================================================================================ 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 JUNE 30, 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 August 13, 2003, 43,529,457 shares of Common Stock of the registrant were issued and outstanding. ================================================================================ 1
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION JUNE 30, 2003 FORM 10-Q TABLE OF CONTENTS Page ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 4 2003 and 2002 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 6 Notes to Condensed Consolidated Financial 7 Statements Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about 17 Market Risk Item 4. Controls and Procedures 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED JUNE 30 DECEMBER 31 In thousands, except shares and par value 2003 2002 - ------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 8,705 $ 19,210 Accounts receivable 131,669 108,019 Inventories 93,467 88,470 Other current assets 30,648 29,524 ------------------------- Total current assets 264,489 245,223 Property, plant and equipment 324,841 308,495 Accumulated depreciation (175,376) (159,903) ------------------------- Property, plant and equipment, net 149,465 148,592 OTHER ASSETS Goodwill, net 109,450 109,450 Other intangibles, net 39,612 41,524 Other noncurrent assets 47,158 44,076 ------------------------- Total other assets 196,220 195,050 ------------------------- Total Assets $610,174 $588,865 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 809 $ 833 Accounts payable 72,218 62,104 Customer deposits 17,025 10,827 Accrued income taxes 3,205 3,928 Other accrued liabilities 52,989 57,571 ------------------------- Total current liabilities 146,246 135,263 Long-term debt 180,994 194,318 Reserve for postretirement and pension benefits 40,671 38,266 Other long-term liabilities 22,812 21,756 ------------------------- Total liabilities 390,723 389,603 SHAREHOLDERS' EQUITY Common stock, $.01 par value; 100,000,000 shares authorized: 65,447,867 shares issued and 43,493,116 and 43,440,840 outstanding at June 30, 2003 and December 31, 2002, respectively 654 654 Additional paid-in capital 272,703 272,782 Treasury stock, at cost, 21,954,751 and 22,007,027 shares, respectively (272,983) (273,634) Retained earnings 241,614 231,282 Deferred compensation 270 270 Accumulated other comprehensive income (loss) (22,807) (32,092) ------------------------- Total shareholders' equity 219,451 199,262 ------------------------- Total Liabilities and Shareholders' Equity $610,174 $588,865 ========================= The accompanying notes are an integral part of these statements. 3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands, except per share data 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------ Net sales $174,856 $179,808 $344,379 $357,133 Cost of sales (127,294) (134,452) (251,541) (266,997) ----------------------------------------------------- Gross profit 47,562 45,356 92,838 90,136 Selling, general and administrative expenses (24,429) (22,231) (48,136) (46,954) Engineering expenses (8,246) (8,476) (16,514) (16,581) Amortization expense (1,045) (1,349) (2,045) (2,834) ----------------------------------------------------- Total operating expenses (33,720) (32,056) (66,695) (66,369) Income from operations 13,842 13,300 26,143 23,767 Other income and expenses Interest expense (2,398) (5,579) (4,797) (10,889) Other expense, net (2,673) (392) (3,809) (1,505) ----------------------------------------------------- Income from continuing operations before income 8,771 7,329 17,537 11,373 taxes Income tax expense (3,201) (2,565) (6,401) (3,981) ----------------------------------------------------- Income from continuing operations 5,570 4,764 11,136 7,392 Discontinued operations, net of tax Income (loss) from discontinued operations (44) 57 73 181 Loss on sale of discontinued operations - - - (529) ----------------------------------------------------- Total discontinued operations (44) 57 73 (348) ----------------------------------------------------- Income before cumulative effect of accounting change 5,526 4,821 11,209 7,044 ----------------------------------------------------- Cumulative effect of accounting change for goodwill, net of tax - - - (61,663) ----------------------------------------------------- Net income (loss) $5,526 $4,821 $11,209 $(54,619) ===================================================== EARNINGS (LOSS) PER COMMON SHARE Basic Income from continuing operations $0.13 $0.11 $0.26 $0.17 Income (loss) from discontinued operations - - - (0.01) ----------------------------------------------------- Income before cumulative effect of accounting change 0.13 0.11 0.26 0.16 Cumulative effect of accounting change for goodwill, net of tax - - - (1.42) ----------------------------------------------------- Net income/(loss) $0.13 $0.11 $0.26 $(1.26) ===================================================== Diluted Income from continuing operations $0.13 $0.11 $0.26 $0.17 Income (loss) from discontinued operations - - - (0.01) ----------------------------------------------------- 4
