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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the Fiscal Year Ended December 31, 2000
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 (412) 825-1000
WILMERDING, PENNSYLVANIA 15148 (Registrant's telephone number)
(Address of principal executive offices,
including zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _____.
As of March 16, 2001, 42,922,780 shares of Common Stock of the registrant were
issued and outstanding. The registrant estimates that as of this date, the
aggregate market value of the voting shares held by non-affiliates of the
registrant was approximately $387.6 million based on the closing price on the
New York Stock Exchange for such stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant's Annual Meeting of
Stockholders to be held on May 22, 2001 are incorporated by reference into Part
III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Executive Officers of the Company........................... 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 20
Item 13. Certain Relationships and Related Transactions.............. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 21
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PART I
ITEM 1. BUSINESS
GENERAL
Westinghouse Air Brake Technologies Corporation does business as Wabtec
Corporation. All references to "we", "our", "us", the "Company" and "Wabtec"
refer to Westinghouse Air Brake Technologies Corporation, a Delaware
corporation, and its subsidiaries. The Company was formed from the November 1999
merger of Westinghouse Air Brake Company ("WABCO") and MotivePower Industries,
Inc. ("MotivePower"). WABCO has its origin in a business founded by George
Westinghouse in 1869. The 1999 merger was accounted for as a "pooling-of-
interests." Accordingly, prior period consolidated financial statements have
been restated giving effect to this transaction as if it had occurred as of the
beginning of the earliest period presented. The discussions that follow are
based on the combined companies for each year.
Wabtec is one of North America's largest providers of value-added,
technology-based equipment and services for the rail industry. The Company's
products can be found on virtually all U.S. locomotives, freight cars and
passenger transit vehicles. The Company is based in Wilmerding, Pa., and has
6,244 employees at facilities throughout North America and around the world.
The Company believes that it maintains a market share in excess of 50% in North
America for its primary braking-related equipment, and significant market shares
in North America for its other principal products. Wabtec also sells products in
Europe, Africa, Australia, South America and Asia. The Company's products, which
are intended to enhance safety, improve productivity and reduce maintenance
costs for customers, include the following: air brakes, electronic controls and
monitors, traction motors, cooling equipment, turbochargers, low-horsepower
locomotives, couplers, door controls, draft gears and brake shoes. The Company
aggressively pursues technological advances for both new product development and
product enhancements.
Management and insiders of the Company own approximately 25% of Wabtec's
outstanding shares, with the remaining shares held by investment companies and
individuals. The Company encourages its employees to own Wabtec stock so that
they have a significant stake in the success of the Company. In addition,
executive management incentives are designed to align management interests with
those of outside shareholders by focusing on cash flow generation and working
capital reduction.
INDUSTRY OVERVIEW
The Company's operating results are strongly influenced by general economic
conditions, and the financial conditions and level of activity of the global
railroad industry. Rail traffic, in terms of both freight and passengers, is a
key factor underlying the demand for the Company's products. Government
investment in public rail transportation also plays a significant role.
In 2000, U.S. freight railroads carried a record 1.46 trillion revenue ton-miles
(a main indicator of rail activity; defined as weight times distance traveled by
Class I railroads), up 1.7% from the prior year. Although ton-miles increased,
however, railroads began to defer maintenance of existing locomotives and
freight cars to offset significantly higher fuel costs. In addition, railroads
had excess capacity of locomotives and freight cars, after the high rate of new
equipment deliveries in recent years. As a result, railroads were able to park
existing equipment and reduce purchases of aftermarket components for repair and
maintenance of their equipment fleets.
Demand for components for new locomotives and freight cars has been strong in
recent years due to historically high deliveries of new equipment. In 2000,
however, deliveries of new equipment were lower than the previous year for both
locomotives and freight cars.
Currently, the active locomotive fleet in the North American market numbers
approximately 33,000 units, which include heavy-haul freight locomotives,
commuter locomotives and lower-horsepower, short-haul and terminal locomotives.
Deliveries of new, heavy-haul locomotives reached approximately 1,400 in 2000 as
railroads invested in modernizing a portion of their fleets. This compares to
approximately 1,500 in 1999. In 2001, the Company expects the industry to
deliver approximately 1,200 new locomotives.
Currently, the active freight car fleet in North America numbers approximately
1.3 million. Deliveries of new freight cars reached a 20-year high of
approximately 76,000 in 1998, as railroads and shippers invested in modernizing
their fleets. In 2000, new freight car deliveries dropped to approximately
56,000. In 2001, the Company expects the industry to
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deliver about 45,000 new freight cars, which would be slightly below the average
delivery rate of the past 10 years.
Demand for fleet maintenance services is driven by the railroads' focus on cost
reduction and productivity improvements as the industry has consolidated over
recent decades, and as railroads consider outsourcing non-transportation
functions. When possible, the Company supplies its own component parts for use
in overhaul and maintenance under these contracts. In this manner, the
locomotive fleet maintenance contracts provide additional opportunities for
sales of component parts.
Since the deregulation of the U.S. railroad industry in 1980, freight railroads
have reduced their equipment base, consolidated operations, and reduced
suppliers in order to lower operating costs and improve their competitive
position compared to trucking companies, which compete with the railroad
industry. In addition, they have been consolidating and merging, hoping to
achieve additional operating and financial efficiencies that will allow them to
compete more effectively.
The Company believes these consolidations offer opportunities to increase
business with the surviving railroads as these railroads seek operating
efficiencies through such means as outsourcing locomotive fleet maintenance and
components repair. In addition, the supplier base has been consolidating, and
the Company is a primary consolidator. The Company operates in a highly
competitive environment, and there can be no assurance that increased rail
traffic, higher fleet utilization, or other economically favorable industry
conditions will benefit the Company.
Demand for passenger transit original equipment and aftermarket products is
driven by the replacement, building and/or expansion programs of transit
authorities. These programs are funded in part by federal and state government
programs, such as TEA-21 (Intermodal Surface Transportation and Efficiency Act),
which is expected to provide up to $42 billion nationally, subject to
appropriations for transit-related infrastructure through 2003. Increased
funding by federal and state governments under TEA-21 has resulted in strong
demand for new passenger transit vehicles.
BUSINESS SEGMENTS AND PRODUCTS
Approximately 58% of net sales in 2000 were derived from the sale of aftermarket
replacement parts, repair services and overhaul work purchased by operators of
rail vehicles such as railroads, transit authorities, utilities and leasing
companies (collectively, "end users" or the "aftermarket"). The balance of sales
was directly to North American Original Equipment Manufacturers (OEMs) of
locomotives, railway freight cars and passenger transit vehicles. We believe
that our substantial installed base of OEM products is a significant competitive
advantage for providing products and services to the aftermarket because end-
users often look to purchase safety- and performance-related replacement parts
from the OEM.
We provide products and services through two principal business segments, the
Freight Group and the Transit Group.
FREIGHT GROUP -- Includes products geared to the production of components for
and the repair and servicing of freight cars and locomotives. Revenues are
derived principally from OEM and aftermarket sales, including repairs and
services. Revenues from these products, as a percentage of total net sales, were
73%, 79%, and 80% in 2000, 1999 and 1998, respectively.
Specific product lines within the Freight Group are:
-- FREIGHT CAR PRODUCTS AND SERVICES -- We manufacture, sell and service air
brake equipment, draft gears, hand brakes and slack adjusters, and
composite brake shoes, blocks and pads, for the OEM freight car market and
for the aftermarket in the form of parts and repair services. Net sales per
typical freight car can vary considerably based upon the type and purpose
of the freight platform, with articulated or intermodal cars generally
having the highest Wabtec product content. The Company's traditional
freight products include the ABDX Freight Brake Valve, the Mark Series
draft gears, hand brakes and slack adjusters, and SAC-1(TM) Articulated
Coupler.
-- LOCOMOTIVE PRODUCTS AND SERVICES -- We manufacture, sell and service air
brake equipment, traction motors, generators, alternators, turbochargers,
cooling equipment, gearing, diesel engines, compressors, air dryers, slack
adjusters, brake cylinders, and monitoring and control equipment for the
locomotive OEM and aftermarket.
We also provide fleet maintenance, overhauling and remanufacturing of
locomotives and diesel engines, and manufacturing of switcher, commuter and mid-
range locomotives up to 4,000 horsepower. The Locomotive product line also
includes manufacturing
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and distribution of replacement, new and remanufactured components and parts for
freight and passenger railroads, including every Class I railroad in North
America, industrial power-related markets and, to a lesser extent, OEMs. Wabtec
provides aftermarket components for locomotives manufactured by the
Electro-Motive Division of General Motors Corporation ("EMD"), certain
components for locomotives made by the GE Transportation Systems unit of General
Electric Company ("GE") and certain components for Alco locomotives. Wabtec
believes it is the leading independent supplier in North America of many
aftermarket locomotive components.
Demand for components is influenced by rail traffic activity and the maintenance
requirements of the railroads. Currently, railroads have deferred maintenance to
offset higher fuel costs. This business is highly competitive, as the Company
faces competition from EMD, GE and numerous smaller, independent manufacturers
and distributors. EMD and GE accounted for virtually 100% of the new
high-horsepower locomotives delivered in the United States in the past five
years and, as OEMs, are the principal suppliers of original parts for their
locomotives.
-- ELECTRONICS -- We manufacture, sell and service high-quality electronics
for the railroads in the form of on-board systems and braking for
locomotives and freight cars. We are an industry leader in insulating or
"hardening" electronic components to protect them from severe conditions,
including extreme temperatures and high/shock vibration environments. Our
new product development effort has focused on electronic technology for
brakes and controls, and over the past several years, we introduced a
number of significant new products including the EPIC(R) Electronic Brake,
Electronically Controlled Pneumatic (ECP) freight brake, Positive Train
Control equipment that encompasses onboard digital data and global
positioning communication protocols, PowerLink(TM), compressor
aftercoolers, Train Trax(TM), Trainlink(TM), Train Sentry III(R),
Fuellink(TM) and Armadillo(TM).
TRANSIT GROUP -- Includes products for passenger transit vehicles (typically
subways and buses). Revenues are derived primarily from OEM and aftermarket
component parts sales. Revenues from these products, as a percentage of total
net sales, were 27%, 21% and 20% in 2000, 1999 and 1998, respectively.
We manufacture, sell and service electronic brake equipment, pneumatic control
equipment, air compressors, tread brakes and disc brakes, couplers, collection
equipment, monitoring systems, wheels, climate control and door equipment and
other components for passenger transit vehicles. In 1997 we received contracts
valued at $150 million to provide equipment for 1,080 passenger transit cars for
the Metropolitan Transportation Authority/New York City Transit (the "MTA").
Deliveries of equipment began in late 1999 and are expected to increase
significantly during 2001.
Substantially all of our principal passenger transit products are engineered to
customer specifications. Consequently, there is less standardization among these
products than with the Freight Group products. We believe the OEM market
presents an opportunity for improved growth during the next several years as
funding from TEA-21 becomes available.
For additional information on our business segments, see Note 16 of "Notes to
Consolidated Financial Statements" included in Part II, Item 8 of this report.
STRATEGY
We are committed to building shareholder value by reducing debt and debt service
costs, capitalizing on the synergies of our merger with MotivePower Industries
and enhancing our leading position as a producer of value-added equipment for
the rail industry. Building on our leading market position, strong aftermarket
presence and technological leadership, we are pursuing a strategy with the
following key elements:
Expand Technology-Driven New Product Development and Product Lines -- We will
continue to emphasize research and development to create new and improved
products to increase our market share and profitability. We are focusing on
technological advances, especially in the areas of electronics, braking products
and other on-board equipment, as a means of new product growth.
Increase Repair and Upgrade Services -- By continuing to leverage our broad
product offering and our large installed product base, we intend to expand our
presence in the repair and upgrade services market. We believe our services are
more cost-effective than, and offer product upgrades not available in, most
independent repair shops. To capitalize on the growing aftermarket and the
railroads' desire to outsource non-transportation functions, we are developing
and marketing retrofit and upgrade products that serve as
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a platform for offering additional installation, replacement parts and repair
services to customers.
Grow International Presence -- We believe that international markets represent a
significant opportunity for future growth. Our net sales outside of the United
States comprised approximately 27%, 26% and 27% in 2000, 1999, and 1998,
respectively (see Note 16 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report). We intend to increase our existing
international sales through acquisitions, direct sales of products through our
subsidiaries and licensees, and joint ventures with railway suppliers having a
strong presence in their local markets.
Pursue Strategic Alliances and Acquisitions -- We intend to pursue strategic
alliances and, possibly, acquisitions that expand our product lines, increase
our aftermarket business, increase international sales and increase our
technical capabilities.
Improve Manufacturing Efficiency and Quality -- We intend to build on what we
consider to be a leading position as a low-cost producer in the industry while
maintaining world-class product quality, technology and customer responsiveness.
Through the Wabtec Quality and Performance System, we are dedicated to "lean
manufacturing" principles and continuous improvement across all phases of our
business. Our QPS includes employee-directed initiatives through Kaizen, a
Japanese-developed team concept used to continuously improve quality, lead time
and productivity, and to reduce costs. Our QPS tools also include Statistical
Engineering and Value Stream Mapping. These efforts enable us to streamline
processes, improve product quality and customer satisfaction, reduce product
cycle times and respond more rapidly to market developments.
BACKLOG
The backlog of customer orders as of December 31, 2000, and December 31, 1999,
and the expected year of recognition is as follows:
TOTAL TOTAL
BACKLOG OTHER BACKLOG OTHER
IN THOUSANDS 12/31/00 2001 YEARS 12/31/99 2000 YEARS
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Freight Group.................. $624,994 $225,924 $399,070 $ 958,861 $310,848 $648,013
Transit Group.................. 227,443 201,044 26,399 312,310 211,776 100,534
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Total..................... $852,437 $426,968 $425,469 $1,271,171 $522,624 $748,547
======== ======== ======== ========== ======== ========
The Company's contracts are subject to standard industry cancellation
provisions, including cancellations on short notice or upon completion of
designated stages, including, without limitation, contracts relating to the MTA.
Substantial scope-of-work adjustments are common. For these and other reasons,
work in the Company's backlog may be delayed or cancelled and backlog should not
be relied upon as an indicator of the Company's future performance. The railroad
industry, in general, has historically been subject to fluctuations due to
overall economic conditions and the level of use of alternate modes of
transportation. The Freight Group has significant multiple year locomotive
overhaul and fleet contracts that may provide some level of assurance that
additional component parts sales in support of overhauling services will occur
in the future.
For OEM passenger transit products, there is a longer lead-time for car
deliveries and, accordingly, the Company carries a large backlog of orders.
Based upon widely available industry data concerning freight and locomotive OEM
backlog and projected 2001 deliveries (that indicate a decline from 2000
deliveries), the Company believes demand for its products will remain reasonably
strong for the foreseeable future.
ENGINEERING AND DEVELOPMENT
Consistent with its strategy of using technology to develop new products, the
Company is actively engaged in a variety of engineering and development
activities. For the fiscal years ended December 31, 2000, 1999, and 1998, the
Company incurred costs of approximately $32.5 million, $35.7 million and $31.6
million, respectively, on product development and improvement activities
(exclusive of manufacturing support). Such expenditures represented
approximately 3.2%, 3.2%, and 3% of net sales for the same periods,
respectively. From time to time, the Company conducts specific research projects
in conjunc-
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tion with universities, customers and other railroad product suppliers.
The Company's engineering and development program is largely focused upon new
braking technologies, with an emphasis on the application of electronics to
traditional pneumatic equipment. Electronic actuation of braking has long been a
part of the Company's transit product line but interchangeability, connectivity
and durability have presented problems to the industry in establishing
electronics in freight railway applications. Efforts are proceeding in the
enhancement of the major components for existing hard-wired braking equipment
and development of new electronic technologies.
INTELLECTUAL PROPERTY
The Company has numerous U.S. patents, patent applications pending and
trademarks as well as foreign patents and trademarks throughout the world. The
Company also relies on a combination of trade secrets and other intellectual
property laws, nondisclosure agreements and other protective measures to
establish and protect its proprietary rights in its intellectual property.
Certain trademarks, among them the name WABCO(R), were acquired or licensed by
the Company from American Standard Inc. in 1990 at the time of the Company's
acquisition of the North American operations of the Railway Products Group of
American Standard (the "1990 Acquisition").
The Company is a party, as licensor and licensee, to a variety of license
agreements. The Company does not believe that any single license agreement,
other than the SAB License discussed in the following paragraph, is of material
importance to its business as a whole.
The Company and SAB WABCO Holdings B.V. ("SAB WABCO") entered into a license
agreement (the "SAB License") on December 31, 1993, pursuant to which SAB WABCO
granted the Company a license to the intellectual property and know-how related
to the manufacturing and marketing of certain disc brakes, tread brakes and low
noise and resilient wheel products. SAB WABCO is a Swedish corporation that was
a former affiliate of the Company, both having been owned by the same parent in
the early 1990's.
