense 8,768 7,525 17,864 14,898 Other (income) expense, net 414 (312) 480 (443) ---------------------- ---------------------- Income before income taxes and extraordinary item 21,065 18,871 40,800 36,384 Income taxes 7,852 7,171 15,198 13,826 ---------------------- ---------------------- Income before extraordinary item 13,213 11,700 25,602 22,558 Loss on extinguishment of debt, net of tax -- (2,730) (469) (2,730) ---------------------- ---------------------- Net income $ 13,213 $ 8,970 $ 25,133 $ 19,828 ====================== ====================== EARNINGS PER COMMON SHARE Basic Income before extraordinary item $0.52 $ 0.47 $ 1.01 $ 0.90 Extraordinary item, net -- (0.11) (0.02) (0.11) ====================== ====================== Net Income $0.52 $0.36 $ 0.99 $ 0.79 ====================== ====================== Diluted Income before extraordinary item $0.51 $ 0.45 $ 0.99 $ 0.88 Extraordinary item, net -- (0.11) (0.02) (0.11) ====================== ====================== Net Income $0.51 $ 0.34 $ 0.97 $ 0.77 ====================== ====================== Weighted Average Shares Outstanding Basic 25,484 25,096 25,409 25,007 Diluted 26,079 25,837 25,916 25,733 ---------------------- ---------------------- The accompanying notes are an integral part of this statement. 4

5 WESTINGHOUSE AIR BRAKE COMPANY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED SIX MONTHS ENDED JUNE 30 In thousands 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 25,133 $ 19,828 Adjustments to reconcile net income to cash provided by operations Extraordinary loss on extinguishment of debt 469 2,730 Depreciation and amortization 12,658 12,999 Provision for ESOP contribution 2,262 2,455 Changes in operating assets and liabilities, net of acquisitions Accounts receivable 4,580 (8,228) Inventories (7,413) (10,270) Accounts payable (9,792) 2,853 Accrued income taxes 1,015 4,787 Accrued liabilities and customer deposits 2,056 (6,312) Other assets and liabilities 604 (216) ------------------------ Net cash provided by operating activities 31,572 20,626 INVESTING ACTIVITIES Purchase of property, plant and equipment, net (11,671) (14,405) Acquisitions of businesses, net of cash acquired (960) (14,114) ------------------------ Net cash used for investing activities (12,631) (28,519) FINANCING ACTIVITIES Proceeds from Senior Note offering 76,875 -- Debt issuance costs (1,926) (978) Net (repayments of) proceeds from the credit agreement (52,055) 12,598 Repayments of other borrowings (40,492) (315) Cash dividends (493) (489) Proceeds from exercise of stock options and employee stock purchases 1,536 1,647 ------------------------ Net cash (used for) provided by financing activities (16,555) 12,463 Effect of changes in currency exchange rates 778 (311) ------------------------ Increase in cash 3,164 4,259 Cash, beginning of year 3,323 836 ======================== Cash, end of year $ 6,487 $ 5,095 ======================== The accompanying notes are an integral part of this statement. 5

6 WESTINGHOUSE AIR BRAKE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 (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 ("OEM") 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, 1998. 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. OTHER COMPREHENSIVE INCOME Comprehensive income is defined as net income and all nonowner changes in shareholders' equity. The Company's accumulated other comprehensive income (loss) consists entirely of foreign currency translation adjustments. Total comprehensive income for the second quarter ending June 30, 1999 and 1998 was $15.0 million and $7.8 million respectively, and for the six months ending June 30, 1999 and 1998 was $27.6 million and $18.7 million respectively. 3. ACQUISITIONS On October 5, 1998, the Company purchased the railway electronics business of Rockwell Collins, Inc. ("RRE"), a wholly owned subsidiary of Rockwell International Corporation, for approximately $80 million in cash. The purchase was initially financed by obtaining additional term debt of $40 million through an amendment to the Company's existing credit facility, an unsecured bank loan of $30 million and additional borrowings under the Company's revolving credit agreement. RRE is a leading manufacturer and supplier of mobile electronics (display and positioning systems), data communications, and electronic braking systems for the railroad industry and its operations are in the United States. Revenues of the acquired business for its fiscal year ended September 30, 1998 were approximately $46 million. During the past eighteen months, the Company also completed the following acquisitions: i) The October 1998 acquisition of the United States railway service center business of Comet Industries, Inc. ("Comet"), for $13.2 million, financed through the issuance of $12.2 million of promissory notes. Annual revenue for its most recent fiscal year was approximately $20 million. ii) In July 1998, the purchase of assets and assumption of certain liabilities of U.S.-based Lokring Corporation ("Lokring"), for $5.1 million in cash. Lokring develops, manufactures and markets patented non-welded connectors and sealing products for railroad and other industries. Annual sales in 1997 were approximately $10 million. iii) The acquisition in April 1998, of 100% of the stock of RFS (E) Limited ("RFS") of England, for approximately $10.0 million including the assumption of certain debt. RFS is a leading provider of vehicle overhaul, conversion and maintenance services to Britain's railway industry. Annual revenue for its most recent fiscal year was approximately $27.5 million. 6