Income before cumulative effect of accounting change 0.13 0.11 0.26 0.16 Cumulative effect of accounting change for goodwill, net of tax - - - (1.41) ----------------------------------------------------- Net income/(loss) $0.13 $0.11 $0.26 $(1.25) ===================================================== Weighted average shares outstanding Basic 43,478 43,321 43,462 43,239 Diluted 43,790 43,734 43,685 43,592 ----------------------------------------------------- The accompanying notes are an integral part of these statements. 5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED SIX MONTHS ENDED JUNE 30 In thousands 2003 2002 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income/(loss) $11,209 $(54,619) Adjustments to reconcile net income/(loss) to net cash used for operations: Depreciation and amortization 11,849 13,013 Results of discontinued operations, net of tax (73) 348 Cumulative effect of accounting change for goodwill - 61,663 Discontinued operations 47 218 Changes in operating assets and liabilities, net of acquisition and disposition of product line Accounts receivable (18,119) 374 Inventories (818) 6,696 Accounts payable 6,983 (283) Accrued income taxes 1,675 (29,231) Accrued liabilities and customer deposits (112) (3,809) Other assets and liabilities (1,230) (4,266) ---------------------- Net cash provided by (used for) operating activities 11,411 (9,896) INVESTING ACTIVITIES Purchase of property, plant and equipment, net (5,364) (5,327) Cash received from disposition of discontinued operations - 1,400 Cash paid for acquisition of product line - (1,654) Discontinued operations (108) (36) ---------------------- Net cash used for investing activities (5,472) (5,617) FINANCING ACTIVITIES Repayments of loans under credit agreement (12,700) - Repayments of other borrowings (659) (1,047) Proceeds from the issuance of treasury stock for stock options and other benefit plans 572 2,119 Cash dividends (877) (997) ---------------------- Net cash (used for) provided by financing activities (13,664) 75 Effect of changes in currency exchange rates (2,780) (283) ---------------------- Decrease in cash (10,505) (15,721) Cash, beginning of year 19,210 53,949 ---------------------- Cash, end of period $ 8,705 $ 38,228 ====================== The accompanying notes are an integral part of these statements. 6
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 (UNAUDITED) 1. BUSINESS Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is one of the largest providers in North America of value-added, technology-based equipment and services for the global rail industry. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for our customers, can be found on virtually all U.S. locomotives, freight cars and passenger transit vehicles. Our primary products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. 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 will reclassify items previously recorded as extraordinary item to interest expense. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities." A variable interest entity ("VIE") is one where the contractual or ownership interests in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. The Company does not believe that this statement will have a material impact on the Company's financial statements or results of operations. 7
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The provisions of this statement are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and should be applied prospectively. SFAS No. 149 has no impact on the Company's financial statements or results of operations. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments embodying an obligation to transfer assets or to issue equity securities be classified as liabilities. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. SFAS No. 150 has no impact on the Company's financial statements r results of operations. 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 JUNE 30 In thousands, except per share 2003 2002 - ----------------------------------------------------------- Net income As reported $5,526 $4,821 Stock-based compensation under FAS123 20 331 -------------------- Pro forma 5,506 4,490 Basic earnings per share As reported $0.13 $0.11 Pro forma 0.13 0.10 Diluted earnings per share As reported $0.13 $0.11 Pro forma 0.13 0.10 SIX MONTHS ENDED JUNE 30 In thousands, except per share 2003 2002 - ----------------------------------------------------------- Net income (loss) As reported $11,209 $(54,619) Stock-based compensation under FAS123 1,409 893 -------------------- Pro forma 9,800 (55,512) Basic earnings (loss) per share As reported $0.26 $(1.26) Pro forma 0.23 (1.28) Diluted earnings (loss) per share As reported $0.26 $(1.25) Pro forma 0.22 (1.27) 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 AND SIX MONTHS ENDED JUNE 30 2003 2002 - --------------------------------------------------- Dividend yield .30% .30% Risk-free interest rate 5.3% 5.7% Stock price volatility 46.0 46.7 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 8
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 and six months ended June 30 was: THREE MONTHS ENDED JUNE 30 In thousands 2003 2002 - ----------------------------------------------------------- Net income $ 5,526 $4,821 Foreign currency translation 5,185 3,134 Unrealized gain on hedges, net of tax 226 49 -------------------- Total comprehensive income $ 10,937 $8,004 - ----------------------------------------------------------- SIX MONTHS ENDED JUNE 30 In thousands 2003 2002 - ----------------------------------------------------------- Net income (loss) $ 11,209 $(54,619) Foreign currency translation 8,761 3,131 Unrealized gain on hedges, net of tax 524 578 -------------------- Total comprehensive income (loss) $ 20,494 $(50,910) - ----------------------------------------------------------- The components of accumulated other comprehensive income (loss) consisted of the following at June 30, 2003 and December 31, 2002: JUNE 30 DECEMBER 31 In thousands 2003 2002 - ------------------------------------------------------- Foreign currency translation $ (8,726) $(17,487) Unrealized loss on hedges, net of tax (482) (1,006) Additional minimum pension liability, net of tax (13,599) (13,599) ------------------------ Total accumulated comprehensive loss $(22,807) $(32,092) - ------------------------------------------------------- 3. DISCONTINUED OPERATIONS In the fourth quarter of 2001, the Company decided to exit certain 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 and six months ended June 30, as follows: THREE MONTHS ENDED JUNE 30 In thousands 2003 2002 - --------------------------------------------------------- Net sales $2,069 $2,322 Income (loss) before income taxes (69) 87 Income tax expense (benefit) (25) 30 -------------------- Income (loss) from discontinued operations $ (44) $ 57 - --------------------------------------------------------- SIX MONTHS ENDED JUNE 30 In thousands 2003 2002 - ------------------------------------------------------- Net sales $4,380 $6,661 Income before income taxes 115 278 Income tax expense 42 97 ------------------ Income from discontinued operations $ 73 $ 181 - ------------------------------------------------------- 4. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. Inventory costs include material, labor and overhead. The components of inventory, net of reserves, were: JUNE 30 DECEMBER 31 In thousands 2003 2002 - ------------------------------------------------------- Raw materials $49,051 $56,016 Work-in-process 37,995 27,856 Finished goods 6,421 4,598 ------------------------ Total inventory $93,467 $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 June 30, 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 determined that this intangible has an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following: 9
JUNE 30 DECEMBER 31 In thousands 2003 2002 - --------------------------------------------------------- Patents and other, net of $14,883 $16,124 accumulated amortization of $40,371 and $39,136 Covenants not to compete, net of accumulated amortization of $17,344 and $16,673 809 1,480 Intangible pension asset 4,357 4,357 ---------------------- Total $20,049 $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 $2 million for the three and six months ended June 30, 2003 and $1.3 million and $2.8 million for the three and six months ended June 30, 2002, respectively. Estimated amortization expense for the remainder of 2003 and the five succeeding years are as follows (in thousands): 2003 (remainder) $1,995 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 and six months ended June 30, 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 JUNE 30 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 $5,570 $4,764 Divided by Weighted average shares outstanding 43,478 43,321 Basic earnings from continuing operations before cumulative effect of accounting change per share $0.13 $0.11 - ------------------------------------------------------ DILUTED EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change applicable to common shareholders $5,570 $4,764 Divided by sum of the Weighted average shares outstanding 43,478 43,321 Conversion of dilutive stock options 312 413 -------------------- Diluted shares 43,790 43,734 outstanding Diluted earnings from continuing operations before cumulative effect of accounting change per share $0.13 $0.11 - ------------------------------------------------------ SIX MONTHS ENDED JUNE 30 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 $11,136 $7,392 Divided by Weighted average shares outstanding 43,462 43,239 Basic earnings from continuing operations before cumulative effect of accounting change per share $0.26 $0.17 - ------------------------------------------------------ DILUTED EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change applicable to common shareholders $11,136 $7,392 Divided by sum of the Weighted average shares outstanding 43,462 43,239 Conversion of dilutive stock options 223 353 -------------------- Diluted shares 43,685 43,592 outstanding Diluted earnings from continuing operations before cumulative effect of accounting change per share $0.26 $0.17 - ------------------------------------------------------ 10
7. WARRANTIES The following table reconciles the changes in the Company's product warranty reserve as of and for the six months ended June 30, 2003 and 2002. SIX MONTHS ENDED JUNE 30 In thousands 2003 2002 - ------------------------------------------------------ Balance at beginning of period $17,407 $15,373 Warranty expense 7,429 11,010 Warranty payments 7,878 10,550 ------------------- Balance at end of period $16,958 $15,833 - ------------------------------------------------------ 8. COMMITMENTS AND CONTINGENCIES Actions have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Since 2000, the number of such claims has increased. Most of these claims have been made against our wholly-owned subsidiary, Railroad Friction Products Corporation (RFPC), and are based on a product sold by RFPC before we acquired American Standard, Inc.'s (ASI) 50% interest in RFPC in 1990. We acquired the remaining interest in RFPC in 1992. These claims include a suit against RFPC by ASI seeking contribution and indemnity for asbestos claims brought against ASI that ASI alleges claim exposure to RFPC's product. Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. Neither the Company nor its affiliates have to date incurred material costs related to these asbestos claims. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated with certainty. 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 was held on May 13, 2003. The parties are currently preparing and filing post-hearing papers. 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 six months of 2003, there were no material changes to the information described in Note 20 therein. 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 include braking, coupling, and monitoring systems, climate control and door equipment 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. 11
