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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 SEPTEMBER 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 October 31, 1999, 33,801,363 shares of Common Stock of the
registrant were issued and outstanding, of which 8,397,196 shares were
unallocated ESOP shares.





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                                TABLE OF CONTENTS



Page --------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 1999 and 1998 4 Condensed Consolidated Statement of Cash Flows for the nine months ended September 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 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15-16 Signatures 17
2 3 WESTINGHOUSE AIR BRAKE COMPANY CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED SEPTEMBER 30 DECEMBER 31 Dollars in thousands, except par value 1999 1998 - -------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 7,487 $ 3,323 Accounts receivable 123,100 132,901 Inventories 110,966 103,560 Other 25,476 23,177 ----------------------------- Total current assets 267,029 262,961 Property, plant and equipment 236,361 214,461 Accumulated depreciation (103,413) (89,480) ----------------------------- Property, plant and equipment, net 132,948 124,981 OTHER ASSETS Prepaid pension costs 6,875 5,724 Goodwill 150,204 151,658 Other intangibles 42,237 46,021 Other noncurrent assets 6,319 4,839 ----------------------------- Total other assets 205,635 208,242 ----------------------------- Total Assets $ 605,612 $ 596,184 ============================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 27,666 $ 30,579 Accounts payable 45,260 62,974 Accrued income taxes 8,228 8,352 Accrued interest 5,217 1,616 Customer deposits 23,070 20,426 Other accrued liabilities 40,716 43,603 ----------------------------- Total current liabilities 150,157 167,550 Long-term debt 413,728 437,238 Reserve for postretirement benefits 17,103 16,238 Accrued pension costs 3,944 3,631 Other long-term liabilities 7,804 5,380 ----------------------------- Total liabilities 592,736 630,037 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 109,186 107,720 Treasury stock, at cost, 13,315,050 and 13,532,092 shares (184,716) (187,654) Unearned ESOP shares, at cost, 8,412,756 and 8,564,811 shares (126,191) (128,472) Retained earnings 219,198 182,291 Unamortized restricted stock award (59) (162) Accumulated other comprehensive income (loss) (5,016) (8,050) ----------------------------- Total shareholders' equity 12,876 (33,853) ----------------------------- Liabilities and Shareholders' Equity $ 605,612 $ 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 In thousands, except per share data 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Net sales $172,471 $160,476 $557,656 $490,664 Cost of sales 114,297 109,142 374,605 332,487 ------------------------ ----------------------- Gross profit 58,174 51,334 183,051 158,177 Selling and marketing expenses 7,325 7,747 23,435 21,815 General and administrative expenses 10,188 9,713 36,438 34,016 Engineering expenses 8,796 6,999 27,332 20,453 Amortization expense 2,887 1,694 7,724 5,873 ------------------------ ----------------------- Total operating expenses 29,196 26,153 94,929 82,157 ------------------------ ----------------------- Income from operations 28,978 25,181 88,122 76,020 Other income and expense Interest expense 8,748 7,386 26,612 22,284 Other (income) expense, net 520 302 1,000 (141) ------------------------ ----------------------- Income before income taxes and extraordinary item 19,710 17,493 60,510 53,877 Income taxes 7,191 6,647 22,389 20,473 ------------------------ ----------------------- Income before extraordinary item 12,519 10,846 38,121 33,404 Loss on extinguishment of debt, net of tax (469) (2,730) ------------------------ ----------------------- Net income $ 12,519 $ 10,846 $ 37,652 $ 30,674 ======================== ======================= EARNINGS PER COMMON SHARE Basic Income before extraordinary item $ 0.49 $ 0.43 $ 1.50 $ 1.33 Extraordinary item, net (0.02) (0.11) ------------------------ ----------------------- Net Income $ 0.49 $ 0.43 $ 1.48 $ 1.22 ======================== ======================= Diluted Income before extraordinary item $ 0.48 $ 0.42 $ 1.47 $ 1.30 Extraordinary item, net (0.02) (0.11) ------------------------ ----------------------- Net Income $ 0.48 $ 0.42 $ 1.45 $ 1.19 ======================== ======================= Weighted Average Shares Outstanding Basic 25,619 25,197 25,449 25,046 Diluted 26,129 25,696 25,960 25,696 ------------------------ -----------------------