7 iv) The acquisition in April 1998, of the transit coupler product line of Hadady Corporation ("Hadady") located in the United States for $4.6 million in cash. v) In February 1999, the acquisition of the mass transit electrical inverter and converter product line of AGC System & Technologies, Inc. of Canada for approximately $960 thousand. All of the above acquisitions were accounted for under the purchase method. Accordingly, the results of operations of the applicable acquisition are included in the Company's financial statements prospectively from the acquisition date. 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: JUNE 30 DECEMBER 31 Dollars in thousands 1999 1998 - --------------------------------------------------------------- Raw materials $ 49,961 $ 47,853 Work-in-process 42,107 29,965 Finished goods 19,376 25,742 ----------------------- Total inventory $111,444 $103,560 - --------------------------------------------------------------- 5. DEBT OFFERING AND EXTRAORDINARY ITEM In 1999, WABCO issued $75 million of 9 3/8% Senior Notes which mature in June 2005. The Senior Notes were issued at a premium resulting in an effective rate of 8.5%. The premium is being amortized over the life of the instruments. The issuance improved WABCO's financial liquidity by i) using a portion of the proceeds to repay $30 million of debt associated with the RRE acquisition that bore interest at 9.56%, and; ii) using a portion of the proceeds to repay variable-rate revolving credit borrowings thereby increasing amounts available under the revolving credit facility. As a result of the issuance and retirement of certain term debt, the Company wrote-off previously capitalized debt issuance costs of approximately $469 thousand, ($.02 per diluted share), net of tax, in the first quarter of 1999. 6. EARNINGS PER SHARE The computation of earnings per share is as follows: THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 In thousands, except per share 1999 1998 1999 1998 - ---------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income, before extraordinary item, applicable to common shareholders $13,213 $11,700 $25,602 $22,558 Divided by Weighted average shares outstanding 25,484 25,096 25,409 25,007 Basic earnings per share before extraordinary item $0.52 $0.47 $1.01 $0.90 - ---------------------------------------------------------------------- DILUTED EARNINGS PER SHARE Income, before extraordinary item, applicable to common shareholders $13,213 $11,700 $25,602 $22,558 Divided by sum of Weighted average shares outstanding 25,484 25,096 25,409 25,007 Conversion of dilutive stock options 595 741 507 726 -------------------------------------- Diluted shares outstanding 26,079 25,837 25,916 25,733 Diluted earnings per share, before extraordinary item $0.51 $0.45 $0.99 $0.88 - ---------------------------------------------------------------------- 7. LEGAL PROCEEDINGS On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris Railway Electronic Services, LLC (collectively, "GE Harris") brought suit against the Company for alleged patent infringement and unfair competition related to a communications system installed in one of the Company's products. GE Harris is seeking to prohibit the Company from future infringement and is seeking an unspecified amount of money damages to recover, in part, royalties. While this lawsuit is in the earliest stages, the Company believes the technology developed by the Company does not infringe on the GE Harris patents. The Company plans to contest the infringement claims vigorously, in order to present alternative product lines to customers in the rail industry. 7

8 8. SEGMENT INFORMATION The Company evaluates its business segments' operating results based on income from operations. 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 below tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies. WABCO has three reportable segments - Railroad Group, Transit Group and Molded Products 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: RAILROAD GROUP consists of products geared to the production of freight cars and locomotives, including braking control equipment and train couplers, and in addition, to freight railroad companies. Revenues are derived from OEM and aftermarket sales and from repairs and services. TRANSIT GROUP consists of products for passenger transit vehicles (typically subways, rail and buses) that include braking, coupling, electrification and monitoring equipment, 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. MOLDED PRODUCTS GROUP include manufacturing and distribution of brake shoes and discs and other rubberized products. Revenues are generally derived from the aftermarket. Segment financial information for the three months ended June 30, 1999 is as follows: MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $112,886 $61,485 $19,610 $193,981 Intersegment sales 6,242 491 3,110 (9,843) -- --------------------------------------------------------------------- Total sales $119,128 $61,976 $22,720 $ (9,843) $193,981 ===================================================================== Income from operations 21,043 4,889 7,261 (2,946) 30,247 Interest expense and other 9,182 9,182 --------------------------------------------------------------------- Income before income taxes and extraordinary item $ 21,043 $ 4,889 $ 7,261 $(12,128) $ 21,065 ===================================================================== Segment financial information for the three months ended June 30, 1998 is as follows: MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $102,521 $51,104 $18,427 $172,052 Intersegment sales 6,136 217 2,357 (8,710) -- --------------------------------------------------------------------- Total sales $108,657 $51,321 $20,784 $ (8,710) $172,052 ===================================================================== Income from operations 20,637 3,025 5,591 (3,169) 26,084 Interest expense and other 7,213 7,213 --------------------------------------------------------------------- Income before income taxes and extraordinary item $ 20,637 $ 3,025 $ 5,591 $(10,382) $ 18,871 ===================================================================== 8

9 Segment financial information for the six months ended June 30, 1999 is as follows: MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $231,202 $116,347 $37,636 $385,185 Intersegment sales 8,497 532 5,701 $(14,730) -- --------------------------------------------------------------------- Total sales $239,699 $116,879 $43,337 $(14,730) $385,185 ===================================================================== Income from operations 43,466 9,259 12,707 (6,288) 59,144 Interest expense and other 18,344 18,344 --------------------------------------------------------------------- Income before income taxes and extraordinary item $ 43,466 $ 9,259 $12,707 $(24,632) $ 40,800 ===================================================================== Segment financial information for the six months ended June 30, 1998 is as follows: MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $190,207 $102,635 $37,346 $330,188 Intersegment sales 8,197 336 4,861 (13,394) -- --------------------------------------------------------------------- Total sales $198,404 $102,971 $42,207 $(13,394) $330,188 ===================================================================== Income from operations 38,131 7,407 11,091 (5,790) 50,839 Interest expense and other 14,455 14,455 --------------------------------------------------------------------- Income before income taxes and extraordinary item $ 38,131 $ 7,407 $11,091 $(20,245) $ 36,384 ===================================================================== 9. PENDING MERGER On June 2, 1999, the Company agreed to merge with and into MotivePower Industries, Inc., pursuant to an Agreement and Plan of Merger. In the merger, each share of our Common Stock will be exchanged with 1.3 shares of MotivePower Common Stock. For accounting purposes, the transaction will be accounted for as a pooling of interests. The merger is intended to be a tax-free reorganization for federal income tax purposes and is subject to a variety of conditions, including approval by the shareholders of both companies at special meetings of shareholders scheduled for August 23, 1999. The Company has filed a Form S-4 that became effective on July 22, 1999, which contains specific details on the proposed merger. 9

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 Company's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 1998 Annual Report on Form 10-K. OVERVIEW Westinghouse Air Brake Company was formed in 1990 through the acquisition of the Railway Products Group of American Standard Inc. The Company is North America's largest manufacturer of value-added equipment for locomotives, railway freight cars and passenger transit vehicles. The Company's business is comprised of three principal business segments: Railroad, Transit and Molded Products. On June 2, 1999, the Company agreed to merge with and into MotivePower Industries, Inc., pursuant to an Agreement and Plan of Merger. In the merger, each share of our Common Stock will be exchanged with 1.3 shares of MotivePower Common Stock. The merger is intended to be a tax-free reorganization for federal income tax purposes and is subject to a variety of conditions, including approval by the shareholders of both companies. For accounting purposes, the transaction will be accounted for as a pooling of interests, and is expected to be completed in the third quarter of 1999. SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998 Summary Results of Operations THREE MONTHS ENDED JUNE 30 Dollars in millions, ------------------- PERCENT except per share 1999 1998 CHANGE - -------------------------------------------------------------- Net sales $194.0 $172.1 12.7% Gross profit margin 32.6% 32.0% nm Income from operations $ 30.3 $ 26.1 16.1 Income before extraordinary item 13.2 11.7 12.8 Extraordinary item, net -- (2.7) nm of tax Net income 13.2 9.0 46.7 Diluted earnings per share, before extraordinary item 0.51 0.45 13.3 Diluted earnings per share 0.51 0.34 50.0 - -------------------------------------------------------------- nm-not meaningful Excluding the $2.7 million, net of tax, extraordinary charge to write-off certain previously capitalized debt issuance costs in the second quarter of 1998, net income would have increased $1.5 million, or 12.8%. Diluted earnings per share before extraordinary item increased 13.3% to $0.51. Income from operations increased in the comparison primarily due to revenue growth and related gross profit. A number of events have occurred over the comparative period 