The Company is authorized to manufacture and sell the licensed products
(described above) in North America (including to OEM manufacturers located
outside North America if such licensed products are incorporated into a final
product to be sold in North America). SAB WABCO has a right of first refusal to
supply the Company with bought-in components of the licensed products on
commercially competitive terms. To the extent SAB WABCO files additional patent
or trademark applications, or develops additional know-how in connection with
the licensed products, such additional intellectual property and know-how are
also subject to the SAB License. The Company may, at its expense, request the
service of SAB WABCO in manufacturing, installing, testing and maintaining the
licensed products and providing customer support. SAB WABCO is entitled to a
free, nonexclusive license of the use of any improvements to the licensed
products developed by the Company. If any such improvements are patented by the
Company, SAB WABCO has the right to request the transfer of such patents upon
payment of reasonable compensation therefore; in such cases, the Company is
entitled to a free, nonexclusive license to use the patented product. Under the
SAB license, the Company is required to pay a lump sum fee for certain licensed
products as well as royalties based on specified percentages of sales. The SAB
license expires December 31, 2003, but may be renewed for additional one-year
terms.
CUSTOMERS
A few customers within each business segment represent a significant portion of
the Company's net sales; however, no one customer represented more than 10% of
consolidated sales in 2000. One customer represented 12% of Freight Group sales
and three customers represented 15%, 13% and 10%, of Transit Group sales,
respectively. Nevertheless, the loss of a few key customers within the Company's
Freight and Transit Groups could have an adverse effect on the Company's
financial condition, results of operations and liquidity.
COMPETITION
The Company operates in a competitive marketplace. Price competition is strong
and the existence of cost-conscious purchasers of a limited number has
historically limited Wabtec's ability to increase prices. In addition to price,
competition is based on product performance and technological leadership,
quality, reliability of delivery and customer service and support. The Company's
principal competitors vary to some extent across its principal product lines.
However, within North America, New York Air Brake
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Company, a subsidiary of the German air brake producer Knorr-Bremse AG
(collectively, "NYAB/ Knorr"), is the Company's principal overall OEM competitor
along with the OEM's themselves. The Company's competition for locomotive,
freight and passenger transit service and repair business is primarily from the
railroads' and passenger transit authorities' in-house operations, the in-house
operations of EMD and GE, and NYAB/Knorr.
EMPLOYEES
At December 31, 2000, the Company had 6,244 employees, approximately 42% of whom
are unionized. Almost all of the employees subject to collective bargaining
agreements are within North America and these agreements are generally effective
through 2001, 2002 and 2003.
The Company considers its relations with its employees and union representation
to be good, but cannot assure that future contract negotiations will be
favorable to the Company.
REGULATION
In the course of its operations, the Company is subject to various regulations,
agencies and entities. In the United States, these include principally the
Federal Railroad Administration ("FRA") and the Association of American
Railroads ("AAR").
The FRA administers and enforces federal laws and regulations relating to
railroad safety. These regulations govern equipment and safety standards for
freight cars and other rail equipment used in interstate commerce.
The AAR promulgates a wide variety of rules and regulations governing safety and
design of equipment, relationships among railroads with respect to railcars in
interchange and other matters. The AAR also certifies railcar builders and
component manufacturers that provide equipment for use on railroads in the
United States. New products generally must undergo AAR testing and approval
processes.
As a result of these regulations and regulations in other countries in which the
Company derives its revenues, we must maintain certain certifications as a
component manufacturer and for products we sell.
EFFECTS OF SEASONALITY
The Company's business is not seasonal, although the third quarter results may
be impacted by vacation and plant shut-downs at several of its major customers
during this period.
ENVIRONMENTAL MATTERS
Information with respect to environmental matters is included in Note 15 of
"Notes to Consolidated Financial Statements" included in Part II, Item 8 of this
report.
We believe that all statements other than statements of historical fact included
in this report, including certain statements here under "Business" may
constitute forward looking statements. For a complete discussion of the risks
associated with these forward looking statements, see pg. 19 of this report.
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ITEM 2. PROPERTIES
The following table provides certain summary information with respect to the
principal facilities owned or leased by the Company. The Company believes that
its facilities and equipment are generally in good condition and that, together
with scheduled capital improvements, they are adequate for its present and
immediately projected needs. The Company's corporate headquarters are located in
the Wilmerding, PA site.
APPROXIMATE
LOCATION PRIMARY USE PRIMARY SEGMENT OWN/LEASE SQUARE FEET
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DOMESTIC
Wilmerding, PA Manufacturing/Service Freight Group Own 850,000(1)
Boise, ID Manufacturing Freight Group Own 294,700
Lexington, TN Manufacturing Freight Group Own 170,000
Elk Grove Village, IL Distribution Freight Group Lease 150,700
Jackson, TN Manufacturing Freight Group Own 150,000
Chicago, IL Manufacturing Freight Group Own 111,500
Laurinburg, NC Manufacturing Freight Group Own 105,000
Greensburg, PA Manufacturing Freight Group Own 97,800
Germantown, MD Manufacturing/Service Freight Group Own 80,000
Willits, CA Manufacturing Freight Group Own 70,000
Latham, NY Manufacturing Freight Group Own 66,000
St. Louis, MO Manufacturing Freight Group Own 62,000
Kansas City, MO Service Center Freight Group Lease 55,900
Emporium, PA Manufacturing Freight Group Own 53,000
Racine, WI Engineering/Office Freight Group Own 50,000
Cedar Rapids, IA Manufacturing Freight Group Lease 37,000
Carson City, NV Service Center Freight Group Lease 22,000
Chicago, IL Service Center Freight Group Lease 19,200
Columbia, SC Service Center Freight Group Lease 12,300
Niles, IL Manufacturing Transit Group Own 355,300
Spartanburg, SC Manufacturing/Service Transit Group Lease 183,600
Plattsburgh, NY Manufacturing Transit Group Lease 64,000
Elmsford , NY Service Center Transit Group Lease 28,000
Richmond, CA Service Center Transit Group Lease 5,400
Sun Valley , CA Service Center Transit Group Lease 4,000
Atlanta, GA Service Center Transit Group Lease 1,200
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APPROXIMATE
LOCATION PRIMARY USE PRIMARY SEGMENT OWN/LEASE SQUARE FEET
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INTERNATIONAL
San Luis Potosi, Mexico Manufacturing/Service Freight Group Lease 1,235,700
Doncaster, UK Manufacturing/Service Freight Group Own 330,000
Stoney Creek, Ontario Manufacturing/Service Freight Group Own 189,200
Acambaro, Mexico Maintenance Freight Group Lease 132,300
Wallaceburg, Ontario Foundry Freight Group Own 127,600
Wetherill Park, Australia Manufacturing Freight Group Lease 73,100
San Luis Potosi, Mexico Manufacturing Freight Group Own 48,600
Calgary, Alberta Manufacturing Freight Group Own 38,000
Schweighouse, France Manufacturing Freight Group Lease 30,000
Burlington, Ontario Manufacturing Freight Group Own 28,200
Tottenham, Australia Manufacturing Freight Group Lease 26,900
San Luis Potosi, Mexico Manufacturing Freight Group Lease 20,200
Winnipeg, Manitoba Service Center Freight Group Lease 20,000
Sydney, Australia Sales Office Freight Group Lease 11,250
St-Laurent, Quebec Manufacturing Transit Group Own 106,000
Sassuolo, Italy Manufacturing Transit Group Lease 30,000
Burton on Trent, UK Manufacturing Transit Group Lease 18,000
Etobicoke, Ontario Service Center Transit Group Lease 3,800
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(1) Approximately 250,000 square feet are currently used in connection with the
Company's corporate and manufacturing operations. The remainder is leased to
third parties.
Leases on the above facilities are long-term and generally include options to
renew.
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ITEM 3. LEGAL PROCEEDINGS
Information with respect to legal proceedings is included in Note 15 of "Notes
to Consolidated Financial Statements" included in Part II, Item 8 of this
report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to executive
officers of the Company as of March 2001.
NAME AGE OFFICE WITH THE COMPANY
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William E. Kassling 57 Director and Chairman
of the Board
Gregory T. H. Davies 54 Director, President and
Chief Executive Officer
Robert J. Brooks 56 Director, Executive
Vice President and
Chief Financial
Officer, Secretary
John M. Meister 53 Executive Vice
President, Transit
Alvaro Garcia-Tunon 48 Senior Vice President,
Finance
Timothy J. Logan 48 Vice President,
International
George A. Socher 52 Vice President,
Internal Audit and
Taxation
Timothy R. Wesley 39 Vice President,
Investor Relations and
Corporate
Communications
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WILLIAM E. KASSLING has been a director and Chairman of the Company since 1990,
and served as Chief Executive Officer until February 2001. Mr. Kassling was also
President of WABCO from 1990 through February 1998. From 1984 until 1990 he
headed the Railway Products Group of American Standard Inc. Between 1980 and
1984 he headed American Standard's Building Specialties Group and between 1978
and 1980 he headed Business Planning for American Standard. Mr. Kassling is a
director of Aearo Corporation and Scientific Atlanta, Inc.
GREGORY T. H. DAVIES joined the Company in March 1998 as President and Chief
Operating Officer, in February 1999 became a director and in February 2001
became Chief Executive Officer. Prior to March 1998, Mr. Davies had been with
Danaher Corporation since 1988, where he was Vice President and Group Executive
responsible for its Jacobs Vehicle Systems, Delta Consolidated Industries and
A.L. Hyde Corporation operating units. Prior to that, he held executive
positions at Cummins Engine Company and Ford Motor Company.
ROBERT J. BROOKS has been a director, Executive Vice President and Chief
Financial Officer, Secretary of the Company since 1990. From 1986 until 1990 he
served as worldwide Vice President, Finance for the Railway Products Group of
American Standard. Mr. Brooks is a director of Crucible Materials Corp.
JOHN M. MEISTER has been Vice President and General Manager of the Company's
Passenger Unit since 1990. In 1997, he was appointed to the newly created
position of Executive Vice President, Transit Group. From 1985 until 1990 he was
General Manager of the passenger transit business unit for the Railway Products
Group of American Standard.
ALVARO GARCIA-TUNON has been Senior Vice President, Finance of the Company since
November 1999. Mr. Garcia-Tunon was Vice President and Treasurer of the Company
from August 1995 until November 1999. From 1990 until August 1995, Mr. Garcia-
Tunon was Vice President of Business Development of Pulse Electronics, Inc.
TIMOTHY J. LOGAN has been Vice President, International since August 1996. From
1987 until August 1996, Mr. Logan was Vice President, International Operations
for Ajax Magnethermic Corporation and from 1983 until 1987 he was President of
Ajax Magnethermic Canada, Ltd.
GEORGE A. SOCHER has been Vice President, Internal Audit and Taxation of the
Company since November 1999. Previously, from July 1995 until November 1999, Mr.
Socher was Vice President and Corporate Controller of the Company.
TIMOTHY R. WESLEY has been Vice President, Investor Relations and Corporate
Communications since November 1999. Previously, Mr. Wesley was Vice President,
Investor and Public Relations of MotivePower Industries, Inc. from August 1996
until November 1999. From February 1995 until August 1996, he served as
Director, Investor and Public Relations of MotivePower Industries, Inc. From
1993 until February 1995, Mr. Wesley served as Director, Investor and Public
Relations of Michael Baker Corporation.
The executive officers are affirmed annually by the Board of Directors of the
Company.
10
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange. As of
March 16, 2001, there were 42,922,780 shares of Common Stock outstanding held by
1,104 holders of record. The high and low sales price of the shares and
dividends declared per share were as follows:
QUARTER HIGH LOW DIVIDEND
- ---------------------------------------------------
2000
Fourth $12.75 $ 8.31 $.01
Third $11.00 $ 9.57 $.01
Second $12.57 $ 9.50 $.01
First $17.19 $ 8.50 $.01
- ---------------------------------------------------
1999
Fourth $19.38 $16.19 $.01
Third $25.75 $17.81 $.01
Second $25.94 $20.00 $.01
First $23.63 $17.75 $.01
- ---------------------------------------------------
The Company's credit agreement restricts the ability to make dividend payments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and see Note 6 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report.
At the close of business on March 16, 2001, the Company's Common Stock traded at
$12.46 per share.
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13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Company and has been derived from restated audited financial
statements. This financial information should be read in conjunction with, and
is qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and the Notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net sales............................ $1,027,976 $1,121,068 $1,036,127 $ 870,371 $ 744,919
Gross profit (1)(3)................ 277,800 333,179 301,701 258,460 210,196
Operating expenses................... (161,178) (173,522) (156,672) (133,867) (106,246)
Merger and restructuring charge (1)... (27,142) (43,648) -- -- --
------------------------------------------------------------
Income from operations............. $ 89,480 $ 116,009 $ 145,029 $ 124,593 $ 103,950
------------------------------------------------------------
------------------------------------------------------------
Interest expense..................... $ (45,505) $ (44,420) $ (37,111) $ (34,892) $ (35,295)
Other income (expense) (2) (3)....... 3,620 (90) 13,393 2,878 5,280
Income before extraordinary item... 25,393 37,942 79,196 57,539 45,298
Net income......................... $ 25,393 $ 36,623 $ 73,851 $ 57,539 $ 44,234
------------------------------------------------------------
------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item..... $ 0.59 $ 0.86 $ 1.79 $ 1.30 $ 0.99
Net income (1) (2) (3)............. $ 0.59 $ 0.83 $ 1.67 $ 1.30 $ 0.97
------------------------------------------------------------
------------------------------------------------------------
Cash dividends declared per share.... $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
------------------------------------------------------------
------------------------------------------------------------
AS OF DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------
BALANCE SHEET DATA
Total assets........................ $ 984,047 $ 996,676 $ 967,382 $ 693,981 $ 597,280
Total debt.......................... 540,197 568,587 573,615 415,441 391,282
Shareholders' equity................ 196,371 181,878 144,076 65,285 44,785
- --------------------------------------------------------------------------------------------------
(1) In 2000, the Company recorded a $29.1 million charge, of which $27.1 million
is the operating expense component and $2 million the charge to gross
profit, for merger and restructuring activities pursuant to a plan that
involves 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. The
effect on diluted earnings per share for 2000 was $0.43, net of tax. In
1999, the Company recorded $50.1 million, of which $43.6 million is the
operating expense component, $5.2 million the charge to gross profit and
$1.3 million as an extraordinary item in accordance with the aforementioned
plan. The effect on diluted earnings per share for 1999 was a charge of
$0.91, net of tax.
(2) In 1998, the Company sold its Argentine investment in Trenes de Buenos Aires
S.A. and recognized an investment gain of $8.4 million. The effect on
diluted earnings per share was a gain of $0.12, net of tax.
(3) In 2000, the Company recorded a $4.4 million gain, or $0.07 net of tax, per
diluted share, on the sale of a product line, a $2 million charge, or $0.03
net of tax, per diluted share, for a legal settlement and also terminated
the Employee Stock Ownership Plan (ESOP) which resulted in the write-off of
the related deferred tax asset of $5.1 million or $0.12 per diluted share.
The write-off of the deferred tax asset is reported as a component of Income
tax expense in the statement of operations.
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14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Net sales decreased by 8.3% from $1.1 billion in 1999 to $1.0 billion in 2000.
The major causes for the change and their effect on the Company's 2000 results
of operations and financial condition include decreases in component sales due
to a slowdown in North American freight car and locomotive deliveries, and a
severe downturn in the locomotive overhaul market, offsetting improved sales and
backlog in the transit business due to increased governmental spending for
transit equipment.
Net income for 2000 was $25.4 million, or $0.59 per diluted share, as compared
to $36.6 million, or $0.83 per diluted share in 1999. The results for 2000
include a $29.1 million restructuring related charge, a $4.4 million gain on the
disposition of a product line, a $5.1 million write-off of a deferred tax asset
relating to the termination of the ESOP and a $2 million legal settlement. The
1999 results include a $50.1 million merger and restructuring related charge.
Excluding these items, earnings per diluted share would have been $1.10 and
$1.74 in 2000 and 1999, respectively.
MERGER AND RESTRUCTURING PLAN
The Company previously announced a merger and restructuring plan pursuant to the
merger of the Company and MotivePower Industries, Inc. ("the merger"). The
Company estimates synergies from the plan yielded approximately $20 million of
pre-tax cost savings in 2000 and reached an ongoing annualized savings of $25
million pre-tax, with such benefits realized through reduced cost of sales and
reduced selling, general and administrative expenses. The merger and
restructuring plan involves 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. The Company estimates the charges to complete the merger and
restructuring plan will now total $84 million pre-tax, due to an acceleration
and refinement of the plan, with approximately $50 million of the charge
previously expensed in 1999 and $29 million in 2000. The Company expects the
remaining charge of $5 million to be incurred in 2001.
The $79 million charge to date included the following announced actions:
-- Costs associated with the transaction for items such as investment bankers,
legal fees, accountant fees, SEC fees, etc.
-- Consolidation of the corporate headquarters to Wilmerding, PA and the
elimination of duplicate corporate functions.
