UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2003 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from ______ to ______ Commission file number 1-13782 WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 25-1615902 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1001 AIR BRAKE AVENUE WILMERDING, PENNSYLVANIA 15148 (412) 825-1000 (Address of principal executive offices) (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No . --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No --- --- As of May 13, 2003, 43,487,117 shares of Common Stock of the registrant were issued and outstanding. 1
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION MARCH 31, 2003 FORM 10-Q TABLE OF CONTENTS Page --------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Certifications 16 2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED MARCH 31 DECEMBER 31 In thousands, except shares and par value 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 12,848 $ 19,210 Accounts receivable 130,088 108,019 Inventories 91,752 88,470 Other current assets 30,926 29,524 --------- --------- Total current assets 265,614 245,223 Property, plant and equipment 315,336 308,495 Accumulated depreciation (166,831) (159,903) --------- --------- Property, plant and equipment, net 148,505 148,592 OTHER ASSETS Goodwill, net 109,450 109,450 Other intangibles, net 40,681 41,524 Other noncurrent assets 45,399 44,076 --------- --------- Total other assets 195,530 195,050 --------- --------- Total Assets $ 609,649 $ 588,865 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 839 $ 833 Accounts payable 71,900 62,104 Customer deposits 12,997 10,827 Accrued income taxes 5,240 3,928 Other accrued liabilities 56,357 57,571 --------- --------- Total current liabilities 147,333 135,263 Long-term debt 191,426 194,318 Reserve for postretirement and pension benefits 40,232 38,266 Other long-term liabilities 22,045 21,756 --------- --------- Total liabilities 401,036 389,603 SHAREHOLDERS' EQUITY Common stock, $.01 par value; 100,000,000 shares authorized: 65,447,867 shares issued and 43,460,315 and 43,440,840 outstanding at March 31, 2003 and December 31, 2002, respectively 654 654 Additional paid-in capital 272,768 272,782 Treasury stock, at cost, 21,987,552 and 22,007,027 shares, respectively (273,391) (273,634) Retained earnings 236,530 231,282 Deferred compensation 270 270 Accumulated other comprehensive income (loss) (28,218) (32,092) --------- --------- Total shareholders' equity 208,613 199,262 --------- --------- Total Liabilities and Shareholders' Equity $ 609,649 $ 588,865 ========= ========= The accompanying notes are an integral part of these statements. 3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED THREE MONTHS ENDED MARCH 31 In thousands, except per share data 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $ 169,523 $ 177,325 Cost of sales (124,247) (132,545) --------- --------- Gross profit 45,276 44,780 Selling, general and administrative expenses (23,707) (24,723) Engineering expenses (8,268) (8,105) Amortization expense (1,000) (1,485) --------- --------- Total operating expenses (32,975) (34,313) Income from operations 12,301 10,467 Other income and expenses Interest expense (2,399) (5,310) Other expense, net (1,136) (1,113) --------- --------- Income from continuing operations before income taxes and cumulative effect of 8,766 4,044 accounting change Income tax expense (3,200) (1,415) --------- --------- Income from continuing operations before cumulative effect of accounting change 5,566 2,629 Discontinued operations, net of tax Income from discontinued operations 117 124 Loss on sale of discontinued operations -- (529) --------- --------- Total discontinued operations 117 (405) --------- --------- Income before cumulative effect of accounting change 5,683 2,224 Cumulative effect of accounting change for goodwill, net of tax -- (61,663) --------- --------- Net income (loss) $ 5,683 $ (59,439) ========= ========= EARNINGS PER COMMON SHARE Basic Income from continuing operations before cumulative effect of accounting change $ 0.13 $ 0.06 Income (loss) from discontinued operations -- (0.01) --------- --------- Income before cumulative effect of accounting change 0.13 0.05 --------- --------- Cumulative effect of accounting change for goodwill, net of tax -- (1.43) --------- --------- Net income/(loss) $ 0.13 $ (1.38) ========= ========= Diluted Income from continuing operations before cumulative effect of accounting change $ 0.13 $ 0.06 Income (loss) from discontinued operations -- (0.01) --------- --------- Income before cumulative effect of accounting change 0.13 0.05 --------- --------- Cumulative effect of accounting change for goodwill, net of tax -- (1.42) --------- --------- Net income/(loss) $ 0.13 $ (1.37) ========= ========= Weighted average shares outstanding Basic 43,453 43,198 Diluted 43,599 43,512 --------- --------- The accompanying notes are an integral part of these statements. 