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 this timeframe were RRE, Comet, Lokring and Hadady. Aggregate incremental revenues from all of the above acquisitions were $17.6 million in the second quarter of 1999. o Continued strength in the OEM market for freight cars. o In the second quarter of 1998, the Company refinanced its credit agreement and wrote-off previously deferred financing costs of approximately $2.7 million ($.11 per share), net of income tax, reported as a non-cash, non-recurring, extraordinary item. Net Sales The following table sets forth the Company's net sales by business segment: THREE MONTHS ENDED JUNE 30 ----------------------- Dollars in thousands 1999 1998 - --------------------------------------------------------------- Railroad Group $112,886 $102,521 Transit Group 61,485 51,104 Molded Products Group 19,610 18,427 ----------------------- Net sales $193,981 $172,052 - --------------------------------------------------------------- Net sales for the second quarter of 1999 increased $21.9 million, or 12.7%, to $194.0 million. This increase was primarily attributable to incremental revenue from the acquisitions referred to above within the Railroad Group, partially offset by decreased sales in the Company's British railroad vehicle overhaul business RFS(E) and increased sales within the Transit Group. Sales volumes within the Railroad Group also reflect a strong OEM market for freight cars, with approximately 19,000 freight cars delivered in the second quarter of 1999 compared to a similar amount in the same period of 1998. 10

11 Gross Profit Gross profit increased 14.9% to $63.3 million in the second quarter of 1999 compared to $55.0 million in the same period of 1998. Gross margin, as a percentage of sales, was 32.6% compared to 32.0%. Gross margin is dependent on a number of factors including sales volume and product mix. Favorable margins on increased sales in the Molded Products and core Railroad Group operations more than offset incremental revenue from recent acquisitions at lower margins as compared to the Company's historical results. Operating Expenses THREE MONTHS ENDED JUNE 30 ------------------ PERCENT Dollars in thousands 1999 1998 CHANGE - -------------------------------------------------------------- Selling and marketing $ 7,607 $ 7,154 6.3 General and administrative 13,422 12,719 5.5 Engineering 9,629 7,016 37.2 Amortization 2,427 2,074 17.0 ------------------ Total $33,085 $28,963 - -------------------------------------------------------------- Total operating expenses as a percentage of net sales were 17.1% in the second quarter of 1999 as compared to 16.8% in the same period a year ago. Total operating expenses increased $4.1 million in the quarter-to-quarter comparison all of which related to operating expenses of the acquired businesses listed above. Income from Operations Operating income totaled $30.2 million in the second quarter of 1999 compared with $26.1 million. Higher operating income resulted from higher sales volume and related higher gross profit. As a percentage of sales, operating income was 15.6% and is substantially consistent with that of the prior year. Favorable volume changes at relatively strong operating margins in the Transit and Molded Products Groups was the primary reason for the increase in operating income. Interest and Other Expense Interest expense totaled $8.8 million, an increase of $1.3 million in the quarter-to-quarter comparison. The increase was primarily due to financing costs of recent acquisitions, partially offset by debt repayments. Income Taxes The provision for income taxes on income before extraordinary items increased to $7.9 million for the second quarter of 1999. The effective tax rate declined to 37.25% in the current quarter from 38.0% a year ago, resulting from additional benefits through our Foreign Sales Corporation and lower overall effective state tax rates. SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 1998 Summary Results of Operations SIX MONTHS ENDED JUNE 30 Dollars in millions, ------------------- PERCENT except per share 1999 1998 CHANGE - -------------------------------------------------------------- Net sales $385.2 $330.2 16.7% Gross profit margin 32.4% 32.4% nm Income from operations $ 59.1 $50.8 16.3 Income before extraordinary item 25.6 22.6 13.3 Extraordinary item, net of tax (0.5) (2.7) nm Net income 25.1 19.8 26.8 Diluted earnings per share, before extraordinary item 0.99 0.88 12.5 Diluted earnings per share 0.97 0.77 26.0 - -------------------------------------------------------------- nm-not meaningful Excluding the $2.7 million and $0.5 million, net of tax, extraordinary charges to write-off certain previously capitalized debt issuance costs in the second quarter of 1998, and the first quarter of 1999, respectively, net income would have increased $3.0 million, or 13.3%. Diluted earnings per share before extraordinary item increased 12.5% to $0.99 per share. Income from operations increased in the comparison primarily due to revenue growth and related gross profit. A number of events have occurred over the comparative period 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 this timeframe were RRE, Comet, Lokring, Hadady, and RFS(E). Aggregate incremental revenues from all of the above acquisitions were $38.5 million, or 70% of the increase, in the six months ending June 30, 1999. o In January 1999, the Company issued $75 million of Senior Notes at a premium resulting in an effective interest rate of 8.5% (See Note 5 - "Notes to Condensed Consolidated Financial Statements" included elsewhere in this report). As a result of the issuance and payoff of the unsecured credit facility, the Company wrote off previously capitalized debt issuance costs of approximately $469 thousand, net of tax ($.02 per diluted share) in the first quarter of 1999, which was reported as an extraordinary item. 11