-- Closing and moving of Young Radiator's Centerville, IA plant and
consolidating the Young administrative offices into the Company's Jackson,
TN facility, from Racine, WI.
-- Closing and relocation of several production operations to San Luis Potosi,
Mexico.
-- Closing and relocation of several additional manufacturing operations.
-- Eliminating duplicate sales functions.
As of December 31, 2000, $6.3 million of the merger and restructuring charge was
still remaining as accrued on the balance sheet. The accrual on the balance
sheet is discussed in greater detail in Note 19 of "Notes to Consolidated
Financial Statements" included in Part II, Item 8 of this report.
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15
RESULTS OF OPERATIONS
The following table sets forth Wabtec's Consolidated Statements of Operations
for the years indicated. To enhance comparability with results of prior periods,
the 2000 adjusted column represents the reported income statement excluding
restructuring related charges, a legal settlement charge, the write-off of a
deferred tax asset and gain on the sale of a product line. The 1999 adjusted
column represent the reported income statement excluding the effects of merger
and restructuring related charges.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
ADJUSTED REPORTED ADJUSTED REPORTED REPORTED
IN MILLIONS 2000 2000 1999 1999 1998
- ---------------------------------------------------------------------------------------------------
Net sales $1,028.0 $1,028.0 $1,121.1 $1,121.1 $1,036.1
Cost of sales (746.2) (750.2) (782.7) (787.9) (734.4)
---------------------------------------------------------
Gross profit 281.8 277.8 338.4 333.2 301.7
Selling, general and administrative
expenses (114.1) (114.1) (122.0) (122.0) (113.6)
Merger and restructuring charges -- (27.1) -- (43.6) --
Engineering expenses (32.5) (32.5) (35.7) (35.7) (31.6)
Amortization expense (14.6) (14.6) (15.8) (15.8) (11.5)
---------------------------------------------------------
Total operating expenses (161.2) (188.3) (173.5) (217.2) (156.7)
Income from operations 120.6 89.5 164.9 116.0 145.0
Interest expense (46.0) (45.5) (44.4) (44.4) (37.1)
Investment income -- Argentina -- -- -- -- 10.4
Other (expense) income, net (.4) 3.6 (.1) (.1) 3.0
---------------------------------------------------------
Income before income taxes and
extraordinary item 74.2 47.6 120.2 71.5 121.3
Income tax expense (26.7) (22.2) (42.8) (33.6) (42.1)
---------------------------------------------------------
Income before extraordinary item 47.5 25.4 77.5 37.9 79.2
Extraordinary loss on extinguishment of
debt, net of tax -- -- (.5) (1.3) (5.3)
---------------------------------------------------------
Net income $ 47.5 $ 25.4 $ 77.0 $ 36.6 $ 73.9
- ---------------------------------------------------------------------------------------------------
2000 COMPARED TO 1999
The following table sets forth the Company's net sales by business segment:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
IN THOUSANDS 2000 1999
- ---------------------------------------------------
Freight Group $ 749,687 $ 882,866
Transit Group 278,289 238,202
-----------------------
Net sales $1,027,976 $1,121,068
- ---------------------------------------------------
Net sales decreased $93.1 million or 8.3% to $1 billion in 2000 from $1.1
billion in 1999. This overall decrease was primarily attributable to decreased
North American OEM freight car and locomotive component sales volumes and lower
locomotive overhauls, all within the Freight Group. Sales volumes within the
Freight Group reflect a softening OEM market for freight cars, with 55,821
freight cars delivered in 2000 compared to 74,223 in 1999. Partially offsetting
these decreases were increases in Transit Group sales, due to increased
shipments under the MTA contract. The Company estimates the OEM freight car and
locomotive industries will deliver 45,000 freight cars and 1,200 locomotives,
respectively, in 2001.
Gross profit decreased to $277.8 million in 2000 compared to $333.2 million in
the same period of 1999. Gross margin, as a percentage of sales, was 27%
compared to 29.7% in 1999. Gross margin is dependent on a number of factors
including pricing, sales volume and product mix. The decrease in gross profit
and margins is largely attributed to the effect of a decrease in sales volumes
(approximately $40 million), offsetting approximately $10 million of synergies
realized as a result of recent restructuring and integration efforts. The
balance is principally a result of changes to sales mix primarily from increased
OEM component sales of Transit Group products at lower margins as compared to
the Company's overall historical results, pricing pressures and manufacturing
inefficiencies primarily related to merger integration efforts.
14
16
Total operating expenses as a percentage of net sales were 18.3% in 2000 and
19.4% in the same period a year ago. After excluding the 2000 $27.1 million and
the 1999 $43.6 million merger and restructuring charges, operating expenses
would have been 15.7% and 15.5% of net sales, respectively. Without the merger
and restructuring charges in both periods, operating expenses would have
decreased $11.1 million in 2000 as compared to 1999. This reduction was
primarily the result of continuing cost reduction programs and the realization
of approximately $10 million of synergies from the 1999 merger.
Income from operations totaled $89.5 million in 2000 compared with $116 million
in 1999 with operating margins of 8.7% and 10.3% respectively. After excluding
the merger and restructuring related charges in both periods, operating income
would have been $120.6 million and $164.9 million in 2000 and 1999,
respectively, and 2000 operating margins as a percentage of sales decreased to
11.7% from 14.7% in 1999. Lower adjusted operating income resulted from
decreased sales volumes in the Freight Group and changes in product mix (see
Note 16 of "Notes to Consolidated Financial Statements" included in Part II,
Item 8 of this report).
Interest expense increased 2.5% to $45.5 million in 2000 from $44.4 million in
1999. Debt, net of cash and equivalents, was $534.1 million at December 31, 2000
versus $561.5 million at the end of 1999. The increase in interest expense, even
though the net debt balance decreased in the fourth quarter of 2000, is
primarily due to higher interest rates.
In February 2000, the Company disposed its transit electrification product line
for $5.5 million in cash and recognized a gain of $4.4 million, which is
reported as other income.
The effective income tax rate for 2000 was 46.7% as compared to 46.9% in 1999.
Wabtec expects the ongoing rate to be approximately 36%. The 2000 rate includes
the effect of the one time, non-cash write-off of the deferred tax asset ($5.1
million) relating to the termination of the ESOP and after excluding this
effect, the rate would be 36%. In 1999, after excluding the assumed tax benefit
component of the merger and restructuring charge, the effective tax rate would
be 35.6%. The Company has consolidated United States federal net operating loss
carryforwards of $18.9 million expiring at various times through year 2010.
In 1999, a $469,000 extraordinary loss, net of tax, was incurred on the
extinguishment of certain term debt as well as an $850,000 extraordinary loss,
net of tax, for the write-off of deferred financing fees on the refinancing of
the Company's principal credit facility in November 1999 in connection with the
merger.
1999 COMPARED TO 1998
The following table sets forth the Company's net sales by business segment:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
IN THOUSANDS 1999 1998
- ---------------------------------------------------
Freight Group $ 882,866 $ 824,326
Transit Group 238,202 211,801
-----------------------
Net sales $1,121,068 $1,036,127
-----------------------
Net sales increased 8.2% to $1.1 billion in 1999 from $1 billion in 1998. The
increase was driven by acquisitions, primarily within the Freight Group, which
contributed $113 million of sales in 1999. Incremental revenue from the
acquisitions, along with an increase in Transit Group sales, were partially
offset by a slowdown in the locomotive overhaul market and in U.S. freight car
deliveries which decreased slightly in 1999 to 74,223 from 75,685 in 1998.
Cost of sales increased 7.3% to $787.9 million in 1999 from $734.4 million in
1998. Gross margin increased to 29.7% as compared to 29.1% in 1998. After
excluding the cost of sales component of the merger and restructuring charge,
gross margin would have increased to 30.2% compared to 29.1% in 1998. The
increase is attributed to volume and a favorable product mix in the Freight
Group component companies, and from the increased volume of the Transit Group.
Selling, general and administrative expenses increased 7.4% to $122 million from
$113.6 million in 1998. Cost reductions and lower incentive-related expenses
were offset by the operating expenses of acquired companies ($18 million).
Engineering expenses increased 13% to $35.7 million from $31.6 million primarily
as a result of the Rockwell acquisition in October 1998 and new product
development efforts.
Amortization expense increased 38% to $15.8 million in 1999 from $11.5 million
in 1998. The increase is primarily attributable to the acquisitions made late in
1998 (Rockwell Railroad Electronics division
15
17
(Rockwell) in October 1998 and Young Radiator (Young) in November 1998) and the
acquisitions made early in 1999 (G&G Locotronics and Q-Tron in January 1999 and
AGC Technologies in February 1999).
Income from operations totaled $116 million in 1999 compared with $145 million
in 1998 with operating margins of 10.3% and 14% respectively. After excluding
the operating expense component of the merger and restructuring charge,
operating income for 1999 would have been $164.9 million and operating margins
as a percentage of sales for 1999 increased to 14.7%, slightly higher than 14%
in the prior year. Higher adjusted operating income resulted from higher sales
volume and related gross profit. Favorable aftermarket sales volume at
relatively strong operating margins in the Transit Group and the component
companies in the Freight Group were the primary reasons for the increase in
operating income (see Note 16 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report).
Interest expense increased 19.7% to $44.4 million in 1999 from $37.1 million in
1998. Debt, net of cash and equivalents, was $562 million as of December 31,
1999 versus $565 million as of December 31, 1998. The increase in interest
expense, even though the net debt balance decreased, is due to Wabtec carrying a
higher average debt balance in 1999 as a result of the late 1998 acquisitions
(Rockwell -- $80 million and Young -- $68 million) and the 1999 acquisitions of
G&G Locotronics, Q-Tron and AGC Technologies ($32 million). Wabtec also funded
cash transaction costs associated with the merger, which totaled approximately
$29 million.
Investment income -- Argentina represents income recognized related to an
investment in Argentina which was sold in 1998 for cash and a secured note
receivable.
Other expense of $90,000 was recorded in 1999 versus other income of $3 million
in 1998. The fluctuation is due to foreign exchange gains/losses as a foreign
exchange loss virtually offsetting in 1999 compared to a foreign exchange gain
of $2 million in 1998.
The Company recorded income tax expense of $33.6 million as compared to $42.1
million in 1998. The effective tax rate for 1999 was 46.9% as compared to 34.7%
in 1998. After excluding the assumed tax benefit component of the merger and
restructuring charge, Wabtec incurred income tax expense of $43 million in 1999,
or an effective tax rate of 35.6%, as compared to 34.7% in 1998. The 1998 rate
was lower due to a non-recurring deferred tax liability reversal. Wabtec expects
the ongoing rate to be approximately 36%. The Company has consolidated Mexican
and United States federal net operating loss carryforwards of $5 million and $19
million expiring at various times through year 2005 and 2010, respectively.
In 1999, a $469,000 extraordinary loss, net of tax, was incurred on the
extinguishment of certain term debt as well as an $850,000 extraordinary loss,
net of tax, for the write-off of deferred financing fees on the refinancing of
the Company's principal credit facility in November 1999 in connection with the
merger. In 1998, Wabtec incurred a $5.3 million extraordinary loss, net of tax,
related to amending certain credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's credit facilities with a consortium of commercial banks ("credit
agreement"). The following is a summary of selected cash flow information and
other relevant data.
YEAR ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS 2000 1999 1998
- ------------------------------------------------------
Cash provided (used) by:
Operating
activities $ 60,214 $ 77,389 $ 73,411
Investing
activities (21,485) (66,371) (243,795)
Financing
activities (38,009) (11,733) 161,941
Earnings before
interest, taxes,
depreciation and
amortization
(EBITDA) 131,142 158,623 181,644
Adjusted EBITDA
(before
restructuring-related
charges) 160,297 207,480 181,644
- ------------------------------------------------------
Operating cash flow in 2000 was $60.2 million as compared to $77.4 million in
the same period a year ago. Working capital increased 5.7% since 1999 primarily
due to an increase to accounts receivable. During 2000 and 1999, cash outlays
for merger and restructuring activities were approximately $28 million and $29
million, respectively, and are reported as a reduction to cash provided by
operating activities. Excluding these cash outlays, cash provided by operating
activities would have been approximately $88.7
16
18
and $106.7 million, respectively. This decrease in operating cash flow in 2000
was primarily the result of lower operating income.
Cash used for investing activities declined in 2000 to $21.5 million from $66.4
million a year ago. In 2000, 1999 and 1998, the Company used $.7 million, $32.2
million and $180.2 million, respectively, for certain business acquisitions.
Capital expenditures were $26.3 million, $30.8 million and $57.8 million in
2000, 1999 and 1998, respectively. The majority of capital expenditures for
these periods relates to upgrades to existing equipment, replacement of existing
equipment and purchases of new equipment due to expansion of Wabtec's
operations, where the Company believes overall cost savings can be achieved
through increasing efficiencies. The Company expects 2001 capital expenditures
for equipment purchased for similar purposes to approximate $35 million.
Cash used for financing activities was $38 million in 2000 versus $11.7 million
in 1999. During 2000, the Company reduced long-term debt by $28.4 million. The
Company issued $75 million of senior notes in the first quarter of 1999 to repay
amounts outstanding on certain unsecured bank term debt and repaid a portion of
the Company's previous revolving credit facility. Historically, the Company has
financed the purchase of significant businesses utilizing cash flow generated
from operations and amounts available under its credit facilities. In addition,
the issuance of the 1999 Notes increased the Company's liquidity by reducing its
outstanding revolving credit borrowings and thereby increasing its available
borrowing capacity.
The Company estimates the charges at completion of the merger and restructuring
plan will total approximately $84 million pre-tax with approximately $79 million
incurred to date.
The Company has adopted a plan by which it may repurchase up to $75 million of
Company Common Stock through open market purchases, if the Company believes it
is more advantageous to proceed than the projected results of other
alternatives, utilizing primarily cash generated from operations and equity
forward contracts.
The following table sets forth the Company's outstanding indebtedness and
average interest rates at December 31, 2000. The revolving credit note and other
term loan interest rates are variable and dependent on market conditions.
YEAR ENDED
DECEMBER 31,
-------------------
IN THOUSANDS 2000 1999
- ---------------------------------------------
Revolving credit
agreement, 8.37% $358,000 $368,000
9.375% Senior notes due
2005 175,000 175,000
Pulse note, 9.5% -- 16,990
5.5% Industrial revenue
bond due 2008 6,169 6,749
Other 1,028 1,848
-------------------
Total $540,197 568,587
Less -- current
portion 751 743
-------------------
Long-term portion $539,446 $567,844
- ---------------------------------------------
Credit Agreement
In November 1999, in connection with the merger, WABCO terminated its then
existing secured credit agreement and refinanced the then existing unsecured
MotivePower credit agreement with a consortium of commercial banks. This
unsecured credit agreement currently provides a $275 million five-year revolving
credit facility expiring in 2004 and a 364 -day $213 million convertible
revolving credit facility maturing in November 2001. In November 2000, the
Company and the banks negotiated a reduction in the 364-day facility from $275
million to $213 million, primarily due to having credit availability in excess
of current and forecasted needs in an effort to reduce commitment costs and
other related fees. At December 31, 2000, the Company had available borrowing
capacity, net of letters of credit, of approximately $106 million.
Under the credit agreement, the Company may elect a base rate, an interest rate
based on the London Interbank Offered Rates of Interest ("LIBOR"), a cost of
funds rate and a bid rate. The base rate is the greater of ABN AMRO Bank N.V.'s
prime rate or the federal funds effective rate plus 0.5% per annum. The LIBOR
rate is based on LIBOR plus a margin that ranges from 87.5 to 200 basis points
depending on the Company's consolidated total indebtedness to cash flow ratios.
The cost of funds rate is a fluctuating interest rate based on ABN AMRO Bank
N.V.'s then cost of funds. Under the bid rate option, any participating bank may
propose the interest rate at which it will lend funds, which rate may either be
a fixed rate or a floating rate based on LIBOR.
17
19
The credit agreement limits the Company's ability to declare or pay cash
dividends and prohibits the Company from declaring or making other
distributions, subject to certain exceptions. The credit agreement contains
various other covenants and restrictions including, without limitation, the
following: a limitation on the incurrence of additional indebtedness; a
limitation on mergers, consolidations and sales of assets and acquisitions; a
limitation on liens; a limitation on sale and leasebacks; a limitation on
investments, loans and advances; a limitation on certain debt payments; a
limitation on capital expenditures; a minimum interest expense coverage ratio;
and a maximum debt to cash flow ratio.
The credit agreement contains customary events of default, including payment
defaults, failure of representations or warranties to be true in any material
respect, covenant defaults, defaults with respect to other indebtedness of the
Company, bankruptcy, certain judgments against the Company, ERISA defaults and
"change of control" of the Company.
