WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001

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:

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 27, 2002, 43,288,935 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 $488.4 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, 2002 are incorporated by reference into Part
III of this Form 10-K.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

1

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.

In November 2001, Wabtec sold certain assets to GE Transportation Systems (GETS)
for $240 million in cash. The assets sold primarily included locomotive
aftermarket products and services for which Wabtec is not the original equipment
manufacturer. All of these assets had been part of MotivePower. The results for
these businesses, along with other businesses that the Company has decided to
exit, are classified as discontinued operations throughout this report. Prior
period results were restated for the discontinued operations.

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
4,436 full time employees at facilities throughout North America and around the
world.

The Company believes that it maintains a market share of 50% or more 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, cooling equipment, switcher and commuter locomotives, couplers, door
controls and draft gears. The Company aggressively pursues technological
advances for both new product development and product enhancements.

Management and insiders of the Company own approximately 23% of Wabtec's
outstanding shares, with the remaining shares held by investment companies and
individuals. 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 provides products and services primarily for the global freight rail
and passenger transit industries, with about 50 percent of its sales to the
aftermarket. About 85 percent of the Company's sales are in North America. The
Company's primary customers are freight and passenger railroads, and
manufacturers of transportation vehicles such as locomotives, freight cars,
subway cars and buses. As such, the Company's operating results are strongly
influenced by the level of activity, financial condition and capital spending
plans 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, particularly in the aftermarket. Government investment in public rail
transportation also plays a significant role. Additionally, railroads
continuously seek to increase the efficiency and productivity of their rail
operations to improve profitability, which has resulted in the purchase of new,
more-efficient equipment.

In 2001, U.S. freight railroads faced difficult market conditions due to the
slowdown in the U.S. economy. Revenue ton-miles (a main indicator of rail
activity; defined as weight times distance traveled by Class I railroads),
increased only about 1 percent and car loadings decreased about 1 percent
compared to 2000. The average capacity per car continues to increase, so that
more weight can be carried in each car. In response to these difficult market
conditions, railroads reduced purchases of new locomotives and freight cars, and
continued low maintenance spending on their existing fleets. These actions
reduced demand for the Company's products and services, particularly in its
higher-margin businesses. The Company expects that railroads will return to a
more typical pattern of maintenance spending when the level of activity in the
industry begins to show consistent increases, as the U.S. economy strengthens.

2

Currently, the active locomotive fleet in the North American market numbers
approximately 33,000 units, including heavy-haul freight locomotives, commuter
locomotives and lower-horsepower, short-haul and terminal locomotives. The
average number of new locomotives delivered in each of the past 10 years was
about 1,000 annually, but railroads have exceeded this figure in recent years,
as the introduction of new technologies has enabled the railroads to purchase
more-efficient and more-powerful locomotives to increase productivity. Many of
the Company's products help to provide this greater productivity. In 2001,
deliveries of new, heavy-haul locomotives were 1,085, down from 1,397 in 2000.
In 2002, the Company expects the industry to deliver about 700 new locomotives,
as railroads reduce capital spending. The Company expects new locomotive
purchases to rise slowly above this level during the next several years.

Currently, the active freight car fleet in North America numbers approximately
1.3 million. The average number of new freight cars delivered in each of the
past 10 years was about 50,000 annually. In 2001, new freight car deliveries
were 34,247, compared to 55,821 in 2000. The Company expects the industry to
deliver about 20,000 new freight cars in 2002, well below the average delivery
rate of the past 10 years and below what the Company believes is normal
replacement demand of about 40,000 units. The Company believes that the delivery
rate for the next several years will increase, as railroads and leasing
companies recognize the benefit of new technology and specialty cars designed to
increase efficiency and productivity.

The Company believes that its products and services offer railroads the ability
to reduce costs and increase productivity to meet their efficiency goals.
However, 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. The average delivery rate for new
transit vehicles in the past 10 years was about 500 units annually. In 2001, the
industry delivered 1,072 new rail transit vehicles, compared to 679 in 2000. In
2002, the Company expects deliveries to be about 1,230 units. These high
delivery rates primarily reflect increased orders placed by the Metropolitan
Transportation Authority of New York City. The primary New York City contract
will be completed by 2003, but a follow-on order is expected to be placed in
2002. As such, the Company expects the transit delivery rate to be in the range
of 600-800 units for the next several years.

BUSINESS SEGMENTS AND PRODUCTS

Approximately 50% of net sales in 2001 were directly to 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. The balance of the sales
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").

We provide products and services through two principal business segments, the
Freight Group and the Transit Group.

FREIGHT GROUP -- Includes components for new and existing 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 63%, 66%, and 72% in 2001, 2000 and 1999, respectively.

All of the assets sold to GETS were part of the Freight Group.

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

3

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, cooling equipment, gearing, compressors, air dryers, slack
adjusters, brake cylinders, and monitoring and control equipment for the
locomotive OEM and aftermarket.

We also manufacture switcher and commuter locomotives and provide maintenance
support for these locomotives. The Locomotive product line also includes
manufacturing and distribution of replacement, new and remanufactured components
and parts for regional railroads. As a supplier of proprietary OEM components
for locomotives manufactured by the Electro-Motive Division of General Motors
Corporation ("EMD") and the GE Transportation Systems unit of General Electric
Company, Wabtec also provides these components in the aftermarket directly to
railroad customers.