12 o In the second quarter of 1998, the Company refinanced its credit agreement and wrote-off previously deferred financing costs of approximately $2.7 million ($0.11 per share) , net of income tax, reported as a non-cash, non-recurring, extraordinary item. Net Sales The following table sets forth the Company's net sales by business segment: SIX MONTHS ENDED JUNE 30 --------------------- Dollars in thousands 1999 1998 - -------------------------------------------------------------- Railroad Group $231,202 $190,207 Transit Group 116,347 102,635 Molded Products Group 37,636 37,346 --------------------- Net sales $385,185 $330,188 - -------------------------------------------------------------- Net sales for the six month period ending June 30, 1999 increased $55.0 million, or 16.7%, to $385.2 million. This increase was primarily attributable to incremental revenue from the acquisitions referred to above within the Railroad Group, and increases in Transit sales are a result of continuing improvements to mass transit authority infrastructure pursuant to recent governmental funding legislation. Sales volumes within the Railroad Group also reflect a continuing strong OEM market for freight cars. In spite of this increase, the Company anticipates new freight car deliveries in 1999 and the immediate future to be lower than that of 1998; however, railroad OEM and aftermarket sales are expected to be reasonably strong for the foreseeable future. Gross Profit Gross profit increased to $124.9 million in the six month period ending June 30, 1999 compared to $106.8 million in the same period of 1998. Gross margin, as a percentage of sales, was 32.4%, the same as the prior period. Gross margin is dependent on a number of factors including sales volume and product mix. Favorable margins on increased sales in the Molded Product and core Railroad Group operations offset incremental revenue from recent acquisitions at lower margins as compared to the Company's historical results. Operating Expenses SIX MONTHS ENDED JUNE 30 -------------------- PERCENT Dollars in thousands 1999 1998 CHANGE - ---------------------------------------------------------------------- Selling and marketing $16,110 $14,068 14.5 General and administrative 26,250 24,303 8.0 Engineering 18,536 13,454 37.8 Amortization 4,837 4,179 15.7 ------------------ Total $65,733 $56,004 - ---------------------------------------------------------------------- Total operating expenses as a percentage of net sales were 17.1% in the six month period ending June 30, 1999 as compared to 17.0% in the same period a year ago. Total operating expenses increased $9.7 million in the period to period comparison, all of which related to operating expenses of the acquired businesses listed above. Excluding incremental revenues and operating expenses from businesses acquired in the comparative period, operating expenses as a percentage of sales would have decreased to 16.2% due to costs incurred in 1998 to install computer system upgrades that included Year 2000 compliant software. In addition, during the fourth quarter 1998 and first quarter of 1999, the Company completed the consolidation of several facilities as it integrated recently acquired businesses into its core operations. Income from Operations Operating income totaled $59.1 million in the six month period ending June 30, 1999 compared with $50.8 million in the same period of 1998. Higher operating income resulted from higher sales volume and related higher gross profit. As a percentage of sales, operating income was 15.4% and is substantially consistent with that of the prior year. Favorable volume changes at relatively stable operating margins in all of the business segments was the primary reason for the increase in operating income (See Note 8 - "Notes to Condensed Consolidated Financial Statements" included elsewhere in this report). Interest and Other Expense Interest expense totaled $17.9 million, an increase of $3.0 million in the comparison. The increase was primarily due to financing costs of recent acquisitions, partially offset by debt repayments. Income Taxes The provision for income taxes on income before extraordinary items increased to $15.2 million. The effective tax rate declined to 37.25% in the current year from 38.0% a year ago, resulting from additional benefits through our Foreign Sales Corporation and lower overall effective state tax rates. 12