4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED THREE MONTHS ENDED MARCH 31 In thousands 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income/(loss) $ 5,683 $(59,439) Adjustments to reconcile net income/(loss) to net cash used for operations: Depreciation and amortization 5,717 6,558 Results of discontinued operations, net of tax (117) 405 Cumulative effect of accounting change for goodwill -- 61,663 Discontinued operations 43 131 Changes in operating assets and liabilities, net of acquisition and disposition of product line Accounts receivable (19,889) 1,516 Inventories (1,675) (162) Accounts payable 7,898 370 Accrued income taxes 1,116 (28,724) Accrued liabilities and customer deposits 238 (3,365) Other assets and liabilities (119) (2,831) -------- -------- Net cash used for operating activities (1,105) (23,878) INVESTING ACTIVITIES Purchase of property, plant and equipment, net (2,804) (2,574) Cash received from disposition of discontinued operations -- 1,400 Cash paid for acquisition of product line -- (1,654) Discontinued operations (62) (4) -------- -------- Net cash used for investing activities (2,866) (2,832) FINANCING ACTIVITIES Repayments of loans under credit agreement (2,700) -- Repayments of other borrowings (190) (411) Proceeds from the issuance of treasury stock for stock options and other benefit plans 229 1,530 Cash dividends (435) (421) -------- -------- Net cash (used for) provided by financing activities (3,096) 698 Effect of changes in currency exchange rates 705 (393) -------- -------- Decrease in cash (6,362) (26,405) Cash, beginning of year 19,210 53,949 -------- -------- Cash, end of period $ 12,848 $ 27,544 ======== ======== The accompanying notes are an integral part of these statements. 5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 (UNAUDITED) 1. BUSINESS Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is one of North America's largest manufacturers of value-added equipment for locomotives, railway freight cars and passenger transit vehicles. Our major products are intended to enhance safety, improve productivity and reduce maintenance costs for our customers. Product offerings include brakes for locomotives, freight cars and passenger transit vehicles, electronic controls and monitors, heat exchangers and cooling systems, switcher and commuter locomotives, couplers, door systems and draft gears. The Company aggressively pursues technological advances with respect to both new product development and product enhancements. 2. ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. These condensed interim financial statements do not include all of the information and footnotes required for complete financial statements. In management's opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year. The Company operates on a four-four-five week accounting quarter, and accordingly, the quarters end on or about March 31, June 30, September 30 and December 31. The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec's Annual Report on Form 10-K for the year ended December 31, 2002. The December 31, 2002 information has been derived from the Company's December 31, 2002 Annual Report on Form 10-K. REVENUE RECOGNITION Revenue is recognized in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Wabtec recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. Contract revenues and cost estimates are reviewed and revised quarterly, at a minimum, and adjustments are reflected in the accounting period as known. Provisions are made for estimated losses on uncompleted contracts as known, if necessary. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. FINANCIAL DERIVATIVES AND HEDGES ACTIVITY The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. In the application, the Company has concluded its interest rate swap contracts qualify for "special cash flow hedge accounting" which permit recording the fair value of the swap and corresponding adjustment to other comprehensive income (loss) on the balance sheet. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued. The Statement updates, clarifies and simplifies existing accounting pronouncements. While the technical corrections to existing pronouncements are not substantive in nature, in some instances, they may change accounting practice. The provisions of this standard related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of this standard must be applied for financial statements issued on or after May 15, 2002. The Company has not completed the process of evaluating the impact that will result from adopting it. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," under which a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company has not had nor anticipates any action that would be covered under this statement. 6
STOCK BASED COMPENSATION PLANS In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation," to provide alternate methods of transition to SFAS No. 123's fair value method of accounting for stock-based compensation. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of the Statement are applicable to all companies with stock-based compensation. The provisions of this standard are effective for fiscal years ending after December 15, 2002. The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized under these plans. Had compensation expense for these plans been determined based on the fair value at the grant dates for awards, the Company's net income and earnings per share would be as set forth in the following table. For purposes of pro forma disclosures, the estimated fair value is amortized to expense over the options' vesting period. THREE MONTHS ENDED MARCH 31 In thousands, except per share 2003 2002 - -------------------------------------------------------------------- Net income (loss) As reported $ 5,683 $ (59,439) Stock-based compensation under FAS123 1,389 562 --------- ---------- Pro forma 4,294 (60,001) Basic earnings (loss) per share As reported $ 0.13 $ (1.38) Pro forma 0.10 (1.38) Diluted earnings (loss) per share As