Credit agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on credit
agreement borrowings was 8.37% at December 31, 2000. To reduce the impact of
interest rate changes on a portion of this variable-rate debt, the Company
entered into interest rate swaps which effectively convert a portion of the debt
from variable to fixed-rate borrowings during the term of the swap contracts. On
December 31, 2000, the notional value of interest rate swaps outstanding totaled
$85 million and effectively changed the Company's interest rate from a variable
rate to a fixed rate of 8.29%. The interest rate swap agreements mature in 2001
and 2003. The Company is exposed to credit risk in the event of nonperformance
by the counterparties. However, since only the cash interest payments are
exchanged, exposure is significantly less than the notional amount. The
counterparties are large financial institutions and the Company does not
anticipate nonperformance.
9 3/8% Senior Notes Due June 2005
In June 1995, the Company issued $100 million of 9.375% Senior Notes due in 2005
(the "1995 Notes"). In January 1999, the Company issued an additional $75
million of 9.375% Senior Notes which are due in 2005 (the "1999 Notes"; the 1995
Notes and the 1999 Notes are collectively, the "Notes"). The 1999 Notes were
issued at a premium resulting in an effective rate of 8.5%. The terms of the
1995 Notes and the 1999 Notes are substantially the same, and the 1995 Notes and
the 1999 Notes were issued pursuant to indentures that are substantially the
same. The issuance of the 1999 Notes improved the Company's financial liquidity
by i) using a portion of the proceeds to repay a short-term, $30 million loan
associated with the Rockwell acquisition that bore interest at 9.56%; ii) using
a portion of the proceeds to repay variable-rate revolving credit borrowings
thereby increasing amounts available under the revolving credit facility; and
iii) repaying the remaining unpaid principal of a $10.2 million loan from a
prior acquisition.
The Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future indebtedness under (i) capitalized
lease obligations, (ii) the Credit Agreement, (iii) indebtedness of the Company
for money borrowed and (iv) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which the Company is responsible
or liable unless, in the case of clause (iii) or (iv), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Notes.
Pulse Note
As partial payment for the 1995 Pulse acquisition, the Company issued a $17
million note due January 31, 2004, with interest at 9.5% to the former Pulse
shareholder. In January 2000, this note was repaid.
Industrial Revenue Bond
In July 1998, a subsidiary of the Company entered into a 10-year $7.5 million
debt obligation that bears an interest rate of 5.5% to provide financing for the
purchase of a building used in the Company's operations.
Principal repayments of outstanding loan balances are due at various intervals
until maturity. See Note 6 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report.
The Company is highly leveraged and its debt service obligations will continue
to be substantial. The debt of the Company requires the dedication of a
substantial portion of future cash flows to the payment of principal and
interest on indebtedness, thereby reducing funds available for capital
expenditures and future
18
20
business opportunities that the Company believes are available. 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.
EFFECTS OF INFLATION
General price inflation has not had a material impact on the Company's results
of operations. Some of the Company's labor contracts contain negotiated salary
and benefit increases and others contain cost of living adjustment clauses,
which would cause the Company's cost automatically to increase if inflation were
to become significant.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency (the "Euro"). The Company conducts business in member countries.
The transition period for the introduction of the Euro is from January 1, 1999
through June 30, 2002. The Company is assessing the issues involved with the
introduction of the Euro; however, it does not expect conversion to the Euro to
have a material impact on its operations or financial results.
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,
19
21
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.
ITEM 7A. 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 $274 million
of variable-rate debt (after considering the effects of interest rate swaps,
further described below), which represent 51% of total long-term debt at
December 31, 2000 and 56% in 1999. Management has entered into pay-fixed,
receive-variable interest rate swap contracts that partially mitigate the impact
of variable-rate debt interest rate increases (see Note 6 of "Notes to
Consolidated Financial Statements" included in Part II, Item 8 of this report).
At December 31, 2000, an instantaneous 100 basis point increase in interest
rates would reduce the Company's annual earnings by $1.8 million, assuming no
additional intervention strategies by management.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
133, and as amended by SFAS 138, "Accounting for Derivative Instruments and
Hedging Activities" effective January 1, 2001. In the application, the Company
has concluded that its 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 on the balance sheet while creating
some volatility in future earnings, due to market sensitivity and
ineffectiveness in offsetting changes in interest rates of Wabtec's variable
rate borrowings (see Note 17 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report). This fluctuation is not expected to
have a material effect on the Company's financial condition, results of
operations and 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
December 31, 2000, 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 year ended December 31, 2000, approximately
73% of Wabtec's net sales are in the United States (74% in 1999), 12% in Canada,
5% in Mexico, and 10% in other international locations, primarily Europe. (See
Note 16 of "Notes to Consolidated Financial Statements" included in Part II,
Item 8 of this report). At December 31, 2000, the Company does not believe
changes in foreign currency exchange rates represent a material risk to results
of operations, financial position, or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are set forth in Item 14, of Part IV
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) is incorporated herein by reference to the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
May 22, 2001. The definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2000.
Information relating to the executive officers of the Company is set forth in
Part I.
20
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The financial statements, financial statement schedules and exhibits listed
below are filed as part of this annual report:
PAGE
----
(a) (1) FINANCIAL STATEMENTS
Reports of Independent Public Accountants 25
Consolidated Balance Sheets as of December 31, 2000 and 1999 27
Consolidated Statements of Operations for the three years
ended December 31, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000, 1999 and 1998 29
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 2000, 1999 and 1998 30
Notes to Consolidated Financial Statements 31
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 50
Schedule II -- Valuation and Qualifying Accounts 51
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on the date
below pertaining to the following items:
On November 14, 2000, text of press release announcing the
settlement of a
lawsuit filed by GE Harris (Items 5 and 7).
FILING METHOD
(C) EXHIBITS -------------
2.1 Amended and Restated Agreement and Plan of Merger, as
amended (originally included as Annex A to the Joint Proxy
Statement/Prospectus) 8
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.3 Amended and Restated By-Laws of the Company, effective
November 19, 1999 8
4.1 Form of Indenture between the Company and The Bank of New
York with respect to the public offering of $100,000,000 of
9 3/8% Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1) 2
4.3 First Supplemental Indenture dated as of March 21, 1997
between the Company and The Bank of New York 5
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005,
Series B 7
4.5 Form of Note (included in Exhibit 4.4) 7
10.1 MotivePower Stock Option Agreement (originally included as
Annex B to the Joint Proxy Statement/Prospectus) 8
10.2 Westinghouse Air Brake Stock Option Agreement (originally
included as Annex C to the Joint Proxy Statement/Prospectus) 8
21
23
FILING METHOD
(C) EXHIBITS -------------
10.3 Voting Agreement dated as of September 26, 1999 among
William E. Kassling, Robert J. Brooks, Harvard Private
Capital Holdings, Inc. Vestar Equity Partners, L.P. and
MotivePower Industries, Inc. (originally included as Annex D
to the Joint Proxy Statement/Prospectus) 8
10.5 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.6 ESOP Loan Agreement dated January 31, 1995 between
Westinghouse Air Brake Company Employee Stock Ownership
Trust ("ESOP") and the Company (Exhibits omitted) 2
10.7 Employee Stock Ownership Trust Agreement dated January 31,
1995 between the Company and U.S. Trust Company of
California, N.A. 2
10.8 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
10.9 Amended and Restated Refinancing Credit Agreement dated as
of November 19, 1999 among the Company, various financial
institutions, ABN AMRO Bank N.V., The Chase Manhattan Bank,
and The Bank of New York (Schedules and Exhibits omitted) 9
10.10 Amended and Restated Stockholders Agreement dated as of
March 5, 1997 among the RAC Voting Trust ("Voting Trust"),
Vestar Equity Partners, L.P. ("Vestar Equity"), Harvard
Private Capital Holdings, Inc. ("Harvard"), American
Industrial Partners Capital Fund II, L.P. ("AIP") and the
Company 5
10.11 Common Stock Registration Rights Agreement dated as of
January 31, 1995 among the Company, Scandinavian Incentive
Holding B.V. ("SIH"), Voting Trust, Vestar Equity, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc.,
the Pulse Shareholders and ESOT (Schedules and Exhibits
omitted) 2
10.12 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust Trustees 2
10.13 Agreement of Sale and Purchase of the North American
Operations of the Railway Products Group, an operating
division of American Standard Inc., dated as of 1990 between
Rail Acquisition Corp. and American Standard Inc. (only
provisions on indemnification are reproduced) 2
10.14 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
10.15 Purchase Agreement dated as of June 17, 1992 among the
Company, Schuller International, Inc., Manville Corporation
and European Overseas Corporation (only provisions on
indemnification are reproduced) 2
10.16 Asset Purchase Agreement dated as of January 23, 1995 among
the Company, Pulse Acquisition Corporation, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc. and
the Pulse Shareholders (Schedules and Exhibits omitted) 2
10.17 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.18 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 7
10.20 Westinghouse Air Brake Company 1995 Non-Employee Directors'
Fee and Stock Option Plan, as amended 9
10.21 Employment Agreement between William E. Kassling and the
Company 2
22
24
FILING METHOD
(C) EXHIBITS -------------
10.22 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.23 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.24 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
10.25 Purchase Agreement dated as of September 19, 1996 by and
among Mark IV Industries, Inc., Mark IV PLC, and W&P Holding
Corp. (Exhibits and Schedules omitted) (Originally filed as
Exhibit No. 2.01) 3
10.26 Purchase Agreement dated as of September 19,1996 by and
among Mark IV Industries Limited and Westinghouse Railway
Holdings (Canada) Inc. (Exhibits and Schedules omitted)
(Originally filed as Exhibit No. 2.02) 3
10.27 Amendment No. 1 to Amended and Restated Stockholders
Agreement dated as of March 5, 1997 among the Voting Trust,
Vestar, Harvard, AIP and the Company 5
10.28 Common Stock Registration Rights Agreement dated as of March
5, 1997 among the Company, Harvard, AIP and the Voting Trust 5
10.29 1998 Employee Stock Purchase Plan 7
10.30 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and
Exhibits omitted) (Originally filed as Exhibit No. 2.01) 6
10.31 Amendment No. 1 dated as of October 5, 1998 to Sale
Agreement dated as of August 7, 1998 by and between Rockwell
Collins, Inc. and the Company (Originally filed as Exhibit
No. 2.02) 6
10.32 Westinghouse Air Brake Technologies Corporation 2000 Stock
Incentive Plan 10
10.33 Amendment No. 1, dated as of November 16, 2000, by and among
the Company and the Guarantors from Time to Time Party
Thereto, and the Banks From Time to Time Party Thereto, and
ABN AMRO Bank N.V. as bookrunner and co-syndication agent,
The Bank of New York, as co-syndication agent, Mellon Bank,
N.A., as documentation agent, and The Chase Manhattan Bank
USA, N.A., (successor in interest to Chase Manhattan Bank
Delaware), as an issuing bank, to the Amended and Restated
Refinancing Credit Agreement, dated as of November 19, 1999
among the Company, various financial institutions, ABN AMRO
Bank N.V., The Chase Manhattan Bank, and The Bank of New
York which was filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1999
(Exhibits omitted) 1
21 List of subsidiaries of the Company 1
23 Consent of Arthur Andersen LLP 1
23.1 Consent of Deloitte & Touche LLP 1
99 Annual Report on Form 11-K for the year ended December 31,
2000 of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust 1
23
25
FILING METHOD
-------------
1 Filed herewith.
2 Filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 33-90866).
3 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 3, 1996.
4 Filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-39159).
5 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1997.
6 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 5, 1998.
7 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1998.
8 Filed as part of the Company's Registration Statement on
Form S-4 (No. 333-88903).
9 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1999.
10 Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2000.
24
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION:
We have audited the accompanying consolidated balance sheets of Westinghouse Air
Brake Technologies Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cashflows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. For the year ended
December 31, 1998, we did not audit the consolidated financial statements of
MotivePower Industries, Inc., a company acquired during 1999 in a transaction
accounted for as a pooling-of-interests, as discussed in Note 4. Such statements
are included in the consolidated financial statements of Westinghouse Air Brake
Technologies Corporation and reflect total assets and total revenues of 38
percent and 35 percent, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for MotivePower
Industries, Inc, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Westinghouse Air Brake Technologies Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
February 12, 2001
25
27
INDEPENDENT AUDITOR'S REPORT
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF MOTIVEPOWER INDUSTRIES, INC.:
We have audited the consolidated statements of income, stockholders' equity and
cash flows for MotivePower Industries, Inc. and subsidiaries for the year ended
December 31, 1998, not separately presented herein. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of MotivePower Industries,
Inc. for the year ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 11, 1999 (March 2, 1999 as to Note 18)
26
28
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
IN THOUSANDS, EXCEPT SHARE AND PAR VALUE 2000 1999
- ------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash........................................................ $ 6,071 $ 7,056
Accounts receivable......................................... 194,379 179,734
Inventories................................................. 202,828 211,396
Deferred taxes.............................................. 23,777 26,173
Income tax receivable....................................... 6,479 --
Other....................................................... 14,021 12,889
----------------------
Total current assets.................................... 447,555 437,248
Property, plant and equipment............................... 407,322 395,687
Accumulated depreciation.................................... (192,677) (172,996)
----------------------
Property, plant and equipment, net...................... 214,645 222,691
OTHER ASSETS
Prepaid pension costs....................................... 7,100 9,178
Contact underbillings....................................... 23,898 27,710
Goodwill, net............................................... 226,597 233,760
Other intangibles, net...................................... 38,797 43,287
Other noncurrent assets..................................... 25,455 22,802
----------------------
Total other assets...................................... 321,847 336,737
----------------------
Total Assets....................................... $ 984,047 $ 996,676
----------------------
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................... $ 751 $ 743
Accounts payable............................................ 86,316 87,388
Accrued merger and restructuring costs...................... 6,257 8,705
Accrued income taxes........................................ 8,758 5,155
Customer deposits........................................... 25,125 31,827
Accrued compensation........................................ 17,013 15,754
Accrued warranty............................................ 23,482 26,832
Other accrued liabilities................................... 22,954 17,808
----------------------
Total current liabilities............................... 190,656 194,212
Long-term debt.............................................. 539,446 567,844
Reserve for postretirement and pension benefits............. 19,387 19,918
Deferred income taxes....................................... 17,110 8,054
Commitments and contingencies............................... 12,852 18,933
Other long-term liabilities............................... 8,225 5,837
----------------------
Total liabilities....................................... 787,676 814,798
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares
issued.................................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized:
65,447,867 shares issued and 42,841,985 outstanding at
December 31, 2000 and 51,529,331 shares outstanding at
December 31, 1999....................................... 654 654
Additional paid-in capital.................................. 273,494 318,357
Treasury stock, at cost, 22,605,882 and 13,918,536 shares,
respectively.............................................. (281,665) (201,711)
Unearned ESOP shares, at cost, 8,366,076 shares at December
31, 1999.................................................. -- (125,491)
Retained earnings........................................... 218,470 194,772
Deferred compensation....................................... 900 6,595
Accumulated other comprehensive income (loss)............... (15,482) (11,298)
----------------------
Total shareholders' equity.............................. 196,371 181,878
----------------------
Liabilities and Shareholders' Equity.................... $ 984,047 $ 996,676
----------------------
----------------------
The accompanying notes are an integral part of these statements.
27
29
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net sales............................................. $1,027,976 $1,121,068 $1,036,127
Cost of sales......................................... (750,176) (787,889) (734,426)
---------------------------------------
Gross profit..................................... 277,800 333,179 301,701
Selling, general and administrative expenses.......... (114,069) (121,990) (113,581)
Merger and restructuring charges...................... (27,142) (43,648) --
Engineering expenses.................................. (32,466) (35,724) (31,636)
Amortization expense.................................. (14,643) (15,808) (11,455)
---------------------------------------
Total operating expenses......................... (188,320) (217,170) (156,672)
Income from operations........................... 89,480 116,009 145,029
Other income and expenses
Interest expense.................................... (45,505) (44,420) (37,111)
Investment income -- Argentina...................... -- -- 10,362
Other income, (expense) net......................... 3,620 (90) 3,031
---------------------------------------
Income before income taxes and extraordinary
item........................................... 47,595 71,499 121,311
Income tax expense.................................... (22,202) (33,557) (42,115)
---------------------------------------
Income before extraordinary item................. 25,393 37,942 79,196
Extraordinary loss on extinguishment of debt, net of
tax................................................. -- (1,319) (5,345)
---------------------------------------
Net income....................................... $ 25,393 $ 36,623 $ 73,851
---------------------------------------
---------------------------------------
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item................. $ 0.59 $ 0.88 $ 1.85
Extraordinary item............................... -- (0.03) (0.13)
---------------------------------------
Net income....................................... $ 0.59 $ 0.85 $ 1.72
---------------------------------------
---------------------------------------
Diluted
Income before extraordinary item................. $ 0.59 $ 0.86 $ 1.79
Extraordinary item............................... -- (0.03) (0.12)
---------------------------------------
Net income....................................... $ 0.59 $ 0.83 $ 1.67
---------------------------------------
---------------------------------------
Weighted average shares outstanding
Basic............................................ 43,318 43,287 42,750
Diluted.......................................... 43,382 44,234 44,141
---------------------------------------
The accompanying notes are an integral part of these statements.