13 LIQUIDITY AND CAPITAL RESOURCES Liquidity is provided primarily by operating cash flow and borrowings under the Company's credit facilities with a consortium of commercial banks ("Credit Agreement"). The following is a summary of selected cash flow information and other relevant data. SIX MONTHS ENDED JUNE 30 ----------------------- Dollars in millions 1999 1998 - --------------------------------------------------------------- Cash provided (used) by: Operating activities $ 31.6 $ 20.6 Investing activities (12.6) (28.5) Financing activities (16.6) 12.5 Earnings before interest, taxes, depreciation and amortization 71.8 63.8 - --------------------------------------------------------------- Operating cash flow in the six month period ending June 30, 1999 increased to $31.6 million from $20.6 million in the same period a year ago, primarily as a result of higher earnings and a significant decrease in the rate of growth in working capital. In addition, inventory levels are increasing within the Transit Group as production continues for future product deliveries related to the Metropolitan Transit Authority/New York City Transit project. Deliveries are expected to commence in the latter part of 1999. Cash used for investing activities declined to $12.6 million from $28.5 million a year ago. In the six month period ending June 30, 1999 and 1998, the Company used $1.0 million and $14.1 million, respectively for certain business acquisitions. Gross capital expenditures were $11.6 million and $14.4 million in the six months ending June 30, 1999 and 1998, respectively. The majority of capital expenditures for these periods relates to incurring costs for upgrades to existing equipment, replacement of antiquated equipment and purchases of new equipment due to expansion of WABCO's operations, where the Company believes overall cost savings can be achieved through increasing efficiencies. The Company expects 1999 capital expenditures for equipment purchased for similar purposes to approximate $25 to $30 million. In 1999, the Company issued $75 million of additional Senior Notes and used the proceeds to repay amounts outstanding on certain term debt and the balance to repay a portion of the Company's revolving credit facility, thereby increasing amounts available under the Credit Agreement (see below for additional information). Additionally, a significant amount of cash generated from operations in the six month period ended June 30, 1999 was used to repay a portion of the outstanding balance on the revolving credit facility. Historically, the Company has financed the purchase of significant businesses through utilizing the amounts available under the credit facility and/or obtaining amendments to or refinancings of the Credit Agreement. Future business acquisitions, if any, will likely require similar debt structurings. Based on anticipated cash flow provided by operations, forecasted results and credit available under the credit agreement, the Company believes it will be able to make planned capital expenditures and required debt payments over the next twelve months. The following table sets forth the Company's outstanding indebtedness and average interest rates at June 30, 1999. The revolving credit note and term loan interest rates are variable and dependent on market conditions. Interest on the Pulse note can vary with changes to prime. JUNE 30 DECEMBER 31 Dollars in thousands 1999 1998 - --------------------------------------------------------------- Credit Agreement, matures 12/2003 Revolving credit, 6.5% $ 61,000 $105,555 Term loan, 6.5% 195,000 202,500 9 3/8% Senior notes due 6/2005 175,000 100,000 Unsecured credit facility -- 30,000 Pulse note, 9.5%, due 1/2004 16,990 16,990 Comet notes -- 10,200 Other 2,229 2,572 ---------------------- Total 450,219 467,817 Less-current portion 27,659 30,579 ---------------------- Long-term portion $422,560 $437,238 - --------------------------------------------------------------- The Credit Agreement provides for an aggregate credit facility of $350 million, consisting of up to $170 million of June 1998 term loans, up to $40 million of September 1998 term loans, and up to $140 million of revolving loans. At June 30, 1999, amounts available under the revolving credit facility increased to $57 million. In 1999, WABCO issued $75 million of 9 3/8% Senior Notes (with an effective rate of 8.5%) which mature in June 2005. The January issuance improved WABCO's financial liquidity by i) using a portion of the proceeds to repay $30 million of debt associated with the RRE acquisition that bore interest at 9.56%, and; ii) using a portion of the proceeds to repay variable-rate revolving credit borrowings thereby increasing amounts available under the revolving credit facility. Management believes, based upon current levels of operations and forecasted earnings, that cash flow from operations, together with available 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 for the foreseeable future, including 1999. 13

14 Nevertheless, the Company will remain leveraged to a significant extent and its debt service obligations will continue to be substantial. The debt of the Company requires the dedication of a substantial portion of future cash flows to the payment of principal and interest on indebtedness, thereby reducing funds available for capital expenditures and future business opportunities that the Company believes are available. The Company believes that cash flow and liquidity will be sufficient to meet its 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. The Company intends to reduce its indebtedness in 1999 through generating operating income and by reducing working capital requirements and other measures. EFFECTS OF YEAR 2000 The Company has information system improvement initiatives in process that include both new computer hardware and software applications. The new system is substantially operational and is year 2000 compliant. The estimated cost