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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
Or
| | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
Commission file number 1-13782
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 25-1615902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 AIR BRAKE AVENUE
WILMERDING, PENNSYLVANIA 15148 (412) 825-1000
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes |X| No | |.
As of August 13, 2002, 43,363,305 shares of Common Stock of the registrant
were issued and outstanding.
1
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
JUNE 30, 2002 FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and December
31, 2001 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certification 18
2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 DECEMBER 31
In thousands, except shares and par value 2002 2001
--------- ----------
ASSETS
CURRENT ASSETS
Cash $ 38,228 $ 53,949
Accounts receivable 107,982 106,527
Inventories 100,269 104,930
Other current assets 31,378 30,288
--------- ---------
Total current assets 277,857 295,694
Property, plant and equipment 324,029 318,188
Accumulated depreciation (159,619) (150,493)
--------- ---------
Property, plant and equipment, net 164,410 167,695
OTHER ASSETS
Goodwill, net 198,655 197,991
Other intangibles, net 43,034 45,145
Other noncurrent assets 21,272 23,427
--------- ---------
Total other assets 262,961 266,563
--------- ---------
Total Assets $ 705,228 $ 729,952
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 807 $ 782
Accounts payable 74,620 75,150
Customer deposits 11,322 10,314
Accrued income taxes 14,781 43,741
Other accrued liabilities 51,968 56,234
--------- ---------
Total current liabilities 153,498 186,221
Long-term debt 240,077 241,088
Reserve for postretirement and pension benefits 29,074 27,544
Other long-term liabilities 25,433 29,828
--------- ---------
Total liabilities 448,082 484,681
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 100,000,000 shares authorized:
65,447,867 shares issued and 43,343,090 and
43,152,546 outstanding at June 30, 2002 and December 31, 2001,
respectively 654 654
Additional paid-in capital 272,421 272,674
Treasury stock, at cost, 22,104,778 and 22,295,322 shares, respectively (274,857) (277,489)
Retained earnings 284,616 278,569
Deferred compensation 278 538
Accumulated other comprehensive income (loss) (25,966) (29,675)
--------- ---------
Total shareholders' equity 257,146 245,271
--------- ---------
Total Liabilities and Shareholders' Equity $ 705,228 $ 729,952
========= =========
The accompanying notes are an integral part of these statements.
3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
In thousands, except per share data 2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 179,808 $ 194,117 $ 357,133 $ 409,422
Cost of sales (134,452) (140,540) (266,997) (294,432)
--------- --------- --------- ---------
Gross profit 45,356 53,577 90,136 114,990
Selling, general and administrative expenses (22,181) (22,288) (46,904) (46,520)
Restructuring charges -- (1,106) -- (1,960)
Engineering expenses (8,526) (8,316) (16,631) (16,824)
Amortization expense (1,349) (3,293) (2,834) (6,619)
--------- --------- --------- ---------
Total operating expenses (32,056) (35,003) (66,369) (71,923)
Income from operations 13,300 18,574 23,767 43,067
Other income and expenses
Interest expense (5,579) (8,550) (10,889) (19,339)
Other expense, net (392) (406) (1,505) (1,502)
--------- --------- --------- ---------
Income from continuing operations before income taxes 7,329 9,618 11,373 22,226
Income tax expense (2,565) (3,239) (3,981) (7,778)
--------- --------- --------- ---------
Income from continuing operations 4,764 6,379 7,392 14,447
Discontinued operations, net of tax
Income from discontinued operations 57 1,583 181 3,875
Loss on sale of discontinued operations -- -- (529) --
--------- --------- --------- ---------
Total discontinued operations 57 1,583 (348) 3,875
--------- --------- --------- ---------
Net income $ 4,821 $ 7,962 $ 7,044 $ 18,323
========= ========= ========= =========
EARNINGS PER COMMON SHARE
Basic
Income from continuing operations $ 0.11 $ 0.15 $ 0.17 $ 0.34
Income (loss) from discontinued operations -- 0.04 (0.01) 0.09
--------- --------- --------- ---------
Net income $ 0.11 $ 0.19 $ 0.16 $ 0.43
========= ========= ========= =========
Diluted
Income from continuing operations $ 0.11 $ 0.15 $ 0.17 $ 0.33
Income (loss) from discontinued operations -- 0.03 (0.01) 0.09
--------- --------- --------- ---------
Net income $ 0.11 $ 0.18 $ 0.16 $ 0.42
========= ========= ========= =========
Weighted average shares outstanding
Basic 43,321 42,937 43,239 42,903
Diluted 43,734 43,212 43,592 43,172
--------- --------- --------- ---------
The accompanying notes are an integral part of these statements.