The accompanying notes are an integral part of this statement. 4 5 WESTINGHOUSE AIR BRAKE COMPANY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED NINE MONTHS ENDED SEPTEMBER 30 In thousands 1999 1998 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 37,652 $ 30,674 Adjustments to reconcile net income to cash provided by operations Extraordinary loss on extinguishment of debt 469 2,730 Depreciation and amortization 19,622 19,294 Provision for ESOP contribution 3,273 3,462 Changes in operating assets and liabilities, net of acquisitions Accounts receivable 10,180 (10,979) Inventories (6,426) (12,981) Accounts payable (18,136) 6,781 Accrued income taxes (168) 7,400 Accrued liabilities and customer deposits 1,318 (8,146) Other assets and liabilities (1,537) (2,986) ------------------------ Net cash provided by operating activities 46,247 35,249 INVESTING ACTIVITIES Purchase of property, plant and equipment, net (17,694) (22,333) Acquisitions of businesses, net of cash acquired (960) (19,314) ------------------------ Net cash used for investing activities (18,654) (41,647) FINANCING ACTIVITIES Proceeds from Senior Note offering 76,875 -- Debt issuance costs (1,926) (1,037) Net (repayments of) proceeds from the credit agreement (60,655) 14,895 Repayments of other borrowings (40,717) (71) Cash dividends (741) (734) Proceeds from exercise of stock options and employee stock purchases 2,939 2,094 ------------------------ Net cash (used for) provided by financing activities (24,225) 15,147 Effect of changes in currency exchange rates 796 248 ------------------------ Increase in cash 4,164 8,997 Cash, beginning of year 3,323 836 ------------------------ Cash, end of period $ 7,487 $ 9,833 ========================
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 SEPTEMBER 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 third quarter ending September 30, 1999 and 1998 was $13.1 million and $10.1 million, respectively, and for the nine months ending September 30, 1999 and 1998 was $40.7 million and $28.8 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. Since the beginning of 1998, the Company also completed the following acquisitions: i) 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. ii) 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. iii) 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. 6 7 iv) 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. v) 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. 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: SEPTEMBER 30 DECEMBER 31 Dollars in thousands 1999 1998 - -------------------------------------------------------------- Raw materials $ 51,988 $ 47,853 Work-in-process 40,559 29,965 Finished goods 18,419 25,742 ---------------------- Total inventory $110,966 $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 ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 In thousands, except per share 1999 1998 1999 1998 - -------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income, before extraordinary item, applicable to common shareholders $12,519 $10,846 $38,121 $33,404 Divided by Weighted average shares outstanding 25,619 25,197 25,449 25,046 Basic earnings per share, before extraordinary item $ 0.49 $ 0.43 $ 1.50 $ 1.33 - -------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE Income, before extraordinary item, applicable to common shareholders $12,519 $10,846 $38,121 $33,404 Divided by sum of Weighted average shares outstanding 25,619 25,197 25,449 25,046 Conversion of dilutive stock options 510 499 511 650 ------------------------------------------- Diluted shares outstanding 26,129 25,696 25,960 25,696 Diluted earnings per share, before extraordinary item $ 0.48 $ 0.42 $ 1.47 $ 1.30 - --------------------------------------------------------------------------------
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. As this lawsuit is in the earliest stages, the Company is unable to estimate the cost, if any, of resolving litigation and thus, no costs have been provided for this matter. 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 tables below 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. Customers include freight car and locomotive manufacturers as well as 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 includes manufacturing and distribution of composition brake shoes and discs and other rubberized products. Revenues are generally derived from the aftermarket. Segment financial information for the three months ended September 30, 1999 is as follows:
MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - -------------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 95,866 $57,711 $18,894 $172,471 Intersegment sales 5,730 2,209 (7,939) -- ----------------------------------------------------------------- Total sales $101,596 $57,711 $21,103 $ (7,939) $172,471 ================================================================= Income from operations 19,118 5,477 6,776 (2,393) 28,978 Interest expense and other 9,268 9,268 ----------------------------------------------------------------- Income before income taxes and extraordinary item $ 19,118 $ 5,477 $ 6,776 $(11,661) $ 19,710 =================================================================
Segment financial information for the three months ended September 30, 1998 is as follows:
MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------------------------------ Sales to external customers $92,294 51,679 16,503 $160,476 Intersegment sales 3,482 598 1,992 (6,072) -- --------------------------------------------------------------- Total sales $95,776 $52,277 $18,495 $ (6,072) $160,476 =============================================================== Income from operations 19,072 3,044 5,023 (1,958) 25,181 Interest expense and other 7,688 7,688 --------------------------------------------------------------- Income before income taxes and extraordinary item $19,072 $ 3,044 $ 5,023 $ (9,646) $ 17,493 ===============================================================
8 9 Segment financial information for the nine months ended September 30, 1999 is as follows:
MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $327,068 $174,058 $56,530 $557,656 Intersegment sales 14,227 532 7,910 (22,669) -- -------------------------------------------------------------------- Total sales $341,295 $174,590 $64,440 $(22,669) $557,656 ==================================================================== Income from operations 62,584 14,736 19,483 (8,681) 88,122 Interest expense and other 27,612 27,612 -------------------------------------------------------------------- Income before income taxes and extraordinary item $ 62,584 $ 14,736 $19,483 $(36,293) $ 60,510 ====================================================================
Segment financial information for the nine months ended September 30, 1998 is as follows:
MOLDED RAILROAD TRANSIT PRODUCTS CORPORATE In thousands GROUP GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Sales to external customers $282,501 $154,314 $53,849 $490,664 Intersegment sales 11,679 934 6,853 (19,466) -- -------------------------------------------------------------------- Total sales $294,180 $155,248 $60,702 $(19,466) $490,664 ==================================================================== Income from operations 57,203 10,451 16,114 (7,748) 76,020 Interest expense and other 22,143 22,143 -------------------------------------------------------------------- Income before income taxes and extraordinary item $ 57,203 $ 10,451 $16,114 $(29,891) $ 53,877 ====================================================================
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. Prior to the August 23, 1999 special meeting to vote upon the proposed merger, WABCO postponed it's meeting in order to provide shareholders more time to evaluate recent financial disclosures regarding MotivePower. On September 26, 1999, the companies agreed to an amended and restated merger agreement. In the revised merger agreement, each share of MotivePower Common Stock and Right will be exchanged with 0.66 shares of WABCO Common Stock. For accounting purposes, the transaction will be accounted for as a pooling of interests and is expected to be completed in the fourth quarter. 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 November 19, 1999. The Company has filed a Form S-4 that became effective on October 20, 1999, which contains specific details on the proposed merger. The Company has deferred costs of approximately $2 million related to the proposed merger and will take this as a charge against earnings in the fourth quarter of 1999 in conjunction with other merger related restructuring and integration costs. 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 September 26, 1999, WABCO and MotivePower Industries, Inc. agreed to an amended and restated merger agreement. In connection with the merger, each share of MotivePower Common Stock and Right will be exchanged with 0.66 shares of WABCO Common Stock. For accounting purposes, the transaction will be accounted for as a pooling of interests and is expected to be completed in the fourth quarter. 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 November 19, 1999. THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 Summary Results of Operations THREE MONTHS ENDED SEPTEMBER 30 Dollars in millions, -------------------- PERCENT except per share 1999 1998 CHANGE - --------------------------------------------------------------- Net sales $172.5 $160.5 7.5% Gross profit margin 33.7% 32.0% nm Income from operations $29.0 $25.2 15.1 Net income 12.5 10.8 15.7 Diluted earnings per share 0.48 0.42 14.3 - --------------------------------------------------------------- nm-not meaningful Net income increased $1.7 million, or 15.7% in the quarter ending September 30, 1999 as compared to the third quarter of 1998. Diluted earnings per share increased 14.3% to $0.48 in the same comparison. 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 and Comet. Aggregate incremental revenues from all of the above acquisitions were approximately $10 million in the third quarter of 1999. o Increased aftermarket sales in all product lines. o Improved sales and backlog in the transit business due to increased governmental spending for transit equipment. Net Sales The following table sets forth the Company's net sales by business segment: THREE MONTHS ENDED SEPTEMBER 30 ---------------------------- Dollars in thousands 1999 1998 - ----------------------------------------------------------------- Railroad Group $ 95,866 $ 92,294 Transit Group 57,711 51,679 Molded Products Group 18,894 16,503 ---------------------------- Net sales $172,471 $160,476 - ----------------------------------------------------------------- Net