Demand for aftermarket components is influenced by rail traffic activity and the
maintenance requirements of the railroads.

- - 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 and services for passenger transit vehicles
(typically subway cars 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 37%, 34% and 28% in 2001, 2000 and 1999, 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 decrease in late
2002.

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
increased federal funding becomes available.

For additional information on our business segments, see Note 19 of "Notes to
Consolidated Financial Statements" included in Part II, Item 8 of this report.

STRATEGY

The Company is committed to building shareholder value by executing the
following four-point plan:

Focus on increasing sales to manufacturers of original equipment -- The Company
currently serves as a Tier I supplier to OEMs in certain markets, but it desires
to increase business with these customers. To achieve this goal, the Company
plans to focus on integrating its electrical, pneumatic and mechanical
technologies across business units and packaging them as systems. In doing so,
the Company expects to strengthen its position against competitors that do not
have the breadth and depth of Wabtec's product line.

Expand Globally -- We believe that international markets represent a significant
opportunity for future growth. Our net sales outside of the United States
comprised approximately 26%, 24% and 22% of total sales in 2001, 2000, and 1999,
respectively (see Note 19 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

4

railway suppliers having a strong presence in their local markets.

Accelerate New Product Development -- 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.

Implement Lean Principles to Improve 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 ("QPS"), 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.
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, 2001, and December 31, 2000,
and the expected year of recognition is as follows. The 2000 backlog has been
restated by reducing the amount for the discontinued operations.

The Company's contracts are subject to standard industry cancellation
provisions, including cancellations on short notice or upon completion of
designated stages. 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.

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, 2001, 2000, and 1999, the
Company incurred costs of approximately $33.2 million, $32.3 million and $34.4
million, respectively, on product development and improvement activities
(exclusive of manufacturing support). Such expenditures represented
approximately 4.2%, 4%, and 4.1% of net sales for the same periods,
respectively. From time to time, the Company conducts specific research projects
in conjunction with universities, customers and other railroad product
suppliers.

The Company's engineering and development program is largely focused upon train
control and 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

5

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 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 1990s. The SAB license expires December 31, 2003, but may be renewed
for additional one-year terms. The Company believes that the patents which are
covered by this license will expire prior to or concurrently with the license
expiration.

The Company has issued licenses to the two sole suppliers of railway air brakes
and related products in Japan, NABCO and Mitsubishi Electric Company. The
Company believes that each of these licensees has a Japanese market share of
approximately 50%. Both licenses were renewed for additional five-year terms in
2000. NABCO has been a licensee for over 78 years. The licensees pay an annual
license fee to the Company and also assist the Company by acting as liaisons
with key Japanese passenger transit vehicle builders for projects in North
America. The Company believes that its relationships with these licensees have
been beneficial to the Company's core transit business and customer
relationships in North America.

CUSTOMERS

A few customers within each business segment represent a significant portion of
the Company's net sales. One customer represented 11% of consolidated sales in
2001. 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 Company, a subsidiary of the
German air brake producer Knorr-Bremse AG (collectively, "NYAB/ Knorr"), is the
Company's principal overall OEM competitor. 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 GETS, and NYAB/ Knorr.

EMPLOYEES

At December 31, 2001, the Company had 4,436 full time employees, approximately
29% of whom are unionized. During 2001, the Company reduced employment by 13%,
excluding asset sales. Almost all of the employees subject to collective
bargaining agreements are within North America and these agreements are
generally effective through 2002, 2003 and 2004.

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.

6

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 typically 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 18 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. 18 of this report.

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 at
the Wilmerding, PA site.

(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.

8

ITEM 3. LEGAL PROCEEDINGS

Information with respect to legal proceedings is included in Note 18 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 2002.

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, Scientific Atlanta, Inc. and Parker Hannifin.

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 Febru-

9

ary 1995, Mr. Wesley served as Director, Investor and Public Relations of
Michael Baker Corporation.

PAUL E. GOLDEN has been President of the Company's Freight Car Group since
February of 2001. Prior to that, he was President of the Company's Cardwell
Westinghouse business unit from November 1999 until February of 2001.
Previously, Mr. Golden served as Vice President and General Manager of the
Cardwell Westinghouse business unit and as Director of WABCO Performance Systems
from June 1998 until November 1999. Prior to 1998, Mr. Golden held management
and operations positions with Danaher Corporation and Federal Mogul Corporation.

SCOTT E. WAHLSTROM has been Vice President, Human Resources since November 1999.
Previously, Mr. Wahlstrom was Vice President, Human Resources & Administration
from August 1996 until November 1999. From September of 1994 until August of
1996, Mr. Wahlstrom served as Director of Human Resources for MotivePower
Industries.

The executive officers are affirmed annually by the Board of Directors of the
Company.

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 27, 2002, there were 43,288,935 shares of Common Stock outstanding held by
1,115 holders of record. The high and low sales price of the shares and
dividends declared per share were as follows:

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 9 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report.

At the close of business on March 27, 2002, the Company's Common Stock traded at
$14.94 per share.

10

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.