4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 7,044 $ 18,323
Adjustments to reconcile net income to net cash (used for) provided by operations:
Depreciation and amortization 13,013 16,580
Results of discontinued operations, net of tax 348 (3,875)
Loss on sale of product line -- 521
Other, primarily non-cash restructuring related charges -- 160
Discontinued operations 218 2,208
Changes in operating assets and liabilities, net of
acquisition and disposition of product line
Accounts receivable 374 28,706
Inventories 6,696 6,259
Accounts payable (283) (9,482)
Accrued income taxes (29,231) 9,364
Accrued liabilities and customer deposits (3,809) (12,522)
Other assets and liabilities (4,266) 18,808
-------- --------
Net cash (used for) provided by operating activities (9,896) 75,050
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (5,327) (7,632)
Cash received from disposition of discontinued operations 1,400 --
Cash received from disposition of product line -- 4,120
Cash paid for acquisition of product line (1,654) (743)
Discontinued operations (36) 645
-------- --------
Net cash used for investing activities (5,617) (3,610)
FINANCING ACTIVITIES
Repayments of loans under credit agreement -- (68,000)
Repayments of other borrowings (1,047) (471)
Purchase of treasury stock -- (549)
Proceeds from the issuance of treasury stock from stock options and other benefit plans 2,119 1,099
Cash dividends (997) (839)
-------- --------
Net cash provided by (used for) financing activities 75 (68,760)
Effect of changes in currency exchange rates (283) (1,373)
-------- --------
(Decrease) increase in cash (15,721) 1,307
Cash, beginning of year 53,949 6,071
-------- --------
Cash, end of period $ 38,228 $ 7,378
======== ========
The accompanying notes are an integral part of these statements.
5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 (UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is one
of North America's largest manufacturers of value-added equipment for
locomotives, railway freight cars and passenger transit vehicles. Our major
products are intended to enhance safety, improve productivity and reduce
maintenance costs for our customers. Our major product offerings include
electronic controls and monitors, air brakes, heat transfer and cooling
equipment, switcher and commuter locomotives, couplers, door controls, draft
gears and friction products. The Company aggressively pursues technological
advances with respect to both new product development and product enhancements.
The Company has two reporting segments: Freight Group and Transit Group.
Although approximately 51% of the Company's sales are to the aftermarket, a
significant portion of the Freight Group's operations and revenue base is
generally dependent on the capital replacement cycles of the large North
American-based railroad companies for locomotives and freight cars. The 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. ACCOUNTING POLICIES
BASIS OF PRESENTATION The unaudited condensed consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission and include the accounts of Wabtec and its majority owned
subsidiaries. These condensed interim financial statements do not include all of
the information and footnotes required for complete financial statements. In
management's opinion, these financial statements reflect all adjustments of a
normal, recurring nature necessary for a fair presentation of the results for
the interim periods presented. Results for these interim periods are not
necessarily indicative of results to be expected for the full year. Certain
prior period amounts have been reclassified, where necessary, to conform to the
current period presentation.
The Company operates on a four-four-five week accounting quarter, and
accordingly, the quarters end on or about March 31, June 30, September 30 and
December 31.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in Wabtec's Annual Report on Form
10-K for the year ended December 31, 2001.
REVENUE RECOGNITION Revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Wabtec
recognizes revenue upon the passage of title, ownership and risk of loss to the
customer.
The Company recognizes revenues on long-term contracts based on the percentage
of completion method of accounting. Contract revenues and cost estimates are
reviewed and revised at a minimum quarterly and adjustments are reflected in the
accounting period as known. Provisions are made currently for estimated losses
on uncompleted contracts.
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.
FINANCIAL DERIVATIVES AND HEDGES ACTIVITY The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, and as amended by SFAS 138,
"Accounting for Derivative Instruments and Hedging Activities" effective January
1, 2001. In the application, the Company has concluded its interest rate swap
contracts qualify for "special cash flow hedge accounting" which permit
recording the fair value of the swap and corresponding adjustment to other
comprehensive income (loss) on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS 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 adopted SFAS 144 in
the third quarter of 2001, prior to the time it was required.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
6
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as net
income and all nonowner changes in shareholders' equity. The Company's
accumulated other comprehensive income (loss) consists of foreign currency
translation adjustments, unrealized losses on derivatives designated and
qualified as cash flow hedges and pension related adjustments. Total
comprehensive income (loss) for the three and six months ended June 30 was:
THREE MONTHS ENDED
JUNE 30
In thousands 2002 2001
------- --------
Net Income $ 4,821 $ 7,962
Foreign Currency
Translation 3,134 2,763
Unrealized gain on hedges, net of tax 49 133
------- --------
Total Comprehensive Income $ 8,004 $ 10,858
------- --------
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
------- --------
Net Income $ 7,044 $ 18,323
Foreign Currency
Translation 3,131 (2,401)
Unrealized gain/(loss) on hedges, net of tax 578 (1,673)
------- --------
Total Comprehensive Income $10,753 $ 14,249
------- --------
The components of accumulated other comprehensive income (loss) consisted of the
following at June 30, 2002 and December 31, 2001:
JUNE 30 DECEMBER 31
In thousands 2002 2001
-------- -----------
Foreign currency translation $(17,521) $(20,652)
Unrealized loss on hedges, net of tax (1,966) (2,544)
Additional minimum pension liability,
net of tax (6,479) (6,479)
-------- --------
Total Comprehensive Loss $(25,966) $(29,675)
-------- --------
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.