Segment financial information for the three months ended June 30, 2003 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------- Sales to external customers $128,578 $46,278 - $174,856 Intersegment sales/(elimination) 2,547 223 (2,770) - ----------------------------------------------- Total sales $131,125 $46,501 $(2,770) $174,856 =============================================== Income from operations $19,313 $80 $(5,551) $13,842 Interest expense and other - - (5,071) (5,071) ----------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $19,313 $80 $(10,622) $8,771 =============================================== Segment financial information for the three months ended June 30, 2002 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------- Sales to external customers $106,760 $73,048 - $179,808 Intersegment sales/(elimination) 2,572 119 (2,691) - ----------------------------------------------- Total sales $109,332 $73,167 $(2,691) $179,808 =============================================== Income from operations $11,168 $7,406 $(5,274) $13,300 Interest expense and other - - (5,971) (5,971) ----------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $11,168 $7,406 $(11,245) $7,329 =============================================== Segment financial information for the six months ended June 30, 2003 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------- Sales to external customers $251,212 $93,167 - $344,379 Intersegment sales/(elimination) 4,510 390 (4,900) - ----------------------------------------------- Total sales $255,722 $93,557 $(4,900) $344,379 =============================================== Income from operations $35,018 $2,299 $(11,174) $26,143 Interest expense and other - - (8,606) (8,606) ----------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $35,018 $2,299 $(19,780) $17,537 =============================================== Segment financial information for the six months ended June 30, 2002 is as follows: FREIGHT TRANSIT CORPORATE In thousands GROUP GROUP ACTIVITIES TOTAL - ------------------------------------------------------------------------------------------------- Sales to external customers $215,367 $141,766 - $357,133 Intersegment sales/(elimination) 5,468 226 (5,694) - ----------------------------------------------- Total sales $220,835 $141,992 $(5,694) $357,133 =============================================== Income from operations $21,027 $13,255 $(10,515) $23,767 Interest expense and other - - (12,394) (12,394) ----------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $21,027 $13,255 $(22,909) $11,373 =============================================== 12
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 June 30, 2003, $297,000 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 TOTAL - ------------------------------------------------------------------------------------------ Beginning balance, January 1, 2003 $647 $647 Amounts paid 350 350 ------------------------------------- Balance at June 30, 2003 $297 $297 - ------------------------------------------------------------------------------------------ The lease impairment charges are associated with the Company's closing of a plant and the consolidation of the corporate headquarters. 11. SUBSEQUENT EVENT In August 2003, the Company issued $150 million of Senior Notes due July 2013 at an interest rate of 6.875%. The net proceeds were used to repay debt under the Company's revolving credit agreement. 13
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 3.6% from $357.1 million in the first six months of 2002 to $344.4 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 sales of commuter locomotives. Net income from continuing operations for the first six months of 2003 was $11.1 million or $0.26 per diluted share. Net loss from continuing operations for the first six months of 2002 was $54.3 million or $1.24 per diluted share The results for the first six 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 $7.4 million or $0.17 per diluted share. This increase in net income from $0.17 per diluted share to $0.26 per diluted share was primarily due to improved margins and lower interest expense. SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002 The following table sets forth the Company's net sales by business segment: THREE MONTHS ENDED JUNE 30 ---------------------- In thousands 2003 2002 - ----------------------------------------------------- Freight Group $128,578 $106,760 Transit Group 46,278 73,048 ---------------------- Net sales $174,856 $179,808 - ----------------------------------------------------- Net sales for the second quarter of 2003 decreased $5 million, or 2.8%, to $174.9 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 sales of commuter locomotives and also higher aftermarket sales. In the quarter, industry deliveries of new freight cars increased to 7,365 units as compared to 4,155 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 $47.6 million in the second quarter of 2003 compared to $45.4 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 27.2% compared to 25.2% in the same period of 2002. (Gross profit was 26.7% in the first quarter of 2003.) The increase