28
30
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
IN THOUSANDS 2000 1999 1998
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income............................................... $ 25,393 $ 36,623 $ 73,851
Adjustments to reconcile net income to cash provided by
operations:
Extraordinary loss on extinguishment of debt........... -- 1,319 5,345
Depreciation and amortization.......................... 41,662 42,614 36,615
Provision for ESOP contribution........................ 1,315 4,078 4,472
Gain on sale of product line........................... (4,375) -- --
Deferred income taxes.................................. 12,193 8,189 6,283
Other, primarily non-cash portion of merger and
restructuring charges............................... 3,106 8,907 --
Changes in operating assets and liabilities, net of
acquisitions
Accounts receivable................................. (17,513) 16,611 (42,419)
Inventories......................................... 6,716 (12,875) (20,426)
Underbillings....................................... 3,812 (935) 5,523
Accounts payable.................................... 90 (13,661) 22,316
Accrued income taxes................................ (4,926) (2,897) 12,025
Accrued liabilities and customer deposits........... 4,026 (9,004) (22,609)
Commitments and contingencies....................... (6,081) (272) 3,653
Other assets and liabilities........................ (5,204) (1,308) (11,218)
------------------------------------
Net cash provided by operating activities......... 60,214 77,389 73,411
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net...... (26,335) (30,808) (57,838)
Acquisitions of businesses, net of cash acquired.... (650) (32,242) (180,199)
Cash received from disposition of product line...... 5,500 -- --
Other............................................... -- (3,321) (5,758)
------------------------------------
Net cash used for investing activities............ (21,485) (66,371) (243,795)
FINANCING ACTIVITIES
(Repayments of) proceeds from credit agreements..... (10,000) (38,555) 109,668
Proceeds from senior notes offering................. -- 75,000 --
(Repayments of) proceeds from other borrowings...... (18,390) (41,473) 48,506
Decrease in restricted cash......................... -- -- 5,194
Debt issuance fees.................................. -- -- (3,819)
Purchase of treasury stock.......................... (12,215) (10,630) --
Proceeds from treasury stock from stock based
benefit plans..................................... 4,291 4,911 3,372
Cash dividends...................................... (1,695) (986) (980)
------------------------------------
Net cash (used for) provided by financing
activities..................................... (38,009) (11,733) 161,941
Effect of changes in currency exchange rates............. (1,705) (1,212) (307)
------------------------------------
Decrease in cash....................................... (985) (1,927) (8,750)
Cash, beginning of year............................. 7,056 8,983 17,733
------------------------------------
Cash, end of year................................... $ 6,071 $ 7,056 $ 8,983
------------------------------------
------------------------------------
The accompanying notes are an integral part of these statements.
29
31
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL UNEARNED
COMPREHENSIVE COMMON PAID-IN TREASURY ESOP RETAINED DEFERRED
In thousands INCOME STOCK CAPITAL STOCK SHARES EARNINGS COMPENSATION
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $652 $311,131 $(190,657) $(131,273) $ 86,264 $ (781)
Cash dividends.................. (980)
Compensatory stock options
granted through a Rabbi
Trust......................... (4,536) 4,536
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................ 1,988 3,003 196
Allocation of ESOP shares, net
of tax effect................. 1,036 2,801
Net income...................... $73,851 73,851
Translation adjustment.......... (3,104)
-----------------------------------------------------------------------------------
$70,747
=======
BALANCE, DECEMBER 31, 1998 652 314,155 (192,190) (128,472) 159,135 3,951
Cash dividends.................. (986)
Purchase of treasury stock...... (10,630)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................ 2 3,522 3,200 553
Allocation of ESOP shares, net
of tax effect................. 680 2,981
Compensatory stock options
granted through a Rabbi
Trust......................... (2,091) 2,091
Net income...................... $36,623 36,623
Translation adjustment.......... 1,857
-----------------------------------------------------------------------------------
$38,480
=======
BALANCE, DECEMBER 31, 1999 654 318,357 (201,711) (125,491) 194,772 6,595
Cash dividends.................. (1,695)
Purchase of treasury stock...... (12,215)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................ (3,697) 9,545 31
Compensatory stock options
granted through a Rabbi
Trust......................... 5,726 (5,726)
Allocation of ESOP shares, net
of tax effect................. (434) 1,749
ESOP Termination................ (40,732) (83,010) 123,742
Net income...................... $25,393 25,393
Translation adjustment.......... (4,184)
-------
$21,209
=======
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $654 $273,494 $(281,665) -- $218,470 $ 900
====================================================================
ACCUMULATED
OTHER
COMPREHENSIVE
In thousands INCOME (LOSS)
- -------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $(10,051)
Cash dividends..................
Compensatory stock options
granted through a Rabbi
Trust.........................
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................
Allocation of ESOP shares, net
of tax effect.................
Net income......................
Translation adjustment.......... (3,104)
----------
BALANCE, DECEMBER 31, 1998 (13,155)
Cash dividends..................
Purchase of treasury stock......
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................
Allocation of ESOP shares, net
of tax effect.................
Compensatory stock options
granted through a Rabbi
Trust.........................
Net income......................
Translation adjustment.......... 1,857
----------
BALANCE, DECEMBER 31, 1999
Cash dividends.................. (11,298)
Purchase of treasury stock......
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net
of tax........................
Compensatory stock options
granted through a Rabbi
Trust.........................
Allocation of ESOP shares, net
of tax effect.................
ESOP Termination................
Net income......................
Translation adjustment.......... (4,184)
----------
BALANCE, DECEMBER 31, 2000 $(15,482)
==========
The accompanying notes are an integral part of these statements
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (the "Company") is one of North
America's largest manufacturers of value-added equipment for locomotives,
railway freight cars and passenger transit vehicles. The Company was formed in
November 1999 from the merger of Westinghouse Air Brake Company and MotivePower
Industries, Inc. Our major products are intended to enhance safety, improve
productivity and reduce maintenance costs for our customers. Our major product
offerings include electronic controls and monitors, air brakes, traction motors,
cooling equipment, turbochargers, low-horsepower locomotives, couplers, door
controls, draft gears and brake shoes. We aggressively pursue technological
advances with respect to both new product development and product enhancements.
The Company has its headquarters in Wilmerding, Pennsylvania and has 6,244
employees at facilities throughout the world.
A portion of the Company's Freight Group's operations and revenue base is
generally dependent on the capital replacement cycles for locomotives and
freight cars of the large North American-based railroad companies. The Company's
Passenger Transit Group's operations are dependent on the budgeting and
expenditure appropriation process of federal, state and local governmental units
for mass transit needs established by public policy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries. Such statements
have been prepared in accordance with generally accepted accounting principles.
Sales between the subsidiaries are billed at prices consistent with sales to
third parties and are eliminated in consolidation. All prior period financial
statements and footnote disclosures have been restated in accordance with
Accounting Principles Board Number 16 "Business Combinations" related to the
merger between WABCO and MotivePower accounted for as a pooling-of-interests
(see Note 4).
Certain prior year amounts have been reclassified, where necessary, to conform
to the current year presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from the
estimates. On an ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
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. Cores inventory is defined as inventory units
designated for unit exchange programs. The components of inventory, net of
reserves, were:
DECEMBER 31,
-------------------
IN THOUSANDS 2000 1999
- ---------------------------------------------
Cores $ 28,213 $ 29,999
Raw materials 95,430 99,948
Work-in-process 53,240 47,319
Finished goods 25,945 34,130
-------------------
Total inventory $202,828 $211,396
- ---------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment additions are stated
at cost. Expenditures for renewals and betterments are capitalized. Expenditures
for ordinary maintenance and repairs are expensed as incurred. The Company
provides for book depreciation principally on the straight-line method over the
following estimated useful lives of plant, property and equipment.
YEARS
- --------------------------------------------
Land improvements 10 to 20
Buildings and improvements 20 to 40
Machinery and equipment 3 to 15
Locomotive leased fleet 4 to 15
- --------------------------------------------
Accelerated depreciation methods are utilized for income tax purposes.
31
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The major classes of depreciable assets are as follows:
DECEMBER 31,
----------------------
IN THOUSANDS 2000 1999
- ---------------------------------------------
Machinery and
equipment $ 255,153 $ 245,199
Buildings and
improvements 134,847 132,276
Land and improvements 14,303 14,266
Locomotive leased
fleet 3,019 3,946
----------------------
Plant, property &
equipment, cost 407,322 395,687
Less accumulated
depreciation (192,677) (172,996)
----------------------
Total $ 214,645 $ 222,691
- ---------------------------------------------
INTANGIBLE ASSETS Goodwill is amortized on a straight-line basis over 40 years.
Other intangibles are amortized on a straight-line basis over their estimated
economic lives. Goodwill and other intangible assets, including patents and
tradenames, are periodically reviewed for impairment based on an assessment of
future operations that indicate the remaining balance of the intangible asset
may not be recoverable. The Company's reviews for impairment, to date, have not
resulted in any revision to intangible assets or their related amortization
periods (see Note 5).
REVENUE RECOGNITION Revenue is recognized when products have been shipped to the
respective customers and the price for the product has been determined.
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 at a minimum quarterly and adjustments are reflected in the
accounting period as known. Provisions are made currently for estimated losses
on uncompleted contracts.
Costs and estimated earnings in excess of billings ("underbillings") and
billings in excess of costs and estimated earnings ("overbillings") on the
contract in progress are recorded on the balance sheet and are classified as
non-current (see Note 20).
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 does not change existing literature on revenue recognition,
but rather explains and clarifies the SEC staff's general framework for revenue
recognition. SAB 101 did not require the Company to change existing revenue
recognition policies and therefore, had no impact on the Company's results of
operations, or financial condition as of December 31, 2000.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation,
including stock options and employee stock purchases, under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (see Note 11 for related pro forma
disclosures).
RESEARCH AND DEVELOPMENT Research and development costs are charged to expense
as incurred. For the years ended December 31, 2000, 1999 and 1998, the Company
incurred costs of approximately $32.5 million, $34.5 million and $30.4 million,
respectively.
WARRANTY COSTS Warranty costs are accrued based on management's estimates of
repair or upgrade costs per unit and historical experience. In recent years, the
Company has introduced several new products. The Company does not have the same
level of historical warranty experience for these new products as it does for
its continuing products. Therefore, warranty reserves have been established for
these new products based upon management's estimates. Actual future results may
vary from such estimates. Warranty expense was $16.4 million, $10.8 million and
$14 million for 2000, 1999 and 1998, respectively. Warranty reserves were $23.5
million and $26.8 million at December 31, 2000 and 1999, respectively.
FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES The Company periodically enters
into interest rate swap agreements to reduce the impact of interest rate changes
on its variable rate borrowings. Interest rate swaps are agreements with a
counterparty to exchange periodic interest payments (such as pay fixed, receive
variable) calculated on a notional principal amount. The interest rate
differential to be paid or received is accrued to interest expense (see Note 6).
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
133, and 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 on the balance sheet
while creating some volatility in future earnings, due to market sensitivity and
ineffectiveness
32
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in offsetting changes in interest rates of the Company's variable rate
borrowings.
INCOME TAXES Income taxes are accounted for under the liability method. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The provision for income taxes includes federal, state and
foreign income taxes (see Note 9).
FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries,
except for the Company's Mexican operations whose functional currency is the
U.S. Dollar, are translated at the rate of exchange in effect on the balance
sheet date while income and expenses are translated at the average rates of
exchange prevailing during the year. Foreign currency gains and losses resulting
from transactions, and the translation of financial statements are recorded in
the Company's consolidated financial statements based upon the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." The effects of currency exchange rate changes on intercompany
transactions of a long-term investment nature are accumulated and carried as a
component of shareholders' equity. The effects of currency exchange rate changes
on intercompany transactions that are non U.S. dollar denominated amounts are
charged or credited to earnings.
EARNINGS PER SHARE Basic earnings per common share are computed by dividing net
income applicable to common shareholders by the weighted-average number of
shares of common stock outstanding during the year. Diluted earnings per common
share are computed by dividing net income applicable to common shareholders by
the weighted average number of shares of common stock outstanding adjusted for
the assumed conversion of all dilutive securities (such as employee stock
options). See Note 10.
OTHER COMPREHENSIVE INCOME Comprehensive income is defined as net income and all
other nonowner changes in shareholders' equity. The Company's accumulated other
comprehensive income (loss) consists entirely of foreign currency translation
adjustments.
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK The Company's trade
receivables are primarily from rail and transit industry original equipment
manufacturers, Class I railroads, railroad carriers and commercial companies
that utilize rail cars in their operations, such as utility and chemical
companies. No one customer accounted for more than 10% of the Company's
consolidated net sales in 2000, 1999, or 1998. The allowance for doubtful
accounts was $3.9 million and $4 million as of December 31, 2000 and 1999,
respectively.
EMPLOYEES As of December 31, 2000, approximately 42% of the Company's workforce
was covered by collective bargaining agreements. These agreements are generally
effective through 2001, 2002 and 2003.
DEFERRED COMPENSATION AGREEMENTS In May 1998, a consensus on Emerging Issues
Task Force Issue No. 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"), was
issued. The adoption of EITF 97-14 required the Company to record as treasury
stock the historical value of the Company's stock maintained in its deferred
compensation plans.
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3. SUPPLEMENTAL CASH FLOW DISCLOSURES
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
IN THOUSANDS 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Interest paid during the year............................... $45,871 $ 44,087 $ 37,391
Income taxes paid during the year........................... 14,935 30,635 27,434
Young Radiator acquisition:
Fair value of assets acquired............................. -- -- 89,594
Liabilities assumed.................................... -- -- (10,188)
---------
Cash paid............................................ -- -- 79,406
Less cash acquired..................................... -- -- 11,721
---------
Net cash paid.......................................... -- -- 67,685
---------
---------
Rockwell Railroad Electronics acquisition:
Fair value of assets acquired............................. -- -- 95,246
Liabilities assumed.................................... -- -- (15,246)
---------
Cash paid............................................ -- -- 80,000
Less cash acquired..................................... -- -- --
---------
Net cash paid.......................................... -- -- 80,000
---------
---------
Other business acquisitions:
Fair value of assets acquired............................. 897 48,202 51,969
Liabilities assumed.................................... (247) (14,646) (19,452)
----------------------------------
Cash paid............................................ 650 33,556 32,517
Less cash acquired..................................... -- 1,314 3
----------------------------------
Net cash paid.......................................... 650 32,242 32,514
----------------------------------
----------------------------------
Noncash investing and financing activities:
Deferred compensation.................................. 5,726 2,091 4,536
Treasury stock......................................... (5,726) (2,091) (4,536)
- ------------------------------------------------------------------------------------------------
4. MERGERS AND ACQUISITIONS
On November 19, 1999, WABCO completed its merger with MotivePower Industries,
Inc. a leading manufacturer and supplier of locomotive components, fleet
overhauls and related services. The Company issued approximately 18 million
shares of Common Stock to former MotivePower shareholders and reserved for the
contingent exercise of stock options approximately 2 million shares, in a
transaction that was accounted for by the pooling-of-interests accounting
method. Accordingly, the prior period consolidated financial statements have
been restated giving effect to this transaction as if it had occurred as of the
beginning of the earliest period presented.
The combined results of the Company and separate results of WABCO and
MotivePower for the periods preceding the merger are as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------
EXTRAORDINARY
IN THOUSANDS SALES ITEM NET INCOME
- --------------------------------------------------------------
WABCO $ 557,656 $ (469) $37,652
MotivePower 294,347 -- 22,376
---------------------------------------
Combined $ 852,003 $ (469) $60,028
- --------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------
EXTRAORDINARY
IN THOUSANDS SALES ITEM NET INCOME
- --------------------------------------------------------------
WABCO $ 670,909 $(3,315) $41,654
MotivePower 365,218 (2,030) 32,197
---------------------------------------
Combined $1,036,127 $(5,345) $73,851
- --------------------------------------------------------------
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During 2000 and 1999, the Company completed the following acquisitions:
i) In July 2000, the Company purchased certain assets of Iron Fireman, a
manufacturer of transportation boiler equipment for $650,000.
ii) In January 1999, the Company acquired certain assets of G&G Locotronics, a
privately held designer of high voltage electrical cabinets and control
stands for locomotives, for total consideration of $17.8 million.
iii) In January 1999, the Company acquired 100% of the Common Stock of Q-Tron,
Ltd., a privately held designer and manufacturer of locomotive electronics
equipment, for total consideration of $14.9 million.
iv) In February 1999, the Company acquired the mass transit electrical inverter
and converter product line of AGC System & Technologies, Inc. of Canada for
approximately $960,000.
These acquisitions were accounted for under the purchase method. Accordingly,
the results of operations of the applicable acquisition are included in the
Company's financial statements prospectively from the acquisition date. The
excess of the purchase price over the fair value of identifiable net assets of
approximately $26 million was allocated to goodwill and is being amortized on a
straight-line basis over 40 years.
On October 5, 1998, the Company purchased the railway electronics business,
Rockwell Railroad Electronics, (Rockwell) of Rockwell Collins, Inc., a wholly
owned subsidiary of Rockwell International Corporation, for $80 million in cash.