In accordance with SFAS 144, the operating results of these businesses, along
with other small non-core businesses that the Company decided to exit in the
fourth quarter of 2001, have been classified as discontinued operations for all
years presented and are summarized for the three and six months ended June 30,
as follows:
THREE MONTHS ENDED
JUNE 30
In thousands 2002 2001
------ -------
Net sales $2,322 $47,551
Income before income taxes 87 2,379
Income tax expense 30 796
------ -------
Income from discontinued operations $ 57 $ 1,583
------ -------
SIX MONTHS ENDED
JUNE 30
In thousands 2002 2001
------ -------
Net sales $6,661 $98,791
Income before income taxes 278 5,961
Income tax expense 97 2,086
------ -------
Income from discontinued operations $ 181 $ 3,875
------ -------
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined under
the first-in, first-out (FIFO) method. Inventory costs include material, labor
and overhead. The components of inventory, net of reserves, were:
JUNE 30 DECEMBER 31
In thousands 2002 2001
-------- -----------
Raw materials $ 62,122 $ 60,013
Work-in-process 30,397 34,265
Finished goods 7,750 10,652
-------- --------
Total inventory $100,269 $104,930
-------- --------
5. INTANGIBLES
The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under its provisions, all goodwill and other
intangible assets with indefinite lives are no longer amortized under a
straight-line basis of estimated useful life. Instead, they will be subject to
assessments for impairment by applying a fair-value-based test. The Company has
completed the Phase I assessment process and has determined that an impairment
exists. As previously announced, Wabtec anticipates that the write down in the
value of goodwill on its balance sheet will be approximately $80 million,
resulting in a non-cash after-tax charge of about $50 million. However, the
final amount of the impairment is still being evaluated and the actual
impairment may vary from this Phase I estimate. We anticipate completing the
Phase II analysis and quantifying the goodwill impairment by the end of the
third quarter.
7
Intangible assets of the Company, other than goodwill, consist of the following:
JUNE 30 DECEMBER 31
In thousands 2002 2001
------- ----------
Patents, tradenames/trademarks and other, net of
accumulated amortization of $41,927 and
$40,571 (3-40 years) $37,408 $38,845
Covenants not to compete, net of accumulated
amortization of $16,000 and $15,326 (5 years) 2,153 2,827
Intangible pension asset 3,473 3,473
------- -------
Total $43,034 $45,145
------- -------
Amortization expense for intangible assets was $1.3 and $2.8 million for the
three and six months ended June 30, 2002. Estimated amortization expense for the
remainder of 2002 and the five succeeding years are as follows (in thousands):
2002 (remainder) $2,803
2003 5,239
2004 3,903
2005 2,962
2006 2,297
2007 2,084
The changes in the carrying amount of goodwill by segment for the six months
ended June 30, 2002 are as follows:
FREIGHT TRANSIT
In thousands GROUP GROUP TOTAL
-------- ------- --------
Balance at December 31, 2001 $174,288 $23,703 $197,991
Goodwill acquired 664 -- 664
-------- ------- --------
Balance at June 30, 2002 $174,952 $23,703 $198,655
-------- ------- --------
Actual results of operations for the three and six months ended June 30, 2002
and pro forma results of operations for the same period of 2001 had we applied
the non-amortization provisions of SFAS No. 142 in these periods are as follows:
THREE MONTHS ENDED
JUNE 30
In thousands, except per share amounts 2002 2001
--------- ---------
Reported net income $ 4,821 $ 7,962
Add: goodwill amortization, net of tax -- 1,111
--------- ---------
Adjusted net income $ 4,821 $ 9,073
Basic earnings per share
Reported net income $ 0.11 $ 0.19
Goodwill amortization -- 0.03
--------- ---------
Adjusted net income $ 0.11 $ 0.22
Diluted earnings per share
Reported net income $ 0.11 $ 0.18
Goodwill amortization -- 0.03
--------- ---------
Adjusted net income $ 0.11 $ 0.21
--------- ---------
SIX MONTHS ENDED
JUNE 30
In thousands, except per share amounts 2002 2001
---------- ----------
Reported net income $ 7,044 $ 18,323
Add: goodwill amortization, net of tax -- 2,192
---------- ----------
Adjusted net income $ 7,044 $ 20,515
Basic earnings per share
Reported net income $ 0.16 $ 0.43
Goodwill amortization -- 0.05
---------- ----------
Adjusted net income $ 0.16 $ 0.48
Diluted earnings per share
Reported net income $ 0.16 $ 0.42