(1) Income statement results have been restated for the 2001 sale of the
locomotive aftermarket business and related assets to GE and for other
businesses Wabtec is exiting. These businesses are classified as
discontinued operations. Balance sheet items have not been adjusted for
discontinued operations.

(2) In 2000, includes charges for merger and restructuring plan of $2 million
and legal settlement of $2 million. In 1999, includes charges for merger and
restructuring plan of $5.2 million.

(3) In 2001, includes charges for asset writedowns of $9.3 million consisting
primarily of an asset impairment related to the locomotive lease fleet of
$5.2 million, a writeoff of $1.8 million of an investment in Argentina and a
$1.5 million writedown of a facility to its estimated realizable value, and
severance costs of $1.7 million.

(4) In 2001, includes gain on asset sales of $685,000. In 2000, includes gain on
asset sale of $4.4 million. In 1998, includes gain on asset sale of $8.4
million.
(5) Includes the items noted above, as well as the following: In 2001, a $2
million tax benefit for research and development tax credits. In 2000, a
write-off of $5.1 million for a deferred tax asset relating to the
termination of the Employee Stock Ownership Plan (ESOP). In 1999, a charge
of $1.3 million for an extraordinary item related to an early extinguishment
of debt. Excluding all of these items, earnings per diluted share from
continuing operations were $0.49 in 2001 and $0.82 in 2000.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

In November 2001, Wabtec sold certain assets to GE Transportation Systems for
$240 million in cash. The assets sold primarily included locomotive aftermarket
products and services for which Wabtec is not the original equipment
manufacturer. The results for these businesses, along with several other small
non-core businesses that the Company has decided to exit, are classified as
discontinued operations throughout this report. Prior period results were
restated for the discontinued operations format.

Net sales of ongoing operations decreased by 3.4% from $811.2 million in 2000 to
$783.7 million in 2001. The major causes for the change and their effect on the
Company's 2001 results of operations and financial condition include decreases
in component sales due to the continuation of the weak freight market, and a
downturn in the locomotive overhaul market, offsetting improved sales in the
transit business due to increased governmental spending for transit equipment.

Net income for 2001 was $61.8 million, or $1.43 per diluted share, as compared
to $25.4 million, or $0.59 per diluted share in 2000. The results for 2001
include $47.8 million of income from discontinued operations (including a $41.5
million gain, net of tax, on the sale and writedown of certain businesses
classified as discontinued operations), a $9.3 million charge for asset
writedowns, a $3.7 million restructuring-related charge, a $685,000 gain on the
disposition of excess facilities, a $2 million research and development tax
credit and a $1.7 million charge for severance costs related to a 10 percent
salary workforce reduction. The 2000 results include $6.2 million of income from
discontinued operations, a $20.2 million merger and 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. Excluding these non-recurring and non-operating
items, earnings from continuing operations per diluted share would have been
$0.49 and $0.82 in 2001 and 2000, respectively.

MERGER AND RESTRUCTURING PLAN

In 2001, the Company completed a merger and restructuring plan with charges
totaling $71 million pre-tax, with approximately $49 million of the charge
expensed in 1999, $20 million in 2000 and $2 million in 2001. The plan involved
the elimination of duplicate facilities and excess capacity, operational
realignment and related workforce reductions, and the evaluation of certain
assets as to their perceived ongoing benefit to the Company.

As of December 31, 2001, $3.2 million of the merger and restructuring charge
still remained as accrued on the balance sheet. The accrual on the balance sheet
is discussed in greater detail in Note 22 of "Notes to Consolidated Financial
Statements" included in Part II, Item 8 of this report.

The Company began and completed a new restructuring plan for the Transit rail
business in 2001. The Company estimates synergies from the plan will yield
approximately $3 million of pre-tax cost savings in 2002 and beyond, with such
benefits realized through reduced cost of sales and reduced selling, general and
administrative expenses. The restructuring plan involved operational realignment
and related workforce reductions. The charges to complete the restructuring plan
totaled $2 million pre-tax.

The $2 million charge included costs associated with relocating several
production operations from Chicago to Montreal, including severance costs for
approximately 103 employees.

12

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 2001 adjusted column represents the reported income statement excluding
restructuring-related charges, asset writedowns, severance costs related to a 10
percent salary workforce reduction, research and development tax credits and the
gain on the sale of excess facilities. 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.

2001 COMPARED TO 2000

The following table sets forth the Company's net sales by business segment:

Net sales decreased $27.5 million or 3.4% to $783.7 million in 2001 from $811.2
million in 2000. 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 reflected a softening OEM market for freight cars, with 34,247
freight cars delivered in 2001 compared to 55,821 in 2000. Partially offsetting
these decreases were increases in Transit Group sales, due to increased
shipments

13

under the MTA contract. The Company estimates the OEM freight car and locomotive
industries will deliver 20,000 freight cars and 700 locomotives, respectively,
in 2002.

Gross profit decreased to $209.9 million in 2001 compared to $235.7 million in
the same period of 2000. Gross margin, as a percentage of sales, was 26.8%
compared to 29.1% in 2000. Gross margin is dependent on a number of factors
including pricing, sales volume and product mix. The decrease in gross profit
and margin is largely attributed to the effect of a decrease in sales volumes
(approximately $11 million in gross profit). The balance is principally a result
of changes to the sales mix primarily from a drop in the Freight Group of 8%
offset by an increase in the Transit Group of 5% and overall pricing pressures
in many product lines.