sales for the third quarter of 1999 increased $12.0 million, or 7.5%, to $172.5 million. This increase was attributable to incremental revenue from the events referred to above, partially offset by decreased OEM freight car volumes within the Railroad Group. Sales volumes within the Railroad Group reflect a strong, but softening OEM market for freight cars, with approximately 16,400 freight cars delivered in the third quarter of 1999 compared to 18,400 in the same period of 1998. Gross Profit Gross profit increased 13.3% to $58.2 million in the third quarter of 1999 compared to $51.3 million in the same period of 1998. Gross margin, as a percentage of sales, was 33.7% compared to 32.0%. Gross margin is dependent on a number of factors including sales volume and product mix. Favorable margins on increased aftermarket sales in all major product lines more than offset the reduction of freight OEM sales and incremental revenue from recent acquisitions at lower margins as compared to the Company's historical results. 10 11 Operating Expenses THREE MONTHS ENDED SEPTEMBER 30 ---------------------- PERCENT Dollars in thousands 1999 1998 CHANGE - ----------------------------------------------------------------- Selling and marketing $ 7,325 $ 7,747 (5.4%) General and administrative 10,188 9,713 4.9 Engineering 8,796 6,999 25.7 Amortization 2,887 1,694 70.4 ---------- ----------- Total $29,196 $26,153 - ----------------------------------------------------------------- Total operating expenses as a percentage of net sales were 16.9% in the third quarter of 1999 as compared to 16.3% in the same period a year ago. Total operating expenses increased $3.0 million in the quarter-to-quarter comparison almost all of which related to operating expenses of the acquired businesses listed above. Amortization expense increased in the comparison due to amortization of goodwill and intangibles on recent acquisitions and amortization of debt fees on the January Senior Notes offering. Income from Operations Operating income totaled $29.0 million in the third quarter of 1999 compared with $25.2 million. Higher operating income resulted from higher sales volume and related higher gross profit. As a percentage of sales, operating income was 16.8% and is slightly higher than the prior year. Favorable aftermarket sales volume at relatively strong operating margins in the Transit and Molded Products Groups was the primary reason for the increase in operating income (See Note 8 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest and Other Expense Interest expense totaled $8.7 million, an increase of $1.3 million in the quarter-to-quarter comparison. The increase was primarily due to financing costs of recent acquisitions. Income Taxes The provision for income taxes on income increased to $7.2 million for the third quarter of 1999. In the third quarter of 1999, the effective tax rate improved to an annual rate of 37% quarter from 38.0% a year ago, resulting from additional benefits through our Foreign Sales Corporation. NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 Summary Results of Operations NINE MONTHS ENDED SEPTEMBER 30 Dollars in millions, ------------------- PERCENT except per share 1999 1998 CHANGE - --------------------------------------------------------------- Net sales $557.7 $490.7 13.6% Gross profit margin 32.8% 32.2% nm Income from operations $ 88.1 $ 76.0 15.9% Income before extraordinary item 38.1 33.4 14.1 Extraordinary item, net of tax (.5) (2.7) nm Net income 37.6 30.7 22.5 Diluted earnings per share, before extraordinary item 1.47 1.30 13.1 Diluted earnings per share 1.45 1.19 21.8 - --------------------------------------------------------------- nm-not meaningful Income before extraordinary item, increased $4.7 million, or 14.1%. Diluted earnings per share before extraordinary item increased 13.1% to $1.47 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, Hadady, Lokring and RFS(E). Aggregate incremental revenues from all of the above acquisitions were $48.5 million, or 72% of the increase, in the nine months ending September 30, 1999. o In January 1999, the Company issued $75 million of Senior Notes at 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 repayment of an 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. 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. 11 12 Net Sales The following table sets forth the Company's net sales by business segment: NINE MONTHS ENDED SEPTEMBER 30 ---------------------------- Dollars in thousands 1999 1998 - ----------------------------------------------------------------- Railroad Group $327,068 $282,501 Transit Group 174,058 154,314 Molded Products Group 56,530 53,849 ---------------------------- Net sales $557,656 $490,664 - ----------------------------------------------------------------- Net sales for the nine month period ending September 30, 1999 increased $67 million, or 13.6%, to $557.7 million. This increase was primarily attributable to incremental revenue from the acquisitions referred to above and increases in Transit sales as a result of continuing improvements to mass transit