Goodwill amortization -- 0.05
---------- ----------
Adjusted net income $ 0.16 $ 0.47
---------- ----------
6. EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS ENDED
JUNE 30
In thousands, except per share 2002 2001
------- -------
BASIC EARNINGS PER SHARE
Income applicable to common shareholders $ 4,821 $ 7,962
Divided by
Weighted average shares outstanding 43,321 42,937
Basic earnings per share $ 0.11 $ 0.19
------- -------
DILUTED EARNINGS PER SHARE
Income applicable to common
shareholders $ 4,821 $ 7,962
Divided by sum of the
Weighted average shares outstanding 43,321 42,937
Conversion of dilutive stock options 413 275
------- -------
Diluted shares outstanding 43,734 43,212
Diluted earnings per share $ 0.11 $ 0.18
------- -------
8
SIX MONTHS ENDED
JUNE 30
In thousands, except per share 2002 2001
------- -------
BASIC EARNINGS PER SHARE
Income applicable to common shareholders $ 7,044 $18,323
Divided by
Weighted average shares outstanding 43,239 42,903
Basic earnings per share $ 0.16 $ 0.43
------- -------
DILUTED EARNINGS PER SHARE
Income applicable to common shareholders $ 7,044 $18,323
Divided by sum of the
Weighted average shares outstanding 43,239 42,903
Conversion of dilutive stock
options 353 269
------- -------
Diluted shares outstanding 43,592 43,172
Diluted earnings per share $ 0.16 $ 0.42
------- -------
7. COMMITMENTS AND CONTINGENCIES
Under the terms of the purchase agreement and related documents for the 1990
Acquisition, American Standard, Inc. ("ASI"), has indemnified the Company for
certain items including, among others, environmental claims. The indemnification
provisions of the agreement expired at various dates through 2000, except for
those claims, which were timely asserted, which continue until resolved. If ASI
was unable to honor or meet these indemnifications, the Company would be
responsible for such items. In the opinion of management, ASI currently has the
ability to meet its indemnification obligations.
The Company's and its affiliates' operations do not use and their products do
not contain any asbestos. Asbestos actions have been filed against the Company
and certain of its affiliates. Consistent with the experience of others, the
number of claims have increased in recent years. However, it is important to
note that these asbestos claims involve products sold prior to the 1990
formation of the Company. The Company and its affiliates have not incurred any
significant costs related to these asbestos claims. The claims are covered by
insurance or are subject to indemnity from the companies who manufactured or
sold the products in question. Management believes that these claims will not be
material; and accordingly, the financial statements do not reflect any costs or
reserves for such claims.
The Company is subject to a number of other commitments and contingencies as
described in its Annual Report on Form 10-K for the Year Ended December 31,
2001. During the first two quarters of 2002, there were no material changes to
the information described in Note 18 therein.
Also, as described in Note 18 of the Form 10-K, the Company is subject to a RCRA
Part B Closure Permit ("the Permit") issued by the Environmental Protection
Agency (EPA) and the Idaho Department of Health and Welfare, Division of
Environmental Quality relating to the monitoring and treatment of groundwater
contamination on, and adjacent to, the MotivePower Industries (Boise, Idaho)
facility. In compliance with the Permit, the Company has completed the first
phase of an accelerated plan for the treatment of contaminated groundwater, and
continues onsite and offsite monitoring for the amount of hazardous
constituents. At June 30, 2002, the Company has accrued $940,000 representing
the estimated remaining costs for remediation. The Company was in compliance
with the Permit at June 30, 2002.
8. 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, on-board electronic components and train coupler equipment.
Revenues are derived from OEM sales and locomotive overhauls, aftermarket sales
and from freight car repairs and services.
TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, commuter rail and buses) that include braking, coupling, and monitoring
systems, climate control and door equipment 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 following tables are not
necessarily a measure computed in accordance with generally accepted accounting
principles and may not be comparable to other companies.