Total operating expenses as a percentage of net sales were 19.9% in 2001 and
19.5% in the same period a year ago. After excluding $9.3 million for asset
writedowns, $3.7 million for merger and restructuring charges and $1.7 million
for severance costs in 2001 and $18.2 million for 2000 merger and restructuring
charges, operating expenses would have been 18% and 17.2% of net sales,
respectively. Without the merger and restructuring charges in both periods and
the asset writedowns and severance costs in 2001, operating expenses would have
increased $1.5 million in 2001 as compared to 2000.

Income from operations totaled $54.1 million in 2001 compared with $77.8 million
in 2000 with operating margins of 6.9% and 9.6% respectively. After excluding
the merger and restructuring-related charges in both periods and the asset
writedowns and severance costs in 2001 and a $2 million legal settlement in
2000, operating income would have been $68.7 million and $100 million in 2001
and 2000, respectively, and 2001 operating margins as a percentage of sales
would have decreased to 8.8% from 12.3% in 2000. Lower adjusted operating income
resulted from decreased sales volumes in the Freight Group and changes in
product mix (see Note 19 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report).

Interest expense decreased 23.2% to $33.5 million in 2001 from $43.6 million in
2000. Debt, net of cash and equivalents, was $187.9 million at December 31, 2001
versus $534.1 million at the end of 2000. The decrease in interest expense is
primarily due to the lower debt amount as a result of working capital management
and the sale proceeds from GETS received in November 2001. The Company expects
interest expense in 2002 to be about $22 million.

In 2001, the Company recorded foreign exchange losses of $1.7 million. In
February 2000, the Company disposed of its transit electrification product line
for $5.5 million in cash and recognized a gain of $4.4 million. These items were
reported as other income (expense), net.

The effective income tax rate for 2001 was 24.2% as compared to 49.4% in 2000.
The Company expects the ongoing rate to be approximately 35-36%. The 2001 rate
includes the effect of research and development tax credits ($2 million).
Excluding this tax credit, the rate would have been 35%. 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. Excluding this effect, the
rate would be 36%.

2000 COMPARED TO 1999

The following table sets forth the Company's net sales by business segment:

Net sales decreased $32.9 million or 3.9% to $811.2 million in 2000 from $844.1
million 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 reflected 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.

Gross profit decreased to $235.7 million in 2000 compared to $274.9 million in
the same period of 1999. Gross margin, as a percentage of sales, was 29.1%
compared to 32.6% in 1999. Gross margin is dependent on a number of factors
including pricing, sales volume and product mix. The decrease in gross profit
and margin is largely attributed to the effect of a decrease in sales volumes
(approximately $13 million in gross profit). The balance is principally a
14

result of changes to the sales mix primarily from increased OEM component sales
of Transit Group products at lower margins than the Company's overall historical
results, pricing pressures, and manufacturing inefficiencies primarily related
to merger integration efforts.

Total operating expenses as a percentage of net sales were 19.5% in 2000 and
22.2% in the same period a year ago. After excluding the merger and
restructuring charges of $18.2 million in 2000 and $42.9 million in 1999,
operating expenses would have been 17.2% and 17.1% of net sales, respectively.
Without the merger and restructuring charges in both periods, operating expenses
would have decreased $4.6 million in 2000 as compared to 1999. This reduction
was primarily the result of continuing cost reduction programs.

Income from operations totaled $77.8 million in 2000 compared with $87.8 million
in 1999 with operating margins of 9.6% and 10.4% respectively. After excluding
the merger and restructuring related charges in both periods and a $2 million
legal settlement in 2000, operating income would have been $100 million and
$135.8 million in 2000 and 1999, respectively, and 2000 operating margins as a
percentage of sales would have decreased to 12.3% from 16.1% in 1999. Lower
adjusted operating income resulted from decreased sales volumes in the Freight
Group and changes in product mix (see Note 19 of "Notes to Consolidated
Financial Statements" included in Part II, Item 8 of this report).

Interest expense increased 4% to $43.6 million in 2000 from $42 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 49.4% as compared to 46.9% in 1999.
Excluding the effect of a one- time, non-cash write-off of the deferred tax
asset ($5.1 million) relating to the termination of the ESOP, 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%.

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.

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.

Operating cash flow in 2001 was $119.1 million as compared to $60.2 million in
the same period a year ago. Working capital decreased significantly during 2001
primarily due to a decrease in accounts receivable and inventory. During 2001
and 2000, cash outlays for merger and restructuring activities were
approximately $6.8 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
$125.9 and $89.2 million, respectively. This increase in operating cash flow in
2001 was primarily the result of improved working capital management.

Cash provided by investing activities increased in 2001 to $227.4 million versus
cash used by investing activities of $21.5 million a year ago. The 2001 amount
is primarily from the sale of businesses to GE for $240 million. In 2001, 2000
and 1999, the Com-

15

pany used $3.7 million, $650,000 and $14.5 million, respectively, for certain
business acquisitions. Capital expenditures for continuing operations were $20.7
million, $23.2 million and $24.1 million in 2001, 2000 and 1999, 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 2002 capital expenditures for equipment purchased for similar
purposes to approximate $21.5 million.