of the project is expected to be in the $8 to $10 million range with the majority of the costs, approximately $8 million, previously incurred. The majority of the expenditures incurred for hardware and purchased software related to this project have been capitalized and is amortized over their estimated useful lives. Other costs, such as training and advisory consulting, are expensed as incurred. These expenditures are not expected to have a significant impact on our future results of operations or financial condition. The Company has identified other equipment that is used in operations that has non-information system characteristics and embedded technology components, such as those items with internal clocks. The Company will need to replace this type of equipment but does not believe a possible Year 2000 failure will have a significant impact on our operations. The estimated cost of replacement equipment is not considered significant. The Company has received written assurances from some of our suppliers and customers and other providers acknowledging Year 2000 issues and stating their present intention to be compliant; however, not all customers, vendors and providers have provided such assurances. The Company will continue to evaluate information technology applications, as well as those of the suppliers regularly, and based on such evaluation, will revise our Year 2000 readiness planning accordingly. The Company is evaluating its preparedness in a number of areas, including our information technology infrastructure, external resources, physical plant and production facilities, equipment and machinery, products and inventory. In the evaluation and prioritization of Year 2000 concerns, the Company seeks to develop potential solutions to the Year 2000 issues identified in planning, consider these solutions in light of other information technology and business priorities, prioritize the various remediation tasks and develop an implementation schedule. Identified problems are corrected as soon as practicable after identification. The Company is in the process of developing contingency plans and actions for Year 2000 issues related to both internal and external systems. As part of this planning, the Company is evaluating the incremental cost of the contingency alternatives as compared to the perceived level of risk for Year 2000 problems. In some cases, we have determined that the perceived level of risk does not justify the cost of the contingency alternative. Contingency plans involve consideration of a number of possible actions, including, to the extent necessary or justified, the selection of alternative service providers and adjustments to staffing strategies, as ordering and billing procedures could be done manually. The Company plans to continue developing and modifying contingency plans throughout 1999 as the Company monitors and evaluates the progress of our internal and external Year 2000 compliance program. With regard to contingency planning, as previously noted, the Company is assessing the Year 2000 readiness of key suppliers, distributors, customers and service providers. Toward that objective, since the Company has not received assurances from all of its suppliers and other service providers that they will be compliant, we are evaluating the risks to us that the failure of others to be Year 2000 ready would cause a material disruption to, or have a material effect on, our financial condition, business or operations. Although the Company has not determined the costs to handle Year 2000 failures by our third party suppliers or customers, we presently believe such costs will not be material. Due to the nature of our business, we do not anticipate that Year 2000 problems at our suppliers or customers will generate many problems with the process such suppliers or customers must undertake in order to provide products to us or purchase products from us, as the case may be. For example, our critical supplies include bar stock and scrap metal and are commodity materials that can be obtained from different sources. Further, these types of industries are not expected to be severely hampered by the Year 2000 issues. Rather, if anything, we expect that Year 2000 problems will affect the ability of suppliers or customers 14

15 to communicate with us in a manner in which we can efficiently obtain the necessary supplies or take customer orders. The Company has attempted to address these Year 2000 concerns by preparing to accept paper copy orders from customers and enter those orders into our own computer system, if our customers' computers are unable to communicate with our computers. The Company's ordering on the supply end is typically done by paper copy rather than computer, so it should not be negatively impacted by Year 2000 issues. The Company is also considering the advisability of augmenting our inventories of certain raw materials and finished products, securing additional sources for certain supplies and services and exploring the use of manual paper flow to handle both the distribution and sales channels, among other things. The Company's products are generally sold with a limited warranty for defects. The Company has reviewed its products currently in use by our customers or being sold and does not believe that there will be material increases in warranty or liability claims arising out of year 2000 non-compliance. However, a material increase