in gross profit percentage is primarily due to operating efficiencies and favorable product mix. Operating expenses increased by $1.7 million in the second quarter of 2003 as compared to the same period of 2002, due to an increase in selling, general and administrative expenses primarily as a result of higher insurance costs, both medical and general. Operating income totaled $13.8 million (or 7.9% of sales) in the second quarter of 2003 compared with $13.3 million (or 7.4% of sales) in the same period in 2002. Higher operating income resulted from increased margins in the second quarter of 2003. (See Note 9 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest expense decreased 57% in the second quarter of 2003 as compared to the prior year quarter primarily due to a substantial decrease in debt and interest rates. Other expense was $2.7 million in the second quarter of 2003 as compared to $392,000 in the same period in 2002. The increase was primarily due to a foreign exchange loss of $2.3 million in the second quarter of 2003, as a result of the U. S. dollar weakening compared to the Canadian dollar. This weakening of the U.S. dollar impacted the Company's Canadian locations that sell primarily to U.S. customers. The effective income tax rate was 36.5% in the second quarter of 2003 and 35% in the second quarter of 2002. The increase in the effective tax rate was due to higher effective state tax rates. SIX MONTH PERIOD OF 2003 COMPARED TO SIX MONTH PERIOD OF 2002 The following table sets forth the Company's net sales by business segment: SIX MONTHS ENDED JUNE 30 ---------------------- In thousands 2003 2002 - ----------------------------------------------------- Freight Group $251,212 $215,367 Transit Group 93,167 141,766 ---------------------- Net sales $344,379 $357,133 - ----------------------------------------------------- Net sales for the first six months of 2003 decreased $12.8 million, or 3.6%, to $344.4 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 14
Group's increased sales reflected higher sales of components for new freight cars and sales of commuter locomotives and also higher aftermarket sales. In the first six months, industry deliveries of new freight cars increased to 13,979 units as compared to 8,010 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 $92.8 million in the first six months of 2003 compared to $90.1 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 27% compared to 25.2% in the same period of 2002. The increase in gross profit percentage is primarily due to operating efficiencies and favorable product mix. Operating expenses in total were virtually unchanged in the first six months of 2003 as compared to the same period of 2002, as an increase in selling, general and administrative expenses was offset by a decrease in amortization expense. Operating income totaled $26.1 million (or 7.6% of sales) in the first six months of 2003 compared with $23.8 million (or 6.7% of sales) in the same period in 2002. Higher operating income resulted from increased margins in the first six months of 2003. (See Note 9 - "Notes to Condensed Consolidated Financial Statements" regarding segment-specific information, included elsewhere in this report). Interest expense decreased 56% in the first six months of 2003 as compared to the prior year quarter primarily due to a substantial decrease in debt and interest rates. Other expense was $3.8 million in the first six months of 2003 as compared to $1.5 million in the same period in 2002. The increase was primarily due to a foreign exchange loss of $2.7 million in the first six months of 2003, as a result of the U. S. dollar weakening compared to the Canadian dollar. This weakening of the U.S. dollar impacted the Company's Canadian locations that sell primarily to U.S. customers. The effective income tax rate was 36.5% in the first six months of 2003 and 35% in the first six months of 2002. The increase in the effective tax rate was due to higher effective state tax rates. 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. SIX MONTHS ENDED JUNE 30 --------------------- In thousands 2003 2002 - ---------------------------------------------------- Cash provided (used) by: Operating activities $11,411 $(9,896) Investing activities (5,472) (5,617) Financing activities (13,664) 75 Cash provided by operations in the first six months of 2003 was $11.4 million compared to cash used by operations of $9.9 million in the same period a year ago. Earnings before depreciation and amortization were the main provider of cash from operations in the first six months of 2003 and 2002. An increase in accounts receivable was the main use of cash from operations in the first six months of 2003. Planned income tax payments of approximately $30 million due to the fourth quarter 2001 net gain from the sale of certain businesses to General Electric were the primary use of cash from operations for the first six months of 2002. Cash used for investing activities was $5.5 million in the first six months of 2003 as compared to $5.6 million a year ago. Capital expenditures for continuing operations were $5.4 million and $5.3 in the first six 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 six 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 $13.7 million in the first six months of 2003 versus $75,000 of cash provided by financing activities in the same period a year ago. The Company reduced long-term debt by approximately $13.4 million in the first six months of 2003 compared to $1 million in the same period a year ago. The following table sets forth the Company's outstanding indebtedness at June 30, 2003 and December 31, 2002. The revolving credit agreement interest rates are variable and dependent on market conditions. JUNE 30 DECEMBER 31 In thousands 2003 2002 - ----------------------------------------------------------------- Revolving credit agreement $177,000 $189,700 5.5% Industrial revenue bond due 2008 4,572 4,909 Other 231 542 ----------------------- Total $181,803 $195,151 Less-current portion 809 833 ----------------------- Long-term portion $180,994 $194,318 - ----------------------------------------------------------------- Credit Agreement At June 30, 2003, 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 15