Cash used for financing activities was $297.2 million in 2001 versus $38 million
in 2000. During 2001, the Company reduced long-term debt by $298.3 million.
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 following table sets forth the Company's outstanding indebtedness at
December 31, 2001 and 2000. The revolving credit note and other term loan
interest rates are variable and dependent on market conditions.

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 $100 million convertible
revolving credit facility maturing in November 2004, with annual renewals each
November. 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. In November 2001, the Company
negotiated a further reduction in the 364-day facility from $213 million to $100
million as a result of the $200 million, net of tax, cash proceeds from the sale
of locomotive businesses to GE. At December 31, 2001, the Company had available
bank borrowing capacity, net of letters of credit, of approximately $288
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.

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

16

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 maximum credit agreement borrowings, average credit
agreement borrowings and weighted-average contractual interest rate on credit
agreement borrowings was $358 million, $272.7 million and 6.38%, respectively
for 2001. 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, 2001, the notional value
of interest rate swaps outstanding totaled $60 million and effectively changed
the Company's interest rate from a variable rate to a fixed rate of 8.70%. The
interest rate swap agreements mature in 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.

The Notes are callable at par in June 2002. The Company will evaluate whether
the Notes, or portions thereof, should be called at that time and replaced with
borrowings under the credit agreement.

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% and is payable in monthly
principal and interest installments. The proceeds of the bond provided 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 9 of "Notes to Consolidated Financial Statements"
included in Part II, Item 8 of this report.

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 to automatically increase if inflation were
to become significant.

17

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 transition to the Euro has not had 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, 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 its
variable-rate debt. After considering the effects of interest rate swaps,
further described below, the Company's variable rate debt represents 1% of total
long-term debt at December 31, 2001 and 51% in 2000. The variable portion is so
low because 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 9 of "Notes to Consolidated Financial
Statements" included in Part II, Item 8 of this report). At December 31, 2001,
an instantaneous 100 basis point increase in interest rates would have minimal
impact on the Company's annual earnings, assuming no additional intervention
strategies by management.

18

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 20 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, 2001, 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, 2001, approximately
74% of Wabtec's net sales are in the United States, 9% in Canada, 1% in Mexico,
and 16% in other international locations, primarily Europe. (See Note 19 of
"Notes to Consolidated Financial Statements" included in Part II, Item 8 of this
report). At December 31, 2001, the Company does not believe changes in foreign
currency exchange rates represent a material risk to results of operations,
financial position, or liquidity.

Wabtec's market risk exposure is not substantially different from its exposure
at December 31, 2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Under its provisions, all goodwill and
other intangible assets with indefinite lives will no longer be routinely
amortized under a straight-line basis of estimated useful life. Instead, they
will be subject to assessments for impairment by applying a fair-value-based
test. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and upon adoption, the Company will cease to record approximately $8
million of goodwill amortization. The Company has not completed the process of
evaluating whether any impairment will result from adopting it.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under its
provisions, all tangible long-lived assets, whether to be held and used or to be
disposed of by sale or other means, will be tested for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company early adopted SFAS 144 in the third quarter of 2001 (see
Note 3 of "Notes to Consolidated Financial Statements" included in Part II, Item
8 of this report).

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, 2002. The definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2001.
Information relating to the executive officers of the Company is set forth in
Part I.

19

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:

24

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, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cashflows for each of the three years in
the period ended December 31, 2001. 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. 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, 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania
February 18, 2002

25

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.
26

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.
27

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.
28

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, 1998 $652 $314,155 $(192,190) $(128,472) $159,135 $ 3,951
Cash dividends.................. (986)
Purchase of treasury stock...... (10,630)
Compensatory stock options
granted through a Rabbi
Trust......................... (2,091) 2,091
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
Net income...................... $36,623 36,623
Translation adjustment.......... 1,857

-----------------------------------------------------------------------------------
$38,480
=======
BALANCE, DECEMBER 31, 1999 $ 6,595
$654 $318,357 $(201,711) $(125,491) $194,772
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..... 31
(3,697) 9,545
Allocation of ESOP shares, net
of tax effect.................
(434) 1,749
Compensatory stock options
granted through a Rabbi
Trust......................... (5,726)
5,726
ESOP Termination................
(40,732) (83,010) 123,742
Net income...................... $25,393
25,393
Translation adjustment.......... (4,184)

-----------------------------------------------------------------------------------
$21,209
=======
BALANCE, DECEMBER 31, 2000...... $ 900
$654 $273,494 $(281,665) -- $218,470
Cash dividends..................
(1,681)
Purchase of treasury stock......
(585)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of tax..... 1
(820) 4,398
Compensatory stock options
granted through a Rabbi
Trust......................... (363)
363
Net income...................... $61,780
61,780
Translation adjustment.......... (5,170)
Cumulative change accounting for
derivative financial
instruments, net of tax....... (1,234)
Unrealized losses on derivatives
designated and qualified as
cash flow hedges, net of
tax........................... (1,310)
Additional minimum pension
liability, net of tax......... (6,479)
-------
$47,587