9
Segment financial information for the three months ended June 30, 2002 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
---------- ---------- ---------- ------------- ----------
Sales to external customers $ 106,760 $ 73,048 -- -- $ 179,808
Intersegment sales/(elimination) 2,572 119 (2,691) -- --
---------- ---------- ---------- ---------- ----------
Total sales $ 109,332 $ 73,167 $ (2,691) -- $ 179,808
========== ========== ========== ========== ==========
Income from operations $ 11,168 $ 7,406 $ (5,274) -- $ 13,300
Interest expense and other -- -- (5,971) -- (5,971)
---------- ---------- ---------- ---------- ----------
Income before income taxes $ 11,168 $ 7,406 $ (11,245) -- $ 7,329
========== ========== ========== ========== ==========
Segment financial information for the three months ended June 30, 2001 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
---------- ---------- ---------- ------------- ----------
Sales to external customers $ 120,367 $ 73,750 -- -- $ 194,117
Intersegment sales/(elimination) 2,670 294 (2,964) -- --
---------- ---------- ---------- ---------- ----------
Total sales $ 123,037 $ 74,044 $ (2,964) -- $ 194,117
========== ========== ========== ========== ==========
Income from operations $ 15,925 $ 8,199 $ (4,444) $ (1,106) $ 18,574
Interest expense and other -- -- (8,956) -- (8,956)
---------- ---------- ---------- ---------- ----------
Income before income taxes $ 15,925 $ 8,199 $ (13,400) $ (1,106) $ 9,618
========== ========== ========== ========== ==========
Segment financial information for the six months ended June 30, 2002 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
---------- ---------- ---------- ------------- ----------
Sales to external customers $ 215,367 $ 141,766 -- -- $ 357,133
Intersegment sales/(elimination) 5,468 226 (5,694) -- --
---------- ---------- ---------- ---------- ----------
Total sales $ 220,835 $ 141,992 $ (5,694) -- $ 357,133
========== ========== ========== ========== ==========
Income from operations $ 21,027 $ 13,255 $ (10,515) -- $ 23,767
Interest expense and other -- -- (12,394) -- (12,394)
---------- ---------- ---------- ---------- ----------
Income before income taxes $ 21,027 $ 13,255 $ (22,909) -- $ 11,373
========== ========== ========== ========== ==========
Segment financial information for the six months ended June 30, 2001 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
---------- ---------- ---------- ------------- ----------
Sales to external customers $ 259,962 $ 149,460 -- -- $ 409,422
Intersegment sales/(elimination) 5,925 445 (6,370) -- --
---------- ---------- ---------- ---------- ----------
Total sales $ 265,887 $ 149,905 $ (6,370) -- $ 409,422
========== ========== ========== ========== ==========
Income from operations $ 38,453 $ 15,942 $ (9,368) $ (1,960) $ 43,067
Interest expense and other -- -- (20,841) -- (20,841)
---------- ---------- ---------- ---------- ----------
Income before income taxes $ 38,453 $ 15,942 $ (30,209) $ (1,960) $ 22,226
========== ========== ========== ========== ==========
9. RESTRUCTURING CHARGES
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 June 30, 2002, $1.8 million of the merger and restructuring charge was
still remaining as accrued on the balance sheet as part of other accrued
liabilities. The table below identifies the significant components of the charge
and reflects the accrual balance at that date.
10
LEASE
IMPAIRMENTS
AND
ASSET
In thousands WRITEDOWNS SEVERANCE OTHER TOTAL
----------- --------- ----- -------
Beginning balance, January 1, 2002 $ 2,458 $ 525 $ 169 $ 3,152
Amounts paid (688) (525) (157) (1,370)
------- ----- ----- -------
Balance at June 30, 2002 $ 1,770 $ -- $ 12 $ 1,782
------- ----- ----- -------
The lease impairment charges and asset writedowns are associated with the
Company's closing of several plants, the consolidation of the corporate
headquarters, and the Company's evaluation of certain assets where projected
cash flows from such assets over their remaining lives are estimated to be less
than their carrying values. The other category represents other related costs
that have been incurred and not yet paid as of June 30, 2002.
The Company began and completed a new restructuring plan for the Transit rail
business in 2001. The restructuring plan involved operational realignment and
related workforce reductions. The charges to complete the restructuring plan
totaled $2 million pre-tax. The Company estimates synergies from the plan will
yield approximately $3 million of annual pre-tax cost savings partially in 2002
and then beyond, with such benefits realized through reduced cost of sales and
reduced selling, general and administrative expenses.
10. SUBSEQUENT EVENTS
On July 8, 2002, the Company redeemed $175 million of its senior notes through
the use of cash on hand and additional borrowings under its credit agreement.
The senior notes were callable at par (face) beginning in June of 2002.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the information in
the unaudited condensed consolidated financial statements and notes thereto
included herein and Westinghouse Air Brake Technologies Corporation's Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in its 2001 Annual Report on Form 10-K.