reported $ 0.13 $ (1.37) Pro forma 0.10 (1.37) Since compensation expense associated with option grants would be recognized over the vesting period, the initial impact of applying SFAS No. 123 on pro forma net income is not representative of the potential impact on pro forma net income in future years. In each subsequent year, pro forma compensation expense would include the effect of recognizing a portion of compensation expense from multiple awards. For purposes of presenting pro forma results, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: THREE MONTHS ENDED MARCH 31 2003 2002 - -------------------------------------------------------------------- Dividend yield .30% .30% Risk-free interest rate 5.3% 5.7% Stock price volatility 43.39 46.70 Expected life (years) 5.0 5.0 - -------------------------------------------------------------------- The Black-Scholes option valuation model was developed for use in estimating fair value of traded options, which are significantly different than employee stock options. Although this valuation model is an acceptable method for use in presenting pro forma information, because of the differences in traded options and employee stock options, the Black-Scholes model does not necessarily provide a single measure of the fair value of employee stock options. OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as net income and all nonowner changes in shareholders' equity. The Company's accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, unrealized gains and losses on derivatives designated and qualified as cash flow hedges and pension related adjustments. Total comprehensive income (loss) for the three months ended March 31 was: THREE MONTHS ENDED MARCH 31 In thousands 2003 2002 - ---------------------------------------------------------------------- Net income (loss) $ 5,683 $(59,439) Foreign currency translation 3,576 (3) Unrealized gain on hedges, net of tax 298 529 -------- -------- Total comprehensive income (loss) $ 9,557 $(58,913) - ---------------------------------------------------------------------- The components of accumulated other comprehensive income (loss) consisted of the following at March 31, 2003 and December 31, 2002: MARCH 31 DECEMBER 31 In thousands 2003 2002 - --------------------------------------------------------------------- Foreign currency translation $(13,911) $(17,487) Unrealized loss on hedges, net of tax (708) (1,006) Additional minimum pension liability, net of tax (13,599) (13,599) -------- -------- Total accumulated comprehensive $(28,218) $(32,092) loss - --------------------------------------------------------------------- 3. DISCONTINUED OPERATIONS In the fourth quarter of 2001, the Company decided to exit some small, non-core businesses. One of these businesses was sold in the first quarter of 2002, and the other is still being marketed for sale. In accordance with SFAS 144, the operating results of these businesses have been classified as discontinued operations for all years presented and are summarized for the three months ended March 31, as follows: 7
THREE MONTHS ENDED MARCH 31 In thousands 2003 2002 - --------------------------------------------------------------- Net sales $2,311 $4,339 Income before income taxes 184 191 Income tax expense 67 67 ------ ------ Income from discontinued operations $ 117 $ 124 - --------------------------------------------------------------- 4. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The components of inventory, net of reserves, were: MARCH 31 DECEMBER 31 In thousands 2003 2002 - --------------------------------------------------------------- Raw materials $48,188 $56,016 Work-in-process 36,338 27,856 Finished goods 7,226 4,598 ------- ------- Total inventory $91,752 $88,470 - --------------------------------------------------------------- 5. INTANGIBLES The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under its provisions, all goodwill and other intangible assets with indefinite lives are no longer amortized under a straight-line basis over the assets estimated useful life. Instead, they are subject to periodic assessments for impairment by applying a fair-value based test. As a result of the adoption of SFAS 142 during 2002, the Company wrote down the carrying value of goodwill by $90 million ($83.2 million for the freight group and $6.8 million for the transit group), resulting in a non-cash after-tax charge of $61.7 million. The fair value of these reporting units was determined using a combination of discounted cash flow analysis and market multiples based upon historical and projected financial information. Goodwill still remaining on the balance sheet is $109.5 million. As of March 31, 2003 and December 31, 2002, the Company's trademarks had a gross carrying amount of $23.1 million and accumulated amortization of $3.6 million, which are no longer amortized because the Company has decided that this intangible has an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following: MARCH 31 DECEMBER 31 In thousands 2003 2002 - ------------------------------------------------------------------------ Patents and other, net of accumulated $15,616 $16,124 amortization of $39,643 and $39,136 Covenants not to compete, net of accumulated amortization of $17,007 and $16,673 1,146 1,480 Intangible pension asset 4,357 4,357 ------- ------- Total $21,119 $21,961 - ------------------------------------------------------------------------ In connection with the adoption of SFAS No. 142, the Company reassessed the useful lives and the classification of its identifiable assets and determined that they continue to be appropriate. The weighted average useful lives of patents was 13 years and covenants not to compete was 5 years. Amortization expense for intangible assets was $1 million and $1.5 million for the three months ended March 31, 2003 and 2002, respectively. Estimated amortization expense for the remainder of 2003 and the five succeeding years are as follows (in thousands): 2003 (remainder) $3,000 2004 2,876 2005 2,318 2006 2,177 2007 1,920 2008 1,473 There was no change in the carrying amount of goodwill for the three months ended March 31, 2003. Goodwill for the freight group and transit group is $92.6 million and $16.9 million, respectively. 