Rockwell was a manufacturer and supplier of mobile electronics (display and
positioning equipment), data communications, and electronic braking equipment
for the railroad industry. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, the results of operations of
Rockwell have been included in the Company's consolidated financial statements
from the date of acquisition. The $70 million excess of the purchase price over
the fair value of the net identifiable assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
On November 18, 1998, the Company acquired 100% of the common stock of Young
Radiator Company, a manufacturer of radiators, air coolers and heat exchange
equipment for rail and industrial power-related markets, for $67.7 million, net
of cash and marketable securities acquired. The acquisition has been accounted
for by the purchase method of accounting, and accordingly, the results of
operations of Young have been included in the Company's consolidated financial
statements from the date of acquisition. The $43 million excess of the purchase
price over the fair value of the net identifiable assets acquired has been
recorded as goodwill and is being amortized on a straight-line basis over 40
years.
The following unaudited pro forma results of operations, including the effects
of pro forma adjustments related to the acquisition of Rockwell and Young have
been prepared as if these transactions occurred at the beginning of 1998:
(UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE 1998
- ---------------------------------------------
Net sales $1,116,846
Income before extraordinary item 76,328
Net income 70,983
Diluted earnings per share
As reported $ 1.67
Pro forma $ 1.61
- ---------------------------------------------
The pro forma financial information above does not purport to present what the
Company's results of operations would have been if these two acquisitions had
actually occurred on January 1, 1998, or to project the Company's results of
operations for any future period, and does not reflect anticipated cost savings
through the combination of these operations.
5. INTANGIBLES
Intangible assets of the Company, other than goodwill, consist of the following:
DECEMBER 31,
-----------------
IN THOUSANDS 2000 1999
- -------------------------------------------------
Patents, tradenames/trademarks
and other, net of
accumulated amortization of
$38,006 and $35,820 (3-40
years) $33,239 $35,333
Covenants not to compete, net
of accumulated amortization
of $18,756 and $16,381 (5
years) 5,558 7,954
-----------------
Total $38,797 $43,287
- -------------------------------------------------
At December 31, 2000 and 1999, goodwill totaled $226.6 million and $233.8
million, net of accumulated amortization of $29.7 million and $23.4 million,
respectively.
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6. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-------------------
IN THOUSANDS 2000 1999
- -------------------------------------------------
Revolving credit agreement $358,000 $368,000
9.375% Senior notes due 2005 175,000 175,000
Pulse note -- 16,990
5.5% Industrial revenue bond
due 2008 6,169 6,749
Other 1,028 1,848
-------------------
Total 540,197 568,587
Less-current portion 751 743
-------------------
Long-term portion $539,446 $567,844
- -------------------------------------------------
Credit Agreement
In November 1999, in connection with the merger, WABCO terminated its then
existing secured credit agreement and refinanced the then existing unsecured
MotivePower credit agreement with a consortium of commercial banks. This
resulted in an unsecured credit agreement which provided a $275 million five-
year revolving credit facility expiring in 2004 and a 364-day $275 million
convertible revolving credit facility. In November 2000, the Company and the
banks negotiated a reduction in the 364-day facility from $275 million to $213
million, primarily due to having credit availability in excess of current and
forecasted needs in an effort to reduce commitment costs and other related fees.
At December 31, 2000, the Company had available borrowing capacity, net of
letters of credit, of approximately $106 million. In connection with the
establishment of its new revolving credit facilities in 1999, the Company wrote
off previously deferred financing costs of approximately $850,000, net of tax
($.02 per diluted share), which has been reported as an extraordinary item in
the accompanying financial statements.
Under the credit agreement, the Company may elect a base rate, an interest rate
based on the London Interbank Offered Rates of Interest ("LIBOR"), a cost of
funds rate and a bid rate. The base rate is the greater of ABN AMRO Bank N.V.'s
prime rate or the federal funds effective rate plus 0.5% per annum. The LIBOR
rate is based on LIBOR plus a margin that ranges from 87.5 to 200 basis points
depending on the Company's consolidated total indebtedness to cash flow ratios.
The cost of funds rate is a fluctuating interest rate based on ABN AMRO Bank
N.V.'s then cost of funds. Under the bid rate option, any participating bank may
propose the interest rate at which it will lend funds, which rate may either be
a fixed rate or a floating rate based on LIBOR.
The credit agreement limits the Company's ability to declare or pay cash
dividends and prohibits the Company from declaring or making other
distributions, subject to certain exceptions. The credit agreement contains
various other covenants and restrictions including, without limitation, the
following: a limitation on the incurrence of additional indebtedness; a
limitation on mergers, consolidations and sales of assets and acquisitions; a
limitation on liens; a limitation on sale and leasebacks; a limitation on
investments, loans and advances; a limitation on certain debt payments; a
limitation on capital expenditures; a minimum interest expense coverage ratio;
and a maximum debt to cash flow ratio.
The credit agreement contains customary events of default, including payment
defaults, failure of representations or warranties to be true in any material
respect, covenant defaults, defaults with respect to other indebtedness of the
Company, bankruptcy, certain judgments against the Company, ERISA defaults and
"change of control" of the Company.
Credit agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on credit
agreement borrowings was 8.37% at December 31, 2000. To reduce the impact of
interest rate changes on a portion of this variable-rate debt, the Company
entered into interest rate swaps which effectively convert a portion of the debt
from variable to fixed-rate borrowings during the term of the swap contracts. On
December 31, 2000, the notional value of interest rate swaps outstanding totaled
$85 million and effectively changed the Company's interest rate from a variable
rate to a fixed rate of 8.29%. The interest rate swap agreements mature in 2001
and 2003. The Company is exposed to credit risk in the event of nonperformance
by the counterparties. However, since only the cash interest payments are
exchanged, exposure is significantly less than the notional amount. The
counterparties are large financial institutions and the Company does not
anticipate nonperformance.
9 3/8% Senior Notes Due June 2005
In June 1995, the Company issued $100 million of 9.375% Senior Notes due in 2005
(the "1995 Notes"). In January 1999, the Company issued an additional $75
million of 9.375% Senior Notes which are due in 2005 (the "1999 Notes"; the 1995
Notes
36
38
and the 1999 Notes are collectively, the "Notes"). The 1999 Notes were issued at
a premium resulting in an effective rate of 8.5%. The terms of the 1995 Notes
and the 1999 Notes are substantially the same, and the 1995 Notes and the 1999
Notes were issued pursuant to indentures that are substantially the same. The
issuance of the 1999 Notes improved the Company's financial liquidity by i)
using a portion of the proceeds to repay a short-term, $30 million loan
associated with the Rockwell acquisition that bore interest at 9.56%; ii) using
a portion of the proceeds to repay variable-rate revolving credit borrowings
thereby increasing amounts available under the revolving credit facility; and
iii) repaying the remaining unpaid principal of a $10.2 million loan from a
prior acquisition. As a result of this issuance, the Company wrote off
previously capitalized debt issuance costs of $469,000, net of tax, or
approximately $.01 per diluted share, in 1999.
The Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future indebtedness under (i) capitalized
lease obligations, (ii) the Credit Agreement, (iii) indebtedness of the Company
for money borrowed and (iv) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which the Company is responsible
or liable unless, in the case of clause (iii) or (iv), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Notes.
Pulse Note
As partial payment for the 1995 Pulse acquisition, the Company issued a $17
million note due January 31, 2004, with interest at 9.5% to the former Pulse
shareholder. In January 2000, this note was repaid.
Industrial Revenue Bond
In July 1998, a subsidiary of the Company entered into a 10 year $7.5 million
debt obligation that bears an interest rate of 5.5% to provide financing for the
purchase of a building used in the Company's operations.
Scheduled principal repayments of outstanding loan balances required as of
December 31, 2000 are as follows:
In thousands
- --------------------------------------------
2001 $ 751
2002 1,369
2003 778
2004 358,788
2005 175,552
Future years 2,959
--------
Total $540,197
- --------------------------------------------
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7. EMPLOYEE BENEFIT PLANS
PENSION PLANS POSTRETIREMENT PLANS
In thousands, except percentages ------------------- ---------------------
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year................... $(60,359) $(63,650) $(18,595) $(20,611)
Service cost...................................... (1,492) (1,746) (231) (337)
Interest cost..................................... (4,572) (4,231) (1,430) (1,364)
Participant contributions......................... (298) (40) -- --
Special termination benefits...................... (2,957) -- -- --
Plan amendments................................... -- (461) -- (205)
Actuarial gain (loss)............................. (2,505) 7,427 (874) 3,440
Benefits paid..................................... 12,895 3,988 696 563
Obligation assumed through an acquisition......... -- -- -- (81)
Effect of currency rate changes................... 879 (1,646) -- --
--------------------------------------------
Obligation at end of year...................... $(58,409) $(60,359) $(20,434) $(18,595)
--------------------------------------------
--------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.... $ 74,554 $ 68,290 -- --
Actual return on plan assets...................... 2,584 6,458 -- --
Employer contribution............................. 2,521 2,325 -- --
Participant contributions......................... 298 40 -- --
Benefits paid..................................... (12,895) (3,988) -- --
Administrative expenses........................... (112) (257) -- --
Effect of currency rate changes................... (1,240) 1,686 -- --
--------------------------------------------
Fair value of plan assets at end of year....... $ 65,710 $ 74,554 -- --
--------------------------------------------
--------------------------------------------
FUNDED STATUS
Funded status at year end......................... $ 7,301 $ 14,195 $(20,434) $(18,595)
Unrecognized net actuarial (gain) loss............ (3,305) (10,109) 1,112 359
Unrecognized prior service cost................... 2,806 3,212 (26) (83)
Unrecognized transition obligation................ -- -- 259 281
--------------------------------------------
Prepaid (accrued) benefit cost.................... $ 6,802 $ 7,298 $(19,089) $(18,038)
--------------------------------------------
--------------------------------------------
PENSION PLANS POSTRETIREMENT PLANS
--------------------------- ------------------------
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST
Service cost............................. $ 1,492 $ 1,746 $ 1,363 $ 231 $ 337 $ 400
Interest cost.......................... 4,572 4,231 2,904 1,430 1,364 1,304
Expected return on plan assets......... (6,708) (6,045) (3,968) -- -- --
Net amortization/deferrals............. 219 734 1,072 69 233 230
-------------------------------------------------------
Net periodic benefit (income)
cost.............................. $ (425) $ 666 $ 1,371 $1,730 $1,934 $1,934
-------------------------------------------------------
-------------------------------------------------------
ASSUMPTIONS
Discount rate.......................... 7.25% 7.75% 6.75% 7.5% 8% 6.75%
Expected long-term rate of return...... 9% 9% 10% na na na
Rate of compensation increase.......... 5% 5% 5% na na na
- --------------------------------------------------------------------------------------------------
A 1% change in the assumed health care cost trend rate will change the amount of
expense recognized for the postretirement plans by approximately $200,000 for
each future year, and change the accu-
38
40
mulated postretirement benefit obligation by approximately $2.5 million.
The composition of plan assets consists primarily of equities, corporate bonds,
governmental notes and temporary investments.
In 2000, as a result of an early retirement package offered to certain union
employees, the Company incurred a charge of approximately $3 million reflected
above as a special termination benefit.
Included in the above table, the Company had a $0.3 million pension plan benefit
obligation that was in excess of plan assets at December 31, 2000.
DEFINED CONTRIBUTION PLANS
Costs recognized under multi-employer and other defined contribution plans are
summarized as follows:
IN THOUSANDS 2000 1999 1998
- ------------------------------------------------
Multi-employer pension
and health & welfare
plans $2,399 $2,251 $3,765
401(k) savings and
other defined
contribution plans 6,164 1,782 1,298
Employee stock
ownership plan
(ESOP) 1,315 4,078 4,472
------------------------
Total $9,878 $8,111 $9,535
- ------------------------------------------------
The Company sponsors defined benefit pension plans that cover certain U.S. and
Canadian employees and provide benefits of stated amounts for each year of
service of the employee. In connection with the establishment of the ESOP (see
Note 8) in January 1995, the pension plan for U.S. salaried employees was
modified to eliminate any credit (or accrual) for current service costs for any
future periods, effective March 31, 1995.
The Company's funding methods, which are primarily based on the ERISA
requirements, differ from those used to recognize pension expense, which is
primarily based on the projected unit credit method applied in the accompanying
financial statements.
In addition to providing pension benefits, the Company has provided certain
unfunded postretirement health care and life insurance benefits for
substantially all U.S. employees. In conjunction with the establishment of the
ESOP in January 1995 (see Note 8), the postretirement health care and life
insurance benefits for salaried employees were modified to discontinue benefits
for employees who had not attained the age of 50 by March 31, 1995. The Company
is not obligated to pay health care and life insurance benefits to individuals
who had retired prior to 1990.
The Company also participates in a variety of defined contribution, 401(k) and
multiemployer pension, health and welfare plans. Additionally, the Company has
stock option-based benefit and other plans further described in Note 11.
8. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
Effective January 31, 1995, the Company established the Westinghouse Air Brake
Company Employee Stock Ownership Plan and Trust (ESOP) to enable participating
employees to obtain ownership interests in the Company. Employees eligible to
participate in the ESOP primarily include the salaried U.S. employees and, as
described in Note 7, the ESOP contributions were intended to supplement or
replace other salaried employee benefit plans.
In connection with the establishment of the ESOP, the Company made a $140
million loan to the ESOP, which was used to purchase 9,336,000 shares of the
Company's outstanding common stock. The ESOP loan initially had a term of 50
years with interest at 8.5% and was collateralized by the shares purchased by
the ESOP. Company contributions to the ESOP were used to repay the ESOP loan's
annual debt service requirements of approximately $12 million. The Company was
obligated to contribute amounts sufficient to repay the ESOP loan. The ESOP used
such Company contributions to repay the ESOP loan. Approximately 187,000 shares
were to be allocated annually to participants over a 50-year period. These
transactions occurred simultaneously and, for accounting purposes, offset each
other. Allocated ESOP shares through August 1, 2000 were approximately 1.1
million shares.
Under a plan that was devised to terminate the ESOP in order to provide a
comparable retirement benefit structure between the former WABCO and MotivePower
employees, Company contributions to the ESOP ceased August 1, 2000. Due to
certain regulatory and other administrative constraints, the Trust and the ESOP
loan continue in place and the voting rights of the unallocated ESOP shares
continue to be governed by the Trust until the termination has been effected.
For accounting purposes, the unallocated
39
41
shares are considered Treasury Stock at December 31, 2000.
Effective August 1, 2000, cash contributions are made to the Company's existing
defined contribution 401(k) plan in lieu of Company Common Stock previously
contributed to ESOP participants and the Company anticipates making additional
discretionary cash contributions to former ESOP participants over the next three
years, for which the Company estimates the costs to be $2 million per year. Also
in 2000, the Company incurred a $5.1 million non-cash charge for the write-off
of the related deferred tax asset, due to its ESOP tax benefits, that otherwise
would have been realized had the ESOP continued, will not be utilized in future
periods. This charge is reported within the caption "Income tax expense" in the
consolidated statement of operations.
9. INCOME TAXES
The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------
IN THOUSANDS 2000 1999 1998
- --------------------------------------------------
Current taxes Federal $ -- $12,569 $22,871
State 1,009 2,264 1,862
Foreign 8,999 10,535 11,099
---------------------------
10,008 25,368 35,832
Deferred taxes
Federal 8,669 2,596 5,311
State 749 (1,020) (387)
Foreign 2,776 6,613 1,359
---------------------------
12,194 8,189 6,283
---------------------------
Total provision $22,202 $33,557 $42,115
- --------------------------------------------------
The 1999 and 1998 provision excludes $0.8 million and $2.0 million,
respectively, for the income tax effect of the extraordinary loss. (See Note 6).
The components of income before taxes for U.S. and foreign operations were $23.4
million and $24.2 million, respectively, for 2000, $38.7 million and $32.8
million, respectively, for 1999, and $81.2 million and $40.1 million,
respectively, for 1998.
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate is provided below:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
- ------------------------------------------------
U.S. federal statutory
rate 35.0% 35.0% 35.0%
State taxes 0.8 3.2 1.5
Foreign 2.2 0.8 (1.8)
Valuation allowance -- (1.3) --
Merger and
Restructuring charge -- 11.3 --
ESOP 10.6 -- --
Other, net (1.9) (2.1) --
-----------------------
Effective rate 46.7% 46.9% 34.7%
- ------------------------------------------------
Components of deferred tax assets and liabilities were as follows:
DECEMBER 31,
-------------------
IN THOUSANDS 2000 1999
- ----------------------------------------------
Accrued expenses and
reserves $ 9,083 $ 9,044
ESOP -- 5,067
Employee benefits/pension 10,730 6,352
Inventory 3,295 2,445
Accrued warranty 7,455 8,202
Restructuring reserve 3,842 4,599
Deferred debt costs 1,405 --
Net operating loss 6,690 9,429
Plant, equipment and
intangibles (20,678) (10,613)
Underbillings (7,815) (7,734)
Other 1,301 (31)
-------------------
15,308 26,760
Valuation allowance (8,641) (8,641)
-------------------
Net deferred tax assets $ 6,667 $ 18,119
-------------------
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance for certain net operating loss carryforwards
and for losses anticipated to produce no tax benefit. Although realization of
the net deferred tax asset is not assured, management believes that it is more
likely than not that the net deferred tax asset will be realized.