OVERVIEW
In November 2001, Wabtec sold certain assets to GE Transportation Systems (GETS)
for $240 million in cash. The assets sold primarily include locomotive
aftermarket products and services for which Wabtec is not the original equipment
manufacturer. The results for these businesses, along with 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 income for the first six months of 2002 was $7 million, or $0.16 per diluted
share, as compared to $18.3 million, or $0.42 per diluted share in the same
period in 2001. The results for the first six months of 2002 included a
$348,000, net of tax, loss from discontinued operations, while 2001 included
$3.9 million, net of tax, of income from discontinued operations and a $2
million restructuring-related charge. Without the effect of the aforementioned
items, net income from continuing operations for the first six months of 2002
and 2001 would have been $7.4 million or $0.17 per diluted share and $15.7
million or $0.36 per diluted share. Net sales from continuing operations
decreased to $357.1 million in the first six months of 2002 as compared to
$409.4 million in the same period in 2001. Operating margins of continuing
operations for the first six months of 2002 decreased to 6.7% as compared to
10.5% in the same period in 2001. The drop in net income was essentially volume
and mix related.
SECOND QUARTER 2002 COMPARED TO
SECOND QUARTER 2001
The following table sets forth the Company's net sales by business segment:
THREE MONTHS ENDED
JUNE 30
-------------------------
In thousands 2002 2001
-------- --------
Freight Group $106,760 $120,367
Transit Group 73,048 73,750
-------- --------
Net sales $179,808 $194,117
-------- --------
Net sales for the second quarter of 2002 decreased $14.3 million, or 7.4%, to
$179.8 million as compared to the prior year period. Both the Freight Group and
Transit Group had lower sales. The Freight Group's decreased sales reflected
lower sales of components for new freight cars. In the quarter, industry
deliveries of new freight cars decreased to 4,155 units as compared to 8,982 in
the same period in 2001. The Transit Group's decreased sales were primarily due
to lower sales of doors for buses and air conditioning units for rail transit
vehicles.
Gross profit decreased to $45.4 million in the second quarter of 2002 compared
to $53.6 million in the same period of 2001. Gross profit is dependent on a
number of factors including pricing, sales volume and product mix. Gross profit,
as a percentage of sales, was 25.2% compared to 27.6% in the same period of
2001. (Gross profit was 25.3% in the first quarter of 2002.) The decrease in
gross profit is primarily attributed to the decrease in sales volumes, an
unfavorable product mix and pricing pressures.
After excluding goodwill amortization (due to the required adoption of Financial
Accounting Standard 142, goodwill is no longer amortized) of $1.7 million and
restructuring charges of $1.1 million in the second quarter of 2001, operating
expenses were virtually unchanged in the second quarter of 2002 as compared to
the same period of 2001.
Operating income totaled $13.3 million (or 7.4% of sales) in the second quarter
of 2002 compared with $18.6 million (or 9.6% of sales) in the same period in
2001. Lower operating income resulted from $14.3 million less in sales volumes
and overall changes to product mix. (See Note 8 - "Notes to Condensed
Consolidated Financial Statements" regarding segment-specific information,
included elsewhere in this report).
Interest expense decreased 34.7% in the second quarter of 2002 as compared to
the prior year quarter primarily due to a substantial decrease in debt.
The effective income tax rate increased from 33.7% in the second quarter of 2001
to 35% in the second quarter of 2002. The 2001 tax rate reflected the year to
date effect of certain tax credits.
SIX MONTH PERIOD OF 2002 COMPARED
TO SIX MONTH PERIOD OF 2001
The following table sets forth the Company's net sales by business segment:
THREE MONTHS ENDED
JUNE 30
-------------------------
In thousands 2002 2001
-------- --------
Freight Group $215,367 $259,962
Transit Group 141,766 149,460
-------- --------
Net sales $357,133 $409,422
-------- --------
12
Net sales for the first six months of 2002 decreased $52.3 million, or 12.8%, to
$357.1 million as compared to the prior year period. Both the Freight Group and
Transit Group had lower sales. The Freight Group's decreased sales reflected
lower sales of components for new freight cars. In the first six months,
industry deliveries of new freight cars decreased to 8,010 units as compared to
20,052 in the same period in 2001. The Transit Group's decreased sales were
primarily due to lower sales of doors for buses and air conditioning units for
rail transit vehicles.
Gross profit decreased to $90.1 million in the first six months of 2002 compared
to $115 million in the same period of 2001. Gross profit is dependent on a
number of factors including pricing, sales volume and product mix. Gross profit,
as a percentage of sales, was 25.2% compared to 28.1% in the same period of
2001. The decrease in gross profit is primarily attributed to the decrease in
sales volumes, an unfavorable product mix and pricing pressures.
After excluding goodwill amortization (due to the required adoption of Financial
Accounting Standard 142, goodwill is no longer amortized) of $3.4 million and
restructuring charges of $2 million in the first six months of 2001, operating
expenses were virtually unchanged in the first six months of 2002 as compared to
the same period of 2001.