authority infrastructure, in both OE and aftermarket, pursuant to recent governmental funding legislation. All business segments experienced significant growth in aftermarket sales volumes in the nine month period ending September 30, 1999 as compared to the prior year period. OEM freight car volumes year to year were lower due to a return to more normal replacement levels of production. The Company anticipates new freight car deliveries to level out in 2000 at a lower level than that of 1999; however, railroad OEM and aftermarket sales are expected to remain strong. Gross Profit Gross profit increased to $183.1 million in the nine month period ending September 30, 1999 compared to $158.2 million in the same period of 1998. Gross margin, as a percentage of sales, was 32.8%, compared to 32.2% for the prior period. Gross margin is dependent on a number of factors including sales volume and product mix. Favorable margins on increased volumes, particularly aftermarket sales in all major product lines more than offset the effect of reduced freight OEM sales and incremental revenue from recent acquisitions at lower margins as compared to the Company's historical results. Operating Expenses NINE MONTHS ENDED SEPTEMBER 30 ---------------------- PERCENT Dollars in thousands 1999 1998 CHANGE - ----------------------------------------------------------------- Selling and marketing $23,435 $21,815 7.4% General and administrative 36,438 34,016 7.1 Engineering 27,332 20,453 33.6 Amortization 7,724 5,873 31.5 ---------- ---------- Total $94,929 $82,157 - ----------------------------------------------------------------- Total operating expenses as a percentage of net sales were 17.0% in the nine month period ending September 30, 1999 as compared to 16.7% in the same period a year ago. Total operating expenses increased $12.8 million in the period to period comparison, substantially all of which related to operating expenses of the businesses acquired during this period. Excluding incremental revenues and operating expenses from businesses acquired in the comparative period, 1999 operating expenses as a percentage of sales would have decreased to 16.2%, as compared to the prior year period, due to costs incurred in 1998 to install computer system upgrades that included Year 2000 compliant software. During 1999, the Company completed cost savings programs from the consolidation of several facilities as it integrated recently acquired businesses into its core operations. Amortization expense increased in the comparison due to amortization of goodwill and intangibles on recent acquisitions and amortization of debt fees on the January Senior Notes offering. Income from Operations Operating income totaled $88.1 million in the nine month period ending September 30, 1999 compared with $76.0 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 15.8% and is substantially consistent with that of the prior year. Favorable volume changes at relatively consistent operating margins, was the primary reason for the increase in operating income (See Note 8 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest and Other Expense Interest expense totaled $26.6 million, compared with $22.3 million in 1998. The increase was primarily due to the effect of financing recent acquisitions. Income Taxes The provision for income taxes on income before extraordinary items increased to $22.4 million. The effective tax rate improved to 37% 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. 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 12 13 following is a summary of selected cash flow information and other relevant data. NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ Dollars in millions 1999 1998 - ------------------------------------------------------------- Cash provided (used) by: Operating activities $ 46.2 $ 35.2 Investing activities (18.7) (41.6) Financing activities (24.2) 15.1 Earnings before interest, taxes, depreciation and amortization 107.7 95.3 - ------------------------------------------------------------- Operating cash flow in the nine month period ending September 30, 1999 increased to $46.2 million from $35.2 million in the same period a year ago, primarily as a result of higher earnings and improved working capital management. However, 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 first quarter of 2000. Cash used for investing activities declined to $18.7 million from $41.6 million a year ago. In the nine month period ending September 30, 1999 and 1998, the Company used $1.0 million and $19.3 million, respectively, for certain business acquisitions. Gross capital expenditures were $17.7 million and $22.3 million in the nine months ending September 30, 1999 and 1998, respectively. The majority of capital expenditures for these periods relates to upgrades to existing equipment, replacement of existing 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 unsecured bank term debt. The balance repaid a portion of the Company's revolving credit facility, thereby increasing amounts available under the Credit Agreement (see below for additional information). Additionally, $26 million of cash generated from operations in the nine month period ended September 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. 