in such claims could have a material adverse effect on our financial condition, future results of operations and liquidity. If large scale systems failures occur, it could have a significant adverse effect on our financial condition, future results of operations and liquidity. FORWARD LOOKING STATEMENTS The Company believes 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. The Company has based these forward-looking statements on current expectations and projections about future events and believes assumptions made in connection with these statements are reasonable, however, there is no assurance these assumptions and expectations will prove to have been correct. These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things: - - Interest rates; - - Demand for services in the freight and passenger rail industry; - - Consolidations in the rail industry; - - Demand for our products and services; - - 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 our customers; - - Governmental funding for some of our customers; - - Future regulation/deregulation of our customers and/or the rail industry; - - General economic conditions in the markets which we compete, including North America, South America, Europe and Australia; - - Successful introduction of new products; - - Successful integration of newly acquired companies; - - Year 2000 concerns; - - Labor relations; - - Completion of additional acquisitions; and - - Other factors. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK In the ordinary course of business, WABCO is exposed to risks that increases in interest rates may adversely affect funding costs associated with $225 million of variable-rate debt (considering the effects of existing interest rate swaps), which represents 50% of total long-term debt at June 30, 1999. At June 30, 1999, an instantaneous 100 basis point increase in interest rates would reduce the Company's earnings annually by approximately $1.4 million, net of tax, assuming no additional intervention strategies by management. FOREIGN CURRENCY EXCHANGE RISK The Company routinely 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 June 30, 1999, the Company had no instruments outstanding. WABCO 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 six months ending June 30, 1999, approximately 75% of WABCO's net sales are in the United States, 12% in Canada and 13% in other international locations, primarily Europe. At June 30, 1999, the Company does not believe changes in foreign currency exchanges rates represent a material risk to results of operations or financial position. LEGAL PROCEEDINGS On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris Railway Electronic Services, LLC (collectively, "GE Harris") brought suit against the Company for alleged patent infringement and unfair competition related to a communications system installed in one of the Company's products. GE Harris is seeking to prohibit the Company from future infringement and is seeking an unspecified amount of money damages to recover, in part, royalties. While this lawsuit is in the earliest stages, the Company believes the technology developed by the Company does not infringe on the GE Harris patents. The Company plans to contest the infringement claims vigorously, in order to present alternative product lines to customers in the rail industry. 15

16 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held May 19, 1999. Two matters were considered and voted upon at the Annual Meeting: the election of three persons to serve as directors, and ratification of the appointment of Arthur Andersen LLP as independent public accountants to audit the financial statements of the Company and its subsidiaries for the 1999 fiscal year. Nominations of Emilio A. Fernandez, William E. Kassling and James V. Napier to serve as directors for a term expiring in 2002 and the appointment of Arthur Andersen were considered and ultimately approved. Votes Votes Votes Broker Nominee For Against Withheld Non-Votes - ------------------------------------------------------------------- Emilio A. Fernandez 31,040,589 -- 137,010 -- William E. Kassling 31,041,581 -- 136,018 -- James V. Napier 30,879,972 -- 297,627 -- Votes Votes Votes Broker For Against Withheld Non-Votes - ------------------------------------------------------------------- Arthur Andersen LLP as auditors for 1999 31,161,542 6,781 9,276 -- On July 26, 1999, the Company first mailed a Joint Proxy Statement/Prospectus to the shareholders for the consideration of and voting upon the proposed merger between the Company and MotivePower Industries, Inc. A special meeting to further consider the proposal will be held on August 23, 1999. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. 27 "Financial Data Schedule" as of and for the Six Months ended June 30, 1999 is filed herewith. There was a Current Report filed on Form 8-K on June 3, 1999 for the purpose of reporting the June 2, 1999 execution of the merger agreement (Item 5) between the Company and MotivePower Industries, Inc. 16

17 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: August 11, 1999 17

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESTINGHOUSE AIR BRAKE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 6,487 0 127,964 0 111,444 268,505 229,987 99,502 606,442 158,112 0 0 0 474 (2,968) 606,442 385,185 385,185 260,308 260,308 65,733 0 17,864 40,800 15,198 25,602 0 (469) 0 25,133 .99 .97