The Company's net operating loss carryforward for the year ended December 31,
2000 is $18.9 million, and will expire in 2010.
40
42
10. EARNINGS PER SHARE
The computation of earnings per share is as follows:
YEAR ENDED DECEMBER 31,
In thousands, ---------------------------
EXCEPT PER SHARE 2000 1999 1998
- --------------------------------------------------
BASIC
Income before
extraordinary item
applicable to
common shareholders $25,393 $37,942 $79,196
Divided by:
Weighted average
shares
outstanding 43,318 43,287 42,750
Basic earnings per
share before
extraordinary item $ 0.59 $ 0.88 $ 1.85
- --------------------------------------------------
DILUTED
Income before
extraordinary item
applicable to
common shareholders $25,393 $37,942 $79,196
Divided by the sum
of:
Weighted average
shares
outstanding 43,318 43,287 42,750
Assumed conversion
of dilutive stock
options 64 947 1,391
---------------------------
Diluted shares
outstanding 43,382 44,234 44,141
Diluted earnings per
share before
extraordinary item $ 0.59 $ 0.86 $ 1.79
- --------------------------------------------------
Options to purchase approximately 4.2 million, 700,000 and 200,000 shares of
Common Stock were outstanding in 2000, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price exceeded the average market price of the common shares.
11. STOCK-BASED COMPENSATION PLANS
STOCK OPTIONS Under the 2000 Stock Incentive Plan (the 2000 Plan), the Company
may grant options to employees for an initial amount of 1.1 million shares of
Common Stock. This amount is subject to annual modification based on a formula.
Under the formula, 1.5% of total common shares outstanding at the end of the
preceding fiscal year (excluding any shares held by the ESOP or the related
trust) are added to shares available for grant under the 2000 Plan. Based on the
adjustment, the Company had approximately 1.8 million shares available for 2000
grants and has available approximately 1,150,078 shares through the end of
fiscal 2001. The shares available for grants on any given date may not exceed
15% of Wabtec's total common shares outstanding (excluding any shares held by
the ESOP or the related trust). Generally, the options become exercisable over
three and five-year vesting periods and expire ten years from the date of grant.
As part of a long-term incentive program, in 1998, the Company granted options
to purchase up to 500,020, to certain executives under a plan that preceded the
2000 Plan. The option price is $20 per share. The options vest 100% after eight
years and are subject to accelerated vesting after three years if the Company
achieves certain earnings targets as established by the compensation committee
of the board of directors. No further grants may be made under this plan.
The Company also has a non-employee director's stock option plan under which
500,000 shares of Common Stock are reserved for issuance. Through year-end 2000,
the Company granted nonqualified stock options to non-employee directors to
purchase a total of 110,000 shares.
EMPLOYEE STOCK PURCHASE PLAN In 1998, the Company adopted an employee stock
purchase plan (ESPP). The ESPP had 500,000 shares available for issuance.
Participants can purchase the Company's Common Stock at 85% of the lesser of
fair market value on the first or last day of each offering period. Stock issued
under this plan thru December 31, 2000 was 134,241 shares.
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
41
43
amortized to expense over the options' vesting period.
YEAR ENDED DECEMBER 31,
In thousands, ---------------------------
EXCEPT PER SHARE 2000 1999 1998
- --------------------------------------------------
Net income
As reported $25,393 $36,623 $73,851
Pro forma 20,601 31,996 69,250
Diluted earnings per
share
As reported $ 0.59 $ 0.83 $ 1.67
Pro forma 0.47 0.72 1.57
- --------------------------------------------------
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:
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
- -------------------------------------------------
Dividend yield .40% .30% .20%
Risk-free interest rate 5.090% 5.875% 4.560%
Stock price volatility 46.74 36.58 29.10
Expected life (years) 5.0 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.
A summary of the Company's stock option activity and related information for the
years indicated follows:
2000 1999 1998
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------------
Beginning of year...................... 4,977,008 $15.14 5,340,182 $16.29 4,744,533 $14.64
Granted................................ 1,310,000 10.81 173,642 24.33 1,091,908 20.99
Exercised.............................. (581,318) 6.20 (361,664) 11.64 (277,158) 14.39
Canceled............................... (316,293) 20.82 (175,152) 15.03 (219,101) 15.86
--------- ---------- ---------
End of year............................ 5,389,397 $14.74 4,977,008 $15.14 5,340,182 $16.29
========= ========== =========
Exercisable at end of year............. 3,621,317 3,958,854 2,116,820
Available for future grant............. 1,150,078 678,028 1,213,334
Weighted average fair value of options
granted during the year.............. $ 5.97 $9.04 $8.98
- ------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2000:
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE
RANGE OF EXERCISE PRICES AS OF 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/00
- ---------------------------------------------------------------------------------------------
$ 3.86--$ 8.63 112,941 5.3 $ 5.14 107,941
$ 9.54--$ 9.54 695,000 9.9 $ 9.54 --
$ 9.88--$10.86 610,839 6.1 $10.64 535,839
$11.00--$12.75 772,625 8.0 $12.16 292,625
$14.00--$14.00 1,577,256 5.1 $14.00 1,577,256
$14.53--$19.91 556,675 7.3 $18.77 553,425
$20.00--$20.00 656,020 7.8 $20.00 171,690
$20.09--$31.63 408,041 8.2 $25.82 382,541
- ---------------------------------------------------------------------------------------------
5,389,397 7.0 $14.74 3,621,317
- ---------------------------------------------------------------------------------------------
42
44
RESTRICTED STOCK AWARD In 1998, the Company granted 15,000 shares of restricted
Common Stock to an officer. The shares vest according to a vesting schedule over
a three-year period. The grant date market value totaled $372,188 and is being
amortized to expense over the vesting period. Unamortized compensation is
recorded as a component of shareholders' equity.
EXECUTIVE RETIREMENT PLAN Under the 1997 Executive Retirement Plan, the Company
may award its Common Stock to certain employees including certain executives who
did not participate in the ESOP. The plan was terminated in August 2000 through
which time, 50,031 shares had been awarded with a fair market value of
approximately $859,027.
With respect to the Restricted Stock Award and the Executive Retirement Plan,
compensation expense is recognized in the consolidated statement of operations.
12. OPERATING LEASES
The Company leases office and manufacturing facilities under operating leases
with terms ranging from one to fifteen years, excluding renewal options.
The Company has sold remanufactured locomotives to various financial
institutions and leased them back under operating leases with terms from five to
20 years.
Total net rental expense charged to operations in 2000, 1999, and 1998 was $7.8
million, $8.6 million and $6.2 million, respectively. Certain of the Company's
equipment rental obligations under operating leases pertain to locomotives,
which are subleased to customers under both short-term and long-term agreements.
The amounts above are shown net of sublease rentals of $4.3 million, $5.7
million and $7.6 million for the years 2000, 1999 and 1998, respectively.
Future minimum rental payments under operating leases with remaining
noncancelable terms in excess of one year are as follows:
IN THOUSANDS REAL SUBLEASE
YEAR ESTATE EQUIPMENT RENTALS TOTAL
- --------------------------------------------------------------
2001 $5,862 $ 7,399 $(3,294) $ 9,967
2002 5,012 5,457 (2,708) 7,761
2003 4,643 4,888 (2,716) 6,815
2004 3,352 5,743 (2,702) 6,393
2005 2,205 4,100 (2,472) 3,833
2006 and after $5,352 $10,709 $(5,183) $10,878
- --------------------------------------------------------------
13. STOCKHOLDERS' AGREEMENTS
As of December 31, 2000, the approximate ownership interests in the Company's
Common Stock are held by management (13%), the ESOP (22%), the investors
consisting of Vestar Equity Partners, L.P., Harvard Private Capital Holdings,
Inc., American Industrial Partners Capital Fund II, L.P. (14%), and all others
including public shareholders (51%).
A Stockholders Agreement exists between management and the investors referred to
above that provides for, among other things, the composition of the Board of
Directors as long as certain minimum stock ownership percentages are maintained,
restrictions on the disposition of shares and rights to request the registration
of the shares.
The shares held by the ESOP (established January 31, 1995) are subject to the
terms of the related ESOP Loan Agreement, Employee Stock Ownership Trust
Agreement, Employee Stock Ownership Plan and the Pledge Agreement. Although the
ESOP has terminated, the unallocated shares remain with the trustee until all
regulatory and administrative actions are completed. The ESOP is further
described in Note 8.
14. PREFERRED STOCK
The Company's authorized capital stock includes 1,000,000 shares of preferred
stock. The Board of Directors has the authority to issue the preferred stock and
to fix the designations, powers, preferences and rights of the shares of each
such class or series, including dividend rates, conversion rights, voting
rights, terms of redemption and liquidation preferences, without any further
vote or action by the Company's shareholders. The rights and preferences of the
preferred stock would be superior to those of the common stock. At December 31,
2000 and 1999 there was no preferred stock issued or outstanding.
15. COMMITMENTS AND CONTINGENCIES
The Company is subject to a variety of environmental laws and regulations
governing discharges to air and water, the handling, storage and disposal of
hazardous or solid waste materials and the remediation of contamination
associated with releases of hazardous substances. The Company believes its
operations currently comply in all material respects with all of the various
environmental laws and regulations applica-
43
45
ble to our business; however, there can be no assurance that environmental
requirements will not change in the future or that we will not incur significant
costs to comply with such requirements.
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, through one of its operating subsidiaries, has been named, along
with other parties, as a Potentially Responsible Party (PRP) under the North
Carolina Inactive Sites Response Act because of an alleged release or threat of
release of hazardous substances at the "Old James Landfill" site in North
Carolina. The Company believes unreimbursed costs, if any, associated with the
cleanup activities at this site will not be material, and as a result of the
indemnification provisions referred to above and an insurance policy from Rocky
Mountain International Insurance Ltd., which has acknowledged coverage and is
currently paying on the claim. The Company has not established a reserve for
such costs.
The Company's operations do not use and its products do not contain any
asbestos. Asbestos actions have been filed against the Company and certain of
its affiliates. These cases involve products manufactured prior to the time the
Company was formed. The Company has not incurred any significant costs related
to these asbestos claims as the claims are indemnified by the companies who
manufactured the products in question or are covered by insurance. Management
believes that these claims will not be material; and accordingly, the financial
statements do not reflect any costs or reserves for such claims.
BOISE, IDAHO
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 Boise Locomotive
Company 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. The Company has accrued $3.2 million at December 31,
2000, the estimated remaining costs for remediation. The Company was in
compliance with the Permit at December 31, 2000.
MOUNTAINTOP, PENNSYLVANIA
Foster Wheeler Energy Corporation ("FWEC") the seller of the Mountaintop
property to the predecessor of one of the Company's subsidiaries in 1989, agreed
to indemnify the Company's predecessor and its successors and assigns against
certain identified environmental liabilities for which FWEC executed a Consent
Order Agreement with the Pennsylvania Department of Environmental Protection
(PADEP) and EPA. Management believes that this indemnification arrangement is
enforceable for the benefit of the Company and that FWEC has the financial
resources to honor its obligations under this indemnification arrangement.
MATTOON, ILLINOIS
Prior to the Company's acquisition of Young Radiator, Young agreed to clean up
alleged contamination on a prior production site in Mattoon, Ill. The Company is
in the process of recharacterizing the site with the state of Illinois and now
estimates the costs to remediate the site to be approximately $700,000, which
has been accrued at December 31, 2000.
RACINE, WISCONSIN
Young ceased manufacturing operations at its Racine facility in the early
1990's. Investigations prior to the acquisition of Young revealed some levels of
contamination on the Racine property and the Company has begun remediation
efforts. The Company has initiated a comprehensive site evaluation with the
state of Wisconsin and believes this governing body is generally in agreement
with the findings. The Company has accrued approximately $700,000 at December
31, 2000 as its estimate of remaining restoration costs.
GE HARRIS
On November 3, 2000 the company settled the suit brought against it by GE-Harris
Railway Electronics, L.L.C. and GE-Harris Railway Electronics Services, L.L.C.
(collectively, "GE-Harris"). In exchange for settlement of the suit, the Company
agreed to deliver $2 million worth of products for GE-Harris by De-
44
46
cember 15, 2000, which the Company expensed in the fourth quarter of 2000. In
addition, the Company will pay GE-Harris $7 million in exchange for a license of
certain intellectual property.
The Company has other contingent obligations relating to certain sale-leaseback
transactions for which reserves have been established.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of the date
hereof, the Company is involved in no litigation that the Company believes will
have a material adverse effect on its financial condition, results of operations
or liquidity.
16. 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, traction motors, on-board electronic systems and
train coupler equipment. Revenues are derived from OEM and locomotive overhauls,
aftermarket sales and from freight car repairs and services.
TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, rail and busses) that include braking 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 before merger and restructuring charges. Corporate activities
include general corporate expenses, elimination of intersegment transactions,
interest income and expense and other unallocated charges. Since certain
administrative and other operating expenses and other items have not been
allocated to business segments, the results in the below tables are not
necessarily a measure computed in accordance with generally accepted accounting
principles and may not be comparable to other companies.
Segment financial information for 2000 is as follows:
FREIGHT TRANSIT CORPORATE MERGER AND
IN THOUSANDS GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ------------------------------------------------------------------------------------------------------
Sales to external customers............ $749,687 $278,289 -- -- $1,027,976
Intersegment sales/(elimination)....... 10,189 570 $ (10,759) --
-------------------------------------------------------------
Total sales....................... $759,876 $278,859 $ (10,759) -- $1,027,976
-------------------------------------------------------------
-------------------------------------------------------------
Income from operations................. $108,548 $ 27,440 $ (17,353) $(29,155) $ 89,480
Interest expense and other............. -- -- (41,885) -- (41,885)
-------------------------------------------------------------
Income before income taxes and
extraordinary item................ $108,548 $ 27,440 $ (59,238) $(29,155) $ 47,595
-------------------------------------------------------------
-------------------------------------------------------------
Depreciation and amortization.......... $ 31,142 $ 7,971 $ 2,549 -- $ 41,662
Capital expenditures................... 16,841 6,742 2,752 -- 26,335
Segment assets......................... 734,378 197,487 52,182 -- 984,047
- ------------------------------------------------------------------------------------------------------
45
47
Segment financial information for 1999 is as follows:
FREIGHT TRANSIT CORPORATE MERGER AND
IN THOUSANDS GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ------------------------------------------------------------------------------------------------------
Sales to external customers............ $882,866 $238,202 -- -- $1,121,068
Intersegment sales/(elimination)....... 26,614 -- $ (26,614) -- --
-------------------------------------------------------------
Total sales....................... $909,480 $238,202 $ (26,614) -- $1,121,068
-------------------------------------------------------------
-------------------------------------------------------------
Income from operations................. $162,350 $ 21,279 $ (18,763) $ (48,857) $ 116,009
Interest expense and other............. -- -- (44,510) -- (44,510)
-------------------------------------------------------------
Income before income taxes and
extraordinary item................ $162,350 $ 21,279 $ (63,273) $ (48,857) $ 71,499
-------------------------------------------------------------
-------------------------------------------------------------
Depreciation and amortization.......... $ 32,600 $ 8,191 $ 1,823 -- $ 42,614
Capital expenditures................... 20,748 9,364 696 -- 30,808
Segment assets......................... 757,171 208,106 31,399 -- 996,676
- ------------------------------------------------------------------------------------------------------
Segment financial information for 1998 is as follows:
FREIGHT TRANSIT CORPORATE
IN THOUSANDS GROUP GROUP ACTIVITIES TOTAL
- -------------------------------------------------------------------------------------------------------
Sales to external customers................... $824,326 $211,801 -- $1,036,127
Intersegment sales/(elimination).............. 22,942 1,276 $(24,218) --
-----------------------------------------------------
Total sales.............................. $847,268 $213,077 $(24,218) $1,036,127
-----------------------------------------------------
-----------------------------------------------------
Income from operations........................ $150,974 $ 16,047 $(21,992) $ 145,029
Interest expense and other.................... -- -- (23,718) (23,718)
-----------------------------------------------------
Income before income taxes and extraordinary
item..................................... $150,974 $ 16,047 $(45,710) $ 121,311
-----------------------------------------------------
-----------------------------------------------------
Depreciation and amortization................. $ 27,724 $ 6,544 $ 2,347 $ 36,615
Capital expenditures.......................... 46,047 8,470 3,321 57,838
Segment assets................................ 738,230 182,398 46,754 967,382
- -------------------------------------------------------------------------------------------------------
The following geographic area data include net sales based on product shipment
destination. Long-lived assets consists of plant, property and equipment, net of
depreciation, which are resident in their respective countries.