6. EARNINGS PER SHARE The computation of earnings per share from continuing operations is as follows: THREE MONTHS ENDED MARCH 31 In thousands, except per share 2003 2002 - ---------------------------------------------------------------- BASIC EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change applicable to common shareholders $ 5,566 $ 2,629 Divided by Weighted average shares outstanding 43,453 43,198 Basic earnings from continuing operations before cumulative effect of accounting change per share $ 0.13 $ 0.06 - ---------------------------------------------------------------- DILUTED EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change applicable to common shareholders $ 5,566 $ 2,629 Divided by sum of the Weighted average shares outstanding 43,453 43,198 Conversion of dilutive stock options 146 314 ------- ------- Diluted shares outstanding 43,599 43,512 Diluted earnings from continuing operations before cumulative effect of accounting change per share $ 0.13 $ 0.06 - ---------------------------------------------------------------- 8
7. WARRANTIES The following table reconciles the changes in the Company's product warranty reserve as of and for the three months ended March 31, 2003 and 2002. THREE MONTHS ENDED MARCH 31 In thousands 2003 2002 - ------------------------------------------------------------------ Balance at beginning of period $17,407 $15,373 Warranty expense 3,615 4,942 Warranty payments 4,315 5,306 ------- ------- Balance at end of period $16,707 $15,009 - ------------------------------------------------------------------ 8. COMMITMENTS AND CONTINGENCIES Under the terms of the purchase agreement and related documents for the 1990 Acquisition, American Standard, Inc. ("ASI"), has indemnified the Company for certain items including, among others, environmental claims. The indemnification provisions of the agreement expired at various dates through 2000, except for those claims which were timely asserted, which continue until resolved. If ASI was unable to honor or meet these indemnifications, the Company would be responsible for such items. In the opinion of management, ASI currently has the ability to meet its indemnification obligations. The Company's and its affiliates' operations do not use and their products do not contain any asbestos. Asbestos actions have been filed against the Company and certain of its affiliates. Consistent with the experience of others, the number of claims have increased in recent years. However, it is important to note that these asbestos claims involve products sold prior to the 1990 formation of the Company. The Company and its affiliates have not incurred any significant costs related to these asbestos claims. The claims are covered by insurance or are subject to indemnity from the companies who manufactured or sold the products in question. Management believes that these claims will not be material; accordingly, the financial statements do not reflect any costs or reserves for such claims. The Company is subject to a number of other commitments and contingencies as described in its Annual Report on Form 10-K for the Year Ended December 31, 2002. During the first quarter of 2003, there were no material changes to the information described in Note 20 therein. Also, as described in Note 20 of the Form 10-K, the Company is subject to a RCRA Part B Closure Permit ("the Permit") issued by the Environmental Protection Agency (EPA) and the Idaho Department of Health and Welfare, Division of Environmental Quality relating to the monitoring and treatment of groundwater contamination on, and adjacent to, the MotivePower Industries (Boise, Idaho) facility. In compliance with the Permit, the Company has completed the first phase of an accelerated plan for the treatment of contaminated groundwater, and continues onsite and offsite monitoring for the amount of hazardous constituents. At March 31, 2003, the Company has accrued $702,000 representing the estimated remaining costs for remediation. The Company was in compliance with the Permit at March 31, 2003. On November 3, 2000, the Company settled a suit brought against it in 1999 by GE-Harris Railway Electronics, L.L.C. and GE-Harris Railway Electronics Services, L.L.C. (collectively "GE-Harris"). On September 20, 2002, a motion in that lawsuit was filed by the successor to GE Harris, GE Transportation Services Global Signaling, L.L.C. ("GETS-GS"). The motion by GETS-GS contends that the Company is acting beyond authority granted in the parties' November 2000 settlement and license agreement and in contempt of the consent order that concluded the suit at that time. In support of its motion, GETS-GS points principally to sales and offers to sell certain railway brake equipment, including distributed power equipment, to Australian customers. GETS-GS is seeking substantial money damages and has claimed a significant business loss. This matter is in discovery and a hearing on GETS-GS' motion is scheduled for May 13, 2003. 