Operating income totaled $23.8 million (or 6.7% of sales) in the first six
months of 2002 compared with $43.1 million (or 10.5% of sales) in the same
period in 2001. Lower operating income resulted from $52.3 million less in sales
volumes and overall changes to product mix. (See Note 8 - "Notes to Condensed
Consolidated Financial Statements" regarding segment-specific information,
included elsewhere in this report).
Interest expense decreased 43.7% in the first six months of 2002 as compared to
the prior year period primarily due to a substantial decrease in debt.
The effective tax rate was 35% for the first six months of 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's unsecured credit facility with a consortium of commercial banks
("credit agreement"). The following is a summary of selected cash flow
information and other relevant data.
SIX MONTHS ENDED
JUNE 30
-------------------------
In thousands 2002 2001
-------- --------
Cash provided (used) by:
Operating activities:
Income taxes $(29,231) $ 9,364
Other operating activities 19,335 65,686
Investing activities (5,617) (3,610)
Financing activities 75 (68,760)
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 36,780 59,647
Operating cash flow in the first six months of 2002 was a use of $9.9 million
compared to cash provided of $75.1 million in the same period a year ago.
Planned income tax payments of approximately $30 million due primarily to the
fourth quarter 2001 net gain from the sale of certain businesses to GETS were
the primary use of cash for the first six months of 2002.
Cash used for investing activities was $5.6 million in the first six months of
2002 as compared to $3.6 million a year ago. In the first six months of 2002,
cash received from the sale of a product line was $1.4 million, compared to $4.1
million in the first six months of 2001. In the first six months of 2002, $1.7
million was paid for the portion of a business that the Company did not already
own as compared to $743,000 for a new product line in the same period of 2001.
Capital expenditures in the first six months of 2002 were $5.9 million compared
to $11.4 million in the same period a year ago. The majority of capital
expenditures for these periods relates to upgrades to existing equipment and
replacement of existing equipment to improve the overall cost savings through
efficiencies.
Cash provided by financing activities was $75,000 in the first six months of
2002 versus cash used of $68.8 million in the same period a year ago. The
Company reduced long-term debt by approximately $1 million in the first six
months of 2002 compared to $68.5 million in the same period a year ago.
The following table sets forth the Company's outstanding indebtedness at June
30, 2002. The revolving credit agreement and other term loan interest rates are
variable and dependent on market conditions.
JUNE 30 DECEMBER 31
In thousands 2002 2001
-------- -----------
Revolving credit agreement $ 60,000 $ 60,000
9.375% Senior notes due 2005 175,000 175,000
5.5% Industrial revenue bond due 2008 5,237 5,556
Other 647 1,314
-------- --------
Total $240,884 $241,870
Less-current portion 807 782
-------- --------
Long-term portion $240,077 $241,088
-------- --------
13
Credit Agreement
The Company's credit agreement provides a $275 million five-year revolving
credit facility expiring in 2004 and a 364-day $100 million convertible
revolving credit facility through 2004 which is to be reconfirmed in November
2002. At June 30, 2002, the Company had available borrowing capacity, net of
letters of credit, of approximately $291 million.
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 Notes were redeemed at par (face) on July 8, 2002 through the use of
cash on hand and additional borrowings under the credit agreement.
The Company believes, based on current levels of operations and forecasted
earnings that 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.
FORWARD LOOKING STATEMENTS
We believe that all statements other than statements of historical facts
included in this report, including certain statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
Economic and Industry Conditions
- materially adverse changes in economic or industry conditions
generally or in the markets served by us, including North America,
South America, Europe, Australia and Asia;
- demand for services in the freight and passenger rail industry;
- consolidations in the rail industry;
- demand for our products and services;
- continued outsourcing by our customers;
- demand for freight cars, locomotives, passenger transit cars and
buses;
- industry demand for faster and more efficient braking equipment;
- fluctuations in interest rates;
Operating Factors
- supply disruptions;
- technical difficulties;
- changes in operating conditions and costs; - successful introduction
of new products;
- labor relations;
- completion and integration of additional acquisitions;
- the development and use of new technology ;
Competitive Factors
- the actions of competitors;
Political/Governmental Factors
- political stability in relevant areas of the world;
- future regulation/deregulation of our customers and/or the rail
industry;
- governmental funding for some of our customers;
- political developments and laws and regulations, such as forced
divestiture of assets, restrictions on production, imports or
exports, price controls, tax increases and retroactive tax claims,
expropriation of property, cancellation of contract rights, and
environmental regulations; and
Transaction or Commercial Factors
- the outcome of negotiations with partners, governments, suppliers,
customers or others.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
CRITICAL ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in Note 2
to the audited consolidated financial statements contained in the Annual Report
on Form 10-K for the year ended December 31, 2001. Management believes that the
application of these policies on a consistent basis enables the Company to
provide the users of the financial statements with useful and reliable
information about the Company's operating results and financial condition.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make judgments, estimates
and assumptions regarding
14
uncertainties that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Areas of uncertainty that require judgments, estimates
and assumptions include the accounting for derivatives, environmental and tax
matters as well as the annual testing of goodwill for impairment. Management
uses historical experience and all available information to make these judgments
and estimates and actual results will inevitably differ from those estimates and
assumptions that are used to prepare the Company's financial statements at any
given time. Despite these inherent limitations, management believes that
Management's Discussion and Analysis and the financial statements and footnotes
provide a meaningful and fair perspective of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes 2 and 5 of "Notes to Condensed Consolidated Financial Statements"
included elsewhere in this report.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In the ordinary course of business, Wabtec is exposed to risks that increases in
interest rates may adversely affect funding costs associated with its
variable-rate debt. After considering the effects of interest rate swaps,
further described below, the Company's variable-rate debt represents less than
1% of total long-term debt at June 30, 2002. 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. With the redemption of the notes on July 8, 2002, the Company's
variable-rate debt became 73% of total long-term debt. At June 30, 2002, 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. With the redemption of the notes on July 8, 2002, an
instantaneous 100 basis point increase in interest rates would reduce the
Company's annual earnings by $1.8 million, assuming no additional intervention
strategies by management.