NET SALES LONG-LIVED ASSETS
IN THOUSANDS ------------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------
United States........... $ 751,232 $ 829,725 $ 753,377 $146,576 $156,106 $157,362
Canada.................. 118,224 100,221 90,193 40,136 42,661 38,775
Mexico.................. 52,244 78,661 76,140 19,852 15,260 15,615
Other international..... 106,276 112,461 116,417 8,081 8,664 7,486
----------------------------------------------------------------------
Total.............. $1,027,976 $1,121,068 $1,036,127 $214,645 $222,691 $219,238
- ------------------------------------------------------------------------------------------------
Export sales from the Company's United States operations were $135.1 million,
$132.7 million and $111.8 million for the years ending December 31, 2000, 1999
and 1998, respectively. The following data reflects income from operations,
including merger and restructuring related charges by major geographic area,
attributed to the Company's operations within each of the following countries or
regions.
INCOME FROM OPERATIONS
IN THOUSANDS --------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------
United States.............................................. $ 55,262 $ 71,905 $ 98,446
Canada..................................................... 16,465 19,176 20,364
Mexico..................................................... 11,893 16,228 18,790
Other international........................................ 5,860 8,700 7,429
--------------------------------
Total................................................. $ 89,480 $116,009 $145,029
- ---------------------------------------------------------------------------------------------
46
48
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments approximate
their related carrying values, except for the following:
2000 1999
--------------------- ---------------------
CARRY FAIR CARRY FAIR
IN THOUSANDS VALUE VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------
9.375% Senior Notes............................ $(175,000) $(168,000) $(175,000) $(183,000)
Note Payable -- Pulse 9.5%..................... -- -- (16,990) (16,990)
Interest rate swaps............................ -- (1,900) -- 367
- -----------------------------------------------------------------------------------------------
Fair values of the fixed rate obligations were estimated using discounted cash
flow analyses. The fair value of the Company's interest rate swaps (see Note 6)
were based on dealer quotes and represent the estimated amount the Company would
pay to the counterparty to terminate the swap agreements.
18. SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
--------------------------------------------
FIRST SECOND THIRD FOURTH
IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------
2000
Net sales....................................... $258,859 $249,164 $255,163 $264,790
Gross profit.................................... 76,493 67,270 67,576 66,461
Operating income................................ 32,739 22,336 15,833 18,572
Income before taxes............................. 25,640 12,537 2,402 7,015
Income (loss) before extraordinary item......... 16,410 8,023 (3,529) 4,489
Net income (loss)............................... 16,410 8,023 (3,529) 4,489
Diluted earnings (loss) per common share before
extraordinary item............................ 0.38 0.18 (0.08) 0.10
Diluted earnings (loss) per common share........ $ 0.38 $ 0.18 $ (0.08) $ 0.10
1999
Net sales....................................... $298,478 $292,644 $260,881 $269,065
Gross profit.................................... 89,068 91,018 78,560 73,333
Operating income (loss)......................... 43,702 46,415 39,720 (13,828)
Income (loss) before taxes...................... 32,145 35,246 27,961 (23,853)
Income (loss) before extraordinary item......... 20,267 22,420 17,811 (22,556)
Net income (loss)............................... 19,798 22,420 17,811 (23,406)
Diluted earnings (loss) per common share before
extraordinary item............................ 0.46 0.50 0.40 (0.51)
Diluted earnings (loss) per common share........ $ 0.45 $ 0.50 $ 0.40 $ (0.53)
- ----------------------------------------------------------------------------------------------
The amounts in the table above differ from those previously reported on Form
10-Q for 1999 due to the merger of Westinghouse Air Brake Company and
MotivePower Industries, Inc. and the application of the pooling-of-interests
accounting and reporting method.
The Company recorded restructuring-related costs of approximately $2.3 million
or $0.03 in the first quarter of 2000, $5.6 million or $0.08, $13.4 million or
$0.20, and $7.8 million or $0.12, net of tax, per diluted share, in the second,
third and fourth quarters of 2000, respectively. The Company also recorded a
$4.4 million, or $0.07, net of tax, per diluted share gain on sale of a product
line in the second quarter of 2000. In the third quarter of 2000, in conjunction
with the ESOP termination, the Company incurred a $5.1 million non-cash, or
$0.12 per diluted share charge, for the write-off of the related deferred tax
asset. Also during the fourth quarter of 2000, the Company recorded a $2
million, or $0.03, net of tax, per diluted share charge for a legal settlement.
In the fourth quarter of 1999, the Company recorded merger and restructuring
costs of approximately $50 million or $0.91, net of tax, per diluted share,
which was the only merger charge in 1999.
47
49
19. MERGER AND RESTRUCTURING
CHARGES
The Company previously announced a merger and restructuring plan pursuant to the
merger of the Company and MotivePower Industries, Inc. ("the merger"). The
Company estimates synergies from the plan yielded approximately $20 million of
pre-tax cost savings in 2000 and reached an ongoing annualized savings of $25
million pre-tax, with such benefits realized through reduced cost of sales and
reduced selling, general and administrative expenses. The merger and
restructuring plan involves 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. The Company estimates the charges to complete the merger and
restructuring plan will now total $84 million pre-tax, due to an acceleration
and refinement of the plan, with approximately $50 million of the charge
previously expensed in 1999 and $29 million in 2000. The Company expects the
remaining charge of $5 million to be incurred in 2001.
The $79 million charge to date included the following announced actions:
-- Costs associated with the transaction for items such as investment bankers,
legal fees, accountant fees, SEC fees, etc.
-- Consolidation of the corporate headquarters to Wilmerding, PA and the
elimination of duplicate corporate functions.
-- Closing and moving of Young Radiator's Centerville, IA plant and
consolidating the Young administrative offices into the Company's Jackson,
TN facility from Racine, WI.
-- Closing and relocation of several production operations to San Luis Potosi,
Mexico.
-- Closing and relocation of several additional manufacturing operations.
-- Eliminating duplicate sales functions.
As of December 31, 2000, $6.3 million of the merger and restructuring charge was
still remaining as accrued on the balance sheet. The table below identifies the
significant components of the charge and reflects the accrual balance at that
date.
TRANSACTION LEASE
COSTS, IMPAIRMENTS
SEVERANCE AND AND
TERMINATION ASSET
IN THOUSANDS BENEFITS WRITEDOWNS OTHER TOTAL
- --------------------------------------------------------------------------------------------------
Beginning balance, January 1, 2000.............. $ 2,119 $5,738 $848 $8,705
Amounts provided in 2000........................ -- 1,178 285 1,463
Amounts paid in 2000............................ (2,119) (955) (837) (3,911)
----------------------------------------------
Balance at December 31, 2000.................... $ -- $5,961 $296 $6,257
- --------------------------------------------------------------------------------------------------
The lease impairment charges and asset writedowns are associated with the
Company's closing of the plants noted, the relocation of the corporate
headquarters, and the Company's evaluation of certain assets where projected
cash flows from such assets over their remaining useful lives are estimated to
be less than their carrying values. The other category represents other related
costs that have been incurred and not yet paid as of December 31, 2000.
20. CONTRACT UNDERBILLINGS
The Company has a long-term contract to provide maintenance and other locomotive
services. Details relative to cumulative costs incurred and revenues recognized
were as follows:
DECEMBER 31,
----------------------
IN THOUSANDS 2000 1999
- ---------------------------------------------
Costs incurred $ 248,865 $ 224,452
Estimated earnings 60,798 51,837
----------------------
309,663 276,289
Less billings to date (285,765) (248,579)
----------------------
Total contract
underbillings $ 23,898 $ 27,710
- ---------------------------------------------
48
50
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/ GREGORY T. H. DAVIES
------------------------------------
Gregory T. H. Davies, Chief
Executive Officer
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities indicated and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ WILLIAM E. KASSLING March 23, 2001
- --------------------------------------------
William E. Kassling, Chairman of the Board
/s/ GREGORY T. H. DAVIES March 28, 2001
- --------------------------------------------
Gregory T. H. Davies, President,
Chief Executive Officer and Director
/s/ ROBERT J. BROOKS March 21, 2001
- --------------------------------------------
Robert J. Brooks, Chief Financial Officer,
Chief Accounting Officer and Director
/s/ KIM G. DAVIS March 26, 2001
- --------------------------------------------
Kim G. Davis, Director
/s/ GILBERT E. CARMICHAEL March 21, 2001
- --------------------------------------------
Gilbert E. Carmichael, Director and Vice
Chairman
/s/ EMILIO A. FERNANDEZ March 23, 2001
- --------------------------------------------
Emilio A. Fernandez, Director and Vice
Chairman
/s/ LEE B. FOSTER, II March 20, 2001
- --------------------------------------------
Lee B. Foster, II, Director
/s/ JAMES P. KELLEY March 19, 2001
- --------------------------------------------
James P. Kelley, Director
/s/ JAMES P. MISCOLL March 19, 2001
- --------------------------------------------
James P. Miscoll, Director
/s/ JAMES V. NAPIER March 21, 2001
- --------------------------------------------
James V. Napier, Director
/s/ JAMES C. HUNTINGTON, JR. March 20, 2001
- --------------------------------------------
James C. Huntington, Jr., Director
49
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Westinghouse Air Brake
Technologies Corporation included in this Form 10-K, and have issued our report
thereon dated February 12, 2001. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in the index in Item 14(a) 2 of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, based on our audits and the report of other auditors, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
February 12, 2001
50
52
SCHEDULE II
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31
BALANCE AT CHARGED/ CHARGED TO DEDUCTIONS
BEGINNING (CREDITED) TO OTHER FROM BALANCE AT
IN THOUSANDS OF PERIOD EXPENSE ACCOUNTS (1) RESERVES(2) END OF PERIOD
- ----------------------------------------------------------------------------------------------------------------
2000
Warranty and overhaul reserves....... $26,832 $16,352 $ -- $19,702 $23,482
Allowance for doubtful accounts...... 3,983 639 -- 673 3,949
Valuation allowance - taxes.......... 8,641 -- -- -- 8,641
Inventory reserves................... 21,543 8,261 252 12,747 17,309
Merger and restructuring reserve..... 8,705 1,463 -- 3,911 6,257
1999
Warranty and overhaul reserves....... $22,985 $10,805 $4,813 $11,771 $26,832
Allowance for doubtful accounts...... 3,530 1,409 117 1,073 3,983
Valuation allowance - taxes.......... 17,204 -- 7,163 1,400 8,641
Inventory reserves................... 16,862 14,480 886 10,685 21,543
Merger and restructuring reserve..... -- 50,184 -- 41,479 8,705
1998
Warranty and overhaul reserves....... $21,473 $13,956 $4,936 $17,380 $22,985
Allowance for doubtful accounts...... 2,439 906 712 527 3,530
Valuation allowance - taxes.......... 17,204 -- -- -- 17,204
Inventory reserves................... 10,219 6,170 4,590 4,117 16,862
- ----------------------------------------------------------------------------------------------------------------
(1) Reserves of acquired companies
(2) Actual disbursements and/or charges
51
53
INDEX TO EXHIBITS
FILING METHOD
(C) EXHIBITS -------------
2.1 Amended and Restated Agreement and Plan of Merger, as
amended (originally included as Annex A to the Joint Proxy
Statement/Prospectus) 8
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.3 Amended and Restated By-Laws of the Company, effective
November 19, 1999 8
4.1 Form of Indenture between the Company and The Bank of New
York with respect to the public offering of $100,000,000 of
9 3/8% Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1) 2
4.3 First Supplemental Indenture dated as of March 21, 1997
between the Company and The Bank of New York 5
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005,
Series B 7
4.5 Form of Note (included in Exhibit 4.4) 7
10.1 MotivePower Stock Option Agreement (originally included as
Annex B to the Joint Proxy Statement/Prospectus) 8
10.2 Westinghouse Air Brake Stock Option Agreement (originally
included as Annex C to the Joint Proxy Statement/Prospectus) 8
10.3 Voting Agreement dated as of September 26, 1999 among
William E. Kassling, Robert J. Brooks, Harvard Private
Capital Holdings, Inc. Vestar Equity Partners, L.P. and
MotivePower Industries, Inc. (originally included as Annex D
to the Joint Proxy Statement/Prospectus) 8
10.5 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.6 ESOP Loan Agreement dated January 31, 1995 between
Westinghouse Air Brake Company Employee Stock Ownership
Trust ("ESOP") and the Company (Exhibits omitted) 2
10.7 Employee Stock Ownership Trust Agreement dated January 31,
1995 between the Company and U.S. Trust Company of
California, N.A. 2
10.8 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
10.9 Amended and Restated Refinancing Credit Agreement dated as
of November 19, 1999 among the Company, various financial
institutions, ABN AMRO Bank N.V., The Chase Manhattan Bank,
and The Bank of New York (Schedules and Exhibits omitted) 9
10.10 Amended and Restated Stockholders Agreement dated as of
March 5, 1997 among the RAC Voting Trust ("Voting Trust"),
Vestar Equity Partners, L.P. ("Vestar Equity"), Harvard
Private Capital Holdings, Inc. ("Harvard"), American
Industrial Partners Capital Fund II, L.P. ("AIP") and the
Company 5
10.11 Common Stock Registration Rights Agreement dated as of
January 31, 1995 among the Company, Scandinavian Incentive
Holding B.V. ("SIH"), Voting Trust, Vestar Equity, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc.,
the Pulse Shareholders and ESOT (Schedules and Exhibits
omitted) 2
10.12 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust Trustees 2
52
54
FILING METHOD
(C) EXHIBITS -------------
10.13 Agreement of Sale and Purchase of the North American
Operations of the Railway Products Group, an operating
division of American Standard Inc., dated as of 1990 between
Rail Acquisition Corp. and American Standard Inc. (only
provisions on indemnification are reproduced) 2
10.14 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
10.15 Purchase Agreement dated as of June 17, 1992 among the
Company, Schuller International, Inc., Manville Corporation
and European Overseas Corporation (only provisions on
indemnification are reproduced) 2
10.16 Asset Purchase Agreement dated as of January 23, 1995 among
the Company, Pulse Acquisition Corporation, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc. and
the Pulse Shareholders (Schedules and Exhibits omitted) 2
10.17 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.18 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 7
10.20 Westinghouse Air Brake Company 1995 Non-Employee Directors'
Fee and Stock Option Plan, as amended 9
10.21 Employment Agreement between William E. Kassling and the
Company 2
10.22 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.23 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.24 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
10.25 Purchase Agreement dated as of September 19, 1996 by and
among Mark IV Industries, Inc., Mark IV PLC, and W&P Holding
Corp. (Exhibits and Schedules omitted) (Originally filed as
Exhibit No. 2.01) 3
10.26 Purchase Agreement dated as of September 19,1996 by and
among Mark IV Industries Limited and Westinghouse Railway
Holdings (Canada) Inc. (Exhibits and Schedules omitted)
(Originally filed as Exhibit No. 2.02) 3
10.27 Amendment No. 1 to Amended and Restated Stockholders
Agreement dated as of March 5, 1997 among the Voting Trust,
Vestar, Harvard, AIP and the Company 5
10.28 Common Stock Registration Rights Agreement dated as of March
5, 1997 among the Company, Harvard, AIP and the Voting Trust 5
10.29 1998 Employee Stock Purchase Plan 7
10.30 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and
Exhibits omitted) (Originally filed as Exhibit No. 2.01) 6
10.31 Amendment No. 1 dated as of October 5, 1998 to Sale
Agreement dated as of August 7, 1998 by and between Rockwell
Collins, Inc. and the Company (Originally filed as Exhibit
No. 2.02) 6
10.32 Westinghouse Air Brake Technologies Corporation 2000 Stock
Incentive Plan 10
53
55
FILING METHOD
(C) EXHIBITS -------------
10.33 Amendment No. 1, dated as of November 16, 2000, by and among
the Company and the Guarantors from Time to Time Party
Thereto, and the Banks From Time to Time Party Thereto, and
ABN AMRO Bank N.V. as bookrunner and co-syndication agent,
The Bank of New York, as co-syndication agent, Mellon Bank,
N.A., as documentation agent, and The Chase Manhattan Bank
USA, N.A., (successor in interest to Chase Manhattan Bank
Delaware), as an issuing bank, to the Amended and Restated
Refinancing Credit Agreement, dated as of November 19, 1999
among the Company, various financial institutions, ABN AMRO
Bank N.V., The Chase Manhattan Bank, and The Bank of New
York which was filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1999
(Exhibits omitted) 1
21 List of subsidiaries of the Company 1
23 Consent of Arthur Andersen LLP 1
23.1 Consent of Deloitte & Touche LLP 1
99 Annual Report on Form 11-K for the year ended December 31,
2000 of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust 1
FILING METHOD
-------------
1 Filed herewith.
2 Filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 33-90866).
3 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 3, 1996.
4 Filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-39159).
5 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1997.
6 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 5, 1998.
7 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1998.
8 Filed as part of the Company's Registration Statement on
Form S-4 (No. 333-88903).
9 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1999.
10 Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2000.
54