9. SEGMENT INFORMATION Wabtec has two reportable segments - the Freight Group and the Transit Group. The key factors used to identify these reportable segments are the organization and alignment of the Company's internal operations, the nature of the products and services, and customer type. The business segments are: FREIGHT GROUP manufactures products and provides services geared to the production and operation of freight cars and locomotives, including braking control equipment, engines, on-board electronic components and train coupler equipment. Revenues are derived from OEM sales and locomotive overhauls, aftermarket sales and freight car repairs and services. TRANSIT GROUP consists of products for passenger transit vehicles (typically subways, commuter rail and buses) that 9
include braking, coupling, and monitoring systems, climate control and door equipment that are engineered to meet individual customer specifications. Revenues are derived from OEM and aftermarket sales as well as from repairs and services. The Company evaluates its business segments' operating results based on income from operations. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies. Segment financial information for the three months ended March 31, 2003 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 122,634 $ 46,889 -- $ 169,523 Intersegment sales/(elimination) 1,963 167 (2,130) -- --------- --------- --------- --------- Total sales $ 124,597 $ 47,056 $ (2,130) $ 169,523 ========= ========= ========= ========= Income from operations $ 15,705 $ 2,219 $ (5,623) $ 12,301 Interest expense and other -- -- (3,535) (3,535) --------- --------- --------- --------- Income from continuing operations before income taxes and cumulative effect of accounting change $ 15,705 $ 2,219 $ (9,158) $ 8,766 ========= ========= ========= ========= Segment financial information for the three months ended March 31, 2002 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 108,607 $ 68,718 -- $ 177,325 Intersegment sales/(elimination) 2,896 107 (3,003) -- --------- --------- --------- --------- Total sales $ 111,503 $ 68,825 $ (3,003) $ 177,325 ========= ========= ========= ========= Income from operations $ 9,859 $ 5,849 $ (5,241) $ 10,467 Interest expense and other -- -- (6,423) (6,423) --------- --------- --------- --------- Income from continuing operations before income taxes and cumulative effect of accounting change $ 9,859 $ 5,849 $ (11,664) $ 4,044 ========= ========= ========= ========= 10. RESTRUCTURING CHARGES In 2001, the Company completed a merger and restructuring plan with charges totaling $71 million pre-tax, with approximately $2 million of the charge expensed in 2001, $20 million in 2000 and $49 million in 1999. The plan involved the elimination of duplicate facilities and excess capacity, operational realignment and related workforce reductions, and the evaluation of certain assets as to their perceived ongoing benefit to the Company. As of March 31, 2003, $402,000 of the merger and restructuring charge was still remaining as accrued on the balance sheet as part of other accrued liabilities. The table below identifies the significant components of the charge and reflects the accrual balance at that date. In thousands LEASE IMPAIRMENTS AND ASSET WRITEDOWNS TOTAL - ------------------------------------------------------------------------------------------ Beginning balance, January 1, 2003 $ 647 $ 647 Amounts paid (245) (245) ----- ----- Balance at March 31, 2003 $ 402 $ 402 - ------------------------------------------------------------------------------------------ The lease impairment charges and asset writedowns are associated with the Company's closing of several plants, the consolidation of the corporate headquarters, and the Company's evaluation of certain assets where projected cash flows from such assets over their remaining lives are estimated to be less than their carrying values. The Company began and completed a new restructuring plan for the Transit rail business in 2001. The restructuring plan involved operational realignment and related workforce reductions. The charges in 2001 for the restructuring plan move totaled $2 million pre-tax. 2002 operations still included much of the cost of integration in normal operations. 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 2002 Annual Report on Form 10-K. OVERVIEW Net sales of ongoing operations decreased by 4.4% from $177.3 million in the first quarter of 2002 to $169.5 million in the same period in 2003. The major cause for the change was the completion of a major transit contract during 2002, which was partially offset by increased sales of components for new freight cars and locomotives. Net income from continuing operations for the first three months of 2003 was $5.6 million or $0.13 per diluted share. Net loss from continuing operations for the first three months of 2002 was $59 million or $1.36 per diluted share The results for the first three months of 2002 included a $61.7 million, net of tax, write off of goodwill in accordance with SFAS No. 142. Net income from continuing operations before cumulative effect of accounting change was $2.6 million or $0.06 per diluted share. The increase in net income was due to improved margins, lower operating