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 September 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 prime. SEPTEMBER 30 DECEMBER 31 Dollars in thousands 1999 1998 - ------------------------------------------------------------------ Credit Agreement, matures 12/2003 Revolving credit, 6.74% $ 52,400 $105,555 Term loan, 6.54% 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 2,004 2,572 -------------------------- Total 441,394 467,817 Less-current portion 27,666 30,579 -------------------------- Long-term portion $413,728 $437,238 - ------------------------------------------------------------------ The Credit Agreement provides for an aggregate credit facility of $350 million, consisting of $210 million of term loans and up to $140 million of revolving loans. At September 30, 1999, amounts available under the revolving credit facility were $65.7 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. 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 13 14 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 maintaining working capital at current 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 cost of the project will be approximately $10 million, with the majority of the costs incurred. The majority of the expenditures incurred for hardware and purchased software related to this project have been capitalized and are 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 regularly evaluate information technology applications, as well as those of the suppliers, and based on such evaluation, will revise Year 2000 readiness plans accordingly. The Company is evaluating its preparedness in a number of areas, including information technology infrastructure, external resources, physical plant and production facilities, equipment and machinery, products and inventory. The Company has developed 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, the Company is 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, financial condition, business or operations. Although the Company has not determined the costs to handle Year 2000 failures by third party suppliers or customers, the Company presently believes 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 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 14 15 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 "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 $216 million of variable-rate debt (considering the effects of existing interest rate swaps), which represents 49% of total long-term debt at September 30, 1999. At September 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 periodically 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 September 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 nine months ending September 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 September 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. As this lawsuit is in the earliest stages, the Company is unable to estimate the cost, if any, of resolving litigation and thus, no costs have been provided for this matter. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 26, 1999, the Company and MotivePower Industries, Inc. agreed to an amended and restated merger agreement whereby each share of MotivePower Common Stock and Right will be exchanged with 0.66 shares of WABCO Common Stock (See Note 9 - "Notes to Condensed Consolidated Financial Statements" included elsewhere in this report). On October 26, 1999, the Company mailed a Joint Proxy Statement/Prospectus to the shareholders for the consideration of and voting upon the proposed revised merger, at a special meeting of shareholders scheduled for November 19, 1999. EXHIBITS AND REPORTS ON FORM 8-K The Company filed the Current Report on Form 8-K on the dates below pertaining to the following items: On August 18, 1999, text of joint press release on the MotivePower Industries, Inc. and the Company's possible synergies, benefits of the merger, and 1999 EPS expectations (Item 7). 15 16 On August 23, 1999, text of press release of the August 20, 1999 announcement of the postponement of the Shareholders meeting to vote upon the merger with MotivePower Industries, Inc. (Item 7). On October 13, 1999, reported the September 26, 1999 Amended and Restated Merger Agreement between MotivePower Industries, Inc. and the Company (Item 5). On October 15, 1999, text of press release of the Company's Third Quarter 1999 and September 30, 1999 Year to Date financial results and share repurchase program (Items 5 and 7). Exhibit No. 27 "Financial Data Schedule" as of and for the Nine Months ended September 30, 1999 is filed herewith. 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: November 5, 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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,487 0 123,100 0 110,966 267,029 236,361 103,413 605,612 150,157 0 0 0 474 12,402 605,612 557,656 557,656 374,605 374,605 94,929 0 26,612 60,510 22,389 38,121 0 (469) 0 37,652 1.48 1.45