annual renewal in November 2003. The credit facility was amended subsequent to June 30, 2003, to provide a $225 million credit facility expiring in November 2004. At June 30, 2003, the Company had available borrowing capacity, net of letters of credit, of approximately $171 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 well 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 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 16
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. 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 represented 75% of total long-term debt at June 30, 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 $870,000, assuming no additional intervention strategies by management. The Company issued $150 million of Senior Notes in August 2003, which decreased the interest rate risk on the Company. The result of this issue is to reduce variable debt to under 10%. See Note 11 of the Company's Notes to Condensed Consolidated Financial Statements for the Quarterly Period Ended June 30, 2003 included herein. See Note 2 of the Company's Notes to Condensed Consolidated Financial Statements for the Quarterly Period Ended June 30, 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 June 30, 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 six months of 2003, approximately 72% of Wabtec's net sales are in the United States, 10% in Canada, 1% in Mexico, and 17% in other international locations, primarily Europe. 17
At June 30, 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 Wabtec's principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec's "disclosure controls and procedures," (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2003. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There was no change in Wabtec's "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, Wabtec's internal control over financial reporting. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held May 23, 2003. Two matters were considered and voted upon at the Annual Meeting: the election of three persons to serve as directors and the ratification of the appointment of Ernst & Young as independent public accountants of the Company for the 2003 fiscal year. Nominations of Gregory T. H. Davies, Kim G. Davis and Michael W. D. Howell to serve as directors for a term expiring in 2006 were considered and each nominee was elected. The latter two directors are independent and are not employees of the Company. Ernst & Young was ratified as the independent public accountant of Wabtec for the 2003 fiscal year. The voting was as follows: Nominee Title Votes For Votes Against Votes Withheld ---------------------------------------------------------------------------------------------------------------------------------- Gregory T. H. Davies President and Chief Executive Officer, Wabtec 29,347,422 - 8,075,112 Kim G. Davis Managing Director, Charlesbank Capital Partners, LLC 36,771,206 - 651,328 Michael W. D. Howell Chief Executive Officer, Transport Initiatives Edinburgh Limited 36,819,618 - 602,916 ---------------------------------------------------------------------------------------------------------------------------------- Votes For Votes Against Votes Abstain Broker Non-Votes --------------------------------------------------------------------------------------------- Ernst & Young 36,647,442 759,241 15,851 - --------------------------------------------------------------------------------------------- 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. 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (b) The Company filed a Current Report on Form 8-K dated May 16, 2003, furnishing a copy of the press release announcing Wabtec's first quarter 2003 earnings. 18
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: August 14, 2003 19
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 by reference 31.1 Rule 13a-14(a) Certification of Chief Executive Officer, filed herewith 31.2 Rule 13a-14(a) Certification of Chief Financial Officer, filed herewith 32.1 Section 1350 Certification of Chief Executive and Chief Financial Officer, filed herewith 20
EXHIBIT 31.1 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-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ GREGORY T.H. DAVIES - -------------------------- Name: Gregory T.H. Davies Title: President & Chief Executive Officer 21
EXHIBIT 31.2 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-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ ALVARO GARCIA-TUNON - ------------------------ Name: Alvaro Garcia-Tunon Title: Chief Financial Officer 22
EXHIBIT 32.1 CERTIFICATION Pursuant to 18 U.S.C. Section 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 June 30, 2003 (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: August 14, 2003 By: /s/ ALVARO GARCIA-TUNON ---------------------------------------- Alvaro Garcia-Tunon Chief Financial Officer Date: August 14, 2003 23