expenses and lower interest expense. FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002 The following table sets forth the Company's net sales by business segment: THREE MONTHS ENDED MARCH 31 ------------------------ In thousands 2003 2002 - -------------------------------------------------------------------- Freight Group $122,634 $108,607 Transit Group 46,889 68,718 -------- -------- Net sales $169,523 $177,325 - -------------------------------------------------------------------- Net sales for the first quarter of 2003 decreased $7.8 million, or 4.4%, to $169.5 million as compared to the prior year period. The increased sales in the Freight Group were offset by lower sales in the Transit Group. The Freight Group's increased sales reflected higher sales of components for new freight cars and locomotives and also higher aftermarket sales. In the quarter, industry deliveries of new freight cars increased to 6,614 units as compared to 3,855 in the same period in 2002. The Transit Group's decreased sales were due to the completion of a contract to supply components for New York City subway cars and lower aftermarket sales. Gross profit increased to $45.3 million in the first quarter of 2003 compared to $44.8 million in the same period of 2002. Gross profit is dependent on a number of factors including pricing, sales volume and product mix. Gross profit, as a percentage of sales, was 26.7% compared to 25.3% in the same period of 2002. (Gross profit was 25.9% in the fourth quarter of 2002.) The increase in gross profit percentage is primarily due to operating efficiencies and favorable product mix. Operating expenses improved by $1.3 million in the first quarter of 2003 as compared to the same period of 2002, due to a decrease in selling, general and administrative expenses and amortization expense. Operating income totaled $12.3 million (or 7.3% of sales) in the first quarter of 2003 compared with $10.5 million (or 5.9% of sales) in the same period in 2002. Higher operating income resulted from increased margins and decreased operating expenses in the first quarter of 2003. (See Note 9 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest expense decreased 54.8% in the first quarter of 2003 as compared to the prior year quarter primarily due to a substantial decrease in debt and interest rates. The effective income tax rate was 36.5% in the first quarter of 2003 and 35% in the first quarter of 2002. The change in the effective tax rate was due to increased state activity, resulting in a higher effective state tax rate. LIQUIDITY AND CAPITAL RESOURCES Liquidity is provided primarily by operating cash flow and borrowings under the Company's unsecured credit facility with a consortium of commercial banks ("credit agreement"). The following is a summary of selected cash flow information and other relevant data. THREE MONTHS ENDED MARCH 31 ------------------ In thousands 2003 2002 - ----------------------------------------------------------- Cash provided (used) by: Operating activities: Income taxes $ 1,116 $(28,724) Other operating activities (2,221) 4,846 Investing activities (2,866) (2,832) Financing activities (3,096) 698 Cash used by operations other than income taxes in the first three months of 2003 was $2.2 million compared to $4.8 million of cash provided by operations in the same period a year ago. Earnings were the main provider of cash from operations in the first three months of 2003 and 2002. An increase in accounts receivable was the main use of cash from operations in the first three months of 2003. Planned income tax payments of approximately $30 million due to the fourth quarter 2001 net 11
gain from the sale of certain businesses to General Electric were the primary use of cash from operations for the first three months of 2002. Cash used for investing activities was $2.9 million in the first three months of 2003 as compared to $2.8 million a year ago. Capital expenditures for continuing operations were $2.8 million and $3.1 in the first three months of 2003 and 2002, respectively. The majority of capital expenditures for these periods relates to upgrades to existing equipment and replacement of existing equipment. In the first three months of 2002, cash received from the sale of a product line was $1.4 million and $1.7 million was paid to acquire the minority interest of a business that the Company did not already own. Cash used by financing activities was $3.1 million in the first three months of 2003 versus $698,000 of cash provided by financing activities in the same period a year ago. The Company reduced long-term debt by approximately $2.9 million in the first three months of 2003 compared to $411,000 in the same period a year ago. The following table sets forth the Company's outstanding indebtedness at March 31, 2003 and December 31, 2002. The revolving credit agreement and other term loan interest rates are variable and dependent on market conditions. MARCH 31 DECEMBER 31 In thousands 2003 2002 - ----------------------------------------------------------------------- Revolving credit agreement $187,000 $189,700 5.5% Industrial revenue bond due 2008 4,742 4,909 Other 523 542 -------- -------- Total $192,265 $195,151 Less-current portion 839 833 -------- -------- Long-term portion $191,426 $194,318 - ----------------------------------------------------------------------- Credit Agreement The Company's credit agreement provides a $275 million five-year revolving credit facility expiring in November 2004 