=======
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001...... $ 538
$654 $272,674 $(277,489) -- $278,569

--------------------------------------------------------------------

--------------------------------------------------------------------

ACCUMULATED
OTHER
COMPREHENSIVE
In thousands INCOME (LOSS)
- -------------------------------------------------------------

BALANCE, DECEMBER 31, 1998 $(13,155)
Cash dividends..................
Purchase of treasury stock......
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.......... 1,857
-----------
---------------------------------------
BALANCE, DECEMBER 31, 1999 $(11,298)
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.........................
ESOP Termination................
Net income......................
Translation adjustment.......... (4,184)
-----------
------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000...... $(15,482)
Cash dividends..................
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.........................
Net income......................
Translation adjustment.......... (5,170)
Cumulative change accounting for
derivative financial
instruments, net of tax....... (1,234)
Unrealized losses on derivatives
designated and qualified as
cash flow hedges, net of
tax........................... (1,310)
Additional minimum pension
liability, net of tax......... (6,479)
=======
-------------------------------------------------------------------- ----------
- --
BALANCE, DECEMBER 31, 2001...... $(29,675)
------------
--------------------------------------------------------------------
------------
--------------------------------------------------------------------

The accompanying notes are an integral part of these statements
29

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, cooling
equipment, switcher and commuter 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 4,436 full time
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
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.

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 (see Note 6).

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 property, plant and equipment.

Accelerated depreciation methods are utilized for income tax purposes (see Note
7).

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 8).

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

30

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 23).

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 14 for related pro forma
disclosures).

RESEARCH AND DEVELOPMENT Research and development costs are charged to expense
as incurred. For the years ended December 31, 2001, 2000 and 1999, the Company
incurred costs of approximately $33.2 million, $32.3 million and $34.4 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 $14.1 million, $11.2 million and
$7.3 million for 2001, 2000 and 1999, respectively. Warranty reserves were $15.4
and $23.5 million at December 31, 2001 and 2000, 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 9).

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, resulting in the recording of
current assets of $266,000, long term assets of $399,000, current liabilities of
$760,000, long term liabilities of $1.1 million, and a decrease in other
comprehensive loss of $1.2 million. 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 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 12).

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 13).

OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as net
income and all other nonowner changes in shareholders' equity. The Company's
accumulated other comprehensive income (loss) consists of foreign currency
translation
31

adjustments, unrealized losses on derivatives designated and qualified as cash
flow hedges and pension related 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. One customer accounted for 11% of the Company's consolidated net
sales in 2001. No one customer accounted for more than 10% of the Company's
consolidated net sales in 2000 or 1999. The allowance for doubtful accounts was
$2.3 million and $3.9 million as of December 31, 2001 and 2000, respectively.

EMPLOYEES As of December 31, 2001, approximately 29% of the Company's workforce
was covered by collective bargaining agreements. These agreements are generally
effective through 2002, 2003 and 2004.

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.

RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets."
Under its provisions, all goodwill and other intangible assets with indefinite
lives will no longer be routinely amortized under a straight-line basis of
estimated useful life. Instead, they will be subject to assessments for
impairment by applying a fair-value-based test. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and upon adoption, the Company
will cease to record approximately $8 million of goodwill amortization. The
Company has not completed the process of evaluating whether any impairment will
result from adopting it.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under its
provisions, all tangible long-lived assets, whether to be held and used or to be
disposed of by sale or other means, will be tested for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company early adopted SFAS 144 in the third quarter of 2001.

3. DISCONTINUED OPERATIONS

On November 1, 2001, the Company completed the sale of certain assets to GE
Transportation Systems (GETS) for $240 million in cash, subject to adjustment
for the finalization of the value of the net assets sold. The assets sold
primarily include locomotive aftermarket products and services for which Wabtec
is not the original equipment manufacturer. Under the terms of the sales
agreement, the Company has agreed to indemnify GETS for, among other things,
certain potential third party, off site environmental cleanup or remediation
costs. The Company has purchased an insurance policy to mitigate its exposure
for the environmental indemnities. The Company reported a $48.7 million after
tax gain on the sale in 2001.

In the fourth quarter of 2001, the Company decided to exit other businesses and
has put these businesses up for sale. The net amount of these businesses has
been written down to their estimated realizable value and has been classified as
Assets Held for Sale on the balance sheet. The Company reported a $7.2 million
after tax loss on the writedown of these entities.

In accordance with SFAS 144, the operating results of these businesses have been
classified as discontinued operations for all years presented and are summarized
as of December 31, as follows:

32

A proforma condensed balance sheet removing the discontinued operations balance
sheets as of December 31, 2000 is as follows:

4. SUPPLEMENTAL CASH FLOW DISCLOSURES

5. 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
33

options approximately 2 million shares, in a transaction that was accounted for
by the pooling-of-interests accounting method.

During 2001, 2000 and 1999, the Company completed the following acquisitions:

i) In October 2001, the Company purchased certain assets of Milufab, a supplier
of door panels for subway trains for $3.7 million.

ii) In June 2001, the Company purchased certain assets of Core Systems, a
company that provides repair billings in the rail industry for $743,000.

iii) In July 2000, the Company purchased certain assets of Iron Fireman, a
manufacturer of transportation boiler equipment for $650,000.