See Note 2 of the Company's Notes to Condensed Consolidated Financial Statements
for the Quarterly Period Ended June 30, 2002 included herein for discussion of
swap contracts. These swap contracts are not expected to have a material effect
on the Company's financial condition, results of operations or liquidity.
FOREIGN CURRENCY EXCHANGE RISK
The Company occasionally enters into several types of financial instruments for
the purpose of managing its exposure to foreign currency exchange rate
fluctuations in countries in which the Company has significant operations. As of
June 30, 2002, the Company had no such instruments outstanding.
Wabtec is also subject to certain risks associated with changes in foreign
currency exchange rates to the extent its operations are conducted in currencies
other than the U.S. dollar. For the first six months of 2002, approximately 76%
of Wabtec's net sales are in the United States, 7% in Canada, 2% in Mexico, and
15% in other international locations, primarily Europe. At June 30, 2002, the
Company does not believe changes in foreign currency exchange rates represent a
material risk to results of operations, financial position, or liquidity.
LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES
There have been no material changes to report regarding the Company's
commitments and contingencies as described in Note 18 of the Company's Annual
Report on Form 10-K for the Year Ended December 31, 2001.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held May 22, 2002. One
matter was considered and voted upon at the Annual Meeting: the election of
three persons to serve as directors.
Nominations of Emilio A. Fernandez, Lee B. Foster, II and James V. Napier to
serve as directors for a term expiring in 2005 were considered and each nominee
was elected. All three directors are independent and are not employees of the
Company.
15
The voting was as follows:
Votes Votes Votes
Nominee Title For Against Withheld Broker Non-Votes
- ------- ----- --- ------- -------- ----------------
Emilio A. Fernandez Chairman, Pulse Medical Instruments 34,951,512 -- 622,426 --
Lee B. Foster, II Chairman, L. B. Foster Company 34,986,226 -- 587,712 --
James V. Napier Retired Chairman, Scientific Atlanta, Inc. 34,984,919 -- 589,019 --
EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed with this report:
3.1 Restated Certificate of Incorporation of the Company dated January
30, 1995, as amended March 30, 1995, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-90866), and
incorporated herein by reference.
3.2 Restated By-Laws of the Company, effective November 19, 1999, filed
as part of the Company's Registration Statement on Form S-4 (No.
333-88903, and incorporated herein by reference.
(b) The Company filed a Current Report on Form 8-K dated May 30, 2002 for the
change in the Company's certifying accountant from Arthur Andersen LLP to
Ernst & Young LLP.
16
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/ ROBERT J. BROOKS
------------------------------------------
Robert J. Brooks
Chief Financial Officer
Date: August 14, 2002
17
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officers of Wabtec
Corporation (the "Company"), hereby certify, to the best of their knowledge,
that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 (the "Report") fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
By: /s/ GREGORY T. H. DAVIES
------------------------------------------
Gregory T. H. Davies
President & Chief Executive Officer
Date: August 14, 2002
By: /s/ ROBERT J. BROOKS
------------------------------------------
Robert J. Brooks
Chief Financial Officer
Date: August 14, 2002
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
- ------- --------------------------------
3.1 Restated Certificate of Incorporation of the Company dated January
30, 1995, as amended March 30, 1995, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-90866), and
incorporated herein by reference
3.2 Restated By-Laws of the Company, effective November 19, 1999, filed
as part of the Company's Registration Statement on Form S-4 (No.
333-88903), and incorporated herein by reference
19