and a 364-day $95 million convertible revolving credit facility maturing in November 2004, with an annual renewal in November 2003. At March 31, 2003, the Company had available borrowing capacity, net of letters of credit, of approximately $161 million, subject to certain financial covenant restrictions. The Company believes, based on current levels of operations and forecasted earnings, cash flow and liquidity will be sufficient to fund its working capital and capital equipment needs as well as meeting the debt service requirements. If the Company's sources of funds were to fail to satisfy the Company's cash requirements, the Company may need to refinance its existing debt or obtain additional financing. There is no assurance that such new financing alternatives would be available, and, in any case, such new financing, if available, would be expected to be more costly and burdensome than the debt agreements currently in place. The Company currently expects to refinance and replace its existing bank facility at least twelve months prior to its November 2004 expiration. FORWARD LOOKING STATEMENTS We believe that all statements other than statements of historical facts included in this report, including certain statements under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that our assumptions and expectations are correct. These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things: Economic and Industry Conditions - materially adverse changes in economic or industry conditions generally or in the markets served by us, including North America, South America, Europe, Australia and Asia; - demand for services in the freight and passenger rail industry; - consolidations in the rail industry; - demand for our products and services; - continued outsourcing by our customers; - demand for freight cars, locomotives, passenger transit cars and buses; - industry demand for faster and more efficient braking equipment; - fluctuations in interest rates; Operating Factors - supply disruptions; - technical difficulties; - changes in operating conditions and costs; - successful introduction of new products; - labor relations; - completion and integration of additional acquisitions; - the development and use of new technology; Competitive Factors - the actions of competitors; Political/Governmental Factors - political stability in relevant areas of the world; - future regulation/deregulation of our customers and/or the rail industry; - governmental funding for some of our customers; - political developments and laws and regulations, such as forced divestiture of assets, restrictions on production, imports or exports, price controls, tax 12
increases and retroactive tax claims, expropriation of property, cancellation of contract rights, and environmental regulations; and Transaction or Commercial Factors - the outcome of negotiations with partners, governments, suppliers, customers or others. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, environmental matters, the testing of goodwill and other intangibles for impairment, proceeds on assets to be sold, pensions and other postretirement benefits, and tax matters. Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company's financial statements at any given time. Despite these inherent limitations, management believes that Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company. A discussion of the judgments and uncertainties associated with accounting for derivatives and environmental matters can be found in the "Notes to Consolidated Financial Statements" included elsewhere in this report. A summary of the Company's significant accounting policies is included in Note 2 in the "Notes to Consolidated Financial Statements" included elsewhere in this report. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company's operating results and financial condition. In 2002, Wabtec adopted the new standard of accounting for goodwill and intangible assets with indefinite lives. The cumulative effect adjustment recognized on January 1, 2002, upon adoption of the new standard, was a charge of $61.7 million (after tax). Also in 2002, amortization ceased for goodwill and intangible assets with indefinite lives. Additionally, goodwill and indefinite-lived intangibles are required to be tested for impairment at least annually. The evaluation of impairment involves comparing the current fair value of the business to the recorded value (including goodwill). The Company uses a combination of a guideline public company market approach and a discounted cash flow model ("DCF model") to determine the current fair value of the business. A number of significant assumptions and estimates are involved in the application of the DCF model to forecasted operating cash flows, including markets and market share, sales volume and pricing, costs to produce and working capital changes. Management considers historical experience and all available information at the time the fair values of its business are estimated. However, actual fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill. Other areas of significant judgments and estimates include the liabilities and expenses for pensions and other postretirement benefits. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality). The rate used to discount future estimated liabilities is determined considering the rates available at year-end on debt instruments that could be used to settle the obligations of the plan. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations and is generally applied to a five-year average market value of assets. The recent declines in equity markets and interest rates have had a negative impact on Wabtec's pension plan liability and fair value of plan assets. As a result, the accumulated benefit obligation exceeded the fair value of plan assets at the end of 2002, which resulted in a $7.1 million, net of tax, charge to other comprehensive loss in the fourth quarter. As a global company, Wabtec records an estimated liability or benefit for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates. Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. Management does not believe that such a charge would be material. RECENT ACCOUNTING PRONOUNCEMENTS See Notes 2 and 5 of "Notes to Condensed Consolidated Financial Statements" included elsewhere in this report. 13
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. After considering the effects of interest rate swaps, further described below, the Company's variable-rate debt represents 45% of total long-term debt at March 31, 2003. Management has entered into pay-fixed, receive-variable interest rate swap contracts that partially mitigate the impact of variable-rate debt interest rate increases. An instantaneous 100 basis point increase in interest rates would reduce the Company's annual earnings by $552,000, assuming no additional intervention strategies by management. See Note 2 of the Company's Notes to Condensed Consolidated Financial Statements for the Quarterly Period Ended March 31, 2003 included herein for discussion of swap contracts. These swap contracts are not expected to have a material effect on the Company's financial condition, results of operations or liquidity. FOREIGN CURRENCY EXCHANGE RISK The Company occasionally enters into several types of financial instruments for the purpose of managing its exposure to foreign currency exchange rate fluctuations in countries in which the Company has significant operations. As of March 31, 2003, the Company had no such instruments outstanding. Wabtec is also subject to certain risks associated with changes in foreign currency exchange rates to the extent its operations are conducted in currencies other than the U.S. dollar. For the first three months of 2003, approximately 74% of Wabtec's net sales are in the United States, 10% in Canada, 1% in Mexico, and 15% in other international locations, primarily Europe. At March 31, 2003, the Company does not believe changes in foreign currency exchange rates represent a material risk to results of operations, financial position, or liquidity. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Wabtec's principal executive officer and its principal financial officer, based on an evaluation as of a date within 90 days of the filing date of this report, have concluded that Wabtec's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) are adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. Changes in Internal Controls There were no significant changes in Wabtec's internal controls or in other factors that could significantly affect these controls and procedures subsequent to the date of the evaluation. LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES There have been no material changes to report regarding the Company's commitments and contingencies as described in Note 20 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 2002. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are being filed with this report: 3.1 Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995, filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-90866), and incorporated herein by reference. 3.2 Restated By-Laws of the Company, effective November 19, 1999, filed as part of the Company's Registration Statement on Form S-4 (No. 333-88903, and incorporated herein by reference. (b) None. 14
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION By: /s/ ALVARO GARCIA-TUNON ----------------------------------- Alvaro Garcia-Tunon Chief Financial Officer Date: May 15, 2003 15
CERTIFICATION I, Gregory T.H. Davies, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ GREGORY T.H. DAVIES - ----------------------- Name: Gregory T.H. Davies Title: President & Chief Executive Officer 16
CERTIFICATION I, Alvaro Garcia-Tunon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Westinghouse Air Brake Technologies Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ ALVARO GARCIA-TUNON - ----------------------- Name: Alvaro Garcia-Tunon Title: Chief Financial Officer 17
CERTIFICATION Pursuant to 18 U.S.C. ss. 1350, the undersigned officers of Wabtec Corporation (the "Company"), hereby certify, to the best of their knowledge, that the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ GREGORY T. H. DAVIES ----------------------------------------------- Gregory T. H. Davies President & Chief Executive Officer Date: May 15, 2003 By: /s/ ALVARO GARCIA-TUNON ----------------------------------------------- Alvaro Garcia-Tunon Chief Financial Officer Date: May 15, 2003 18
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION AND METHOD OF FILING ------- -------------------------------- 3.1 Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995, filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-90866), and incorporated herein by reference 3.2 Restated By-Laws of the Company, effective November 19, 1999, filed as part of the Company's Registration Statement on Form S-4 (No. 333-88903), and incorporated herein by reference 19