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.

v) 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.

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 was
approximately $14 million was allocated to goodwill and is being amortized on a
straight-line basis over 40 years. Effective January 1, 2002, goodwill will not
be amortized upon adoption of SFAS No. 142 (see Note 2).

6. INVENTORY

The components of inventory, net of reserves, were:

The as adjusted 2000 column above represents the removal of the discontinued
operations (see Note 3).

7. PROPERTY, PLANT & EQUIPMENT

The major classes of depreciable assets are as follows:

The as adjusted 2000 column above represents the removal of the discontinued
operations (see Note 3).

8. INTANGIBLES

Intangible assets of the Company, other than goodwill, consist of the following:

At December 31, 2001 and 2000, goodwill totaled $198 million and $226.6 million,
net of accumulated amortization of $32.6 million and $29.7 million,
respectively.

34

9. LONG-TERM DEBT

Long-term debt consisted of the following:

36

10. EMPLOYEE BENEFIT PLANS

A 1% change in the assumed health care cost trend rate will change the amount of
expense recognized for the postretirement plans by approximately $466,000 for
each future year, and change the accumulated postretirement benefit obligation
by approximately $2.8 million.

The composition of plan assets consists primarily of equities, corporate bonds,
governmental notes and temporary investments.

In 2001 and 2000, as a result of an early retirement package offered to certain
union employees, the Company incurred charges of approximately $1.6 million and
$3 million, respectively, reflected above as a special termination benefit.

Included in the above table, the Company had benefit plans which had $1.4
million of plan assets that were in excess of pension plan benefit obligations
at December 31, 2001 (the total of which was pension plan benefit obligation in
excess of plan assets) and a $0.3 million pension plan benefit obligation that
was in excess of plan assets at December 31, 2000 (the total of which was plan
assets in excess of pension plan benefit obligation).

DEFINED CONTRIBUTION PLANS

Costs recognized under multi-employer and other defined contribution plans are
summarized as follows:

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 Employee
Stock Ownership Plan and Trust (see Note 11) 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

38

11), 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 14.
11. 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 10, 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.

The Company terminated all contributions to the ESOP effective August 1, 2000
and has now received all regulatory approvals whereby allocated shares will be
distributed to the participants 401(k) accounts and the unallocated shares will
be returned to the Company in exchange for forgiveness of the ESOP loan.
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. These
benefits, which 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.

12. INCOME TAXES

The components of the income from continuing operations before provision for
income taxes for the Company's domestic and foreign operations for the years
ended December 31 are provided below:

The consolidated provision (credit) for income taxes included in the Statement
of Income for the years ended December 31 consisted of the following:

Consolidated income tax provision (credit) is included in the Statement of
Income as follows:

39

A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate on continuing operations for the years ended December
31 is provided below:

Research and development credit related to both credits claimed in the current
period and refund claims filed with amended returns for the prior periods.

Components of deferred tax assets and liabilities were as follows:

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,
2001 is $8.6 million, and will expire in 2010.

13. EARNINGS PER SHARE

The computation of earnings per share is as follows:

Options to purchase approximately 2.8 million, 4.2 million and 700,000 shares of
Common Stock were outstanding in 2001, 2000 and 1999, 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.

14. 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,

40

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 1.2 million shares available for 2001 grants and has available
approximately 1,432,980 shares through the end of fiscal 2002. 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 a three-year vesting
period 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 2001,
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 discounted
stock purchase plan (DSPP). The DSPP 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
outstanding under this plan at December 31, 2001 was 157,951 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 amortized to
expense over the options' vesting period.

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:

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.

41

A summary of the Company's stock option activity and related information for the
years indicated follows:

The following table summarizes information about stock options outstanding at
December 31, 2001:

RESTRICTED STOCK AWARD In February of 2001, the Company awarded to two officers
4,920 shares of restricted Common Stock in lieu of a cash bonus for 2000. The
shares must be held for one year before they can be sold.

15. 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 2001, 2000, and 1999 was $5.7
million, $6.3 million and $6.8 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 $2.8 million, $4 million
and $4.5 million for the years 2001, 2000 and 1999, respectively.

Future minimum rental payments under operating leases with remaining
noncancelable terms in excess of one year are as follows:

42

16. STOCKHOLDERS' AGREEMENTS

As of December 31, 2001, the approximate ownership interests in the Company's
Common Stock are held by management (11%), the ESOP (21%), the investors
consisting of Vestar Equity Partners, L.P., Charlesbank Equity Fund II, Limited
Partnership, and American Industrial Partners Capital Fund II, L.P. (13%), and
all others including public shareholders (55%).

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 11.

17. 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,
2001 and 2000 there was no preferred stock issued or outstanding.

18. 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 applicable 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 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 and its affiliates' operations do not use and their products do
not contain any asbestos. Asbestos actions have been filed against the Company
and certain of its affiliates. Consistent with the experience of others, the
number of claims have increased in recent years. However, it is important to
note that these asbestos claims involve products sold prior to the 1990
formation of the Company. The Company and its affiliates have not incurred any
significant costs related to these asbestos claims. The claims are covered by
insurance or are subject to indemnity from the companies who manufactured or
sold the products in question. Management believes that these claims will not be
material; 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

43

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 hazardous constituents. The Company has accrued $1.1 million at
December 31, 2001, the estimated remaining costs for remediation. The Company
was in compliance with the Permit at December 31, 2001.

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 remediating the site with the state of Illinois and now
estimates the costs to remediate the site to be approximately $613,000, which
has been accrued at December 31, 2001.

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 $546,000 at December
31, 2001 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 December 15,
2000, which the Company expensed in the fourth quarter of 2000. In addition, the
Company paid GE-Harris $7 million in exchange for a license of certain
intellectual property.

The Company has other contingent obligations relating to certain sales 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.

19. SEGMENT INFORMATION

Wabtec has two reportable segments -- the Freight Group and the Transit Group.
The key factors used to identify these reportable segments are the organization
and alignment of the Company's internal operations, the nature of the products
and services and customer type. The business segments are:

FREIGHT GROUP manufactures products and provides services geared to the
production and operation of freight cars and locomotives, including braking
control equipment, engines, on-board electronic systems and train coupler
equipment. Revenues are derived from OEM and locomotive overhauls, aftermarket
sales and from freight car repairs and services. All of the assets sold to GETS
were part of the Freight Group.

TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, rail and buses) 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
44

measure computed in accordance with generally accepted accounting principles and
may not be comparable to other companies.

Segment financial information for 2001 is as follows:

Segment financial information for 2000 is as follows:

Segment financial information for 1999 is as follows:

45

In 2001 and 2000, $530,000 and $2 million, $15.2 million and $235,000 of the
above merger and restructuring costs related to the Freight Group and Transit
Group, respectively. In 1999, the merger and restructuring charge primarily
related to costs of the merger between WABCO and MotivePower, the consolidation
of the corporate headquarters and the elimination of duplicate corporate
functions.

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.

Export sales from the Company's United States operations were $90.3 million,
$98.9 million and $93.6 million for the years ending December 31, 2001, 2000 and
1999, 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.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial instruments approximate
their related carrying values, except for the following:

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 9)
were based on dealer quotes and represent the estimated amount the Company would
pay to the counterparty to terminate the swap agreements.

46

21. SELECTED QUARTERLY FINANCIAL DATA

47

Results have been restated for the 2001 sale of certain locomotive assets to GE
and for other businesses the Company is exiting. These businesses are classified
as discontinued operations.

The Company recorded restructuring-related costs of approximately $854,000 or
$0.01 in the first quarter of 2001, $1.1 million or $0.02, $1.6 million or
$0.02, and $192,000 or $0.00, net of tax, per diluted share, in the second,
third and fourth quarters of 2001, respectively. The Company also recorded a $2
million, or $0.05, per diluted share research and development tax credit in the
third quarter of 2001. In the fourth quarter of 2001, the Company recorded a
$9.3 million, or $0.14, net of tax, per diluted share charge for asset
writedowns, consisting primarily of an asset impairment related to the
locomotive lease fleet of $5.2 million, a writeoff of $1.8 million of an
investment in Argentina and a $1.5 million writedown of a facility to its
estimated realizable value, a $1.7 million, or $0.03, net of tax, per diluted
share charge for severance related to a ten percent salary headcount reduction,
and a $685,000, or $0.01, net of tax, per diluted share gain on the sale of
unused facilities.

The Company recorded restructuring-related costs of approximately $1.9 million
or $0.03 in the first quarter of 2000, $4.8 million or $0.07, $6.9 million or
$0.10, and $4.5 million or $0.07, net of tax, per diluted share, in the second,
third and fourth quarters of 2001, 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 2001. In the third quarter of 2001, 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 2001, the Company recorded a $2
million, or $0.03, net of tax, per diluted share charge for a legal settlement.

22. MERGER AND RESTRUCTURING
CHARGE

In 2001, the Company completed a merger and restructuring plan with charges
totaling $71 million pre-tax, with approximately $49 million of the charge
expensed in 1999, $20 million in 2000 and $2 million in 2001. The plan involved
the elimination of duplicate facilities and excess capacity, operational
realignment and related workforce reductions, and the evaluation of certain
assets as to their perceived ongoing benefit to the Company.

As of December 31, 2001, $3.2 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.

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 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, 2001.

The Company began and completed a new restructuring plan for the Transit rail
business in 2001. The Company estimates synergies from the plan will yield
approximately $3 million of pre-tax cost savings in 2002 and beyond, with such
benefits realized through reduced cost of sales and reduced selling, general and
administrative expenses. The restructuring plan involved operational realignment
and related workforce reductions. The charges to complete the restructuring plan
totaled $2 million pre-tax.

The $2 million charge included costs associated with relocating several
production operations from Chicago to Montreal, including severance costs for
approximately 103 employees.

48

23. CONTRACT UNDERBILLINGS

The Company had a long-term contract to provide maintenance and other locomotive
services, which was part of the assets sold to GE. Details relative to
cumulative costs incurred and revenues recognized were as follows:

49

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 26, 2002

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.

50

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 18, 2002. 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, 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 18, 2002

51

SCHEDULE II

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31

(1) Reserves of acquired/(sold) companies

(2) Actual disbursements and/or charges

52

EXHIBITS